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MB-0045Q.1 Discuss the objective of profit maximization vs wealth maximization.T h e f i n a n c i a l m a n a g e m e n t c o m e a l o n g w a y b ys h i f t i n g i t s f o c u s f r o m t r a d i t i o n a l approach tomodernapproach. The modern approach focuses on wealthmaximization rather than profit maximization.Thisgives a longer term horizonfor assessment, making way for sustainable performance by businesses.A myopicperson or business is mostly concerned aboutshort term benefits. A short termhorizon canfulfill objective of earning profit but may not helpin creatingwealth. It is because wealth creation needsa longer term horizon Therefore,FinanceManagement or Financial Management emphasizes onwealthmaximization rather thanprofitmaximization.For a business, it is notnecessary that profit should be the only objective; it mayconcentrate onvarious other aspects like increasing sales, capturing more marketshare etc,

whichwill take care of profitability. So, we can say thatprofit maximizationisa subset of wealth and being a subset, it will facilitate wealth creationGivingpriority to value creation, managers havenow shifted from traditionalapproach to modernapproach of financial management that focuseson wealthmaximization. This leads to better and trueevaluation of business. For e.g.,under wealth maximization, more importance is given to cash flowsratherthan profitability. As it issaid that profit is a relative term, it can be a figure insome currency, itcan be in percentage etc.For e.g. a profit of say $10,000cannot be judged as good or bad for a business,till it is comparedwithinvestment, sales etc. Similarly, duration of earning the profit is alsoimportanti.e. whether it is earned in short term or long term.In wealthmaximization, major emphasizes is on cashflows rather than profit. So, toevaluate variousalternatives for decision making, cash flows aretaken underconsideration. For e.g. to measure theworthof a project, criteria like:

present valueof its cash inflow present value of cash outflows (netpresent

value) is taken. Thisapproach considers cash flows rather than profits intoconsideration andalso use discountingtechnique to find out worth of a project.Thus, maximization of wealth approachbelieves thatmoney has time value.Anobvious question that arises now is that how can we measure wealth.Well, a

basic principle is thatultimately wealth maximization should be discovered inincreasednet worth or value of business. So, tomeasure the same, value ofbusiness is said to be a functionof two factors - earnings per shareandcapitalization rate. And it can be measured by adoptingfollowingrelation:Value of business = EPS / Capitalization rateAt times, wealthmaximizationmay create conflict, known as agency problem. This describesconflictbetween the owners andmanagers of firm. As, managers are the agents

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appointed by owners, a strategicinvestor or theowner of the firm would bemajorly concerned about the longer term performance of thebusinessthat canlead to maximization of shareholders wealth. Whereas, a manager mightfocus ontakingsuch decisions that can bring quick result, so that he/she canget credit for good performance.However, in course of fulfilling the same, amanager might opt for risky decisions which can puton stake the ownersobjectives.Hence, a manager should align his/her objective to broadobjectiveof organization and achieve atradeoff between risk and return while makingdecision;keeping in mind the ultimate goal of financial management i.e. tomaximize the wealth of itscurrent shareholdershe objections are:-(i) Profitcannot be ascertained well in advance to expressthe probability of return asfuture isuncertain. It is not at possible to maximize what cannot beknown.(ii)The executive or the decision maker may not have enough confidence in theestimatesof future returns so that he does not attempt future to maximize. It is

argued that firm's goalcannotbe to maximize profits but to attain a certainlevel or rate of profit holding certain share of themarket or certain level ofsales. Firms should try to 'satisfy' rather than to 'maximize'(iiiThere must be a balance between expected return and risk. The possibility ofhigher expectedyields are associated with greater risk to recognise such abalance and wealthMaximization isbrought in to the analysis. In such cases,higher capitalisation rate involves. Suchcombination of expected returns withrisk variations and related capitalisation rate cannot beconsidered intheconcept of profit maximization.(iv) The goal of Maximization of profitsisconsidered to be a narrow outlook. Evidentlywhen profit maximizationbecomes the basis of financial decisions of the concern, it ignoresthe interestsof the community on the one hand andthat of the government, workersandother concerned persons in the enterprise on the other hand.Keeping theabove objections in view, most of the thinkers on the subject have cometotheconclusion that the aim of an enterprise should be wealth Maximizationand not the profitMaximization. Prof. Soloman of Stanford University hashandled the issued very logically.Heargues that it is useful to make adistinction between profit and 'profitability'. Maximizationof profits with avie to maximising the wealth of shareholders is clearly an unreal motive.

Ontheother hand, profitability Maximization with a view to using resources toyield economicvalueshigher than the joint values of inputs required is a usefulgoal. Thus the proper goal of financialmanagement is wealth maximization.Q2. Explain the Net operating approach to capital structure.

Ans.

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net operating income approach examines the effects of changes in capitalstructure in termsof net operating income. In the net income approachdiscussed above net income available toshareholders is obtained by deductinginterest on debentures form net operating income. Thenoverall value of thefirm is calculated through capitalization rate of equities obtained on thebasisof net operating income, it is called net income approach. In the secondapproach, on the other hand overall value of the firm is assessed on the basisof net operating income not on the basis of net income. Hence this secondapproach is known as net operating income approach.The NOI approachimplies that (i) whatever may be the change in capital structure theoverallvalue of the firm is not affected. Thus the overall value of the firm isindependent of the degreeof leverage in capital structure. (ii) Similarly theoverall cost of capital is not affected by anychange in the degree of leverage incapital 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 mustdecrease withthe increase in debts whereas it is assumed under this methodthat overall cost of capital isunaffected and hence it remains constantirrespective of the change in the ratio of debts to equitycapital. How can thisassumption be justified? The advocates of this method are of the opinionthatthe degree of risk of business increases with the increase in the amount ofdebts.Consequently the rate of equity over investment in equity shares thus onthe one hand cost of capital decreases with the increase in the volume of debts;on the other hand cost of equitycapital increases to the same extent. Hence thebenefit of leverage is wiped out and overall costof capital remains at the samelevel as before. Let us illustrate this point.

If follows that with the increase in debts rate of equity capitalization alsoincreases andconsequently the overall cost of capital remains constant; it doesnot decline.To put the same in other words there are two parts of the cost ofcapital. One is the explicit costwhich is expressed in terms of interest chargeson debentures. The other is implicit cost whichrefers to the increase in therate 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 firmremains constant. In spite of the change in the ratio ofdebts to equity the market value of itsequity shares remains constant. Thismeans there does not exist a optimum capital structure.Every capitalstructure is optimum according to net operating income approach.

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Q.3 What do you understand by operating cycle.

Ans.An operating cycle is the length of time between the acquisition

of inventoryand the saleof that inventory and subsequent generation of aprofit. The shorter the operating cycle, the faster a business gets areturn oninvestment(ROI) for the inventory it stocks. As a general rule,companies wantto keep their operating cycles short for a number of reasons, but incertainindustries, a long operating cycle is actually the norm. Operating cyclesare not tied toaccounting periods, but are rather calculated in terms of howlong goods sit in inventory beforesale.When a business buys inventory, it tiesup money in the inventory until it can be sold. Thismoney may be borrowedor paid up front, but in either case, once the business has purchasedinventory,

those funds are not available for other uses. The business views this as anacceptabletradeoff because the inventory is an investment that will hopefullygenerate returns, but keepingthe operating cycle short is still a goal for mostbusinesses so they can keep their liquidity high.Keeping inventory during along operating cycle does not just tie up funds. Inventory must bestored andthis can become costly, especially with items that require special handling,such ashumiditycontrols or security. Furthermore, inventory can depreciate ifit is kept in a store toolong. In the case of perishable goods, it can even berendered unsalable. Inventory must also beinsured and managed by staffmembers who need to be paid, and this adds to

overalloperatingexpenses.There are cases where a long operating cycle inunavoidable. Wineries and distilleries, for example, keep inventory on handfor years before it is sold, because of the nature of the business.In theseindustries, the return on investment happens in the long term, rather than theshort term.Such companies are usually structured in a way that allows themto borrow against existinginventory or land if funds are neededtofinanceshort-term operations.Operating cycles can fluctuate. Duringperiods of economic stagnation, inventory tends to sitaround longer, whileperiods of growth may be marked by more rapid turnover. Certain products

can be consistent sellers that move in and out of inventory quickly. Others,like big ticket items,may be purchased less frequently. All of these issues mustbe accounted for when makingdecisions about ordering and pricing itemsfor inventory.Q.4 What is the implication of operating leverage for a firm.

Ans.Operating leverage:

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Operating leverage is the extent to which a firm uses fixed costs in producingits goods or offering its services. Fixed costsincludeadvertisingexpenses,administrative costs, equipment and technology,depreciation, and taxes, but not interest on debt,which is part of financialleverage. By using fixed production costs, a company can increase its profits.If a company has a large percentage of fixed costs, it has a high degree ofoperatingleverage. Automated and high-tech companies, utility companies,and airlines generally havehigh degrees of operating leverage.As anillustration of operating leverage, assume two firms, A and B, produce and sellwidgets.Firm A uses a highly automated production process with roboticmachines, whereas firm Bassembles the widgets using primarily semiskilledlabor. Table 1 shows both firms operatingcost structures.Highly automatedfirm A has fixed costs of $35,000 per year and variable costs of only $1.00per unit, whereas labor-intensive firm B has fixed costs of only $15,000 per

year, but its variablecost per unit is much higher at $3.00 per unit. Both firmsproduce and sell 10,000 widgets per year at a price of $5.00 per widget.Firm Ahas a higher amount of operating leverage because of its higher fixed costs,but firm Aalso has a higher breakeven pointthe point at which total costsequal total sales. Nevertheless,a change of I percent in sales causes more thana I percent change in operating profits for firm A, but not for firm B. Thedegree of operating leverage measures this effect. The followingsimplifiedequation demonstrates the type of equation used to compute the degree ofoperatingleverage, although to calculate this figure the equation wouldrequire several additional factorssuch as the quantity produced, variable costper unit, and the price per unit, which are used todetermine changes in profitsand sales:Operating leverage is a double-edged sword, however. If firm Assales decrease by I percent, its profits will decrease by more than I percent,too. Hence, the degree of operating leverage showsthe responsiveness ofprofits to a given change in sales.Implications:Total risk can be divided into two parts: business risk and financial risk.Businessrisk refers to the stability of a companys assets if it uses no debt orpreferred stock financing.Business risk stems from the unpredictable nature

of doing business, i.e., the unpredictability of consumer demand for productsand services. As a result, it also involves the uncertainty of long-termprofitability. When a company uses debt or preferred stock financing,additional riskfinancial riskis placed on the companys common shareholders. Theydemand a higher expected return for assuming this additional risk, which inturn, raises a companys costs.Consequently, companies with high degrees of

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business risk tend to be financed with relativelylow amounts of debt. Theopposite also holds: companies with low amounts of business risk canafford touse more debt financing while keeping total risk at tolerable levels. Moreover,usingdebt as leverage is a successful tool during periods of inflation. Debtfails, however, to provideleverage during periods of deflation, such as theperiod during the late 1990s brought on by theAsian financial crisis.

MB-46

Q.1 What is product mix? What are the strategies involved in product

mixand product line? (10 marks)

Answer Product mixThe number of individual products produced or sold by an organization.Themix is defined by the industry and manufacturing environment, andmanagement strategiesthat position the company as a specialty, niche or broad- based supplier of goods and services.Instances where the product mix varieswidely from period to period often requires more

investment in facilities andinventory, and may result in lower levels of customer service.It isextremely important for any organization to have a well-managed productmix. Mostorganizations break down managing the product mix, product line,and actual product into threedifferent levels.Strategies involved in product mix and product lineProduct-mix decisions areconcerned with the combination of product linesoffered by the company. Management of thecompanies' product mix is theresponsibility of top management.Some basic product-mixdecisions include:1.reviewing the mix of existing product lines;2.adding new lines to anddeleting existing lines from the product mix;3.determining the relative emphasis on new versusexisting product lines in themix;4.determining the appropriate emphasis on internaldevelopment versus externalacquisition in the product mix;5.gauging the effects of adding or

deleting a product line in relationship to other lines in the product mix; and6.forecasting theeffects of future external change on the company's productmix.Product-line decisions areconcerned with the combination of individual products offered within a given line. The product-line manager supervisesseveral product managers who are responsible for individual productsin theline. Decisions about a product line are usually incorporated into a marketing plan at the

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divisional level. Such a plan specifies changes in the product linesand allocations to products ineach line.

Generally, product-line managers have the following responsibilities:1.considering expansion

of a given product line;2.considering candidates for deletion from the product line;3.evaluatingthe effects of product additions and deletions on the profitability of other items in the line;and4.allocating resources to individual products in the line on the basis of marketing strategiesrecommended by product managers.Decisions at the first level of product management involvethe marketing mixfor an individual brand/product. These decisions are the responsibility ofa brand manager (sometimes called a product manager). Decisions regarding themarketing mixfor a brand are represented in the product's marketing plan. The plan for a new brand wouldspecify price level, advertising expenditures for thecoming year, coupons, trade discounts,distribution facilities, and a five-year statement of projected sales and earnings. The plan for an

existing productwould focus on any changes in the marketing strategy. Some of thesechangesmight include the product's target market, advertising and promotionalexpenditures,product characteristics, price level, and recommended distributionstrategyManaging the productmix for a company is very demanding and requiresconstant attention. Top management mustprovide accurate and timely analysis(BCG) of their company's product mix so the appropriateadjustments can bemade to the product line and individual products.Q.2 What is a distribution channel? Explain the factors to be consideredwhilesetting up a distribution channel. (10 marks)Answer Distribution channelA path through which goods and services flow in one direction(from vendor tothe consumer), and the payments generated by them that flow in the

oppositedirection (from consumer to the vendor).A marketing channel can be as short as beingdirect from the vendor to theconsumer or may include several interconnected intermediariessuch aswholesalers, distributors, agents, retailers. Each intermediary receives the itemat onepricing point and moves it to the next higher pricing point until it reachesthe final buyer. Alsocalled channel of distribution or marketing channel.

Distribution is also a very important component of Logistics & Supply chainmanagement.Distribution in supply chain management refers to the distributionof a good from one businessto another. It can be factory to supplier, supplier toretailer, or retailer to end customer. It isdefined as a chain of intermediaries,each passing the product down the chain to the next

organization, before itfinally reaches the consumer or end-user. This process is known asthe'distribution chain' or the 'channel.' Each of the elements in these chains willhave their ownspecific needs, which the producer must take into account, alongwith those of the all-importantend-user.Factors to be considered for setting up Distribution channelThe selection ofdistribution is affected by many of factors, which playsignificant role while choosing thechannel for distribution. It may include the buying pattern of consumer, type of the product isperishable, or auto mobile,weight and bulk and it also depends on the company's resources.The

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main affecting factors are following..Organization objectives - If company objective is to havemass appeal and rapidmarket penetration.type of product - Perishable products should have ashort distribution channel,FMCG goods should have a wide reaching, intensive distributionchannel.nature and extent of market- Distribution to consumer market or industrialmarketswould be different channel structures.existing channel for comparable product- company maychose it's existingchannel of distribution for relative product. buying habit of customers-Understanding consumer needs and criteria for buyingChannel Availability - Channels maynot be availableand other factors likeCustomer CharacteristicsProduct AttributesType ofOrganizationCompetitionMarketing Environmental Forces and Characteristics ofIntermediariesChannelsA number of alternate 'channels' of distribution may be available:

Distributor, who sells to retailers,Retailer (also called dealer or reseller), who sells to endcustomersAdvertisement typically used for consumption goodsDistribution channels may not

be restricted to physical products alice from producer to consumer in certain sectors, since bothdirect and indirect channelsmay be used. Hotels, for example, may sell their services (typicallyrooms)directly or through travel agents, tour operators, airlines, tourist boards,centralizedreservation systems, etc. process of transfer the products or servicesfrom Producer to Customeror end user.There have also been some innovations in the distribution of services. For example,there has been an increase in franchising and in rental services - thelatter offering anything fromtelevisions through tools. There has also beensome evidence of service integration, withservices linking together, particularlyin the travel and tourism sectors. For example, links nowexist between airlines,hotels and car rental services. In addition, there has been a significantincreasein retail outlets for the service sector. Outlets such as estate agencies and building

society offices are crowding out traditional grocers from major shopping areas.ChanneldecisionsChannel Sales is nothing but a chain for to market a product throughdifferentsources.Channel strategyGravity & adventurePush and Pull strategyProduct (orservice)CostConsumer locationManagerial concernsThe channel decision is very important. Intheory at least, there is a form of trade-off: the cost of using intermediaries to achieve widerdistribution issupposedly lower. Indeed, most consumer goods manufacturers couldnever justify the cost of selling direct to their consumers, except by mail order. Manysuppliersseem to assume that once their product has been sold into the channel,into the beginning of thedistribution chain, their job is finished. Yet thatdistribution chain is merely assuming a part of

the supplier's responsibility; and,if they have any aspirations to be market-oriented, their jobshould really be

extended to managing all the processes involved in that chain, until the productor service arriveswith the end-user. This may involve a number of decisions onthe part of the supplier:ChannelmembershipChannel motivationMonitoring and managing channelsQ.3 Discuss the communication development process with examples.(10marks)

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Answer In development communication, you see that there are twowords-development andcommunication.Communication is a message understood or sharing of experience. Whenwerefer to communication, in the context of development, we refer to various typesofcommunication like interpersonal, group and mass communication.Development,It is not easyto define this as it depends on the context.Development is about change. It is about changing forthe better.It could be about social or economic change for improvement or progress.When werefer to development communication, it is about such communicationthat can be used fordevelopment. It is about using communication to change or improve something. Here we usedifferent types of messages to change thesocio-economic condition of people. These messagesare designed to transformthe behaviour of people or for improving their quality of life.Therefore,development communication can be defined as the use of communicationto promote development. Those who write or produce programmes on issuesrelated todevelopment are called development communicators.Role of a developmentcommunicator The development communicator plays a very significant role in explaining

thedevelopment process to the common people in such a way that it findsacceptance.In order toachieve this objective a development communicator:has to understand the process ofdevelopment and communication;should possess knowledge in professional techniques andshould know theaudience; prepare and distribute development messages to millions of peoplein such a way that they are received and understood, accepted and applied.If they accept thischallenge they will be able to get the people to identifythemselves as part of a society and anation. This identity will help in bringinghuman resources together for the total welfare of theindividual and thecommunity at large.DEVELOPMENT COMMUNICATION USINGVARIOUS MEDIAThe history of development communication in India can be traced torural radio broadcasts in the 1940s in different languages. Have you ever heard arural programme on radio? If you come from a rural area, you probably would haveheard.People who present these programmes speak in a language or dialect thatthe people in your areaspeak. The programmes may be about farming andrelated subjects. The programme maycomprise of interviews with experts,officials and farmers, folk songs and information aboutweather, market rates,availability of improved seeds and implements. There would alsobe programmes on related fields. During the 1950s, the government started hugedevelopmentalprogrammes throughout the country.In fact, when Doordarshanstarted on 15th September1959, it was concentrating only on programmes onagriculture. Many of you might have seenthe Krishi Darshan programme onDoordarshan. Later in 1975, when India used satellites for

telecasting television programmes in what is known as SITE (Satellite InstructionalTelevisionExperiment), the programmes on education and development were madeavailable to2400 villages in the states of Andhra Pradesh, Bihar, Karnataka,Madhya Pradesh, Orissa andRajasthan.As far as the print media is concerned, after Independence when the Five Year Planswere initiated by the government for planned development, it was thenewspapers which gavegreat importance to development themes. They wroteon various government developmentprogrammes and how the people couldmake use of them.If the print media have contributed to

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development communication, theelectronic mediaradio and television especially All IndiaRadio andDoordarshan have spread messages on development as the main part oftheir broadcasts. However, amongst all the media that are used fordevelopmentcommunication, traditional media are the closest to people who need messagesofdevelopment like the farmers and workers. Such forms of media are participatory andeffective.You may have seen construction workers cooking their meal of dal and riceover openfires in front of their tents set up temporarily on the roadside. Theyneed to be educated about thevalues of balanced nutrition, cleanliness, hygiene and water and sanitation.In various parts ofIndia, groups of volunteers use street theatre as a medium for development communication.This is done through humorous skits and playsthrough which the importance of literacy,hygiene etc. are enacted. The contentfor the skits is drawn from the audiences life. Forexample, they are told aboutbalanced nutrition . This means supplementing their staple diet of

dal and ricewith green leafy vegetables known to cure night blindness, an ailmentcommonamong construction workers. Similarly, female construction workers and their children

are taught how to read and write.However, problems in communicating a message in aneffective way has been amatter of concern to development workers.How can people be taughtnew skills at a low cost?What would be a good way to deal with sensitive topics such as healthissues?How can complicated new research, like that in agriculture for example, besimplified sothat ordinary people can benefit?One option has been the use of comics. But, in order to achievethe desiredresults, these comics should be created locally.But what are comics ? You musthave all at some point of time read a comic.Comics involve story telling using visuals whichmust follow local ideas andculture in order to be understood correctly by people. The importantthing aboutcomics is that they are made by people on their own issues in their ownlanguage. So,readers find them closer to their day-to-day lives.Programmes are organized in the remote areasof Jharkhand, Rajasthan,Tamilnadu, and the North East to provide training to ruralcommunicators toenable them to use comics in development communication.Information onsensitive health issues such as HIV/AIDS has beencommunicated throught the medium ofcomics in several states. However, youmust understand that development communication usingvarious media is possible only with the active involvement of the following:(i) Developmentagencies like departments of agriculture.(ii) Voluntary organizations(iii) Concerned citizens(iv)Non governmental organizations (NGOs)ExamplesOne of the first examples of developmentcommunication was Farm Radio

Forums in Canada. From 1941 to 1965 farmers met in groups each week tolisten to specialradio programs. There were also printed materials and preparedquestions to encourage groupdiscussion. At first this was a response to theGreat Depression and the need for increased foodproduction in World War II.But the Forums also dealt with social and economic issues. Thismodel of adulteducation or distance education was later adopted in India and Ghana.In 1999 theU.S. Government and D.C. Comics planned to distribute 600,000comic books to children

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affected by the Kosovo War. The comic books are inAlbanian and feature Superman andWonder Woman. The aim is to teachchildren what to do when they find an unexploded landmine left over fromKosovo'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 1997Ottawa Treaty which attempts to ban land mines they continue to killor injure 20,000 civilianseach year around the world.Since 2002, Journalists for Human Rights, a Canadian based NGO,has operatedlong term projects in Ghana, Sierra Leone, Liberia, and the DR Congo. jhr worksdirectly with journalists, providing monthly workshops, student sessions,on the job training, andadditional programs on a country by country basis.Q.4. Select any mobile handset and mobile company and then evaluateitspositioning strengths or weakness in terms of attributes, benefits,values,brand name and brand equity. (10 marks)Answer AbstractIn the late 1990s, Nokia overtook then leader Motorola to emerge as abehemothin the global mobile phone industry. Nokia's dominance continued into the firstfew

years of the 2000s, but it suddenly came under threat in 2003-2004, whensmaller Asian vendorsstarted making their presence felt with better products atlower prices.

The company's problems also had internal causes and analysts said one of thereasons could bethat it had become too complacent with its success and lost itsagility in reading and respondingto market signals.This case study discusses the various problems Nokia faced in 2003-2004,including the company's tardiness in introducing the clamshell phones that had becomevery popular and its resistance to manufacturing operator specifichandsets. It also discusses theefforts Nokia made to recover its market once itrealized that its performance was slipping. The

case concludes with an analysisof the challenges the company faced in the future and thevarious options aheadof it.Issues:To understand the difficulties faced by an erstwhile giant inthe global mobile phone industry in 2003-2004.To appreciate the importance of innovation in adynamic and volatile industry.To analyze the effect of changing market conditions oncompanies.To appreciate the importance of keeping abreast with changing marketconditionsand adapting to them speedily.To examine future challenges that the company faced and thevarious optionsavailable to itWe want to be the company that brings this industry to the nextphase. And if we have a little bit of a bump in the road in 2004, that's immaterial."- Jorma Ollila,CEO of Nokia, in mid 2004.1"Nokia didn't have the coolness factor. They didn't really do flip

phones; theywere a little late with cameras, and they didn't push them. Coolness in theconsumerspace is a big deal, and they were stodgy."Jack Gold, vice president of Meta Group,aConnecticut-based technology consulting firm, in 2005.2Positive SignsThe announcement ofNokia Corporation's (Nokia) quarterly results in April2005 was a much awaited event as far asthe global mobile phone industry wasconcerned. The company, which had emerged as anindustry leader in the late1990s, had run into rough weather in 2003-2004, with sales andearnings falling below expected levels. So much so that when the company announced poor

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results in the first quarter of 2004, several analysts declared that it was the beginning of the endof Nokia's dominance in the industry.However, Nokia was not ready to throw in the towel quiteso easily. Thecompany put up a tough fight over the second half of 2004 to recapture itslost position in the market.It introduced several new models, modified designs, and aggressivelypromoted products with a view to increasing its market share, which had fallen to a lowof around 28 percent in early 2004 from an average of 35 percent over the previousthreeyears. Nokia's efforts started paying off by late 2004. The company announcedsatisfactoryresults for the fourth quarter of 2004 and market share for the year 2004 also stabilized at 32percent by the end of the year. Jorma Ollila (Ollila), Nokia's CEO, while acknowledging that2004 had been a challenging year,declared that the company was poised to recover in 2005.Ollila's predictioncame true when the company announced better than expected results for thefirstquarter of 2005, ending March 31.In the first quarter of 2005, Nokia's sales increased 17percent over thecorresponding quarter of the previous year to $9.65 billion. Net profit rose 18percent to $1.1 billion. Global handset sales rose 11 percent, prompting Nokia to increase itsestimate of the size of the global handset marketin 2005 by 100 million to 740million.Commenting on Nokia's improved performance, Jussi Hyoty (Hyoty), an analyst at

securities firm FIM Securities,said, "Nokia's result was definitely better than expected, and itshows that it's agrowth company again."3However, despite these positive signs, several analystswondered whether Nokiawould ever be able to dominate the industry as it did in the late 1990sand thefirst two years of the new century, especially in light of the aggressivecompetition posedby several new Asian companies as well as more established players like Motorola and SonyEricsson.BackgroundDespite the relatively recent emergence of the mobile phone industryglobally, Nokia's company history goes back to the 1800s.The company was first set up on thebanks of the river Nokia (after which it wasnamed) in southwestern Finland in 1865 by FredrikIdestam, who was a mining engineer. The original Nokia was a forest industry enterprise thatprimarilymanufactured paper.In 1898, Carl Henrik Lampen, a shopkeeper, and J.E. Segerberg,an engineer,set up the Finnish Rubber Works Ltd. (FRW) to manufacture rubber andassociatedchemicals. In 1912, Konstantin Wikstrom, an engineer, set up theFinnish Cable Works (FCW)to manufacture electrical cables for lighting purposes. These three companies had businessdealings with each other throughthe early 1900s and eventually merged in 1967 to form theNokia Corporation.The new company had four major businesses - forestry, rubber, cableandelectronics.By 1980, Nokia was a large business conglomerate with several

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businessesranging from tires to televisions and computers to telecommunications.ExcerptsTheRise to the Top Nokia drew on its experience of setting up Nordic cellular networks(whichwere more advanced than those used by Japan, the rest of Europe, and the US atthattime) to successfully adopt the GSM standard. The company was listed onthe New York StockExchange in 1994. Over the 1990s, Nokia became one of the most successful mobile phonemanufacturers in the world and began to enter non-Scandinavian markets as well. Nokia wasalso one of the first mobile manufacturers to realize the importanceof the design element inmobile phones and its phones were more aestheticallydesigned than those of competitors. In1998, Nokia overtook Motorola to become the largest mobile manufacturer in theworld...Designed for Innovation Nokia was the first mobile phone manufacturer to realize in thelate 1990s that phones no longer played only a functional role; they were also becomingfashionsymbols.Until Nokia began emphasizing the design aspect, mobile phones werebulky, bricklike devices with an external antenna and a standard keypad.Manufacturersemphasized functionality over aesthetic appeal. Nokia broke new ground in 1999, when it

launched its 8200 handset on thecatwalk at a Paris fashion week..

The Decline

In mid-2004, The Economist wrote, "When a firm dominates its market,especially one that isdriven by constant technological advances, it risks becoming so fixated with trying to ward offwhat it reckons to be its most powerful challenger that it leaves itself vulnerable to attack fromother directions."Analysts said this statement accurately characterized what happenedwithNokia.In the early 2000s, Microsoft Corp (Microsoft) announced its decision to enter themobile phones market. The announcement set alarm bells ringing in Nokiaas Microsoft had the

reputation of being an aggressive competitor...Efforts at RecoverySoon after announcingdisappointing results in the first quarter of 2004, Nokiarealized that it was in trouble and beganto take steps to correct matters. Thecompany not only cut prices on certain handsets to increasemarket share, butalso fine-tuned its portfolio to adjust products to meet market needs. Itkilledsome outmoded models and brought forward the launch of several others,including anumber of clamshell phones.In June 2004, Nokia launched five new models of phones, out ofwhich threewere clamshells. Nokia's new models were the 6260 model, a clamshellwhosecover not only flipped open but also swiveled, the 6630, which Nokia claimedwas theworld's smallest camera phone, designed for 3G networks, another clamshell, the 6170, and twolow end models, the 2650 and 2600. Several other models were also marketed aggressively.For

instance, the low end 1100 model for emerging markets and the 6230 midrange model becamevery popular in 2004. (The 6230 was so popular in somemarkets that at times, Nokia was notable to meet the demand)...A Challenging FutureDespite Nokia's laudable efforts in thedirection of recapturing its lost market position, the opinions of analysts on its turnaroundweremixed.While the company's detractors believed that Nokia had lost its competitiveadvantage inthe mobile phone market, its supporters said the company'sinherent strengths and stablefinancial position would help it sail through thedifficulties it had faced in 2003-2004 to recover

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in the future. However, most of them agreed that the mobile phone industry was undergoing avast change.In the early 2000s, mobile phones were expected to perform a variety of functionsin addition to looking stylish and being easy to operate. Nokia'scompetitors had understood thisand were in the process of launching severalmodels that were style statements in themselves...

ExhibitsExhibit I: The Phone Feature of N-Gage

Q. 5 What is retailing? Explain the functions and different types of retailing

with its key features. (10 marks)

Answer RetailingRetail consists of the sale of goods or merchandise from a fixed location,suchas a department store, boutique or kiosk, or by mail, in small or individual lotsfor directconsumption by the purchaser.[1] Retailing may include subordinatedservices, such as delivery.Purchasers may be individuals or businesses. Incommerce, a "retailer" buys goods or productsin large quantities frommanufacturers or importers, either directly or through a wholesaler, and

thensells smaller quantities to the end-user. Retail establishments are often calledshops or stores.Retailers are at the end of the supply chain. Manufacturingmarketers see the process of retailingas a necessary part of their overalldistribution strategy. The term "retailer" is also applied wherea service provider services the needs of a large number of individuals, such as a public utility,likeelectric power.Types of retailers by marketing strategy:Department stores - very large storesoffering a huge assortment of "soft" and"hard goods; often bear a resemblance to a collection ofspecialty stores. Aretailer of such store carries variety of categories and has broad assortmentataverage price. They offer considerable customer service.Discount stores - tend to offer a widearray of products and services, but theycompete mainly on price offers extensive assortment of

merchandise ataffordable and cut-rate prices. Normally retailers sell less fashion-oriented brands.Supermarkets - sell mostly food products;Warehouse stores - warehouses thatoffer low-cost, often high-quantity goods piled on pallets or steel shelves; warehouse clubscharge a membership fee;Variety stores or "dollar stores" - these offer extremely low-costgoods, withlimited selection;Demographic - retailers that aim at one particular segment (e.g.,high-endretailers focusing on wealthy individuals).Mom-And-Pop (or Kirana Stores as they callthem in India): is a retail outletthat is owned and operated by individuals. The range of productsare veryselective and few in numbers. These stores are seen in local community often arefamily-run businesses. The square feet area of the store depends on the storeholder.Specialtystores: A typical speciality store gives attention to a particular category and provides high level

of service to the customers. A pet store thatspecializes in selling dog food would be regarded asa specialty store. However, branded stores also come under this format. For example if acustomer visits aReebok or Gap store then they find just Reebok and Gap products intherespective stores.General store - a rural store that supplies the main needs for thelocalcommunity;Convenience stores: is essentially found in residential areas. Theyprovidelimited amount of merchandise at more than average prices with a speedycheckout.This store is ideal for emergency and immediate purchases.Hypermarkets: provides variety and

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huge volumes of exclusive merchandise atlow margins. The operating cost is comparativelyless than other retail formats.A classic example is the Metro in Bangalore.Supermarkets: is a

self service store consisting mainly of grocery and limited products on non food items. Theymay adopt a Hi-Lo or an EDLP strategy for pricing. The supermarkets can be anywherebetween 20,000-40,000 square feet.Example: SPAR supermarket.Malls: has a range of retailshops at a single outlet. They endow with products,food and entertainment under a roof.Example: Sigma mall and Garuda mall inBangalore, Express Avenue in Chennai.Categorykillers or Category Specialist: By supplying wide assortment in asingle category for lowerprices a retailer can "kill" that category for other retailers. For few categories, such aselectronics, the products are displayed atthe centre of the store and sales person will be availableto address customer queries and give suggestions when required. Other retail format storesareforced to reduce the prices if a category specialist retail store is present in thevicinity. Forexample: Pai Electronics store in Bangalore, Tata Croma.E-tailers: The customer can shopand order through internet and themerchandise are dropped at the customer's doorstep. Here the

retailers use dropshipping technique. They accept the payment for the product but thecustomer receives the product directly from the manufacturer or a wholesaler. This formatisideal for customers who do not want to travel to retail stores and areinterested in homeshopping. However it is important for the customer to bewary about defective products and nonsecure credit card transaction. Example:Amazon and Ebay.Vending Machines: This is anautomated piece of equipment wherein customerscan drop in the money in machine andacquire the products. For example: Softdrinks vending at Bangalore Airport.Some stores take ano frills approach, while others are "mid-range" or "high end", depending on what income levelthey target.Other types of retail store include:Automated Retail stores are self service, robotickiosks located in airports, mallsand grocery stores. The stores accept credit cards and are usuallyopen 24/7.Examples include ZoomShops and Redbox.Big-box stores encompass largerdepartment, discount, general merchandise,and warehouse stores.Convenience store - a smallstore often with extended hours, stocking everydayor roadside items;General store - a storewhich sells most goods needed, typically in a rural area;Retailers can opt for a format as eachprovides different retail mix to itscustomers based on their customer demographics, lifestyle andpurchase behaviour. A good format will lend a hand to display products well and enticethetarget customers to spawn sales.Functions of RetailingRetailers play a significant role as aconduit between manufacturers,wholesalers, suppliers and consumers. In this context, theyperform variousfunctions like sorting, breaking bulk, holding stock, as a channel

of communication, storage, advertising and certain additional services.SortingManufacturersusually make one or a variety of products and would like to selltheir entire inventory to a fewbuyers to redu7ce costs. Final consumers, incontrast, prefer a large variety of goods and servicesto choose from and usually buy them in small quantities. Retailers are able to balance thedemands of bothsides, by collection an assortment of goods from different sources, buyingthemin sufficiently large quantities and selling them to consumers in small units.The aboveprocess is referred to as the sorting process. Through this process,retailers undertake activities

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and perform functions that add to the value of the products and services sold to the consumer.Supermarkets in the US offer, onand average, 15,000 different items from 500 companies.Customers are able tochoose from a wide range of designs, sizes and brands from just onelocation. If each manufacturer had a separate store for its own products, customers wouldhaveto visit several stores to complete their shopping. While all retailers offer an assortment, theyspecialize in types of assortment offered and the market towhich the offering is made. Westsideprovides clothing and accessories, while a chain like Nilgiris specializes in food and bakeryitems. Shoppers Stop targetsthe elite urban class, while Pantaloons is targeted at the middleclass.Breaking Bulk Breaking bulk is another function performed by retailing. The wordretailing isderived from the French word retailer, meaning to cut a piece off. To

reducetransportation costs, manufacturers and wholesalers typically ship large cartonsof theproduct, which are then tailored by the retailers into smaller quantities tomeet individualconsumption needs.Holding Stock Retailers also offer the service of holding stock for themanufacturers. Retailersmaintain an inventory that allows for instant availability of the product

to theconsumers. It helps to keep prices stable and enables the manufacturer toregulateproduction. Consumers can keep a small stock of products at home asthey know that this can bereplenished by the retailer and can save on inventorycarrying costs.Additional ServicesRetailersease the change in ownership of merchandise by providing servicesthat make it convenient tobuy and use products. Providing product guarantees,after-sales service and dealing withconsumer complaints are some of theservices that add value to the actual product at theretailers end. Retailers alsooffer credit and hire-purchase facilities to the customers to enablethem to buy a product now and pay for it later. Retailers fill orders, promptly process,deliver and install products. Salespeople are also employed by retailers to answer queries andprovide additional information about the displayed products. Thedisplay itself allows theconsumer to see and test products before actual purchase. Retail essentially completestransactions with customers.Channel of CommunicationRetailers also act as the channel ofcommunication and information between thewholesalers or suppliers and the consumers. Fromadvertisements, salespeopleand display, shoppers learn about the characteristics and features ofa product or services offered. Manufacturers, in their turn, learn of sales forecasts,deliverydelays, and customer complaints. The manufacturer can then modify defectiveorunsatisfactory merchandise and services.

Transport and Advertising FunctionsSmall manufacturers can use retailers to provide assistance

with transport,storage, advertising and pre-payment of merchandise. This also works theother way round in case the number of retailers is small. The number of functions performed bya particular retailer has a direct relation to the percentage andvolume of sales needed to coverboth their costs and profits.

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Q. 6 a. What is CRM? What are its objectives? (2 marks)b. Write a short noteon Brand development. (8 marks)AnswerCRMstands forCustomer Relationship Management. It is a process or methodology used to learn more about customers needs andbehaviors in order to developstronger relationships with them. There are manytechnological components to CRM, butthinking about CRM in primarilytechnological terms is a mistake. The more useful way tothink about CRM is as aprocess that will help bring together lots of pieces of informationabout customers,sales, marketing effectiveness, responsiveness and market trends.CRMhelps businesses use technology and human resources to gain insight into thebehavior of customers and the value of those customers.

Objectives of CRMCRM, the technology, along with human resources of the company, enables thecompany toanalyze the behavior of customers and their value. The main areas offocus are as the namesuggests:

customer,

relationship, and

the management of relationshipand the mainobjectives to implement CRM in the business strategy are:To simplify marketing and sales processTo make call centers more efficientTo provide better customer serviceTo discover new customers and increase customer revenueTo cross sell products more effectivelyThe CRM processes should fully supportthe basic steps of

customer life cycle. The basicsteps are:Attracting present and new customers

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Acquiring new customersServing the customersFinally, retaining the customersBrand developmentA plan to improve the performance of a particular product or service. For example,as part of brand development a firm may initiate a new advertising campaign thatincludes freesamples.

MB-48

Q1. What are the essential characteristics of Operation Research? Mentiondifferentphases in an Operation Research study. Point out some limitations of O.R?Ans.Characteristics of Operations Research

Operations research, an interdisciplinary division of mathematics and science, usesstatistics,algorithms and mathematical modeling techniques to solve complexproblems for the best possible solutions. This science is basically concerned withoptimizing maxima and minima of the objective functions involved. Examples ofmaxima could be profit, performance and yield.Minima could be loss and risk. Themanagement of various companies has benefited immenselyfrom operationsresearch.Operations research is also known as OR. It has basic characteristics suchas systems orientation,using interdisciplinary groups, applying scientificmethodology, providing quantitative answers,revelation of newer problems andthe consideration of human factors in relation to the stateunder which research isbeing conducted.Systems Orientationo This approach recognizes the fact that the behavior of any part of the systemhas an effect onthe system as a whole. This stresses the idea that the interactionbetween parts of the system iswhat determines the functioning of the system. Nosingle part of the system can have a bearingeffect on the whole. OR attempts

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appraise the effect the changes of any single part would haveon the performance ofthe system as a whole. It then searches for the causes of the problem thathas ariseneither in one part of the system or in the interrelation parts.Interdisciplinary groupso The team performing the operational research is drawn fromdifferent disciplines. Thedisciplines could include mathematics, psychology,statistics, physics, economics andengineering. The knowledge of all the peopleinvolved aids the research and preparation of thescientific model.Application of Scientific Methodologyo OR extensively uses scientific means and methods to solve problems. MostOR studiescannot be conducted in laboratories, and the findings cannot be appliedto natural environments.Therefore, scientific and mathematical models are usedfor studies. Simulation of these models iscarried out, and the findings are thenstudied with respect to the real environment.

New Problems Revealed

o Finding a solution to a problem in OR uncovers additional problems. To obtainmaximum benefits from the study, ongoing and continuous research is necessary.New problems must be pursued immediately to be resolved. A company looking toreduce costs in manufacturing mightdiscover in the process that it needs to buy onemore component to manufacture the end product.Such a scenario would result inunexpected costs and budget overruns. Ensuring flexibility for such contingenciesis a key characteristic of OR.

Provides Quantitative Answerso The solutions found by using operations research are always quantitative.OR considers twoor more options and emphasizes the best one. The company mustdecide which option is the bestalternative for it.Human Factorso In other forms of quantitative research, human factors are not considered, but inOR, humanfactors are a prime consideration. People involved in the process may

become sick, which wouldaffect the companys output.PHASES OPERATIONS RESEARCH

Formulate the problem:This is the most important process, it is generally lengthy and timeconsuming. Theactivities that constitute this step are visits, observations, research, etc. Withthehelp of such activities, the O.R. scientist gets sufficient information and supportto proceed and is better prepared to formulate the problem. This process starts with

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understanding of theorganizational climate, its objectives and expectations.Further, the alternative courses of actionare discovered in this step.Develop a model:Once a problem is formulated, the next step is to express the probleminto amathematical model that represents systems, processes or environment inthe formof equations, relationships or formulas. We have to identify both the staticand dynamicstructural elements, and device mathematical formulas to represent theinterrelationshipsamong elements. The proposed model may be field tested andmodified in order to work under stated environmental constraints. A model mayalso be modified if themanagement is not satisfied with the answer that it gives.Select appropriate data input:Garbage in and garbage out is a famous saying. Nomodel will work appropriately

if data input is not appropriate. The purpose of this step isto have sufficient input tooperate and test the model.Solution of the model:After selecting the appropriate data input, the next step is to finda solution. If themodel is not behaving properly, then updating and modification isconsidered atthis stage.Validation of the model:A model is said to be valid if it can provide a reliableprediction of the systemsperformance. A model must be applicable for a longer time

and can be updated from time to time taking into consideration the past, presentandfuture aspects of the problem.Implement the solution:The implementation of the solution involves so many behavioural issues and theimplementing authority is responsible for resolving theseissues. The gap betweenone who provides a solution and one who wishes to use it should be eliminated. To

achieve this, O.R. scientist as well as management should play a positive role. Aproperly implemented solution obtained through O.R. techniques resultsinimproved working and wins the management support.LimitationsDependence on an Electronic Computer:

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O.R. techniques try to find out an optimalsolution taking into account allthe factors. In the modern society, these factors areenormous and expressing themin quantity and establishing relationships among theserequire voluminouscalculations that can only be handled by computers.

Non-Quantifiable Factors:O.R. techniques provide a solution only when all theelements related to a problemcan be quantified. All relevant variables do not lendthemselves to quantification.Factors that cannot be quantified find no place in O.R.models.Distance between Manager and Operations Researcher:O.R. being specialists jobrequires a mathematician or a statistician, who might

not be aware of the business problems. Similarly, a manager fails to understand thecomplex working of O.R. Thus,there is a gap between the two.

Money and Time Costs:When the basic data are subjected to frequent changes,incorporating them into theO.R. models is a costly affair. Moreover, a fairly goodsolution at present may bemore desirable than a perfect O.R. solution available after sometime.Implementation:Implementation of decisions is a delicate task. It must take intoaccount thecomplexities of human relations and behaviour.Q2. What are the common methods to obtain an initial basic feasible solution foratransportation problem whose cost and requirement table is given? Give astepwiseprocedure for one of them?Ans.Transportation Problem & its basic assumptionThis model studies the minimization of the cost of transporting a commodity froma number of sources to several destinations. The supply at each source and thedemand at eachdestination are known. The transportation problem involves msources, each of which hasavailable.i (i = 1, 2, ..,m) units of homogeneousproduct andn destinations, each of which requiresbj (j = 1, 2., n) units of

products. Here a

i and bj are positiveintegers. The cost cij of transporting one unit of the productfrom theith source to the jth destination is given for eachi and j. The objective is todevelop an integral transportation schedule that meets all demandsfrom theinventory at a minimum total transportation cost.It is assumed that the total

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supplyand the total demand are equal.i.e.Condition (1)The condition (1) isguaranteed by creating either a fictitious destination with ademand equal tothe surplus if total demand is less than the total supply or a (dummy)source with asupply equal to the shortage if total demand exceeds total supply. The costof transportation from the fictitious destination to all sources and from alldestinations to thefictitious sources are assumed to be zero so that total cost oftransportation will remain thesame.Formulation of Transportation ProblemThe standard mathematical model for the transportation problem is as follows. Letxij be number of units of the homogenous product to be transported from source ito thedestination j Then objective is toTheorem:A necessary and sufficientcondition for the existence of a feasible solution to thetransportation problem (2) isthatQ3. a. What are the properties of a game? Explain the best strategy on the basis

of minmax criterion of optimality.b. State the assumptions underlying game theory.Discuss its importance to businessdecisions.Ans. a) Minimax(sometimesminmax) is a decision rule used indecision theory,gametheory, statistics and philosophyformini

mizing the possible losswhilemax

imizing the potential gain.Alternatively, it can be thought of as maximizing theminimum gain (maximin). Originallyformulated for two-playerzero-sum game theory, covering both thecases where players takealternate moves and those where they make simultaneousmoves, it has also been extended tomore complex games and to general decisionmaking in the presence of uncertainty.Game theory

In the theory ofsimultaneous games,a minimax strategy is a mixed strategywhich

is part of thesolution to a zero-sum game. In zero-sum games, the minimaxsolution is the same as the Nashequilibrium.Minimax theoremThe minimax theorem states:For every two-person, zero-sum game with finitelymany strategies, there exists a value V and amixed strategy for each player, suchthat (a) Givenplayer 2s strategy, the best payoff possiblefor player 1 is V, and (b)Givenplayer 1s strategy, the best payoff possible for player 2 is V.Equivalently,

http://en.wikipedia.org/wiki/Decision_theoryhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Philosophyhttp://en.wikipedia.org/wiki/Philosophyhttp://en.wikipedia.org/wiki/Loss_functionhttp://en.wikipedia.org/wiki/Zero-sumhttp://en.wikipedia.org/wiki/Zero-sumhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Game_theory#Simultaneous_and_sequentialhttp://en.wikipedia.org/wiki/Game_theory#Simultaneous_and_sequentialhttp://en.wikipedia.org/wiki/Strategy_(game_theory)#Pure_and_mixed_strategieshttp://en.wikipedia.org/wiki/Nash_equilibriumhttp://en.wikipedia.org/wiki/Nash_equilibriumhttp://en.wikipedia.org/wiki/Nash_equilibriumhttp://en.wikipedia.org/wiki/Nash_equilibriumhttp://en.wikipedia.org/wiki/Strategy_(game_theory)#Pure_and_mixed_strategieshttp://en.wikipedia.org/wiki/Strategy_(game_theory)#Pure_and_mixed_strategieshttp://en.wikipedia.org/wiki/Game_theory#Simultaneous_and_sequentialhttp://en.wikipedia.org/wiki/Game_theory#Simultaneous_and_sequentialhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Zero-sumhttp://en.wikipedia.org/wiki/Zero-sumhttp://en.wikipedia.org/wiki/Loss_functionhttp://en.wikipedia.org/wiki/Loss_functionhttp://en.wikipedia.org/wiki/Philosophyhttp://en.wikipedia.org/wiki/Philosophyhttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Decision_theory

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Player 1s strategy guarantees him a payoffof V regardless of Player 2sstrategy,and similarly Player 2 can guarantee himself a payoff of V. The nameminimax arises becauseeach player minimizes the maximum payoff possible forthe othersince the game is zero-sum,he also maximizes his own minimumpayoff.This theorem was established by John von Neumann,[1]who is quoted as saying As far as I cansee, there could be notheory of games without that theorem I thought there was nothingworth publishing until the

Minimax Theorem

was proved.[2]SeeSions minimax theoremandParthasarathys theoremfor generalizations; seealsoexampleof a game without a value.Example

The following example of a zero-sum game, whereAandBmake simultaneous moves,illustratesminimax

solutions. Suppose each player has three choices and considerthe payoff matrixforAdisplayed at right.Assume the payoff matrix forBis thesame matrix with the signs reversed(i.e. if the choices are A1 and B1 thenBpays 3 toA). Then, the minimaxchoice forAis A2 since the worst possible result is then having to pay 1, while thesimpleminimax choice for

Bis B2 since the worst possible result is then no payment. However, thissolution isnot stable, since ifBbelievesAwill choose A2 then

http://en.wikipedia.org/wiki/John_von_Neumannhttp://en.wikipedia.org/wiki/John_von_Neumannhttp://en.wikipedia.org/wiki/Minimax#cite_note-0http://en.wikipedia.org/wiki/Minimax#cite_note-0http://en.wikipedia.org/wiki/Minimax#cite_note-Casti-1http://en.wikipedia.org/wiki/Minimax#cite_note-Casti-1http://en.wikipedia.org/wiki/Sion's_minimax_theoremhttp://en.wikipedia.org/wiki/Sion's_minimax_theoremhttp://en.wikipedia.org/wiki/Sion's_minimax_theoremhttp://en.wikipedia.org/wiki/Parthasarathy's_theoremhttp://en.wikipedia.org/wiki/Parthasarathy's_theoremhttp://en.wikipedia.org/wiki/Parthasarathy's_theoremhttp://en.wikipedia.org/wiki/Example_of_a_game_without_a_valuehttp://en.wikipedia.org/wiki/Example_of_a_game_without_a_valuehttp://en.wikipedia.org/wiki/Payoff_matrixhttp://en.wikipedia.org/wiki/Payoff_matrixhttp://en.wikipedia.org/wiki/Payoff_matrixhttp://en.wikipedia.org/wiki/Payoff_matrixhttp://en.wikipedia.org/wiki/Payoff_matrixhttp://en.wikipedia.org/wiki/Example_of_a_game_without_a_valuehttp://en.wikipedia.org/wiki/Example_of_a_game_without_a_valuehttp://en.wikipedia.org/wiki/Example_of_a_game_without_a_valuehttp://en.wikipedia.org/wiki/Parthasarathy's_theoremhttp://en.wikipedia.org/wiki/Parthasarathy's_theoremhttp://en.wikipedia.org/wiki/Sion's_minimax_theoremhttp://en.wikipedia.org/wiki/Sion's_minimax_theoremhttp://en.wikipedia.org/wiki/Minimax#cite_note-Casti-1http://en.wikipedia.org/wiki/Minimax#cite_note-0http://en.wikipedia.org/wiki/John_von_Neumannhttp://en.wikipedia.org/wiki/John_von_Neumann

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Bwill choose B1 to gain 1; thenifAbelievesBwill choose B1 thenAwill choose A1 to gain 3; and thenBwill choose B2; andeventually both players will realize the difficulty of making achoice. So a more stable strategy isneeded.Some choices aredominated

by others and can be eliminated:A

will not choose A3 since either A1 or A2 will produce a better result, no matterwhatBchooses;Bwill not choose B3 sincesome mixtures of B1 and B2 will produce a better result,no matter whatAchooses.Acan avoid having to make an expected payment of more than 1/3 by choosing A1with probability 1/6 and A2 with probability 5/6, no matter whatBchooses.Bcan ensure an expectedB chooses B1B chooses B2B chooses B3A chooses A1+ 3 2 + 2

A chooses A2 1 0 +4A chooses A3 4 3 + 1

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gain of at least 1/3 by using a randomized strategy of choosing B1 with probability1/3 and B2with probability 2/3, no matter whatAchooses. These mixedminimax strategies are now stableand cannot be improved.b)Brandenburger and Nalebuff discuss how game theory works and how companiescan use the principles to make decisions. The authors state that managers can use

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the principles to create newstrategies for competing where the chances forsuccess are much higher than they would be if they continued to compete under thesame rules. A classic example used in the article is the caseof General Motors. Theautomobile industry was facing many expenses due to the incentives thatwerebeing used at the retailers. General Motors responded by issuing a new creditcard wherethe cardholders could apply a portion of their charges towardspurchasing a GM car. GM evenwent so far as to allow cardholders to use a smallerportion of their charges towards purchasing aFord car, allowing both companies tobe able to raise their prices and increase long term profits.This action by GMcreated a new system where both GM and Ford could be better off, unlikethetraditional competitive model where one company must profit at the expense ofanother.The authors state that while the traditional win-lose strategy maysometimes be appropriate, butthat the win-win system can be ideal inmany circumstances. One advantage to win-winstrategies is that since they have

not been used much, they can yield many previouslyunidentified opportunities.Another major advantage is that since other companies have theopportunity tocome out ahead as well, they are less likely to show resistance. The lastadvantageis that when other companies imitate the move the initial companybenefits as well, in contrast tothe initial company losing ground as they would in awin-lose situation.The authors also state that there are five elements to competitionthat can be changed to providea more optimal outcome. These elements are: theplayers (or companies competing), addedvalues brought by each competitor, therules under which competition takes place, the tacticsused, and the scope orboundaries that are established. By understanding these factors,companies canapply different strategies to increase their own odds of success.The first way thatcompanies can increase their chances of success involves changing whothecompanies are that are involved in the business. One way that companies canimprove their oddsof success is by introducing new companies into the business.For example, both Coke and Pepsiwanted to get a contract to have Monsanto as asupplier. Since Monsanto had a monopoly at thetime, they encouraged HollandSweetener Company to compete with Monsanto. Since it seemedMonsanto nolonger had a monopoly on the market, they were able to get morefavorablecontracts with Monsanto. Another way that companies can improve their

chances is by helpingother companies introduce more or better complimentaryproducts.Companies can also change the added values of themselves or theircompetitors. Obviously,companies can build a better brand or change theirbusiness practices so they operate moreefficiently. However, the authors discusshow they can also lower the value of reducing the valueof other companies as aviable strategy. Nintendo reduced the added value of retailers by notfilling all oftheir orders, thus leaving a shortage and reducing the bargaining power of the

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stores buying its products. They also limited the number of licenses available toaspiring programmers,lowering their added value. They even lowered the valueheld by comic book characters whenthey developed characters of their own thatbecame widely popular, presumably so that they

wouldnt have to pay as much to license these characters.Changing the rules isanother way in which companies can benefit. The authors introduce theidea of judoeconomics, where a large company may be willing to allow a smaller companytocapture a small market share rather than compete by lowering its prices. As longas it does not become too powerful or greedy, a small company can oftenparticipate in the same marketwithout having to compete with larger companies onunfavorable terms. Kiwi International Air Lines introduced services on its carriersthat were of lower prices to get market share, but madesure that the competitorsunderstood that they had no intention of capturing more than 10% of any

market.Companies can also change perceptions to make themselves better off. Thiscan be accomplishedeither by making things clearer or more uncertain. In 1994,the New York Post attempted tomake radical price changes in order to get theDaily News to raise its price to regain subscribers.However, the Daily Newsmisunderstood and both newspapers were headed for a price war. The New YorkPost had to make its intentions clear, and both papers were able to raise theirpricesand not lose revenue. The authors also show an example of how investmentbanks can maintainambiguity to benefit themselves. If the client is more optimisticthan the investment bank, the bank can try to charge a higher commission as longas the client does not develop a morerealistic appraisal of the companys

value.Finally, companies can change the boundaries within which they compete.For example, whenSega was unable to gain market share from Nintendos 8-bitsystems, it changed the game byintroducing a new 16-bit system. It tookNintendo 2 years to respond with its own 16-bit system,which gave Sega theopportunity to capture market share and build a strong brand image. Thisexampleshows how companies can think outside the box to change the way competitiontakes place in their industry.Brandenburger and Nalebuff have illustrated howcompanies that recognize they can change therules of competition can vastlyimprove their odds of success, and sometimes respond in a waythat benefits both

themselves and the competition. If companies are able to develop a systemwherethey can make both themselves and their competitors better off, then they do nothave toworry so much about their competitors trying to counter their moves. Also,

because companiescan easily copy each others ideas, it is toa firms advantage ifthey can benefit when their competitors copy their idea, which is not usuallypossible under the traditional win-losestructure.This article has some parallels withthe article Competing on Analytics by (). The biggestfactor that both of these

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articles have in common is how crucial it is for managers to understandeverythingthey can about their business and the environment in which they work.InCompeting on Analytics, the authors say that it is important to be familiar withthisinformation so that managers can change the way they compete to improvetheir chances ofsuccess. At the end of The Right Game: Use Game Theory toShape Strategy, the authorsdiscuss how in order for companies to be able tochange the environment or rules under whichthey compete they need to understandeverything they can about the constructs under which theyare competing. Whethera manager intends to use analytics or game theory to be successful, he or she mustfirst have all available information and use that information to understand how tomakethe company better off. However, the work shown in Competing onAnalytics tends to placean emphasis almost exclusively on the use of quantitativedata to improve efficiency or marketshare of the company. The RightGame, however focuses more on using information to find

creative ways of changing the constructs or rules applied between companies, oftenyielding amuch broader impact.Q4. a. Compare CPM and PERT explaining similarities and mentioning where theymainlydiffer.Ans.The Major Differences and Similarities between CPM andPERTCPM (Critical Path Method) & PERT(Program Evaluation and ReviewTechnique)1)PERT is a probabilistic tool used with three 1)CPM is a deterministictool, with only singleEstimating the duration for completion of estimate of

duration.2)This tool is basically a tool for planning 2)CPM also allows and explicitestimate of andcontrol of time. costs in addition to time, therefore CPM can controlboth time and cost.3)PERT is more suitable for R&D related 3)CPM is best suitedfor routine and those projectswhere the project is performed for projects wheretime and cost estimates can the first time andthe estimate of duration be accuratelycalculated are uncertain.4)The probability factor i major in PERT 4)Thedeterministic factor is more so values or sooutcomes may not be exact. outcomesare generally accurate and realistic.Extensions of both PERT and CPM allowthe user to manage other resources in addition to timeand money, to trade off

resources, to analyze different types of schedules, and to balance the useofresources. Tensions of both PERT and CPM allow the user to manage otherresources inaddition to time and money, to trade off resources, to analyze differenttypes of schedules, and to balance the use of resources.Graphs

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_ In mathematics, networks are called graphs, the entities are nodes, and the linksare edges _ Graph theory starts in the 18th century, with Leonhard Euler _ Theproblem of Knigsberg bridges _ Since then graphs have been studied extensively.Graph Theory

_ Graph G=(V,E) _ V = set of vertices _ E = set of edges 2 _ An edge is defined bythetwo vertices which itconnects _ optionally: 1 3A direction and/or a weight _Two vertices are adjacentif they are connected byan edge 4 5_ A vertexs degreeis thenumber of its edgesGraph G=(V,E)2V = set of verticesE = set of edgesEach edge is now an 1 3arrow, not just a line ->directionThe indegree of a vertexis the number of 5incoming edges 4Theoutdegree of a verte

is the number of outgoingedges