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Vol.

I Issue 1 October 2010

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JOURNAL

A RESEARCH JOURNAL OF BIMTECH STUDENTS

TATTVA is a forum for BIMTECH students to bring to light the outcomes of their journey of
discovery into the issues on which they have been cogitating - whether the issues are in
marketing, finance, world business, retail management, insurance or sustainability or
livelihood or microfinance. It is aspirational in intent, striving for rigour and has something of
importance or an insight to share. In short, it is a platform for full fledged researchers-in-themaking. We have christened it TATTVA, meaning essence or the most vital ingredient.
Welcome to TATTVA - a Research Journal of BIMTECH Students!

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JOURNAL

Preface

Management educators and planners may not reach a consensus on the issue of
curriculum design and the mix of conceptual knowledge, applied experience and
ultimately assimilation of the knowledge, but there is no disagreement on the issue of
integrating original and applied business research into management education.
At BIMTECH we consider summer projects not only as an opportunity to expose
students to the knowledge, practice, discipline, and ethics followed among corporate
business community but also as a platform to encourage conducting original research,
albeit on a limited scope and scale.
In our journey to continuously improve and increase the research content of projects
executed by students we have taken many concrete steps. Some of them being:
Align Research Methodology course to bring focus on design of experiments
Integrate SPSS and Excel into various courses through projects and assignments
Deliver Management Sciences, Supply Chain and Business Simulation & Modelling
courses using Excel
Incorporate Multivariate Data Analysis tools as part of the course
Encourage students to take up live projects requiring solution to real business
problems by collecting primary data and analysing with some statistical tools
Continuously enriching the course contents with Modelling and Simulation
exercises
This year, for the first time, BIMTECH has brought out TATTVA - a Research Journal of
BIMTECH Students, for showcasing nine research projects. It was a tough task for the
advisory board to select only nine out of so many excellent research projects. We plan
to bring out second volume shortly.
Such a venture like TATTVA cannot come to fruition without the active participation of
motivated students, help and cooperation of faculty guides at different centres of
learning at BIMTECH and the research project guides in the corporate sector who have
given valuable guidance and quality inputs to our students.
We hope you will appreciate the efforts put in by students under the guidance of
industry and faculty guides. Your feedback on these projects will work as a motivator
for all those who are involved in bringing out this issue.
We would in future be publishing the research efforts of students such as short term,
special research reports etc. in TATTVA.
Dr. A. K. Dey
Professor
Supply Chain & Operations Management
Centre for Business Management

Advisory Board
Dr. A. K. Dey
Prof. R. J. Masilamani
Prof. Ashok Malhotra

Prof. K. K. Krishnan
Prof Sangeeta Shukla

Student Committee
R. Natraj (CBM)
Parul Agarwal (CBM)
Priyanka Raina (CBM)

Sweta Behera (CIBM)


Upasana Singh (CIBP)
Rahul Goyal (CRM)

Industry Guides
Mr. Sukrit Vijayakar
Head Product Trading
International Supplies and
Trading Division
Essar Oil Limited, Mumbai
Mr. T. Srinivas
Head International Supplies and
Trading Division
Essar Oil Limited, Mumbai
Mr. Ravi Arora
Sr Manager (Sales & Marketing)
New Holland Fiat (India) Ltd.

Ms. Madhulika Mishra


Deputy Manager (HRD)
Corporate Office
MMTC Limited
Mr. Chandrashekhar Singh
Business Manager
MIRC Electronics Ltd.
Mr. Jaspreet Jolly
Store Manager (Rohini)
Infiniti Retail Limited
Mr. Sushil Gopinath
Store Manager (South Ext.)
Wills Lifestyle
ITC Limited

Mr Deepak Bhandari
R K Feed Equipments
Halol, Gujarat
Mr. N. C. Dhal
Former SDM, Sambalpur Division
Principal, Sales Training Centre
LIC of India
Dr. Subhendu Chakrabarti
Scientist & Head
Business Processes Division
Central Leather Research Institute
Chennai

Faculty Guides
Dr. Anupam Varma
Dr. A. K. Dey
Prof. R. J. Masilamani
Prof. K. K. Krishnan

Prof. Pankaj Priya


Prof. Ravi Agarwal
Prof. Manosi Choudhuri

Student Contributors
Parul Aggarwal
Sweta Behera
Upasana Singh
Pallavi Banerjee
Vijay Gaur

Mahima Gupta
Rahul Goyal
K. Natraj
Sweta Agarwal

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JOURNAL

contents
R&D Intangibles Valuation - Integrating Monte Carlo and Real Options &
Fund Allocation Process Through AHP: A Focus on Public Funded Research
Organizations in India
Nataraj K and Ravi Agarwal

MMTC: A Case of Knowledge Management and Learning Organization


Pallavi Banerjee and Manosi Chaudhuri

13

Factors of After-Sales Service Affecting Customer Satisfaction in Indian


Consumer Electronics and Appliances Market
The Case of MIRC Electronics Ltd. (ONIDA), Pune Region, India
Parul Aggarwal and R. J. Masilamani

23

Introduction of Concierge Service in Vadodara


Sweta Agarwal and A. K. Dey

37

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria


Upasana Singh and Anupam Varma

45

Factors Influencing the Purchase of Private Labels: A Case Study on Roma


Mahima Gupta and Pankaj Priya

57

Competitive Analysis of New Holland Tractors in Western U.P. and Haryana


Vijay Gaur and R.J. Masilamani

65

Underwriting of Female Lives vis--vis Underwriting Practices in General


(A Case Study of the LIC of India, Sambalpur Divisional Office)
Sweta Behera and K.K. Krishnan

73

Fast Fashion Retail Strategy based on Consumer Perception:


An Empirical Research in Delhi NCR
Rahul Goyal and Pankaj Priya

81

R&D Intangibles Valuation - Integrating


Monte Carlo and Real Options & Fund
Allocation Process through AHP
Nataraj K*

Abstract
Technological innovation involves extreme risk as the R&D activity is uncertain in terms of the cost involved in producing the output, time
duration involved in creating the output and also most importantly the output itself is not certain. This intangible nature of the R&D projects makes it
relatively hard to value when compared to other tangible projects. Hence capturing the actual value of the intangibles is considered to be highly
challenging by the researchers. In this paper a holistic approach is made with the objective of valuing the intangibility of the R&D projects. The project
starts by creating a framework for selection of the most appealing projects by evaluating the alternatives using multifactor criteria based on
hierarchical considerations which help in fund allocation process, followed by the projects income projection using tabula rasa method and life cycle
analysis method. After performing the basic discounted cash flow valuation, simulation analysis is done through Monte Carlo method to incorporate
uncertainties involved. As R&D activity will be carried out in phases there exist some options with the management which adds more value to the R&D
output. This is captured here by incorporating binomial lattice real options approach. The mentioned models are empirically implemented in a live
project which involves creation of collagens.
Keywords: Patent Valuation, Real Options, Binomial lattice, Monte Carlo simulation, AHP
JEL Classification: G11, C15, C52

Introduction
Patent valuation problems currently hinder efficient
transfer of technologyunlike the market for used cars,
no equivalent of the used car lot has emerged in the
context of patented technology.(Denton & Heald, 2003)
Most of the public funded organizations pore on
meliorating the small and medium scale industries. Also
in transferring the technology these organizations do
not have any rigid valuation framework and the
technology is priced as per the buying power of the
clients. But in order to have an internal evaluation
mechanism they need a framework that can be applied
to value the knowledge base being produced by their
various departments. Also in order to carefully allocate
the limited sanctioned budget a decision making tool is
also needed in order to select the most valuable projects
from the alternatives. Thus these two requirements are

the prime focus of this research paper. Also it will be


clear from the next section that all the research done till
now in this area are focused only on various methods of
valuation. i.e. they straight away start with the valuation
issue. But for the research organization, where the
scientists are not familiar with much of the financial
concepts it becomes difficult to understand and
implement the process described. Hence another focus
of this paper is to provide a complete framework starting
from project selection till the valuation in a step by step
fashion so that it might be easily implemented by the
research organizations.

Literature Review
Myers (1984) was among the first to publish in the
academic literature the notion that financial option
pricing methods could be applied to strategic issues
concerning real assets rather than just financial assets.

*Centre for Business Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. Ravi Agarwal, Centre for Business Management, Birla Institute of Management Technology

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TATTVA - Vol. 1 Issue 1 October 2010

(Myers S. , 1977) identified investments in real assets as


mere options. (Dixit & Pindyck, 1994) argued that most
investment decisions have three important
characteristics in terms of real options. They are i)
investment is partially or completely irreversible. ii)
there is always uncertainty over the future return from
the investment and iii) the investors have choices to
invest at flexible time.
The dynamics of the expected cost to completion of the
R&D project are described by the controlled diffusion
process by (Pindyck, 1993) and given as:

dK = _ Idt

IK dz

.....1

Where dZ is an increment to a Gauss Wiener process,


the first term is the control of the diffusion process and
the second term corresponds to what Pindyck calls
technical uncertainty.
(Luehrman, 1998) presented a framework that bridges
the gap between the practicalities of real world capital
projects and the higher mathematics associated with
formal option-pricing theory. A simulation approach to
value patents and patent-protected R&D projects
based on the Real Options approach was given by
(Schwartz, 2002). Similar to it a real options model of
R&D valuation was given by (Hsu & Schwartz, 2003).
(Lev, 2003) has reviewed the various aspects of
intangible assets by focusing on the question, How can
we accomplish the main objective of promoting
improvements to the reporting of intangible assets? A
unified approach to the valuation of an R&D project
that integrates three analytical tools: Discounted Cash
Flow, Decision Trees, and Real Options was proposed
by (Boer P. F., 2004). The traditional valuation methods
drawback in valuing intangibles and other suggested
method for valuing them especially Brand names,
flexibility and Patents were explained with examples by
(Damodaran, Dealing with Intangibles: Valuing Brand
Names, Flexibility and Patents, 2006). (Lerner & Farrar,
2006) Provided a review of patent licensing approaches
which has aimed to better understand current
practices and the theoretical underpinnings of those

02

practices and discussed a licensing model that can


accommodate open source software.
(Carlsson, Fuller, Heikkila, & Majlender, 2007) in their
paper presented a fuzzy mixed integer programming
model for the R&D optimal portfolio selection
problem. (Sereno, 2009) finds that Pharmaceutical IPR
investments have the property that much of the value
of the investment is associated with future cash flows
that are contingent on intermediate decisions. (Mun,
2002) in his book have explained completely about
various real options model and the procedure to solve
them. Also (Razgatis, 2009) in his book have analyzed
all the methods of valuation and have also discussed
about the deal making process.
Framework for R&D Portfolio selection/
Resource Allocation:
Government funded research institutes like CLRI
allocates the funds to various departments based on
the knowledge base created by each of the department
in the previous fiscal. Few might argue that this would
motivate the departments to produce more
knowledge base, but this might hinder the
development of a most valuable patent or technology.
Also allocating funds should not be like an appraisal
mechanism.
Hence what is required is a standard mechanism for
fund allocation. In other words a framework that would
prioritize the activities or rank the activities based
upon the objectives of the firm. Any research
organization will be having n number of crucial
decision problems regarding the selection or accepting
the project proposals. The obvious aim will be to select
the most compelling project in terms of many factors
which will be discussed below.
The work from (Carlsson, Fuller, Heikkila, & Majlender,
2007), (Bekkum, Pennings, & Smit, 2009) all focuses on
the R&D portfolio selection. (Suresh Kumar, 2004)
provides a judgmental model for R&D project
evaluation using multifactor criteria based on
hierarchic considerations.

R&D Intangibles Valuation - Integrating Monte Carlo and Real Options & Fund Allocation Process through AHP

Model Formulation and Application:


The four perspectives of the Balance Score Card
method are included in the AHP model. Several factors
are identified under each perspective through which
the proposals will be pair wise compared and rated.
The proposed model is shown in the figure 1.
Application of the AHP starts by disaggregating the
problem structure into multilevel hierarchy. The
decision authority might determine weights or
priorities of a set of criteria in one level of the problem
to the next level just above. By repetition of this
process level by level the matrices summarizing the

priorities of the alternatives at the lowest level


according to their influence on the overall goal or focus
of the hierarchy. The proposals from different
departments are analyzed using this model and the
best proposal is selected whichever is having the
highest score. The various steps involved are Fixing the
AHP Judgment scale; Pair wise comparison of the
factors; Normalization of the comparison matrix;
Finding Normalized matrix for all the criteria involved;
Calculation of composite hierarchical priorities;
Grading Scale for project proposal; Proposal rating;
Scoring the Proposal

Figure 1: AHP Model


Best Portfolio
of Projects

Internal
Business
Process

Learning
and
Growth

Human
Expertise

Probability of
technical
success

Relevance of
projects
objectives in the
social context

Anticipated
completion time

Reputation of
project Leader

Extent of
innovation

Anticipated
change of
commercial
success

Infrastructure
Availability of
Technology
Inhouse
Availablity of
material
resources

Technological
relevance of the
project

Intellectual Proper ty Income


Projections:
Analyzing the income producing capability of the
intellectual property is the primary step in the
valuation process.
The common methods that are used in practice are
Extrapolation, Tabula rasa, Life cycle analyses,
Sensitivity/scenario analyses, Simulation analyses
Monte Carlo, Judgmental methods.

Customer

Utility of reginol
resources

Financial

Financial
Feasibility
of the
project
Commercial
Sponsorship
Aids or
collaboration for
the project from
outside source
Expected
economic benifit
from the output

In case of projects involving R&D where the entire life


of the project is imbibed with uncertainties and usually
with no close comparables it is clear that the analyst
should start from scratch. Hence Tabula Rasa method is
preferred here.

Tabula Rasa method:


Tabula rasa in Latin means clean slate. Initially the
process begins with a clean slate. The primary concern
is the uncertainty involved in deciding from where to
03

TATTVA - Vol. 1 Issue 1 October 2010

begin. Without any available past data the best way to


proceed is to conduct extensive interviews with the
inventor. The analyst should begin with detailed set of
questions that help in filling the clean slate with data.
Once the slate is filled with data the next step will be to
prepare an income projection. Here Project life cycle
analyses is used where the intellectual property is
associated with the product or service.

include multiple flexibilities available with the decision


maker. When closed form methodology is used, all the
options cannot be applied simultaneously. i.e. option
to choose cannot be valued using closed form
methodology. Hence this project will focus on binomial
lattice trees.
Empirical application of the Valuation Model:
Collagens from bio waste

Project life cycle analyses:


The stages involved are Development phase,
Introduction phase, Growth phase, Maturity phase,
Decline Phase. The product development stage begins
when the company finds and develops a new
product/service idea. During the product development
stage, revenues are typically zero and profits are
typically negative. During the introduction phase, as
the product is new to the market the revenue will be
low. In the market growth stage the company will begin
to make significant profit also by the end of this phase
the profit begins to decline. In the maturity phase the
profit will see neither growth nor decline and will be
leveled off. It is in this phase the competition will be at
its peak. Due to emergence of the new products or
services the decline phase starts for the current
product or service.
Input for Income based approach (DCF):
The output at this point will be the required input for
basic Discounted Cash Flow method. i.e. from the
assumptions about the future prospects of the
underlying project the estimates are made for the
income producing ability throughout its useful life. This
estimate will be used to find the present value of the
project or patent or technology.

Which model to apply?


The elegance of the closed form Black Scholes equation
for option value comes at the price of a set of
assumptions that simply do not apply to technology
valuations solutions. Also the important aspect for
choosing real options methodology is its ability to

04

C L R I being operating in leather industry produces bio


waste from its slaughtering house in bulk. The waste
from slaughtering house includes, Blood, tissue, Lungs
etc. Disposal of this waste was of a big problem faced.
According to industry experts 90% of the waste when
treated properly at source can be recycled. Scientists at
CLRI have decided not only to handle the waste to
dispose them but also to innovate a way in such a way
that some valuable products can be produced from the
bio waste produced. They have invented that from the
soft tissues of the animal a medical product can be
produced which is rich in fibrous protein called
collagens.
Now in order to find the value of the patent the
following assumption is made, i.e. considering CLRI as a
part of a company and not as a separate research
institute. Hence now C L R I is a R&D department of the
company. As this particular invention is in the medical
side it is assumed that the company is operating in
pharmaceutical company.
Now let us apply the whole work of the project into this
problem. Assume that the proposal is made and has
been formally approved and fund is allocated to the
project. The next step will be the income projection
through tabula rasa and the life cycle analyses.
Being in the pharmaceutical sector, the product is
expected to face severe competition. First step is to
find the useful life of the patent protected product.
After expiry of the patent the products useful life can
be calculated as the multiple of the cash flows received
till that period.

R&D Intangibles Valuation - Integrating Monte Carlo and Real Options & Fund Allocation Process through AHP

The patent will be granted for the period of 20 years,


consider that it takes 2 years to complete the invention
and 2 years to set up the production facility and
simultaneously for initial trial and drug approval the
overall useful life of the patent is reduced to 16 years.
But considering the fact that the pharmaceutical
industry is highly competitive a better product is
introduced in the market by the competitors in another
8-10 years, the useful life of the patent protected
product is further reduced to 10 years, and the
remaining years will view a decline in the revenue.

Application of Income Method/DCF


Method:
Now for this 10 year period the income projection
needs to be made along with the growth rate
considering the life cycle analysis.
The income generation for the next 16 years will begin
after the initiation of commercialization phase. The
first 4 years is meant for the development phase.
The calculation of the value of the patent is given in the
Figure 2. As it is very clear from the calculation that the
normal DCF model is a static one and does not allow
any variations. None of the business will be performing
as per the basic initial assumption. Due to high
uncertainty few factors will be varying which will affect
the predicted NPV value and hence it is necessary to
incorporate the variable nature of few factors to arrive
at a close to actual value of the NPV.

Uniform Distribution:
A uniform distribution, or uniform prescribed
randomness, is one that assigns equal probability to
any value between prescribed upper and lower
bounds. Here the COGS are assumed to follow the
uniform distribution.
Triangular Distribution:
A Triangular Distribution is similar to the Uniform
Distribution in that it also assumes zero probability of
values below the specified lower bound and above the
upper bound. It differs in that the Triangular
Distribution uses a most likely value and constructs a
triangle of probability that varies linearly from the
maximum probability at the most likely value to zero at
the upper and lower bounds. Here the WACC/discount
rate is assumed to follow the triangular distribution.
Beta Distribution:
Beta key attributes are (effectively) a combination of
the Triangle and Normal Distributions, with a smooth
decrease in probability away from the peak value,
similar to the Normal Distribution, but with exact
upper and lower bounds like the Triangular
Distribution. Here the S.G.A costs are assumed to
follow the beta distribution. As the revenues are
already adjusted according to the life cycle, no
distribution is assumed for it. Else normal distribution
can be assumed for the same.
Figure 3: Distribution of NPV through Simulation

Hence in order to find the value close to the actual the


approach is now towards Monte Carlo method.

Application of Monte Carlo


simulation:
For performing the Monte Carlo simulation, Crystal Ball
software from Oracle is used. This software has
predefined distribution which can be applied to the
various parameters involved in the valuation. To be
selective in nature let us see only those distribution
used in the project.

Once the required distributions are assigned to the


corresponding parameters then the forecast
05

06

NPV

36.897

9.594

13.24

1.00

12.24

-5.76

18.00

1.00

19.00

11.00

20.00

50.00

0.725

-20.40

0.00

-20.40

9.60

-30.00

0.00

-30.00

30.00

0.00

0.00

0.00

Discounted Cash Flow

-20.40

0.00

-20.40

9.60

-30.00

0.00

-30.00

30.00

0.00

0.00

0.00

7.648

0.525

14.56

1.10

13.46

-6.34

19.80

1.10

20.90

12.10

22.00

55.00

Introduction

Discount Factor

-10.20

0.00

-10.20

4.80

-15.00

0.00

-15.00

15.00

0.00

0.00

0.00

8.313

0.381

21.85

1.65

20.20

-9.50

29.70

1.65

31.35

18.15

33.00

82.50

9.035

0.276

32.77

2.48

30.29

-14.26

44.55

2.48

47.03

27.23

49.50

9.821

0.200

49.15

3.71

45.44

-21.38

66.83

3.71

70.54

40.84

74.25

185.63

Growth
123.75

9.252

0.145

63.90

4.83

59.07

-27.80

86.87

4.83

91.70

53.09

96.53

241.31

10

8.380

0.105

79.87

6.03

73.84

-34.75

108.59

6.03

114.62

66.36

120.66

301.64

11

6.680

0.076

87.86

6.64

81.23

-38.22

119.45

6.64

126.09

73.00

132.72

331.80

12

13

4.840

0.055

87.86

6.64

81.23

-38.22

119.45

6.64

126.09

73.00

132.72

331.80

Maturity

2.806

0.040

70.29

5.31

64.98

-30.58

95.56

5.31

100.87

58.40

106.18

265.44

14

1.627

0.029

56.23

4.25

51.98

-24.46

76.45

4.25

80.69

46.72

84.94

212.36

15

0.884

0.021

42.17

3.19

38.99

-18.35

57.34

3.19

60.52

35.04

63.71

159.27

16

0.480

0.015

31.63

2.39

29.24

-13.76

43.00

2.39

45.39

26.28

47.78

119.45

17

18

0.261

0.011

23.72

1.79

21.93

-10.32

32.25

1.79

34.04

19.71

35.83

89.59

Decline

0.142

0.008

17.79

1.34

16.45

-7.74

24.19

1.34

25.53

14.78

26.88

67.19

19

1.01

12.34

-5.81

18.14

1.01

19.15

11.09

20.16

50.39

20

18.334

0.006

3171.89

Discount Rate

-10.20

Free cash Flow

0.00

-10.20

4.80

-15.00

0.00

-15.00

15.00

0.00

0.00

2
Development

3158.55

0.380

0.320

0.050

0.220

0.400

0.00

Terminal Value

Add: Depreciation

NOPAT

Taxes

EBIT

Less: Depreciation

EBITDA

Set up costs

R&D costs

S.G.&A.

C.O.G.S.

Less:

Revenues

Phase

Period

Figure 2: DCF Calculation

TATTVA - Vol. 1 Issue 1 October 2010

R&D Intangibles Valuation - Integrating Monte Carlo and Real Options & Fund Allocation Process through AHP

parameter (NPV) is defined for initiating the simulation


after prescribing the required number of simulations.
After the simulation is complete the distribution is
obtained for the forecast parameter as shown in the
figure 3. It can be inferred that the value of the patent is
improved when compared to normal DCF valuation. In
spite of this improvement in the value still this method
valuation faces a strong drawback, i.e. the decision
making capability of the management with respect to
this patent which will add value is not captured. For this
reason now the focus is shifted to Real Options
approach.

Application of Real Options Method:


Real Options tend to value the flexibility in terms of
making business decisions. Due to confidentiality
issues only the basic data were shared and in order to
cover the full application of the real options method
several assumptions will be made which will help in
valuing any kind of projects in future by C L R I. The
management can expand its operation by 30% which
will incur an addition cost of 10 Lakhs at any point
during the life of the project. Also they can contract its
operation by 10% which will result in saving of 12 Lakhs.
It has been assumed that the project can be abandoned
at any point which will fetch 30 Lakhs.
Initially each of the options will be valued separately
followed by the valuation of the options considering
simultaneously.

Option to Expand:
The inputs required for solving the real options are:
Calculated from Monte Carlo valuation
Calculated by logarithmic cash flow returns approach by forecasting the free cash flow value while
performing the Monte Carlo simulation method.
t Number of years/number of steps in lattice
Remaining parameters are either found directly or by
using the formula mentioned in section 6.

After finding all the parameters involved both the


lattice, lattice of the underlying and the option
valuation lattice is derived.
S0 = 37.48 Lacks (from Monte Carlo simulation results)
s = 28.48% ; T = 15 years ; dt = 1

u = es
d = e-s
p

=s

dt

=> u = 1.329

dt

=> d = 0.752

(rf - b) (dt)

u-d

-d

=> p = 0.518

Lattice Evolution of the Underlying:


The calculation of the lattice of the underlying is shown
in the below figure 4. The highlighted upper node is
calculated by (S0*u) which yields the value as Rs 49.83L.
The highlighted lower node is calculated by(S0*d) which
yields the value as Rs 28.19L. In similar way the lattice
obtained for all 15 time steps.
Option Valuation Lattice:
Additional input required for this step, Expansion
factor: 1.3, with additional cost of Rs 10 Laks.
Calculation of the option valuation lattice starts with
the terminal node of the previous lattice. i.e. the value
of that particular node (Rs2685.99 L) is compared with
the value after including the expansion factor. Then the
maximum value is chosen as the value of the node in
the option lattice.
Value of that node = Max (Rs2685.99, {(2685.99 * 1.3)
10} = Rs 3481.79 Lakhs
For highlighted intermediate node too comparison is
made between the value of keeping the option as open
and the value of expansion option. The value of
keeping the option open is obtained by the process of
backward integration. i.e. by applying the formula:
[(p)up + (1 - p)down]e [-rf)( dt)]
.....5
The calculation is shown in the below figure 5.
On comparing both the lattice the expansion option is
found to have the value of Rs 7.434 Lakhs (difference
between the starting nodes of both the lattices).

07

TATTVA - Vol. 1 Issue 1 October 2010

Option to Contract:
As we are dealing with the same project the lattice of
the underlying will be the same. Hence only the option
valuation lattice will be calculated keeping the lattice of
the underlying from previous calculation. Additional
input required for this step, Contraction factor: 0.9,
with additional savings of Rs 12 Laks. Calculation of the
option valuation lattice starts with the terminal node of
the previous lattice. i.e. the value of that particular
node (Rs2685.99 L) is compared with the value after
including the expansion factor. Then the maximum
value is chosen as the value of the node in the option
lattice. Value of that node = Max (Rs2685.99, {(2685.99
* 0.9) + 12}
= Rs 2685.99 Lakhs
On comparing both the lattice the contraction option is
found to have the value of Rs 8.252 Lakhs (difference
between the starting nodes of both the lattices).
Option to Exit/Abandon:
Similar to the calculation of the above 2 options, the
calculation is performed and on comparing both the
lattice the expansion option is found to have the value
of Rs 6.258 Lakhs (difference between the starting
nodes of both the lattices).

Option to Choose:
In the real world business situations, all the options will
be available simultaneously and the option that
provides maximum value needs to be chosen. Real
options provide the method for finding this value too
through Option to choose method.
Here too the option valuation lattice alone is done as
the lattice of the underlying is the same. The
methodology for calculating the option lattice is also
similar i.e. the value of the nodes will be decided after
comparing all the options value simultaneously and
choose the option that gives the higher value. The
option to choose has the value of Rs 13.283 Lakhs.
from the results of various options value:
Option to Expand Rs 7.434 Lakhs
08

Option to Contract Rs 8.252 Lakhs


Option to Exit
Rs 6.258 Lakhs
Option to Choose Rs 13.283 Lakhs
This implies that when the decision making is imbibed
with multiple options the value also increase.
Section 6:

Conclusion and Scope for further


research
In this project a framework for stream lining the fund
allocation process carried out in CLRI is proposed using
AHP method and advanced valuation methods such as
Real Options and Monte Carlo simulation are used to
value the intangibles. It is also evidenced that these
methods provide far better value than the traditional
valuation methods. Also it is observed that these
methods are best suitable in valuation of intangibles
when the economic benefits of the underlying are
known. It has been remarked from the empirical
application of the advanced models to value the
Collagens project that even the advanced methods
betrays to capture the complete value of the patent or
technology. i.e. when the option involves other
benefits apart from economic benefits like social
benefits, there are no strong framework or models to
captivate the value of those benefits.
Hence in public funded organizations like CLRI where
the prime focus is on societal benefit and not economic
benefit, there is a lack of valuation framework that
proves the efficiency of their knowledge base.
A basic approach has been put forward that would help
in ascertaining the value of the intangibles which
demands any kind of benefits valuation. It is also a
known fact that this field valuation of intangibles
through real options is much younger when compared
to other financial concepts, the scope of further
research is very wide open that in future a single
framework might be applied to fetch the actual value of
the intangibles involving any type of benefits. The
proposed basic approach when further enhanced will
do the needful and the valuation of intangibles might

rf

dt

Risk Free Rate

Time

Time Step

Up Factor

Down Factor

Risk Neutral Probablity

S*u

S*d

Highlighted Upper Node

Highlighted Lower Node

Calculation of nodes

37.48

S0

Volatility of free cash flow

37.48*0.752

37.48*1.329

28.19113191

49.82951391

21.2043735

37.48

66.24814453

0.752164672

e^-s (dt)

(e^(rf*dt) - d)/(u-d)

1.329496102

e^s (dt)

1 (15 steps for 15 years)

15

0.05

0.2848

37.48

Lattice Evolution of the Underlying

Present Value of the project

15.94918064

28.19113191

49.82951391

88.07664994

0.518084429

11.99641023

21.2043735

37.48

66.24814453

117.0975628

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

6.78698941

11.99641023

21.2043735

37.48

66.24814453

117.0975628

206.9769548

5.104933665

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

275.1750546

3.839750757

6.78698941

11.99641023

21.2043735

37.48

66.24814453

117.0975628

206.9769548

365.8441626

2.888124869

5.104933665

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

275.1750546

486.3883882

Figure 4: Lattice Evolution of the Underlying

2.172345496

3.839750757

6.78698941

11.99641023

21.2043735

37.48

66.24814453

117.0975628

206.9769548

365.8441626

646.6514663

1.633961538

2.888124869

5.104933665

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

275.1750546

486.3883882

859.720604

1.229008144

2.172345496

3.839750757

6.78698941

11.99641023

21.2043735

37.48

66.24814453

117.0975628

206.9769548

365.8441626

646.6514663

1142.995192

0.924416508

1.633961538

2.888124869

5.104933665

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

275.1750546

486.3883882

859.720604

1519.607653

0.69531344

1.229008144

2.172345496

3.839750757

6.78698941

11.99641023

21.2043735

37.48

66.24814453

117.0975628

206.9769548

365.8441626

646.6514663

1142.995192

2020.312451

0.522990205

0.924416508

1.633961538

2.888124869

5.104933665

9.023275967

15.94918064

28.19113191

49.82951391

88.07664994

155.6807533

275.1750546

486.3883882

859.720604

1519.607653

2685.99753

R&D Intangibles Valuation - Integrating Monte Carlo and Real Options & Fund Allocation Process through AHP

09

Expansion Factor

10

32.95912785

60.47916463

259.0700412

3481.796789

Expand

Node Value

2685.99753
3481.796789

Open

TERMINAL NODE

262.0297227

262.0297227

17.54659378

32.54659878

59.97654093

109.2802249

Expand

24.08309606

44.47722842

81.34915166

Open

INTERMEDIATE NODE

Node Value

44.914

1.3 10L additional cost

Option valuation Lattice

12.78216067

23.7148695

43.98266467

80.78928964

146.5968111

6.886186763

12.55940114

23.30645754

43.41905167

80.15485708

145.9595546

5.122152001

9.208546014

16.91923788

31.55424113

58.75241994

107.9954837

195.7178215

351.0273788

Max(Open, Expand)

1.3(value from previous lattice)-Additional Cost Involved

Q3

Max(Open, Expand)

1.3(value from previous lattice)-Additional Cost Involved

*(p)up + (1-p)down+ e^*(-rf)(dt) +

9.346200828

17.24320566

32.08161958

59.40551457

108.6753422

196.3785149

262.7117646

3.839750757

6.821927999

12.33985154

22.85330053

42.77044253

79.43295801

145.2515208

262.0297227

468.5505304

Figure 5: Option valuation Lattice

2.888124869

5.104933665

9.094171611

16.5801284

30.95015285

57.99820985

107.2321987

194.9911127

350.3193888

624.8967224

2.172345496

3.839750757

6.78698941

12.14026813

22.35084643

42.01203314

78.60801531

144.4700523

261.2820333

467.8094035

832.8588983

1.633961538

2.888124869

5.104933665

9.023275967

16.24108993

30.24596731

57.11430779

106.3804606

194.1976718

349.5402635

624.1175971

1109.449478

1.229008144

2.172345496

3.839750757

6.78698941

11.99641023

21.79670128

41.09859376

77.66411505

143.6197519

260.4629614

466.9903316

832.0398264

1477.28667

0.924416508

1.633961538

2.888124869

5.104933665

9.023275967

15.94918064

29.39305392

56.05417136

105.4512707

193.3366051

348.6791968

623.2565304

1108.588411

1966.441574

0.69531344

1.229008144

2.172345496

3.839750757

6.78698941

11.99641023

21.2043735

39.91888022

76.61029364

142.7145374

259.5577469

466.0851171

831.1346119

1476.381455

2616.893893

0.522990205

0.924416508

1.633961538

2.888124869

5.104933665

9.023275967

15.94918064

28.19113191

54.77836809

104.4996449

192.3849793

347.727571

622.3049046

1107.636785

1965.489949

3481.796789

TATTVA - Vol. 1 Issue 1 October 2010

R&D Intangibles Valuation - Integrating Monte Carlo and Real Options & Fund Allocation Process through AHP

become as straight forward as the valuation of the


tangibles which are now well established.

References
Bekkum, S. V., Pennings, E., & Smit, H. (2009). A Real Options
Perspective On R&D Portfolio Diversification. SSRN.
Black, F., & Scholes, M. S. (1973). The pricing of options and corporate
liabilities. Journal of Political Economy 83 , 637-659.
Boer, P. F. (2004). Risk-adjusted Valuation of R&D Projects.
Boer, P. (2002). The Real Options Solution: Finding Total Value in a HighRisk World. New Jersey: John Wiley & Sons, Inc.
Carlsson, C., Fuller, R., Heikkila, M., & Majlender, P. (2007). A fuzzy
approach to R&D project portfolio selection. International
Journal of Approximate Reasoning , 93-105.
Cohen, J. A. (2005). Intangible Assets-Valuation and Economic benifit.
New Jersey: John Wiley & Sons,.
Cotropia, C. A. (2009). Describing Patents as Real Options. The Journal
of Corporation Law , 1128-1149.
Damodaran, A. (2006). Dealing with Intangibles: Valuing Brand Names,
Flexibility and Patents. Stern School of Business.
Damodaran, A. The Promise and Peril of Real Options.
Denton, F. R., & Heald, P. (2003). Random Walks, Non-Cooperative
Games, and the Complex Mathematics of Patent Pricing.
Rutgers Law Review.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty.
Princeton University Press.
Hsu, J. C., & Schwartz, E. S. (2003). A model of R&D valuation and the
design of research incentives. Cambridge: National Bureau Of
Economic Research.
Jeff, T., & Blatnicky, L. (2006, February 7). How to Value a Business
Intellectual Property. SanFransisco, CA. Retrieved from
www.hlhz.com.
Lerner, J., & Farrar, A. L. (2006). Valuing Patents for licensing: A Practical
survey of literature. SSRN.

Lev, B. (2003). Remarks on the measurement, valuation and reporting


of Intangible Assets. FRBNY Economic Policy Review , 17-22.
Luehrman, T. A. (1998). Investment Oppurtunities as Real Options:
Getting started on the numbers. Harvard Business Review.
Mun, J. (2002). Real Options Analysis: Tools and Techniques for Valuing
Strategic Investments and Decisions. New Jersey: John Wiley &
Sons, Inc.,.
Myers, S. C. (1984). Finance Theory and financial strategy. Interfaces
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Myers, S. (1977). Determinants of Corporate Borrowing. Journal of
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Pindyck, R. S. (1993). Investments of Uncertain cost. Cambridge:
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Razgatis, R. D. (2009). Valuation and Dealmaking of Technology-Based
Intellectual Property: Principles, Methods, and Tools. New
Jerssey: John Wiley & Sons, Inc.,.
Reilly, R. F., & Schweihs, R. P. (2004). The Handbook of Business
Valuation and Intellectual Property Analysis. The McGraw-Hill
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Schwartz, E. S. (2002). Patents and R& D as Real Options. UC Los
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Sereno, L. (2009). Real options valuation of pharmaceutical patents. A
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Smith, G. V., & Parr, R. L. (2005). Intellectual Property: Valuation,
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Suresh Kumar, S. (2004). AHP-based formal system for R&D project
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PAPERS.

11

TATTVA - Vol. 1 Issue 1 October 2010

12

MMTC : A Case of Knowledge Management and


Learning Organization
Pallavi Banerjee*

Abstract
PURPOSE: The vast subject of Knowledge Management has recently started gaining significance in India. However, despite the investment of
time, resources and money, only few companies can claim to have successfully implemented an organization-wide Knowledge Management System.
These past experiences reiterate technology infrastructure to be only an enabler of knowledge management and the employees to be the driving force.
Thus, the purpose of the research is to explore the perception of employees towards knowledge creation, transfer and sharing practices in an Indian
Public Sector Enterprise, MMTC. This case seeks to recognize and recommend characteristics that enhance knowledge sharing attitudes in employees
and work culture in organizations.
The project also explores the need of developing knowledge management strategy and linking it with corporate goals and human resources
strategy and processes. It also identifies the existing knowledge initiatives and resources in the organization as a first step towards knowledge
management in the firm.
In a knowledge economy where knowledge is a source of competitive advantage for organizations, continuous learning can enable
organizations to adapt to changes faster than their competitors. Thus, companies aim to emerge as Learning Organizations which is defined by
Professor Garvin as an organization skilled at creating and transferring knowledge, and at modifying its behaviour to reflect the new knowledge. This
definition emphasises the inter-relatedness of the two concepts of Knowledge Management and Learning Organization.
The research describes the traits that define a learning organization and provides actionable steps which can enable this particular
organization to emerge as one.
APPROACH: The research uses primary data collected using two questionnaires. The first questionnaire attempts to capture the perception of
employees towards knowledge management initiatives and their linkage to Human Resource processes. The second questionnaire is a learning
Organization assessment survey developed by Garvin, Edmondson and Gino (2008) and published in Harvard Business Review (2008). The case
contains an analysis of the primary data using factor and discriminant analysis and perception mapping.
FINDINGS: This case provides a roadmap for knowledge management implementation based on two broad categories of knowledge
Management strategy, namely Codification (which is Explicit knowledge oriented) and Personalisation (which is Tacit Knowledge Oriented). The paper
emphasises on enhancing social interaction and collaboration within the organization to successfully share and transfer knowledge.
To emerge as a Learning Organization, the organization would need to improve on processes of information collection and transfer as well as
initiate openness to new ideas and experimentation as a part of their organization culture.
Key words: Knowledge management, Learning organization, Explicit knowledge, Collective knowledge, Factor Analysis

Introduction
The post industrial society today is on the brink of
change and is increasingly expressed as a knowledge
economy. Scholars all over the world are defining
knowledge as a powerful economic resource and a
source of sustained and unique competitive advantage.

The importance of knowledge is not unknown to India


and its government. The erstwhile President of India, Dr.
A. P. J. Abdul Kalams work India 2020: A Vision for the
New Millennium stressed on the importance of
knowledge and ways to facilitate Indias transition to
emerge as a knowledge economy. With this view, Prime

*Centre for Business Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. Manosi Chaudhuri, Centre for Business Management, Birla Institute of Management Technology

13

TATTVA - Vol. 1 Issue 1 October 2010

Minister Dr. Manmohan Singh set up a knowledge


commission in 2005 with the vision to develop India
into a knowledge-leveraging 21st century society.

distinguished in two forms, namely:


Tacit /Explicit Knowledge
Individual /Collective knowledge

There is vast amount of literature defining Knowledge


differently. For the purpose of the case, it is defined as
a whole set of intuition, reasoning, insights,
experiences related to products, technology,
processes, customers, markets, competition, etc. so as
to enable effective action.

Hislop (2002) defines tacit knowledge is highly


personal and difficult to formalise and even share with
others. Subjective insights, individuals action and
experience as well as the ideals and values are some
examples of tacit form of knowledge. On the other
hand, explicit knowledge is codified, impersonal and
easy to communicate in an organization. Rules,
documents and manuals are certain manifestations of
explicit knowledge.

In an organization, there is a continuous flow of


knowledge through processes of creating,
disseminating, applying, renewing and updating the
knowledge. Bain and Company emphasises on the
growing need to tap and manage the knowledge
processes within an organization. Knowledge
management is based on the premise of successful
businesses being a collection of distinctive knowledge
bases (Bain and Company, 2009). This case seeks to
understand the broad concepts developed within
knowledge management and the steps which can
enable an organization to emerge as a Learning
Organization. There is an attempt to develop a
conceptual framework for knowledge management
architecture as a part of the case.

Literature Review
In one of his path breaking works, Peter Drucker
acknowledges knowledge to be emerging as a critical
resource. Thus, managements most significant
responsibility is to ensure productivity of knowledge
which is going to emerge as the competitive advantage
of a nation, industry, a firm.
Prahalad (1998) also reiterates this in his work as he
quotes a recent survey where Japanese managers have
rated knowledge creation and innovation and not
quality as first source of competitive advantage.
Knowledge gains its value when applied for social or
commercial benefit. Thus, Knowledge Management
encompasses creation, sharing and utilisation of
knowledge whether at individual, group (or team) and
organizational level. Knowledge has primarily been
14

These classifications form the framework of the


Knowledge spiral suggested by Nonaka and Takeuchi,
popularly denoted as the SECI model. SECI model
suggests four modes of knowledge conversion, namely
Socialisation (sharing of tacit knowledge from
individual to organisation level), Externalisation
(conversion of tacit to explicit knowledge),
Combination (explicit knowledge sharing between
organisations such as documents) and Internalisation
(conversion of explicit into individual tacit knowledge).
This process is closely linked to the concept of
organisational learning, in which individual learning is
converted into the organisational learning and
memory.
Mukherji (2005) involves one of the most popular
frameworks to differentiate between two broad types
of knowledge strategies namely, Codification and
Personalisation. Codification strategy is primarily
centred around creation of repositories for storage and
easy use and retrieval of codified knowledge.
Personalisation strategy on the other hand, is
concerned with improving face-to-face knowledge
sharing with its focus on tacit knowledge possessed by
different workers.
There is very little literature available in the context of
Knowledge Management and Organizational Learning
in India. World Bank (2004) emphasises that it is the
opportune time for India to emerge as a knowledge
economy. To enable the transition into a knowledge
economy, India needs to focus on more skilled and

MMTC : A Case of Knowledge Management and Learning Organization

educated workers and identify and implement efficient


innovation systems.
Pillania (2006) finds that knowledge management
continues to be considered a technology oriented
strategy, instead of a human resources strategy in
India. Knowledge Management is still considered to be
a task of few designated ones and no requirement of
knowledge sharing is felt. Communities of Practices are
found rarely in Indian companies except in a few
software companies.
The literature available on the subject of Learning
Organizations is extensive as well as largely subdivided
into two camps- one which advocates the ideal of
Learning Organization and the other camp which
argues sceptically about its merits.
Interest in the area of Organizational Learning
predated that of Knowledge Management; however
there is a large amount of overlapping between the
two vast subjects. It is difficult to separate the two
subjects as knowledge begins at the point where
learning ends and learning begins with knowledge
processes.
Mohan Thite focuses on the need of learning
organization in a knowledge economy and considers it
to be a daunting yet pertinent ideal for organizations.
To become learning organizations, firms would require
fundamental changes in the mindset and remain openminded to constant change.
Although there is vast literature available on
Organizational Learning and becoming a learning
organization, there are few assessment tools available
to quantitatively measure and compare organizations
on their Learning practices.
Due to its comprehensive format and in-depth analysis
of traits of learning Organizations, an assessment
survey developed by Professors Garvin, Edmondson
and Gino and published in Harvard Business Review
(2008) was taken up to conduct a pilot study of learning
practices in MMTC.

The assessment survey is based on three primary


building blocks which Garvin et al. consider to be
three broad factors identified as essential for
organizational learning. These building blocks include
several characteristics under each block.
1.

2.

3.

A Supportive Learning Environment


A work environment which is supportive of
learning involves four characteristics which are:
Psychological Safety
Appreciation of differences
Openness to new ideas
Time for Reflection
Concrete Learning Processes and Practices
A learning organization requires a series of steps
and implementation of learning practices. An
organization should develop learning processes
which involve:
Experimentation
Information Collection and Transfer
Analysis
Education and Training
Leadership that Reinforces Learning
Learning processes need to be strongly driven by
top management. The leaders of the organization
should:
Demonstrate willingness to listen to divergent
viewpoints.
Advocate the importance of devoting time
towards problem identification, experimentation,
knowledge transfer, analysis and reflection.
Initiate active discussion and questioning on
major organizational issues.

Rationale for The Study


MMTC today faces the challenge of a major loss of its
supervisory and managerial level employees due to
employees reaching the age of superannuation in the
next five-ten years. The challenge lies in not just
acquiring and developing new talent, but in losing the
wealth of knowledge existing within these employees.
There is an immense need to harness the existing
knowledge so as to prevent new employees from
continuously reinventing the wheel.

15

TATTVA - Vol. 1 Issue 1 October 2010

Knowledge from its primary definition is seen to reside


within individuals. While intellectual assets in the
organisation can exist in the form of documents and
manuals, knowledge gained through experience and
performance of the tasks is embedded in individuals.
Thus, it is essential to adopt processes and practices
which generate new knowledge as well as organise and
share existing intellectual assets within an
organisation. There is a need to assess the impact of
adopting these practices on organisation culture. Since
Knowledge Management processes require huge
investment in form of time, money and effort, it is
important to determine the motivation of employees
towards such practices.
The Project explores the need of Knowledge
Management (KM) practices in MMTC. It attempts to
identify the current knowledge assets in the
organisation and evaluate the factors which can gain
employee and leadership support towards it, thereby
ensuring its success.
Knowledge generation and sharing cannot be
considered nor implemented without ensuring
individual and team learning. A pilot study has been
undertaken in MMTC to determine the characteristics
required by the organisation to emerge as a learning
organisation

Methodology
To capture the perception of employees regarding
knowledge management initiatives, a questionnaire
was designed based on an extensive literature review.
The questionnaire also seeks to identify existing
knowledge resources and their usage in the
organisation. A five point Likert scale was utilised in the
questionnaire so as to maintain simplicity yet providing
ample scope to agree/disagree. The design of the study
undertaken is exploratory and descriptive in nature. An
effective sample size of 40 employees was utilised for
the research on Knowledge Management. Based on
convenience sampling, employees of diverse
departments and designations were included in the
sample.

16

While all organisations aim to emerge as a Learning


Organisation, there are few standardised tools to
assess the individual and organisational learning of
firms. With this view, a standardised assessment
survey developed by Professors Garvin et al. in 2008
has been applied as a pilot study on a smaller sample
audience of 30 employees in the organisation.

Data Analysis and Results


Analysis of the primary data collected for Knowledge
Management was undertaken through application of
factor and discriminant analysis. The assessment
survey of learning Organisation was primarily studied
using the benchmark data given as a part of
assessment tool. Factor and discriminant analysis was
also applied to confirm the results acquired through
the comparison with benchmark data. The primary
data was utilised for analysis after conducting
reliability analysis.

Knowledge Management
Factor analysis was applied on all twenty questions in
the knowledge management questionnaire. However,
to refine the results acquired through factor analysis,
the anti-image matrix and communalities table were
analysed. Factors with lower values in anti-image
matrix and communalities table were dropped until
the KMO value was found suitable for further analysis.
Finally nine items of the questionnaire was considered
suitable for further. These extracted factors include:
Key Success Factors

Organising available knowledge resources in


MMTC can reduce duplication of work

Innovation in daily routine tasks is not encouraged


/practiced in your job

Knowledge Management practices should be


initiated by each department head

Knowledge creation groups such as Learning


teams(Informal self organizing groups that share
knowledge and use it to solve problems together)
is encouraged in MMTC

MMTC : A Case of Knowledge Management and Learning Organization

A formal Mentoring program so that juniors can


gain knowledge from their senior employees
should be implemented in MMTC
MMTC possesses a participative work culture
where employees of different departments
interact and formally share their expertise and
knowledge.
New practices related to the field of knowledge
management cannot be implemented without
support of top/senior management
Organising and sharing Knowledge should form a
formal part of your daily work
Sharing of expertise and knowledge with peers is
recognized and rewarded in MMTC

KMO and Bartletts Test of Sphericity


With only the nine factors considered, KMO was found
to be above 0.7 and the null hypothesis as given by
Bartletts test stood rejected. This indicated that the
correlation matrix was not an identity matrix at 0.05
level of significance and there was a degree of
correlation amongst the factors considered. Thus,
further analysis using factor and discriminant analysis
could be further carried out.

Reliability Analysis
T-tests applied to each of the nine factors determined
that the questions allowed the respondents to clearly
agree or disagree. Each factor was rejected at 0.05
significance level.
Reliability analysis was also carried out by testing the
adequacy of sample size using Cronbach analysis. The
analysis yielded acceptable result of 0 .794.

Validity of The Factors Included


To determine the primary components that can
strongly impact knowledge initiatives in MMTC, Factor
analysis was applied on all extracted nine factors. On
application of factor analysis on nine factors, three
components were extracted which explained 70% of
the variance and the alignment of the nine factors
within the three dimensions was noted.

The rotated component matrix (included in annexure


A) was examined to identify the loadings and
determine the factors falling in each component. The
established three dimensions included:

Leadership and Social Interaction, which reflects


the people aspect of Knowledge Management
system.

Organization of Knowledge assets and initiatives


in the organization, which reflects the process
aspect of Knowledge Management system.

Work culture and innovation, which reflects the


organizational culture of MMTC.
Discriminant analysis was then applied to decipher any
significant differences between the opinions given by
employees at different designations. Discriminant
Analysis is significant for a study which takes into
account peoples perceptions. It can be considered to
be a confirmatory factor analysis since the factors
considered in factor analysis should be able to
reclassify the responses correctly according to the
dependant variable.
Discriminant analysis was applied on the basis of four
designations - deputy manager, manager, senior
manager and deputy general manager. 82.5% of the
data was reclassified correctly on the basis of the
independent variables in the analysis. This reflected
that the factors considered for factor analysis were
successfully able to map perceptions across the
groups/designations.
The results achieved for Knowledge Management
(three extracted components) were found to be similar
to the three building blocks identified by Garvin et al.
and utilised in the Learning Organisation assessment
survey. The three critical factors for Knowledge
Management architecture determined through
application of factor analysis included leadership,
Knowledge initiatives and processes, and conducive
organization culture. The building blocks identified by
Garvin for continuous learning in organizations also
similarly involves leadership that initiates learning,
learning practices and processes and supportive
learning culture and environment. To further explore
the long-term goal of MMTC emerging as a learning
17

TATTVA - Vol. 1 Issue 1 October 2010

organisation, data was collected and analysed through


use of the assessment tool developed by Garvin et al.

Learning Organisation Analysis


The primary data collected in MMTC was organised
according to each building block and their
subcomponents. The data collected was further
subdivided into two sets, one of which measured the
perception of employees on the subcomponents of
building blocks, while the other reflects the
expectations of the employees from the organisation.
For further data analysis, nine factors under perception
and expectation each were considered.
The building Block of Leadership in the assessment tool
does not have sub components and cannot be easily
scaled. It is therefore excluded from factor analysis and
discriminant analysis. However, its overall scoring is
included in perception mapping and assessment of the
gap between Perception and Expectation.

Reliability Analysis
Using SPSS, Cronbach Alpha was calculated separately
for the two groups of data, namely Perception of
Employees and Expectation of Employees.
Cronbach Alpha measures slightly less than 0.7 in both
the cases but this can be attributed to lower number of
respondents.
T-Test conducted on Perception and Expectation of
Employees on the same parameters, was rejected at
0.05 level of significance and reflected significant
differences between perception and expectation of
employees.

Factor and Discriminant Analysis


On application of factor analysis, the perception and
expectation of each sub-component loaded onto
different components in the rotated component
matrix. The purpose of factor analysis for this primary
data is not data reduction; instead it validates the

18

significant difference between the expectation and


perception of employees in MMTC. The perception
about each subcomponent lies under a different factor
as compared to the expectation of that subcomponent.
Discriminant analysis was applied as a confirmatory
factor analysis taking designation as dependant
variable. 81.5% of the responses were correctly
reclassified with few errors at the first two levels. The
satisfactory results reflected that the perception at
senior managerial positions could be clearly
distinguished from that of the lower managerial
positions through the components considered in the
questionnaire.

Perception Matching
Primary data collected using the assessment survey
developed by Garvin et al. was essentially analysed
through the benchmarking scores provided as a part of
the diagnostic tool.
Comparison could also be drawn between the
expectations of employees as compared to the ratings
given by them for each questionnaire item which
together form the perception of the employees.
By assessing performance on each building block, the
areas which require improvement can be identified.
Garvin et al. believe the assessment tool can pinpoint
areas where companies need to foster knowledge
sharing, idea development, learning from mistakes and
holistic thinking.
On comparison of perception score with expectation
score given by employees as well as comparison of
perception score with benchmark score, the areas
noted for improvement were Appreciation of
differences(Supportive learning environment),
Analysis and Information transfer(Concrete learning
practices).

Discussions and Recommendations


Before investment in knowledge management
architecture, the organisation would need to establish

MMTC : A Case of Knowledge Management and Learning Organization

a roadmap which would be followed to develop


knowledge initiatives suitable for Indian PSU, MMTC.
(Roadmap in Annexure C).
The first step in the roadmap involves selection of a
suitable knowledge strategy (Personalization or
Codification). Based on the selected strategy, suitable
knowledge program and practices could be developed.
In case of MMTC, initiating personalization strategy
would enable them to garner support of employees.
The strategy would include knowledge sharing
initiatives such as:
Developing experience sharing sessions
Sharing and recording best practices and lessons
learnt from errors within the organization
amongst the regions or departments. This could
be done via email/newsletter
Mapping employee competency and preparing a
list of experts in different domains. The expertise
can be channelized through the intranet as all
employees have ready access to contact details of
the experts.
Implementing Mentoring and Peer Assist
programs initiated by prospective mentees.
Although MMTC assigns mentors to all new recruits, it
is essential to devote resources to ensure that the
mentor-mentee relationship is established and
continuously worked upon.
In India, Public Sector Enterprises (PSE) such as NTPC
generally undertake codification strategy through
development of a knowledge portal ,dedicated to
sharing of knowledge through articles and documents
on one hand and collaborative tools of online chat and
discussion rooms on the other.
The knowledge sharing practices and knowledge portal
developed would have to be aligned closely to a
Knowledge Management strategy which would be
established on the basis of the needs of the employees.
The knowledge management strategy would in turn be
closely linked to the corporate strategy of the
organization.

The final aim of the organisation should be to utilise the


knowledge to ensure continuous learning throughout
the organisation. Based on the results deduced from
the assessment survey of Garvin et. al., a need was felt
to not only establish knowledge sharing initiatives, but
the significance of refurbishing the organization
culture was also realised. Thus, there is a need to
emphasise innovation, team building, and openness to
divergent viewpoints, and leadership that believes in
open-door policy as a part of the organization culture.
The HRD department (training cell) should renew focus
on leadership, team building and entrepreneurship
skills which could be included in the training and
development programmes designed by MMTC for both
its corporate and regional offices.

Conclusion
The three focus areas to consider while tapping
knowledge creation, generation, sharing and
dissemination processes so as to emerge as a
continually developing and learning organisation are
organisation culture and the work environment , the
knowledge sharing and Learning processes and
practices and top management support and leadership
in the organisation.

Limitations

The research was conducted on a small sample


size due to restriction of time and access. It was
also limited to the corporate office of MMTC and
could not be extended to the various regional
offices located in other cities of India.
Knowledge Management was an unfamiliar term
for many of the employees thereby securing
fewer uptakes in terms of responses to interviews
and questionnaires.
Due to paucity of time and interest, research was
restricted only to the people issues involved in
implementation of Knowledge Management.
Issues related to technology infrastructure related
to KM were not given equal consideration in the
primary research.

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TATTVA - Vol. 1 Issue 1 October 2010

ANNEXURES
Annexure A : Rotated Component Matrix for Knowledge Management
Rotated Component Matrixa
Component
1

Practiced by department head

.790

.170

.006

Organising knowledge reduces duplication

.718

.188

-.167

Learning Teams

.707

.178

.442

Knowledge sharing part of daily work

.117

.895

.162

Top management support

.150

.881

-.035

Formal mentoring program

.437

.651

-.078

Knowledge sharing recognized

.104

.033

.809

Innovation encouraged

-.387

-.113

.622

Knowledge sharing work culture

.587

.265

.620

Extraction Method: Principal Component Analysis.


Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 4 iterations.

Annexure B
BUILDING BLOCK 1 : SUPPORTIVE LEARNING ENVIRONMENT
EXPECTATION

PERCEPTION

BENCHMARKING
SCORE

Psychological Safety

TOP QUARTILE (90)

TOP QUARTILE(100)

TOP : 87-100

Appreciation Of
Differences

TOP QUARTILE (80)

THIRD QUARTILE(68)

THIRD : 65-79

BOTTOM QUARTILE(56)

BOTTOM QUARTILE(62)

BOTTOM: 38-80

TOP QUARTILE (100)

TOP QUARTILE (97)

TOP: 65-100

Openness
Ideas

to

New

Time For Reflection

BUILDING BLOCK 2 : CONCRETE LEARNING PROCESSES AND PRACTICES


Experimentation

THIRD QUARTILE (78)

BOTTOM
(40)

QUARTILE

THIRD:72-82
BOTTOM: 18-53

Information Collection

SECOND QUARTILE (78)

SECOND QUARTILE (76)

SECOND: 71-79

Analysis

THIRD QUARTILE(77)

SECOND QUARTILE (61)

THIRD: 72-86

Information Transfer

THIRD QUARTILE(79)

TOP QUARTILE (100)

THIRD: 72-84
TOP : 85-100

Education
Training

TOP QUARTILE (100)

TOP QUARTILE (98)

TOP : 90-100

SECOND: 57-70

And

BUILDING BLOCK 3 : LEADERSHIP THAT REINFORCES LEARNING


Leadership

20

TOP QUARTILE(88)

TOP QUARTILE(90)

TOP: 83-100

MMTC : A Case of Knowledge Management and Learning Organization

Annexure C

References
Drucker P. F. (1993), Post Capitalist Society, Butterworth-Heinemann,
London.
Garvin David A., Amy C. Edmondson, and Francesca Gino. (2008) Is
Yours a Learning Organization? Harvard Business Review 86, No.
3 (March 2008).
Hislop D. (2002) Knowledge Management in Organization - A Critical
Introduction, Oxford University Press.
Kalam, A. P. J. (2001) in Keynote Address at Indian Economic Summit
2001- Transforming India into a Knowledge Society organised by
World Economic Forum.
Mukherji (2005) Knowledge Management Strategy in Software
Services Organization: Straddling Codification and
Personalisation, Management Review Volume 17, No. 3.
Nonaka I. and Konno N. (1998) The Concept of Ba: Building a
Foundation for Knowledge Creation. California Management
Review , Vol. 40, No. 3
Nonaka I. and Takeuchi H. (1995) The Knowledge Creating Company:

How Japanese Companies create the dynamics of innovation ,


New York: Oxford University Press
Pillania, R. K. (2006) State of Organizational Culture for Knowledge
Management in Indian Industry, Global Business Review, Vol. 17,
Issue I.
Prahalad, C.K. (1998), Strategies for Growth, Nicholas-Brealey
Publishing.
Rigby, K.Darrell (2009), Management Tools 2009: An Executives Guide,
Bain and Company Inc.
Rigby, D. and Bilodeau B. (2009), Management Tools and Trends 2009,
Bain and Company Inc.
The Human Factor, HR Transformation in PSEs, August 2009, Vol1,
Issue 9 (Page 17)
Thite M. (2004), Managing People in the New Economy: Targeted HR
Practices that Persuade People to Unlock Their Knowledge
Power, Sage Publications.
World Bank (2004), India and The Knowledge Economy: Leveraging
Strengths and Opportunities (www.worldbank.org.in) in Pillania
R. K., Study of Knowledge Management in Selected KnowledgeIntensive SMEs in Clusters in NCR Delhi.

21

TATTVA - Vol. 1 Issue 1 October 2010

22

Factors of After-Sales Service Affecting Customer


Satisfaction in Indian Consumer Electronics and
Appliances Market
(The Case of MIRC Electronics Ltd. (ONIDA), Pune Region, India)

Parul Aggarwal*

Abstract
Objective: This study was done to identify the factors of after-sales service affecting customer satisfaction in the Indian consumer electronics
and home appliances market. The findings were extended to assess the after-sales service offered by MIRC Electronics Ltd. (ONIDA), Pune Region,
India, for its products and suggest possibilities for improvement to the company.
Approach: A questionnaire on sixteen parameters was constructed on a reverse five-point Likert scale, with 5 indicating Very Poor and 1
indicating Very Good. Response was collected from the 100 (Onida and non-Onida) dealers in the Pune Region of Maharashtra, covering eleven
different cities and townships. The responses of the respondents were validated through the customer complaints registered at their respective
counters. Responses were taken from only those dealers currently dealing in ONIDA products or who have dealt with them at least once in the previous
year.
Results: Using Factor Analysis, the 16 parameters were found to fall under three important categories Dealer-controlled Delivery, Companycontrolled Post-delivery (Installation and Warranty Service), and Dealer-controlled repair outside warranty. Using Regression Analysis, it was
established that customer satisfaction and loyalty for a brand were most affected by company-controlled post-delivery factors. Improving and
optimizing these factors would possibly lead to increase in market share of the company.
Conclusion: This study will help the marketers and the service providers of MIRC Electronics and other major players in the industry to pay more
attention to the company-controlled post-delivery factors of after-sales service to enhance satisfaction level of their customers and attract new
customers. Similar studies can be done with other companies in the industry to validate the findings and to generalize the conclusions for the Indian and
the global consumer durable sector.
Keywords: After-sales service, Customer Satisfaction, Indian Consumer Electronics, Home appliances, Consumer Durables, Delivery, Postdelivery, Installation, Warranty

Introduction
Importance of Studying After-Sales Service: After-sales
service is an integral aspect of Customer Relationship
Management (CRM), which is a vital tool to enhance
customer loyalty and retain profitable relationship with
customers over the long-term. This is particularly
important in the consumer durables industry, where the
frequency of repeat purchase is low. The literature
review suggested that there is a strong correlation
between customer satisfaction, as a dependent variable,
and the 3 independent variables Delivery, Installation,
and Warranty. An attempt was made to find out which
sub factors under these three categories are critical for
business organizations like MIRC Electronics Ltd. to

create customer satisfaction and beyond that the elusive


goal of customer delight. Satisfied customers will not
only remain loyal, but will have increased positive
perceptions about the companys products and services.
This will lead to a positive word-of-mouth in the market,
thereby resulting in an increase in the number of new
customers and thereafter in overall market share.
The Present Scenario: India is the worlds second largest
growing economy, having a vast consumer class with
increasingly high disposable incomes. This has made
consumer durables one of the fastest growing industries
in the country. Various drivers, like housing and real
estate demand, an emerging retail boom, increase in the

*Centre of Business Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. R. J. Masilamani, Centre of Business Management, Birla Institute of Management Technology

23

TATTVA - Vol. 1 Issue 1 October 2010

level of affluence of a part of the population, easy


availability of finance, emergence of double-income
families, fall in prices due to increased competition,
government support, growth of media, improvements
in technology, reduction in customs duty, growth in the
consumer base of the Indian rural sector, and greater
disposable income of people, have all contributed to
the spectacular growth of this sector. Currently the
Indian consumer electronics and household appliances
market is dominated by major Indian and international
brands, including LG, Samsung, Whirlpool, Videocon,
Godrej, MIRC Electronics (ONIDA), Blue Star, Bajaj,
Panasonic, Haier, etc. LG and SAMSUNG, the two major
Korean companies, are the leading players in this
sector, with LG being the market leader in almost every
product category of consumer electronics and
household appliances.
Product Categories: The consumer durables sector can
be segmented into two broad categories Consumer
Electronics and Consumer Appliances, which is further
segmented into Brown and White Goods. The product
line included under each of these categories is as
follows:
Consumer electronics: VCD/DVD, home theatre,
music players, color televisions (CTVs), LCDs,
Mobile Phones.
White goods: Air Conditioners, Washing
Machines, Refrigerators, etc.
Kitchen appliances/brown goods: Mixers,
Grinders, Microwave Ovens, Chimneys, Cooking
Range, Irons, Electric Fans, etc.
Amongst all the product categories, the CTV segments
enjoys the maximum share (nearly 30 percent) and
provides the largest contribution to overall growth of
the industry, in terms of both volume and value. CTVs,
Refrigerators and Air-conditioners together constitute
more than 60 percent of the sales in terms of the
number of units sold. Companies like LG, Whirlpool and
Samsung have registered double-digit growth in the
direct- cool refrigerator market.
In the washing machines segment, the semi-automatic
category and the fully-automatic categories have
grown annually by 4 percent and 8 percent
24

respectively. In the air-conditioner segment, the sale of


window ACs has grown by 32 percent and that of split
ACs by 97 percent. The Indian household appliances
market generated total revenues of $4.8 billion in 2008,
representing a Compound Annual Growth Rate (CAGR)
of 12.5 percent for the period spanning 2004-2008. In
comparison, the Japanese and Chinese markets grew
with CAGRs of 1.1 percent and 7.5 percent,
respectively, over the same period, to reach respective
values of $18.6 billion and $24.4 billion in 2008. Market
consumption volumes increased with a CAGR of 13.2
percent in 2004-2008 to reach a total of 34.7 million
units in 2008. This is expected to rise to 52.2 million
units by the end of 2013, representing a CAGR of 10
percent for the 2008-2013 periods (McKinsey Global
Institute MGI report, 2008)
The MNC Challenge: This particular sector in India is
characterized by the emergence of MNCs, exchange
offers, discounts, resulting in intense competition. The
market share of MNCs in the consumer durables sector
is 65 percent. The major target of all the companies
competing in this sector is the growing Indian middle
class. MNCs offer superior technology to the
consumers whereas the Indian companies compete on
the basis of the firm grasp of the local market, their well
acknowledged brands, and wide and effective
distribution networks.
The Rising Rural Market: Since the penetration in the
urban areas for these products is already quite high,
the markets for both C-TV and Refrigerators are shifting
to the semi-urban and rural areas. The rural sector,
constituting nearly 70 percent of the total Indian
population, offers a huge potential for consumer
durables. However, the penetration level in still very
low in the rural market. An important factor behind the
low penetration is the poor government spending on
infrastructure specifically in electrification programs in
rural areas. This discourages the consumer durables
companies from investing adequately and pursuing
effectively this potentially large market. However,
despite a low penetration level, the growth rate is
much more than that of the urban market and is now
seen as a product replacement market.

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

Winning the Customer: The bottom line is Indian


market is changing rapidly and showing an
unprecedented business opportunity. The penetration
level of consumer durables is very low in India, as
compared with the other countries. This translates into
a vast unrealized potential. In light of the intense
competition facing the consumer electronics industry
and the vast untapped potential of the Indian market,
manufacturers are now constantly engaged in the
creation of new innovative products and introduction
of new technologies that would hopefully win
consumers' acceptance. However, against a backdrop
of changing technology and increasingly sophisticated
consumer wants, gaining customers acceptance and
increasing the market share for both the existing and
the new products becomes an uphill task.
Key Factors: In order to improve the market share and
increase the scope for repeated purchases and brand
loyalty that eventually leads to optimum profitability, it
is important for the marketers to first understand the
consumers buying behavior including his perceptions
and preferences towards choosing a specific offering.
At the same time, after-sales service is equally
important in satisfying consumer needs, and in
creating a long term mutually beneficial relationships
with customers. According to Alexander et al, 2002,
effective after-sales service may generate more than
three times the profit of the original purchase during a
given products life-cycle.
Investigating After-Sales Service: This study, thus,
attempts to identify the factors of after-sales service
that affect customer satisfaction in Indian consumer
electronics and home appliances market so as to help
the companies competing in this sector to determine
which aspects of after-sales service require more focus
and investment. By extending the findings to discover
factors that existed and impacted customers
satisfaction in the after-sales service offered by MIRC
Electronics Ltd. (ONIDA), Pune Region, India for its
products, and consequently the companys market
share, the study attempts to pinpoint aspects of after
sales service that can be directly correlated with
customer satisfaction and could on the other hand lead
to drastic fall in market shares, if ignored.

MIRC Electronics Ltd. (Onida) Company Background


The History- Onida is one of India's leading electronics
brands, established as "MIRC Electronics" in 1981.
Onida was started by G.L. Mirchandani and Vijay
Mansukhani in 1981 in Mumbai. In 1982, Onida started
assembling television sets at their factory in Andheri,
Mumbai. Since then, Onida has evolved into a multiproduct company in the consumer durables and
appliances sector. Onida achieved a 100 percent
growth in ACs and microwave ovens and a 40 percent
growth in washing machines last year. ONIDA created
the famous caption "Neighbors envy, Owner's Pride",
and a legendary character, the devil complete with
horns and tail. This character has now been replaced
by a young married couple- Siddharth and Ritu
marking the transition from bold new entrant
attracting deep envy to established, reliable market
leader.
ONIDA Today- MIRC Electronics Ltd. is a leading
Consumer Electronics Conglomerate of India with
2008-09 turn over of Rs.1800 Cr. It has the ownership of
the Popular 'ONIDA Brand with 3200 Employees, 33
Branch Offices, 233 Service Centres, 1200 Trained
Engineers, Network of 9000 Dealers & 180 Distributors
and International Presence in CIS, UAE, Africa & China.
MIRC Electronics won an Award for Excellence in
Electronics in 1999, from the Ministry of Information
Technology, Government of India. Onida with its Sales
& Marketing office in Dubai reported a 215 per cent
export growth in two years, setting the base for an
increased robust international presence. Onida
products have been favored by hypermarkets like Lu-Lu
Centres, Carrefours, Geants and Dasmans in the Gulf
Cooperation Council (GCC) countries.
ONIDA Product Range - Today, in the Indian market
ONIDA competes with all the local and international
brands in the following product categories CTVs,
LCDs, DVDs and Home Theater Systems, Washing
Machines, Microwave Ovens, Air Conditioners,
Presentation Products, and Mobile Phones.

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TATTVA - Vol. 1 Issue 1 October 2010

ONIDA Manufacturing Facilities: ONIDA has 3


Manufacturing Plants across the country - Wada,
Mumbai (7sigma plant), Roorkee, and Noida. These
Mfg Plants are ISO 9001 and ISO 14001 certified and
having all world class facilities for Designing and
Manufacturing of LCD TV, CRT TV, Projectors, Air
Conditioner, Microwave, DVD Player, Washing Machine
etc.
After Sales Service System Pune Region: The After
Sales Service has been outsourced to ADONIS, which
operates 3 branches, 1 each in Pune, Kolhapur, and
Goa. The Pune Branch operates 5 service centers 4
service centers (Sholapur, PCMC, Kotrud, and
Swargate) run by individuals, and 1 service depot
(Ahmednagar) run directly by ADONIS. The Kolhapur
branch, on the other hand, has its service centers in
Kolhapur, Sangli, and Ratnagiri. Goa Branch has 1
service center at Panjim and 1 CRC (Customer Relation
Center) at Madgaon. A vast majority of customers (80
percent) directly log complaints at AEGIS, a centralized
call center located at Yerwada, Pune.
Technicians - A Key Resource: The number of
technicians at each service center varies according to
the complaints registered on the firms products. These
technicians are required to make 8 calls per day and are
paid incentives on a per-call basis. They are required to
report to their respective Group Leaders at their
service center after the call is closed, after which
relevant details are fed into a centralized CRM
database. The spare part non-availability complaints
are recorded in the PNA database and are monitored
accordingly. Technicians are incrementally trained on
new product launched by the company. They are also
responsible for installation and demos at the time of
installation.
Service Agents: Regular visits are made by the service
agents to the dealer counters to resolve any issues. A
centralized call service center number is provided to all
the dealers and on all the products and catalogues.
Nearly 20 percent complaints that are launched at the
dealer counters are reported by the dealers to the main
service center or the centralized call center of the
company. A small customer call center is also operated
26

in the regional branch office of the company to follow


up with the dealers and handle the day-to-day
complaints launched at dealer counters.
While delivery of the product and providing accurate
information regarding time of installation are handled
by the respective dealers, installation, repair, and
warranty issues are dealt by companys (ADONISMIRC) technicians, customer care executives, and ISDs.
Purpose of Studying the Various Factors Affecting
Customer Satisfaction in ONIDAs After-Sales Service:
MIRC Electronics offers a wide range of consumer
durables, including C-TVs, LCD TVs, Air Conditioners,
DVD Players, Microwave Ovens, Washing Machines,
and Mobile Phones, under the brand name ONIDA.
Although the brand has been performing extremely
well in the TV, DVD, and AC categories, it is lagging
behind LG, Samsung, Whirlpool, and IFB in most
product categories. For instance, it lags other major
players in the categories of washing machines and
microwave ovens, with a market share of only 5% and
8% respectively. Therefore, it was important for the
company to know the areas where improvements were
required. Therefore, the study was taken up to identify
the factors that affect customer satisfaction in aftersales service in the Indian electronics and appliance
market and to recognize those particular aspects of
MIRCs after-sales services that affected customer
satisfaction levels and needed to be improved.

Literature Review
Creating innovative products of superior value and
attaining customer satisfaction towards the offered
products and services are the prerequisites for building
a lasting customer relationship. According to Kotler, P.
and Armstrong, G. (Principles of Marketing, Thirteenth
edition), profitable customer relationships can be built
and maintained for the long-term success of any
company only if the various aspects of acquiring,
retaining, and growing customers are dealt with
properly using effective customer relationship
management (CRM).

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

After-sales service, an integral part of CRM, refers to all


the activities that are organized by business
organizations after the purchasing stage. Traditionally,
the term After-sales services has been used to
describe services that are provided to the customer
after the products have been delivered. On other hand,
many other authors have suggested that after-sales
services are nothing but product support activities,
that is, all activities that support the product-centric
transaction. A study by Loomba, A.P.S., 1996, defined it
as customer support elements where all activities
that ensure that a product is available to consumers
over its useful lifespan for trouble-free use. It is worth
mentioning that after-sales plays a vital role in
supporting marketing activities to enhance customer
loyalty, and thus to increase profitability in the long
term (Gaiardelli, P., Saccani, N., and Songini, L., 2006).
According to Alexander, W.L., Dayal, S., Dempsey, J.J.
and Vander Ark, J.D. (2002), profit margins can be
significantly increased by delivering the after sale
service compared to product sale without it. It may
generate at least three times the profits from the
original purchase during a given product lifecycle. After
sale services represent one of the few constant
connections those customers have with a brand
(Gallagher, T., Mitchke, M.D. and Rogers, M.C., 2005).
Gallagher et al. (2005) point to after-sales as a way to
recover profits lost due to the fierce competition on
sales prices of original equipment, representing at the
same time one of the few constant connections that
customers have with a brand.
After-sales is thus a potential source of competitive
advantage for the firm (Armistead and Clark, 1992;
Goffin, 1999). The same services are sometimes called
fields services, when they are organized in the main
characteristics that are located at a customers site
(Simmons, 2001). After-sales service is often referred
to product support services where all activities will
support the sold product (Lele and Karmarkar, 1983).
However, most of the business organizations are not
aware about the after-sales service factors and its
impact on customer satisfaction. Failure to realize the
importance of these factors can lead to poor and
sometimes disastrous business relationships.
Dissatisfied customers will turn to competitors who

can offer better after-sales services. Although


profitable business relationships require enormous
efforts and cost to build on, they are not something
that a company can take lightly as they can lead to huge
benefits in the long-term once established.
According to Irini D. R. (2008) installation and delivery
are the keys to positive influence on the customer.
Beyond this buyers of product want assurance that the
product will perform satisfactorily over its useful life.
This is achieved through post-sale support such as
installation, warranties, extended warranties,
maintenance service contracts, provision of spares,
training programs, product upgrades and etc (Murthy
D.N.P. et. al, 1995). Value-conscious consumers would
demand that a companys products provide more value
than its competitors offerings not only in design and
manufacturing, but also in product delivery and aftersales service support (Sherman, 1992). Increasingly,
distribution and service support options available for a
product are key determinants in consumers product
purchase decision (Lele and Sheth, 1987).
Levitt (1993) opined that manufacturers and retailers
cannot presume that their active role ends with the
sale but should continue supporting their customers
with after-sales service including reliable delivery of
spare parts. According to Goffin (1999), installation is
one of the seven elements of customer support, with
installation being the first. For a complex product, or
where safety issues are involved, the installation is
usually performed by personnel from the
manufacturing company. The rationale of installation
packages are based on three main factors which are
after-sales economics, customer requirements, and
competitive arguments (Oliva and Kallenberg, 2003).
However, according to Murthy D. N. P., et al. (2004)
customer dissatisfaction can arise due to poor
performance of the purchased item and/or the quality
of warranty service provided by the manufacturer. In
either case, it results in a negative impact on the overall
business performance. This may lead to the dissatisfied
customers switching to a competitor or the company
losing potential customers due to negative word-ofmouth effect.

27

TATTVA - Vol. 1 Issue 1 October 2010

The consequence of poor warranty servicing is more


difficult and costly to rectify and hence it is very
important that manufacturer avoids this occurrence in
the first instance. Since non-conforming items have a
higher failure rate, they tend to fail early and this
affects consumer satisfaction. One way of overcoming
this is through a consumer incentive warranty policy
(Murthy D. N. P, et al., 1995). Offering better warranty
terms convey greater assurance to buyers and can
result in greater sales. This implies that product
warranty logistics are very important from the
customer satisfaction as well from the manufacturers
profitability point of view. (Murthy D. N. P., et al., 2004).
Lastly, a study done on factors affecting customer
satisfaction in after-sales service of Malaysian
electronic business market (Mohd Rizaimy Shaharudin
et. al, 2009) revealed various factors of delivery,
installation and warranty and assessed the extent to
which these factors affect customer satisfaction. The
study established a strong correlation between
customer satisfaction, as a dependent variable, and 3
independent variables Delivery, Installation, and
Warranty.

Statement and Importance of Problem


The above findings led to making an attempt to find out
which factors under the three categories delivery,
installation, and warranty - are most essential for
business organizations in the Indian electronics and
appliances market to ensure customer satisfaction,
eventually leading to delight. If the customer is
satisfied, he will not only remain loyal, but will also
have a good perception about the companys products
and services. This will lead to positive word-of-mouth
in the market, thereby resulting in an increase in
number of new customers and hence in the overall
market share. Customer loyalty, on other hand, is
particularly important for success in long term in
consumer durables industry, where frequency of
repeat purchase is low.
Research Objective: Thus, the main objectives of the
study were (i) To identify the main factors of aftersales service influencing customer satisfaction in the
Indian consumer electronics and household appliances
28

market (ii) To suggest possible areas of improvement in


after-sales service of ONIDA, based on findings arising
from the study.
Factors of After-sales Service Chosen for Study: In light
of the preceding discussion and based on initial field
surveys and companys secondary data analysis, 16
different aspects of after-sales services under three
broad categories of installation, delivery, and warranty,
were taken as independent variables to study their
correlation with the dependent variable of Customer
Satisfaction. Some of these factors have already been
shown to have an impact on customer satisfaction in
the Malaysian market (Shaharudin et al 2009). The
factors however were categorized, based on the extent
of control the company had over each of them, as
follows:
Dealer-Controlled Delivery Factors: Reception of
Invoice, Transfer of product to customer place,
Reliability in delivery times, Quality of product
when delivered at home, quality of product
packaging when delivered, Accurate Information
about time of installation
Company-controlled Post-Delivery Factors
(Installation & Warranty): Time elapsed between
delivery and installation, Attentiveness of
technicians to avoid damage, Demo/advice given
by technicians, Quality of response to complaints,
Time taken to respond to complaints, Satisfaction
after 1st complaint resolution, Time taken to
rectify failed item, Availability of spare parts,
Replacement of defective product after 2-3
repairs
Dealer-Controlled Warranty: Dealer repair
quality outside warranty claim.
The sub-objective of the study was to study correlation
of each of the aforementioned factors with customer
satisfaction in after-sales service provided by MIRC
Electronics for ONIDA products. Proposed theoretical
framework is illustrated in Fig.1

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

Fig.1 : Proposed Theoretical Framework


Independent Variables

Dealer Controlled Factors


Delivery
(C2)

Dealer Repair
outside
warranty (C3)

Company Controlled Factors


Installation

Warranty

(C1)

(C1)

CUSTOMER SATISFACTION
Dependent Variable

Research Methodology
Hypothesis: Given the preceding problem statement
and defined research objectives, the following
hypothesis:
H01: There is no significant difference between
dealer-controlled delivery factors towards
customer satisfaction
H02: There is no significant difference between
company-controlled post-delivery factors
towards customer satisfaction
H03: There is no significant difference between
dealer-controlled warranty factors towards
customer satisfaction.
Research Design: This research is a quantitative
research where sources of information are gathered
from questionnaire. Instrument utilized was the selfadministered questionnaire featuring closed-ended
responses and scales to matrix questions. This study is
oriented towards describing the characteristics of a
population or phenomenon, thus qualifying as a
descriptive study. It also featured hypotheses testing
to determine the influence of dealer-controlled
delivery, company-controlled post-delivery, dealercontrolled warranty factors contributing to customer
satisfaction. Both, an exploratory and a conclusive
research, were carried out to collect and analyze data
in accordance with the objective.
Exploratory research was done to study the after sales
service system and the perceptions of the dealers

towards after-sales service quality of ONIDA vis--vis


other major players in the market. This helped to
identify the alternative courses of action, define the
problem more precisely, isolate key variables, identify
relationships, gain insight on developing an approach
to the research problem, and to establish priorities for
further research. It also provided clues to the various
aspects of after-sales service where the company
lagged behind the market leaders. Conclusive Research
was then carried out to identify various factors
affecting customer satisfaction in after sales service.
Both descriptive and causal data was collected and
used for arriving at conclusions.
Questionnaire and Scaling Te chniques: A
questionnaire on the aforementioned 16 aspects of
after sales service was constructed on a Reverse 5point Likert scale, with 5 indicating Very Poor and 1
indicating Very Good. Pre-testing of the questionnaire
was done during a pilot study featuring a sample of
thirty respondents, which included 8 area sales
managers of different territories, 2 ISDs (In-shop
demonstrators), 3 ADONIS customer-care executives, 7
Onidian, and 5 non-Onidian dealers, and 5 Onidian
consumers.
Data Collection: Secondary data regarding the current
scenario of the consumer durable market in India and
Pune region was collected from the past research data,
latest ORG reports, the companys official records,
internal sources and company market researches,
channel partners, and the internet journals. As tracking
and reaching Onida consumers was not possible,
primary data was collected by making personal visits to
100 Onida and non-Onida direct dealers and
distributors, sub-dealers, from Pune Region,
comprising 11 cities and towns of Maharashtra,
including Goa, Ratnagiri, Kolhapur, Sholapur,
Osmanabad, Pimpri-Chinchwad Municipal
Corporation, Pune City, Sindudurg, Sangli, Satara, and
Ahmednagar). The dealers were asked about customer
satisfaction levels and their perceptions and
experience of the companys after-sales service.
Responses from each of the 100 dealers were validated
through customer complaints registered at their
respective counters.
29

TATTVA - Vol. 1 Issue 1 October 2010

Sampling: Out of the 100 dealers interviewed from the


major markets of Pune Region, sampling was done in a
manner to collect data from a more or less equal
number of Class A+, A, B, and C dealers (as per turnover
done for ONIDA) to remove any bias. Similarly, out of
the 100 dealers thus surveyed, 51 were Onida direct
dealers, 26 were Onida sub-dealers, and 23 were nonOnida dealers. The type of sampling chosen was
probability sampling. Data collected was based on
stratified sampling. Responses were taken from only
those dealers who are currently dealing in ONIDA
products or have dealt with them at least once in the
previous year.
Data Analysis Method: To compute all the data
gathered from questionnaires and carry out factor and
regression analysis, the Statistical Software Package for
Social Sciences (SPSS) Version 17.0 was used. The
techniques of analysis used in this study were
descriptive (mean, standard deviation) and inferential
analysis (regression) to sum up the data collected. The
questionnaires used are adopted from the
questionnaires developed by past researchers. Dealer
controlled delivery was constructed in five
measurement items, Company-controlled Postdelivery was constructed in ten measurement items,
and dealer-controlled warranty was constructed as a
single item.
Factor Analysis and Regression Analysis was used for
data-reduction and summarizing. Factor analysis is a
multivariate technique and is employed in the study for
the purpose of analyzing the data. The Principal
Component Method is considered appropriate, as the
primary purpose is to determine the minimum number
of factors that would account for the maximum
variance in the data collected. Regression analysis
would be used to assess the correlation between the
dependent and independent variables and assess the
influence of the relevant factors on sales or customer
satisfaction.

Results and Discussion


This section presents the findings of this study. The
data is interpreted using the mean, factor analysis and
regression methods of SPSS.
30

Pilot Study: Improvement based on feedback has been


effected by reducing the questionnaire Likert scale
rating from a 7 point rating to a 5 point rating. This has
improved respondents understanding and
interpretation of each question. It also helped to
shortlist and finalizes the 16 aspects of after sales
service that best suit the present condition in the
Indian market.
Calculation of Mean Rating: On calculating the mean
rating, the following results were obtained. (Table 1) A
close observation of the average ratings of these
factors affecting customer satisfaction in ONIDAs
after-sales service suggests that the overall satisfaction
in after sales service was nearly poor. While the
satisfaction in dealer-controlled deliveries and
warranty was found to be good, the companycontrolled installation and warranty, was rated from
satisfactory to poor, and needed considerable
improvement.
Factor Analysis: Based on KMO measure of sampling
adequacy test in Table 2, it was found that the factor
analysis data was appropriate with the value of 0.777,
which falls between the permissible ranges of the
factor analysis data. Bartletts Test was utilized with
the result indicating a highly significant result with
p=0.000 (p<0.001) and therefore establishing that
factor analysis is appropriate. From the results
obtained in rotated matrix Table 3, all three factors can
be accepted with attributes required for reshufflement and reduction. This reduction is possible
because the attributes are related. The rating given to
any one attribute is partially the result of the influence
of other attributes.

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

Table 1: Mean Rating of Factors of ONIDAs After-Sales Service


COMPONENT

FACTORS

C 2 (DealerControlled Delivery)

X1
X2
X3
X4
X5
X6

C 1 (CompanyControlled PostDelivery)

X7
X8
X9

3.6

Good
Good
Nearly
Poor

3.4

Satisfactory

3.9

ONIDA's quality of response to complaints


Time taken to respond to complaints
Repeat complaints; Satisfaction after 1st
resolution

3.8
3.9

3.8
4.3

X15
X16

Time taken to rectify failed item


Availability of spare parts
Replacement of defective product, after 2 -3
repairs
Dealer repair quality outside warranty claim

4
2.3

Poor
Good

X17

Customer Satisfaction in AFS

3.8

Nearly
Poor

X12
X13
X14

Table 2: KMO and Bartletts Test


Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity

2.4
2.4

Rating
Good
Good
Good
Good

Poor
Nearly
Poor
Poor
Nearly
Poor
Nearly
Poor
Poor

X10
X11

C 3 (dealercontrolled warranty)
Dependent Variable
(DV)

Reception of Invoice/Delivery Papers


Transfer of Product to your Place
Reliability in delivery times
Quality of product when delivered at home
Quality of product packaging when
delivered
Accurate info about installation
Time elapsed between delivery and
installation
Attentiveness of technicians to avoid
damage
Advice and demo/instructions given by
technicians

Mean
Rating on
scale of 1-5
1.8
1.9
2
2.3

.777
1263.526

df

120

Sig.

.000

a. Based on correlations
Regression Analysis: Table 4 shows the R-Square and
Durbin-Watson test. R-Square test result of 0.936 can
be accepted for the regression analysis. The DurbinWatson test result of 1.963, an indicator that the
autocorrelation approaches zero or there is a
significant difference that exists between the
dependent and independent variables (no
autocorrelation). A strong R value of 0.968 shows a
significantly high correlation between the listed
factors and the overall satisfaction in after sales
service of the company.

3.7

There is a significant correlation (0.80 and above)


between overall customer satisfaction and company
controlled post-delivery factors (C1), like the efficiency
of the spare part availability, response to complaints,
time taken to respond and rectify the failed items, etc.
Lesser correlation (<0.70) was found between
customer satisfaction and variables under C2 and C3
(dealer-controlled factors).
From the ANOVA in Table 5, it is clear that the predictor
variables are not equal to each other and that they can
be used to predict the dependent variable, customer
satisfaction, as is indicated by F value of 54.967 and
strong significance level of 0.000 (p<0.05). Further as
shows in Table 6, the results show that all of the
variables are significant (p<0.001) with high Beta
(0.324, 0.398 and 0.356) and t value (5.569, 5.678 and
4.167). The VIF value of less than 5 for all the three
components (predictor variables) and tolerance values
of less than 0.20 show that the problem of multicollinearity have not existed and all data are mutually
exclusive.
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TATTVA - Vol. 1 Issue 1 October 2010

Table 3: Rotated Component Matrix a

Raw

Rescaled

Component

Component

Reception of Invoice

.019 .484

.166 .032 .815 .279

Transfer of product

.131 .536

.055 .221 .904 .093

Reliability of delivery times

.002 .395

.125 .004 .772 .245

Quality of product when delivered at home

.068 .365

.131 .126 .676 -.243

Quality of product packaging when delivered

.035 .360

.002 .070 .711 -.003

Accurate info about installation

.102 .421

.021 .175 .728 .037

Time elapsed between delivery and installation

.710 .038

.179 .854 .046 -.216

Attentiveness of technicians to avoid damage

.624 .297

.108 .782 .372 -.136

Advice and demo/instructions given by technicians

.701 .121

.385 .806 .139 -.443

ONIDA's quality of response to complaints

.775 .068

.055 .939 .083 .066

Time taken to respond to complaints

.791 .186

.045 .928 .218 .053

Repeat complaints; Satisfaction after 1st resolution

.638 .058

.096 .827 .075 .124

Time taken to rectify failed item

.768 .086

.048 .946 .106 .059

Availability of spare parts

.588 .182

.325 .716 .221 .396

Replacement of defective product, after 2 -3 repairs

.769 .208

.151 .839 .227 .165

Dealer repair quality outside warranty claim

.039 .169

.431 .066 .283 .720

Extraction Method: Principal Component Analysis.


Rotation Method: Varimax with Kaiser Normalization.
a.Rotation converged in 5 iterations.

As for the interpretation, the test indicates that all the


three components dealer-controlled delivery,
company controlled post-delivery (installation and
warranty), and dealer repair outside warranty have
significant influence towards customer satisfaction. By
examining the t statistic for all the independent
variables it is apparently confirmed that the three
components have significant relationship due to strong
significance level (p<0.05) with customer satisfaction,
indicating that the null hypotheses are wrong and can
be rejected. However, on closely studying the means
and correlation matrix, the findings were extended to
determine the possible areas of improvement in aftersales service provided by MIRC Electronics. It was
observed that company-controlled installation and
warranty issues were not dealt with properly and were
major reasons for customer dis-satisfaction.
32

Discussion: The statistical result corroborated the


earlier findings that dealer-controlled delivery,
company-controlled installation and warranty, and
dealer repair outside warranty are all significantly
related to customer satisfaction in after-sales service of
the company. All of these factors are important in
delivering an acceptable after sales service
performance that will be able to ensure customer
satisfaction leading to customer delight. A good
delivery system always derives from a pull strategy
where demand pulls rather than product push
through marketing channels lead to customer
satisfaction (Shaharudin et al, 2009). Customers
require products to be delivered at the right place, time
and at the right price, and in the right condition.
Accurate information regarding time of installation
should also be provided at time of delivery.

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

Table 4: Result of R- Square and Durbin Watson Test


Model

R Square

.968

.936

Adjusted R Square Std. Error of the Estimate


.919

Durbin-Watson

.25157

1.963

Table. 5: Results for ANOVA Test


Model
1

Sum of Squares

Mean Square

Sig.

55.657

3.479

54.967

.000

Residual

3.797

.063

Total

59.455

Regression

Table 6: Results of Coefficients


Variables

Standardized
Coefficients
Beta

Sig.

Tolerance

VIF

1 (Constant)

0.356

0.508

0.612

0.451

2.213

Dealer Controlled Delivery


Company Controlled Post-Delivery
Dealer Controlled Warranty

0.324
0.398
0.356

5.569
5.678
4.167

0.000
0.000
0.000

0.589
0.602
0.750

1.451
2.234
1.333

These delivery factors are usually controlled by the


dealer, with the company having no say in it. The fact
that dealers try their level best to maintain a good
relation with the customers is the reason why these
factors were not the key reasons behind the poor
customer satisfaction in ONIDAs after-sales service.
Usually, companies pay too little attention to their
distribution channels, sometimes with damaging
results (Kotler and Armstrong, 2010). Apparently such
circumstances can threaten the existing sellerconsumer relationship. But, MIRC Electronics (ONIDA),
being a long-established Indian brand, has a very
strong distribution network, with strong relations with
dealers.
Furthermore, factors such as a superior installation
process and good warranty service proved to have a
very strong influence on customer satisfaction. This is
because these factors reduce risk of damages to the
product as well as provide assurance of the product
quality and reliability. Moreover, installation carried
out by an experienced and expert employee,
contributes to satisfaction and delight in the postpurchase environment, thereby leading to increase in
sales.

Collinearity Statistics

Thus, manufacturers of consumer electronics and


appliances cannot consider that their active roles have
ended with the sale, but rather must provide their
customers with a set of supporting after-sales services,
such as installation packages, technical advice for use,
maintenance/repair, spare parts delivery, product
upgrading, etc. Failure to deliver proper warranty
service can have a negative impact on sales through
spread of negative word-of-mouth in the market about
the brand. This implies that product warranty logistic is
very important from customer satisfaction as well from
the manufacturers profitability point of view (D. N. P.
Murthy et al. 2004).
Outsourcing of Critical Activities: In the Indian market,
the installation and warranty functions are controlled
by the company. The functions are usually outsourced
to a service provider that operates in sync with the
company. This arrangement is followed by MIRC, who
has outsourced the work to ADONIS, who takes care of
installation and post-installation warranty issues.
Statistical results clearly showed that the company was
lagging behind in these areas, thus emphasizing the
need to pay more attention to customer care service
quality, time taken to rectify failure, spare part
availability, time taken for installation, and demos

33

TATTVA - Vol. 1 Issue 1 October 2010

given during installation. In a parallel study, it was


found that other major players enjoying a much larger
market share than ONIDA in all product categories
were strong in these company-controlled installation
and warranty areas. This is a clear indicator that these
factors are very strongly correlated with customer
satisfaction and have a direct bearing on current and
future sales.

The above findings were further validated and backed


by the following general observations made regarding
the companys after-sales service during field surveys:
Product Replacement: Although the company
claims to have a policy of replacing the product if it
doesnt work properly even after 3 repairs/repeat
complaints, the field study revealed that at most
dealer counters more than a month is taken for
replacement of defective/damaged products. At
times, dealers replace the product with other
brand offerings (some people prefer to take a
different brand on replacement) themselves but
do not get replacement for the defective product
from Onida. This has led to a situation where
almost 60% dealers claim to have lost confidence
in the services of the company and have stopped
dealing in low moving products like Washing
Machines and Microwave Ovens, for which spare
part availability has been a major problem with
the company
Spare parts availability for both new and old
models of all product categories is a major issue
faced by the company. LG, Samsung and others
take no more than 15 days after requisitioning for
spare part supplies to their dealers.
Response to Complaints: Time taken to respond
to complaints and repair is more than one week.
No follow up is done with customers after
complaint launch.
Training of Technicians: Almost every dealer out
of 100 claimed that the technicians are not
trained properly to handle electronics as well as
appliances. Most technicians are not aware of
product details like warranty period, and
functioning. They are less motivated partly
because of low salaries and do not pay regular
visits at counters to make calls registered at the
34

dealer counters. Installation is usually delayed


and demos given during installation are poor.
Authorized service centers and technicians are
not available in remote areas on the outskirts of
Pune including Uruli Kanchan, Shirwal, Chakan,
PCMC, and Baramati. Just two technicians are
assigned to handle all these areas and even these
two do not visit these areas often.
Complaints over phone are not responded to
effectively. No call monitoring system is in place at
the call center.
Sub-dealers are not followed up on service issues
and they are the ones that spread the negative
word-of-mouth in the market. Since the number
of these sub dealers is large, they contribute
disproportionately to the companys poor image.
Complaint registering system at the dealer
counters and the service center system is not
integrated well. Dealers are not informed about
the follow up done or about complaint resolution.

In light of the findings of this study, the above


loopholes should be immediately taken care of if the
company wants to gain a competitive edge in the
market and regain its earlier market position in CTV
segment. Inadequate service provided for newly
launched products, like washing machines, will lead to
negative word-of-mouth in market, thereby affecting
sales of established products like CTV.
Therefore, after-sales service is clearly important in
satisfying consumer needs, and in creating long term
profitable relationship with the customer. Good aftersales support may generate more than three times the
profit from the original purchase during a given
products life-cycle (Alexander et al., 2002).

Conclusion
Based on the study, it can be concluded that the three
significant factors involved in after-sales service are
delivery, installation and warranty, with installation
and warranty functions being controlled by the
company. If all these all three factors are being looked
at professionally and efficiently, the reputation of the
company will be enhanced and this will contribute to

Factors of After-Sales Service Affecting Customer Satisfaction in Indian Consumer Electronics and Appliances Market

the companys positive image with its customers and


an advantage compared to its competitors. ASS is of
utmost importance for building a long lasting profitable
relationship with the existing customer and creating
new customers. Such relationship will create a strong
loyal customer base that will give the company a lasting
competitive edge.
Recommendations: In light of the statistical findings of
this study and the presented case of MIRC Electronics
(ONIDA) in Pune Region, the following
recommendations can be made to ensure maximum
customer satisfaction, retention, and new customer
creation:
Outsourcing of after-sales service: It is a serious
mistake to outsource after sales service. No
company that calls itself a good company can
afford to outsource this absolutely critical
function.
Other requirements for after-sales service: The
head of service must be a very senior person and
he should equally be seen to have the confidence
and support of the top management. The service
people also must be superior if not excellent
performers because it is here that customer
loyalty is built and repurchase decisions can take
place when customers are satisfied.
The feedback and complaints of the dealers
regarding service issues must be addressed on a
regular basis to maintain good dealer-company
and company-customer relationship.
Top Priority: What is required is giving top priority
to After Sales Service, with the company taking
the initiative on warranty complaints ensuring
prompt and effective attention to complaints
including handling the logistics and then training,
motivating and incentivizing dealers who do good
after sales service
The Marketing including Sales and after sales
service functions should establish the need for
drastic improvement in the delivery as measured
by promptness and effectiveness to each and
every complaint.
Adequate infrastructure in terms of place, people
and materials especially critical spares must be set
up and kept in place.

The company must set targets for time duration


and quality of service including repairs for all
service centers and for operatives.
The service technicians should be trained and
motivated before being assigned to their
respective jobs.
Parts availability has also to be accorded top
priority. For critical parts even if excessive
inventory levels have to be maintained it should
be considered as acceptable. Unfortunately most
companies fail here because these parts are also
needed for production and if there is a lack of full
availability the spares function always suffers.
Therefore instructions have to come from the
highest level and compliance monitored also at
the highest level.
Thus, companies need to improve on their
inventory management by keeping acceptable
safety stock to avoid the delay in product delivery
to the customer. Furthermore, it must always keep
the lead time at the minimum possible as to meet
urgent needs of the customer.
The company must always train its staff to give
consistent and reliable services to the customers.
Here, a good attitude towards working together
throughout the installation process with the
customer is needed so that the customer will be
satisfied and delighted with the service.
There is a need to respond within a reasonable
and acceptable period of time to the customer
regarding replacement claims. The company
should not delay the claim made by a customer
and try to fulfill it promises by replacing with a
new product.
Finally, continuous improvement is required
through integrated functional activities in order to
produce high quality products which in turn can
lead to customers high satisfaction and
confidence. Every department be it Marketing,
Finance, Operations or Human Resources must
work together to achieve the mission, vision and
objectives of the company.

Limitations: The service centers of ADONIS and the


service network could not be studied for further
recommendation on after sales service to the
35

TATTVA - Vol. 1 Issue 1 October 2010

company, as tracking and reaching 100+ consumers of


different ONIDA products was not possible. Survey
data was collected from both Onida and non-Onida
dealers in the local market. This can lead to the
possibility of the results being biased in favor of
dealers. However, this bias was removed to a great
extent by verifying the response of each dealer with
the consumer complaints registered at that particular
counter. Further verification of responses and results
was done by matching them with customer complaints
lodged in the central customer care center of ADONIS
as well as those recorded in the CRM database of the
company.
Scope of Contribution of Study: This study will help
marketers and service providers of MIRC Electronics
and all other major players in this industry to pay more
attention to the company-controlled post-delivery
factors of after-sales service to enhance satisfaction
level of their customers and attract new customers.
Similar studies can be done with other companies in
the industry to validate the findings and also with
similar industries like Construction, Manufacturing,
and Automotive, to generalize the conclusions for both
the Indian and global consumer durable sectors.

36

References
Armistead, C. and Clark, G. (1992). Customer Service and Support:
Implementing Effective Strategies. FT Books, London
Corey, R.E., Cespedes, F.V. and Rangan, V.K. (1989), Going to Market:
Distribution Systems for Industrial Products. Harvard Business
School Press, Boston, MA, pp. 22-59.
Gallagher, T., Mitchke, M.D. and Rogers, M.C. (2005). Profiting from
spare parts. The McKinsey Quarterly, 2 March.
Goffin, K. (1999). Customer support: a cross-industry study of
distribution channels and strategies. International Journal of
Physical Distribution & Logistics Management, Vol. 29, pp. 37497.
Irini D. R., et. al. (2008). After-sales service quality as an antecedent of
customer satisfaction, the case of electronic appliances. Journal
Managing Service Quality, Vol. 18 No. 5, pp. 512-527
Kotler, P. and Armstrong G., 2010. Principles of Marketing. Pearson
Prentice Hall, Thirteen Edition, New Jersey, NJ
Lele, M.M. and Karmarkar, U.S. (1983). Good product support is smart
marketing. Harvard Business Review, Vol. 61 No. 6, pp. 124-32.
Lele, M.M. and Sheth, J.N. (1987), The Customer Is Key, John Wiley &
Sons, New York, NY, pp. 179-207. Levitt, T. (1983). After the sale is
over . . .. Harvard Business Review, Vol. 61 No. 5, pp. 87-93.
Loomba, A.P.S. (1996). Linkages between product distribution and
service support functions. International Journal of Physical
Distribution & Logistics Management, Vol. 26 No. 4, pp. 4-22.
Murthy D.N.P., et. al (1995). A consumer incentive warranty policy and
servicing strategy for products with uncertain quality. Quality
and Reliability Engineering International 11, pp. 155163.
Saccani, N. et. al. (2006). The role and performance measurement of
after-sales in the durable consumer goods industries: an
empirical study. Journal of Productivity and Performance
Management, Vol. 55 No. 3/4, pp. 259-283
Shaharudin M. R. (2009). Factors affecting customer satisfaction in
after sales service of Malaysian electronic business market;
Canadian Social Science, Vol 5, No. 6
Sherman, S. (1992). How to prosper in the value decade. Fortune, p pp.
103.
Simmons, D.E. (2001). Field service management: a classification
scheme and study of server flexibility. School of Management,
Binghamton University, State University of New York,
Binghamton, NY.
Oliva, R. and Kallenberg, R. (2003). Managing the transition from
products to services. International Journal of Service Industry
Management, Vol. 14 No. 2, pp. 160-72.

Introduction of Concierge Service


in Vadodara
Sweta Agarwal*

Abstract
Problem Statement: The research was undertaken to identify the bundle of services preferred by households and corporates from an outside
agency. The study also identified which key parameters i.e. cost, time, quality etc were considered important by the respondents by recording
preference given to different alternatives for service fulfilment i.e. services rendered by outside agency, online help and maids help with regard to the
above mentioned parameters. The research also studied what were the preferred combination of attributes i.e. cost alternatives, service add on, time
execution and type of service by respondents and how each attribute added utility to the preferred set. Ultimately, it also studied if there were
differences in perception based on income, gender and working/nonworking spouse. Approach: After exploratory research, two questionnaires were
prepared to cover households and corporates. Analysis: The results were analysed using SPSS and Excel. The basic tools used were Factor Analysis,
Analytical Hierarchy Process (AHP), Discriminant Analysis and Conjoint Analysis.
Research Type: Case
Key Words: Concierge services, Factor Analysis, Analytical Hierarchy Process, Conjoint Analysis, Outsourcing

Introduction
Concierge Services
While people want things done, they do not have the
time to do them. They would be happy to pay someone
who can take care of their business efficiently with a
touch of class. With the advent of improved
opportunities, dual careers, increased burdens,
extended geographical coverage, higher disposable
income, quick paced urbanisation, and intense
competition, people have started seeking services which
will make their life more comfortable and daily work less
cumbersome. While people are getting resource and
time constrained, the service industry is being looked
upon with greater expectations to solve everyday
problems.
Many new services - never heard before - have now
come up around the globe fulfilling the anticipations of

customers. With a large young Indian population,


demand for concierge services for taking care of routine
chores as well as special services is on a rise.
Trivia Advertising, an established player in the field of
promotions and communications in Vadodara, is
studying the local market for concierge services and
plans to enter. As an extension to its existing services,
Trivia Advertising plans to set-up an organisation
TAMARI SEVA (Service for You) which will provide a
variety of jobs at a prescribed fee.
The proposed services include:
Help Services:
Bill payment, Courier, Banking, Entertainment i.e. ticket
booking, Postal Services, Miscellaneous Services i.e.
R.T.O Services, Gift/Flowers/Cake Delivery, Information
on schools/college forms, Taxation Related Forms, Key
Duplication, Traffic Offence Challan Payment, Camera
Rolls Development, Prepaid Mobile Refill cards,

*Centre of Business Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. A. K. Dey, Centre of Business Management, Birla Institute of Management Technology

37

TATTVA - Vol. 1 Issue 1 October 2010

Classified Ad Submissions, Passport related Forms,


Pancard Forms etc.
Referral Services:
Car Hire/Maintenance, Handyman Services(Carpenter,
E l e c t r i c i a n , M a s o n ) , I n s u ra n c e , C o m p u te r
Maintenance, Taxation, Passport Renewal, Furniture
Disposal, Printing and designing.
Relocation Services:
Real Estate Brokers, Interior Decorators, Architects,
Home Tutors, Movers and Packers, Paying Guest
Accommodations, Utilities (Gas, Electricity, Telephone
related).

services). The key issues to be addressed were:

Who are the prospective clients?

Do the clients possess certain differentiated


characteristics?

How do respondents perceive the utility of


various attributes of a service offering?

Which combination of service attributes give


them above average satisfaction?

Which set of services are being demanded


together?

Do preferences differ on the basis of gender,


income and working/nonworking status of
spouse?

Materials and Methods


In addition, the offers would be customized to suit
corporate and household needs. Tamari Seva has to
compete with the in-house Concierge Desk service
offered by many corporate organisations and the
unorganised Personal Care Taker service used by
households.

Need for The Study

To capture the information, an exploratory research


was conducted and based on data collected,
questionnaires were prepared. The questionnaire
prepared for households, corporate administration
officials and company employees were tested with five
respondents in each category and errors were
removed. The survey was conducted in organisations
belonging to various sectors i.e., BPO, Banking,
Manufacturing, Consultancy, Education, and
Engineering. Households were selected randomly
based on convenience sampling. Responses of
households were also captured online (with a 15 day
window period) where Google Docs was used. It was
posted on various websites, blogs, communities where
Vadodara respondents could be reached. The total
responses collected for questionnaire were 31 for
corporates spread over 10 companies and 44 for
households. Table 1 gives a list of parameters and
alternatives, suggested by the firm, to which the
responses were captured.

Trivia Advertising wanted to understand how a tier two


city would respond to such a service. Mr Panchal, the
head of Trivia Advertising, approached a friend Mr
Borse, research consultant for help. Mr. Borse was
made to accept a steep target knowing fully well that
his field investigators are all tied up. Mr Panchal
needed the result at the earliest as he was in talks to
acquire a franchisee set up for the same. Many
organizations were providing personalised services at a
small scale in Vadodara. However, there were no big
well known players in the field of concierge services
yet. Apart from understanding whether such services
were preferred or not, Mr Panchal wanted to know
how prospective clients could be targeted and what
kind of packages could be attractive.

The services chosen for analyses, to see which services


are being preferred together, are mentioned in table 2.

Problems and Issues

Data Analysis

Mr Borse started working on the survey. The scope of


this study included people working across all sectors
(for corporates) and housewives (for household

Reliability Test (T-Test) of each question: This test


helps in determining whether a question is well
understood and it is able to distinguish between two

38

Introduction of Concierge Service in Vadodara

classes of respondents: one who wish to Rate High


and the other who wish to Rate Low. For such
questions the null hypothesis of a two tailed t-test
should get rejected when applied to test if there is any
significant difference between the mean responses of
top quartile and the bottom quartile of respondents in
an ordered list. The null hypothesis for each question in
the questionnaire was rejected at 0.05 level of
significance. Hence analyses were carried out with all
questions.
Reliability of data captured: Summated scales are
often used in survey instruments to probe underlying
constructs that the researcher wants to measure.
These may consist of indexed responses to
dichotomous or multi-point questions, which are later
summed to arrive at a resultant score associated with a
particular question. The question of reliability arises as
the function of scales is stretched to encompass the
realm of prediction. One of the most popular reliability
statistics in use today is Cronbachs alpha. It
determines the internal consistency or average
correlation of items in a survey instrument to gauge its
reliability. All scale reliability for corporate is 0.789 and
household is 0.843, both are fairly high (more than 0.7).
Table 3 displays the number of respondents obtained
for both corporate and households as well as other
results.
For the corporate sector, services of cake/card delivery,
utilities and courier were removed step by step as their
value was found to be the lowest each time on
examining the anti-image correlation matrix. After this,
the value for KMO improved and the null hypothesis of
Bartlett test was rejected. Both the sectors (household
and corporate) had KMO values above 0.589, which
allows us to proceed with factor analysis.
Factor analysis to determine perception about
services: The findings of Factor analysis were validated
with Discriminant analysis.
Difference among natural classes: Discriminant
function analysis is used to determine which variables
discriminate between two or more naturally occurring

groups. The difference in preference for services on the


basis of natural groups i.e. income, Gender and
Working/Nonworking Spouse is displayed in table 4.
Conjoint Test to determine utilities: Conjoint analysis
is a statistical technique used in market research to
determine how people value different features that
make up an individual product or service. The objective
of conjoint analysis is to determine which combination
of a limited number of attributes is most influential on
respondents choice or decision making. This test
applied for households determined the preferred set of
combinations of various attributes (Cost, Time,
Satisfaction and Service type) of service offering. It
revealed the utilities as shown in table 5. Since the
utilities are all expressed in a common unit, they can be
added together to give the total utility of any
combination.
Analytic Hierarchy Process (AHP) used to measure
satisfaction: AHP is one of multi criteria decision
making method used to measure subjective opinions
i.e. satisfaction, feelings and preference. For purpose
of knowing which combination of attributes and
alternatives were preferred, respondents were asked
to rate four alternatives namely outside agency,
managed himself/herself, managed by servant and
internet help on attributes namely cost
effectiveness, time saving, availability and quality
of service. The figure 1 shows the relative weights that
are derived after interviewing respondents.
For purpose of comparison, all respondent results were
divided into three categories Strongly favour, Mildly
Favour and Do not Favour. Any value above the
average of that category was considered to be strongly
favoured (Figure 2).

Results
KMO and Bartletts test of sphericity: In both the
cases, KMO were found to be more than 0.589 and the
null hypothesis for Bartletts test were rejected. This
implies that the observed correlation matrix in each
case is significantly (at 0.05 level of significance)
different than an identity matrix. Hence data reduction
can be carried out.
39

TATTVA - Vol. 1 Issue 1 October 2010

Factor analysis and total variance explained: Table 6


shows elaborate results of factor analysis. The main
purpose of factor analysis was to identify which
services are being preferred together. The results
revealed an identical preference on the basis of
frequency of usage of services. The first dimension
mentions administrative services i.e., courier, passport
renewal and pan card forms are being preferred
together. The second dimension emphasized on usage
which was less frequent and of household nature i.e.,
furniture disposal, carpenter/electrician, newspaper
disposal and car maintenance. The next dimension
includes services which may or may not be required at
a given point of time. These include relocation services
i.e., architect, real estate brokers and interior
decorators. Again the next dimension includes services
which will be required by only a few respondents and
therefore can be offered as a customized set not
included in basic set of services offer able to all clients.
They are movers & packers, designing & printing and
home tutors. The last dimension shows entertainment
services being preferred together i.e., Gift/cake
delivery and ticket booking.
Conjoint Analysis: Customers are keener on getting
personal services at monthly subscription rather than
annual subscription. Customers are willing to pay for
relocation services on a per transaction basis and not
on a monthly basis because they feel the need for such
service may or may not arise. Also, they prefer
approaching specialized firms providing services of
legal consultancy, interior decorators etc on their own
and will prefer Tamari Seva only when they do not
have any knowledge regarding the same.
The least utility derived is from a combination for
relocation services with Rs 4000 yearly subscription.
On simulating cases with other costs, it was found that
while all other combinations more or less have a value
of 7 or above, the combination with yearly subscription
has the value of only 5 i.e. under no circumstances are
respondents willing to pay yearly for relocation even if
the execution is within 3-4 hours.
On an average, combinations with timely execution of
service was preferred more than additional perks
40

which in turn was preferred more than after service


perks. This reveals that people are more conscious
about getting their work done on time rather than
risking the possibility of delaying it in exchange of some
perks. Perks in unrelated services were preferred more
than discount on same services
Analytical Hierarchy Process: Respondents had
allotted highest preference to internet usage on all
parameters. However, servants help and outside
agencys help is rated as second best i.e. both involve
someone else apart from himself/herself completing
the work. Thus, external help in any form is being
preferred in cases where internet cannot help.
It was found that almost 68% (17 out of 25) strongly
favoured internet whereas 24% mildly favoured it.
Averages for servant help and outside agency help
were found to be same. Further analysis revealed that
60% of respondents found both the options strongly
favourable. Percentages of those not favouring outside
agency and servant help were found to be 24% and 12%
respectively. Hence the people not favouring outside
agency was almost twice and compared to those not
favouring servant help. This reflects that there might be
a serious problem in how outside agencies are
perceived as less trustworthy than own servant. From
Fig. 1 it appears that Internet help delivers highest
value. But Fig. 2 shows that the combined percentage
(of people who strongly favour and mildly favour an
alternative) is the same for Managed by own self (22
out of 25) and Internet help (23 out of 25) categories.
Thus, respondents found their servant to be a good
combination of external help as well as customization
as per own needs and convenience.

Conclusion
The study has brought out following observations:
Apart, from basic set of services offered, the
company should be open to some more services
customized for a particular household at an extra
fee on an a la carte basis.
The company should concentrate on putting as
many services online as possible. Moreover, order
and checking of status of service through mobile

Introduction of Concierge Service in Vadodara

phones and SMS be encouraged.


Positioning itself as a personal assistant will be
favorable for the company and a single point of
contact should be allotted to each client for
rendering services.
Offers should be made on the basis of initial
perception survey being carried out in companies
and households.
The respondents of Vadodara are keen on getting
personal services i.e. bill payment, courier, cake
delivery etc. at different combination of costs.
However, talking about relocation and referral
services, they do not want to pay monthly or
annually for them. Therefore, for these services, a
charge per transaction is advised.
Respondents are keen to derive satisfaction out
of timely execution of services and are ready to
bear a suitable increase in cost. Therefore, the
firms marketing communication efforts should
stress completion of services within promised
time.
The respondents are more worried to get their
work done on time than getting additional perks.

crept in. The sample on the basis of gender was also not
equal leading to a possible bias. A bigger sample size
with equality in gender and income group would be
highly recommended. A similar study in metropolitan
cities of Gujarat would assist in knowing if preferences
amongst respondents differ on the basis of city status
i.e. tier 1, tier 2 and metropolitans. An office employee
is also a householder. Therefore his opinion as
corporate respondent may be influenced.

Decision
Mr Panchal was sure that demand for such a concierge
service did exist in Vadodara. However, he was unsure if
these pockets were huge enough to be catered to. He
did realize the results might be biased on account of
less sample size. But he was determined to make a
choice. He would like you to suggest if these services be
introduced or not and out of twenty three services
which should be selected during entry phase for
corporate and household segments. He would also like
you to suggest how to identify prospective clients.

Table 2: List of services offered


Table 1: Parameter-Alternative List
Parameters
Cost

Time

Service

Satisfaction

Alternatives
Rs 500 monthly for unlimited transactions
Rs 175 for 5 monthly transactions
Rs 50 per transaction with no initial fee
Rs 4000 annually for unlimited transactions
Within 3-4 hours
Within 2 days
Within a week
Before deadlines (irrespective of time taken)
Personal
Referral
Relocation
Quality of service
After Service perks
Timely Execution of service
Additional perks i.e. free tickets, discount on shopping

Limitations
The respondents were residents of Vadodara region
only. This study needs to be replicated in other areas to
increase external validity. The sample for each income
group was not the same and therefore bias may have

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Bill Payment
Ticket Booking (Movie, Air, Rail)
Taxation Related forms
Information on schools/colleges
Key Duplication
Traffic Offence Related payment
Prepaid Mobile refill cards
Passport related forms
PAN CARD Forms
Classified AD Submissions
Car Hire/maintenance
Carpenter / Electrician / Mason
Computer Maintenance
Passport renewal
Furniture Disposal
Newspaper Disposal
Printing & Designing
Real estate Services
Interior Decorators
Architects
Home tutors
Movers and Packers
Paying Guest Accomodation
Utilities i.e. Gas, Telephone, Electricity related
Courier
Gift/Cake Delivery

41

TATTVA - Vol. 1 Issue 1 October 2010

Table 3: Cronbachs Alpha, KMO and Bartletts Test

Model type

No. of
respondents

Cronbachs
alpha

KMO of
sampling
adequacy

Bartletts
test of
sphericity

Corporate

31

0.789

0.589

Reject H0

Household

44

0.843

0.751

Reject H0

Combined

75

0.818

0.616

Reject H0

Table 4: Discriminant Analysis


Natural Group

Correctly Reclassified
Households

Corporate

INCOME

87%

97%

GENDER
WORKING/
NONWORKING SPOUSE

89%

97%

87%

94%

Table 5: Utilities after running Conjoint Analysis


Utilities

Parameters

Satisfaction

Cost

Time

Service
(Constant)

42

Alternatives
Quality of service
After service perks
Timely execution of service (deadline)
Additional perks i.e. discount on
shopping
Rs 500 monthly for unlimited
transactions
Rs 175 monthly for 5 transactions,
Rs 50 per transaction with no initial
fee
Annual Rs 4000 for unlimited
transactions
Within 3-4 hours
Within 2 days
Within a week
Before deadlines
Personal services
Referral services
Relocation services

Utility
Estimate
-0.363
-0.888
1.363

Importance
Values

28.89

-0.113
-0.710
-1.419
-2.129

24.59

-2.839
0.204
0.408
0.612
0.816
-1.140
-2.281
-3.421
11.773

19.96

26.53

Introduction of Concierge Service in Vadodara

Figure 1: Attribute-Alternative Preferences

Outside Agency
Managed by you
Managed by your servant

fs
er
vic
e

lab
ilit
y

Qu
ali
ty
o

Av
ai

Sa
ve
s

Tim
e

Internet help

Co
st
E

ffe
ct
ive
ne
ss

Values

Attribute-Alternative Preferences
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

Attributes-Alternatives

Figure 2: Difference in Preference

Table 6: Factor Analysis and Identification of Dimensions


No of
Factors
Extracted

Total
Variations
Explained

65%

Dimension
1

Alignment of factors
Dimension
Dimension
2
3

Dimension
4

Dimension
5

Administrative

Household

Relocation

Niche

Entertainment

8,9,14,25,10,1

12,16,13,15,11,24

20,19,18

22,21,17, 5

26,2,7

43

TATTVA - Vol. 1 Issue 1 October 2010

44

Evaluating Potential Market for Exporting


Gasoline in Perspective with Nigeria
Upasana Singh*

Abstract
Purpose: Exploring new potential market worldwide for the domestic gasoline producers. In order to earn better margins India looks at the
foreign markets. Thus, ESSAR Oil Ltd, a fully integrated oil and gas company of international scale which is one of the major players in oil industry of
India is exploring new opportunities for exporting gasoline to Nigeria due to attractiveness of the market. Nigeria is one of the largest exporters of
crude oil. In spite of this it is a very attractive market for gasoline. The cost benefit of exporting to Nigeria over other countries is high but it also involves
risk.
Design/methodology/approach: This paper is an analytical study which provides the data and results based on which one can make decision for
exporting gasoline to Nigeria. First the trend is determined and forecasted so as to look upon whether there is a sustained demand or not. Then the
technical feasibility has to be worked out whether the required gasoline quality is makeable at the concerned refinery or not. Then work out the
profitability of exporting to Nigeria.
Findings: ESSAR should export to Nigeria as the returns are higher than exporting to other countries. In spite of risk involved Nigeria is attractive
market.
Research limitations/implications: The research is based on secondary data. This only gives an insight about the Nigerian market. The duration
of the research is only 6 months. The gasoline market is a volatile market so it changes every time.
Practical implications: Oil companies who are looking for capturing new markets might benefit from the methodology for their initial research
with additional country specific requirements.
Originality/value: All the calculations and analysis are done on the original data.
Keywords: Gasoline export, Nigeria gasoline market, Gasoline profitability.
Paper type: Analytical Research paper

Introduction
The domestic gasoline market is the most attractive for
oil refiners in India. Exporting gasoline to different
country involves additional costs like freight, tariffs and
additional charges, all these reduce the profit margins
(EIA U.S 2010). But gasoline is still exported from India as
the domestic market is saturated (S.K Sarangi General
Manager IOL). Oil companies export in order to utilize
their production. They look for the best market to obtain
optimum refining margins. For cashing upon this one has
to search for markets which are inherently short of
gasoline, where the increase in gasoline demand is

gasoline at a good rate and which pays high prices for the
material. ESSAR is looking at Nigeria as a potential
market for exporting gasoline as Indian government has
notified an additional incentive of 2% on the export of
certain products to Nigeria, Algeria and Mexico (as
information received by ESSARs taxation department).
This will contribute to the profit margins while exporting
to Nigeria.
Nigeria lies to the Northwest of Africa. It is the most
populous country of Africa. Nigeria is a member of OPEC
(Organization of the Petroleum Exporting Countries)

*Centre of International Business & Policy 2009-11, Birla Institute of Management Technology
Under the guidance of Prof. Anupam Varma, Centre of International Business & Policy, Birla Institute of Management Technology

45

TATTVA - Vol. 1 Issue 1 October 2010

since 1991 as it has a high reserve of crude oil 37.2


billion barrels of proven oil reserves as of January 2010
(Nigeria Energy Data 2010). In spite of the high reserves
it is deficient in refined oil products. There are four
working refineries there but they all are working under
capacity. This is due to poor corporate relations with
indigenous communities, vandalism of oil
infrastructure, severe ecological damage, and personal
security problems throughout the Niger Delta oil
producing region. These problems continue to plague
Nigeria's oil sector. Thus, the actual capacity is 445,000
bbl/d but it is refining at a capacity of 214,000 bbl/d
(Mbedi Information Services 2010). High demand is
due to low production which makes it a potential
market to look at.
Forecasting the consumption for year 2010 is done
based on the historic data after determining the trend
of consumption in the last 8 year. This gave a better
insight about the market demand conditions.
After studying the demand the next step is to look at
the feasibility of the project. We need to look at the
technical and economic feasibility of exporting
gasoline. This includes both deciding on whether the
quality of gasoline required can be produced or not and
the profit margin of gasoline.
Risks are also to be determined before starting export
so that we do not face any difficulties or failure later.
Like it was recently in news that few more refineries are
to be set up in Nigeria with the collaboration of China
for reducing its dependence on refined oil products
import but that will take some time. So for now we can
still target the Nigerian market. The domestic
production of gasoline is on a decline due to low
capacity utilization of the refineries which leads to an
increasing import of gasoline (BBC News Nigeria Friday,
May 14).

Statement of Objectives
The objective is to study both the technical and
economic feasibility for exporting gasoline to Nigeria.
Forecast the future demand 2010 for gasoline in
Nigerian domestic market for gasoline.
46

To work out the Technical and Economic feasibility


of exporting gasoline from ESSAR to Nigeria.

Considering all the important factors affecting the


export the analysis should be done. On the basis of the
results obtained analysis through the decision of
exporting to Nigeria has to take place.

Review of Literature
Although Nigeria is the fifth-largest supplier of crude oil
to the U.S. and the 12th largest world-wide, Nigeria is
saddled with a decrepit infrastructure and little
economic development outside the oil sector. Its four
refineries, with a total capacity of 438,750 barrels a
day, are all more than 30 years old. Because of their age
and poor maintenance, they operate at around
100,000 barrels a day. That covers less than half of
Nigeria's gasoline requirement of around 250,000
barrels a day -- meaning it has to rely on imports. The
government says the solution to the refining-capacity
crunch lies in privatization and the construction of new
facilities by private investors; it wants to sell 51% equity
in the four refineries. But analysts say the investment
won't come until the government completes the
deregulation of the downstream sector, which began in
2003. (Vincent Nwanma and Norval Scott. Wall Street
Journal)
Inaccurate assessment of business and economic
development is possible if one refuses to assume that
seasonable patterns are not affected by other known
influences, such as price. Thus, another forecasting
alternative to seasonality is possible in addition to the
conventional alternatives of a fixed seasonal pattern or
a seasonal pattern that shifts but is not related to other
observable data. Motor gasoline, which showed a real
price increase of 50% in the last 10 years, is an
illustration. Regression analysis indicates that demand
for gasoline at the peak periods of the year have been
more responsive to higher prices than the demand has
been during other times in the year. These seasonal
price elasticities illustrate the worth of studying the
causes of seasonality in economic time series. (Planting
Ron, Business Economics)

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria

Managers are always trying to make estimates of what


will happen in the future in the face of uncertainty. But
good forecasts are an essential part of efficient and
effective management; they are a crucial modeling tool
both in strategic and tactical decision making.

The SYSTAT program ran a time-series projection


using an Auto Regressive Integrated Moving Average
(ARIMA) model3 to determine New Yorks growth
trend in relation to that of the Middle Atlantic region
(New York State Energy Plan - June 2002).

Quantitative methods rely on mathematical models


and assume that past data and other relevant factors
can be combined into reliable predictions of the future.
Two methods are in use; Auto projection (time series)
or causal. Each method is suited to different
circumstances. (Dianne Waddell and Amrik S. Sohal )

Ample supplies have provided refiners with plenty of


alternatives to Nigerian fare, which suffers from a
reputation for unreliability due to frequent disruptions
caused by militant attacks during the past year or so.
This week is no exception: Shell has declared force
majeure on Bonny Light exports for both April and May,
due to a fire on the Bomu manifold on the Trans-Niger
Pipeline in its Eastern Operations area. (Anonymous.
Energy Intelligence Briefing, 2009)

The problem of the Niger Delta is not unconnected with


the impact of the oil exploration activities of the oil
companies and the state of affairs in the region, in
terms of the living conditions or standard of living of
the people, environmental wholesomeness and the
availability of the basic and essential social amenities.
The paper will however dwell on the relationship
between oil, environment and the Nigerias NigerDelta and this was subjected to empirical analysis.(
Felix Olanrewaju Awosika 2008)
Since the early 1970s, there has been a worldwide
upsurge in the price of energy and in particular of
gasoline. Therefore, demand functions for energy and
its components like gasoline have received much
attention. However, since confidence in the estimated
demand functions is important for use in policy and
forecasting. The demand for gasoline is estimated with
five alternative time series techniques with data from
Fiji. Estimates with these alternative techniques are
very close, and thus increase our confidence in them.
We found that gasoline demand is both price and
income inelastic. (B Bhaskara Rao, Gyaneshwar Rao
Kidlington: Oct 2009)
The time-series model is preferred in this case because
it weighs recent years more heavily than years past. To
predict New York as a percentage of the Middle Atlantic
using regression analysis, the SYSTAT program fits an
equation into to a set of data in order to best describe
the relationship between the variables. In this case, the
relationship established between the ratio of New York
data to Middle Atlantic for a given fuel and over a
specified period of time, was linear.

Methodology
In order to work out the attractiveness of Nigerian
gasoline market series of methods was followed.
Initially secondary data analysis was done using help of
the online resources providing relevant information.
Here the overview of the Nigerian gasoline market was
done. Then based on the previous years consumption
data the demand for 2010 is forecasted by using the
Time Series moving average method and Regression
tool in Microsoft Excel. The required specification of
the Nigerian gasoline as per the specifications provided
by the buyer-Nigerian National Petroleum Corporation
(NNPC) was matched with the refinery specifications.
This comparison was done considering all the
important parameters critical in determining the
quality of gasoline. This comparison was made in order
to know whether the refinery can produce the required
quality or not. Then calculation of the profitability
margins was carried out. Then a comparative analysis
was done between the benchmarked countries and
Nigeria. After the economic and technical feasibility
research the potential risk factors were analyzed as to
they should not be neglected while evaluating the
attractiveness of Nigerian Gasoline market. The
recommendations are designed around this analysis.

47

TATTVA - Vol. 1 Issue 1 October 2010

Consumption of Gasoline-Forecasting
Initially for determining the potential of a market there
is a need of foreseeing the demand in that market.
Gasoline demand is dynamic and is highly affected by
various factors. It is majorly affected by the seasonal
demand. Oil demand is forecasted using the past 8 year
data and keeping other factors constant like-number of
refineries, war situation and political imbalances. The
data for gasoline consumption is of historical nature
which counteracts the seasonal effect. Thus,
forecasting will be done using moving average method.
The trend was determined using this data in order to
predict the future demand. The trend was determined
using the Regression in Excel to do a demand
forecasting for the year-2010.
The gasoline consumption data of past 8 years for
Nigeria is extracted from the Nigerian National
Petroleum council (NNPC) reports (NNPC Annual
Statistical 2002-2008) these are published on their
website. The consumption figures can be seen in the
Table I of Annexure B at the end.
The method involves the following variables (Frederick
S Hillier Third Edition)
Q - Quarter

MA-Moving Average

is a positive consumption trend and it support that


Nigeria is a potential market for exporting gasoline to
as the demand exists.
Oil import and export is generally quarterly basis.
Based on the previous years data the quarter with the
highest consumption level was determined giving an
idea as to which time of the year is the best to export
Gasoline to Nigeria. The result of this is depicted with
the help of a Graph 1 in the Analysis and conclusion
section.
Based on the data of Table I in Annexure B demand
forecasting was done. Given in the Table A of Analysis
and conclusion section are the forecasted figures for
2010.

Technical Feasibility
The refineries are designed and built with certain
refining parameters, range and capacities i.e. the
equipment is made for refining a specific range of crude
oil and then getting the specific quality range of refined
oil products. Due to this constraint we have to check
whether the refinery could produce this quality of
product required by the buyer.

Seasonality Index for particular quarters = Average of


respective quarters/Average of all quarters

Initially the specifications from the buyers (NNPC) from


Nigeria were asked for. Both the Nigerian specifications
and the refinery specifications were matched. This was
to determine the technical feasibility whether or not
the required quality of gasoline can be produced as
required by the Nigerian buyer. Those parameters
should be marked where there was a mismatch in the
specifications. The mismatch parameter needs to be
discussed with the refinery that whether the quality
can be produced by scaling up the specifications. The
cost should be kept in mind while the scale up process.

De-seasonalized data = (Actual Value / Seasonality


Index)*100

The matching is done and is illustrated in tabular form


in the Table II of Appendix B.

After we got the trend and the trend coefficient, they


are used for forecasting. The results are discussed in
the analysis section. The trend obtained could be seen
in the Graph II in Analysis and conclusion section. There

The important quality determining parameters for


gasoline are discussed in Appendix A.

4QMA = Average of 4 values (Next time taking average


of 4 values eliminating 1st one and adding one next
value)
Centered MA = Average of 2 subsequent values of
4QMA

48

The quality parameters should be matched

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria

simultaneously. The parameter are matched in


following methodNigerias required maximum should be > the refinerys
maximum limit
Nigerias required minimum should be < the refinerys
minimum limit

Economic Feasibility
Major Costs Involved
Gasoline benchmark prices (g) were taken for that
particular period.
Premium (p) offered by the Nigerian buyers on basis of
$/MT was found from the listings news services like
Reuters. The information of the last tenders signed is
listed. The premium offered by Nigerian buyers is very
high-$82 a tonne over average cash prices of premium
unleaded gasoline in Europe(EOL,2010).
Freight (f) for exporting gasoline to that country is
calculated by obtaining costs from online portal like
world scale which provides with the freight charges.
Demurrage charges (d) taken in the case of Nigeria due
to congestion at the ports.
FOB value of the product (V) is calculated by the
following formula
V=g+p-f-d
Duty exemption on the crude imported in India is 5%
on custom duty paid.
Additional benefit for exporting to Nigeria is 2% on
FOB value of the product as mentioned above.
Duty calculation is done on the basis of two schemes:
1) Duty drawback: 5% discount on the crude oil
which is used in the production of gasoline.
2) Advanced authorization scheme: Standard
conversion values are determined by the

government in order to measure quantity of crude


oil used in the specific amount of gasoline called
standard input output norms (SION).
This calculation is done to get an approximate net profit
for export to Nigeria. The margin calculated is based on
the 2009 prices as the premium price which was
available is obtained from a tender document from
Reuters from Aug-Nov 2009 tender. The actual margins
may largely differ from this depending on the market
condition at that time. The calculations are done in
Microsoft excel and the tables are under Annexure B at
the end.
The Calculation Procedure Followed

The imported product (Crude Oil) less 15% was


done to calculate the value of the raw material
price less for the discounted duty calculation
(Indias foreign trade policy 2009-2014).

The discounted duty calculation was done on the


basis of SION (Standard Input Output Norms)
method by dividing the Free on Board (FOB) by
SION value.

The minimum of the two values is considered for


the application of the 5% discounted duty
calculation.

The additional 2% benefit was calculated on the


FOB value of the gasoline.

Further adding up the discounted duty to the FOB


value we are earning will give us the Export Price
Parity (EPP). This means that on exporting
something it is always better off selling it in the
domestic market.

We calculated the EPP for other countries in order


to study that whether it is profitable to export to
Nigeria or to export to any other country.

The margins can get changed due to any of the


above mentioned price but the most crucial prices
are

Premium

Demurrage

Benefit %age
Any major change in these will affect the profit
margins.

49

TATTVA - Vol. 1 Issue 1 October 2010

The similar steps were repeated to calculate the profit


for the Benchmarked countries- Singapore, Arab Gulf,
Europe and US who sets the prices of gasoline for the
nearby markets. For these countries no premium and
demurrage is considered as the premium prices are
paid only by the nearby countries who quote their price
+/- the benchmarked prices. Demurrage is only paid
when the ports are not efficient in working and are
congested. Calculations of margins are done in Table III
provided in Appendix B. The effective profitability for
Nigeria was now calculated by finding out the
difference between the EPP of Nigeria and other
countrys EPP in $/MT.

Analysis and Conclusions


The analysis of the results obtained from the above
observations and tools application. This analysis gives a
clear picture of what and how to proceed for exporting
gasoline to Nigeria.
Forecasting
Garph I shows that the major demand is in the 2nd
quarter then it is in the 3rd quarter. Altough not much
of difference is there in the demand figures. This means
that the market has almost the same demand
throughout the year. From the regression result we can
see that the relation between the months and the
consumption is very low it is about- 0.1% i.e. in Nigeria
the monthly demand is not affected by the seasons as it
is a temperate climate country.

Graph I. Depicting the quarterly consumption


Consumption in Million lts

Quarterly Avg Consumption


0.75

0.744492417

0.74
0.73
0.72
0.708267916

0.70668646

0.7

0.69
0.68
Q1

Q2

Q3

Quarters of an year

50

Quarterly Avg
Consumption

0.717302732

0.71

Q4

In the Graph II below the straight line shows the


consumption trend without the seasonal effect of
gasoline in Nigeria and the spiked line shows the real
consumption with the seasonal effect.
Graph II. Trend of gasoline consumption in Nigeria
1000000
900000
800000
700000

Consumption
Trend

600000
Quarterly
Consumption

500000
400000
Consumption Q3-02Q1-04Q3-04Q1-05Q3-05Q1-06Q3-06Q1-07Q3-07Q1-08Q3-08Q1-09
in '000 lts
Quarters for 2002-2009

Table A. The forecasted demand for 2010


2010

Q1
Q2
Q3
Q4

Average
Consumption
in million lts*
738.533
739.509
740.485
741.461

Average
Consumption in
million MT*
6.277
6.286
6.294
6.302

The forecasting was done on the basis of trend


obtained. Based on the figures obtained are stated in
Table A .This is inferred that there is a demand in
Nigerian market for gasoline.
Technical Feasibility
It is technically feasible to produce Nigerian gasoline in
the ESSARs refinery. All of the required parameters of
Gasoline matched with the refinerys specification.
Economic Feasibility
The profitability of supplying gasoline to Nigeria is as
follows. Considering premium to be around 82 $/MT
(according to the latest tender information) the
profitability of supplying gasoline to Nigeria very high
as can be seen in the graphs. The Graph III- a,b,c,d were
plotted from the results obtained in Table III of
Annexure B.

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria

Graph III Nigerian Benefit


Graph a. Nigerian Benefit over Singapore in $/bbl

Graph b. Nigerian Benefit over Arab Gulf in $/bbl

100.00

100.00

95.00

90.65

90.00
85.00
80.00

95.00

94.44

93.51

85.00

84.98
81.77

81.51
77.51

75.21

75.00

Nigeria EPP
Singapore EPP

84.98

82.54
77.89

75.81

Nigeria EPP
Arab Gulf EPP

70.00
65.00

Aug-09

Sept-09

Oct-09

Aug-09

Nov-09

Graph c. Nigerian Benefit over US in $/bbl

Sept-09

Oct-09

Nov-09

Graph d. Nigerian Benefit over Europe in $/bbl


100.00

100.00

95.00

94.44

93.51
90.65

90.00

80.00

83.01

75.00

65.00

85.00

90.65

80.00

70.00

95.00

94.44

93.51

90.00

84.98

82.43

Nigeria EPP

80.00

US EPP

84.98

82.73

81.82
79.02

75.00

71.48

70.00

90.65

85.00

80.98
77.81

75.00

94.44

93.51

90.00

Nigeria EPP
Europe EPP

73.46

70.00

65.00

65.00

Aug-09

Sept-09

Oct-09

Nov-09

Aug-09

The major risks involved in this export are the


demurrage charges we have to pay in case of late
unloading of the cargoes. Then the term of payment is
on 45 days Open account credit in the case of Nigeria
and it may be 30 days Open credit for other countries
which is the normal term. For Nigeria the duration may
increase to 70-90 days. This information is taken from
the tender from the Nigerian authority NNPC. The
open account credit is a risky mode of payment for the
supplier. Here due to the unrest the government is
highly volatile. Apart from these risks the physical
damage to the cargoes is also high in the Niger delta.
The 2008 figures are stated in Table B (Bergen Risk
Solutions Report-2008)

Kidnap

Serious crime

Attempts

Total

29

40

Sept-09

Oct-09

Nov-09

Recommendations
After working out all the possibilities the most
important recommendations to make are

Essar Oil Limited should look towards Exporting


Gasoline to Nigeria. As we can see in the quarterly
consumption demand of gasoline in Nigeria one
should focus at selling more gasoline in the 2nd
quarter of the year as it has the maximum demand
at that time of year.
Although many a times the shipment terms
depend on the buyer sellers agreement but from
the study of the attack reports (Bergen Risk
Solutions Report-2008) which occurred at the
ports the safest and the best option is the port of
Calabar.

51

TATTVA - Vol. 1 Issue 1 October 2010

Annexure A
Definitions
Parameters which are highly important in determining
the quality

Oxidation Stability: The oxidation stability should be


within range as it only determines the stability of the oil
within the ignition engine.

Specific Gravity: Know the volume at different


temperatures when gauging the liquid content.

Flash Point: It is the lowest temperature to which oil


must be heated for its vapors to ignite in a flame.
Minimum permissible flash point is usually prescribed
by state and municipal laws.

Distillation: The distillation shows the volatility and


ease of vaporization of a fuel. If the maximum point is
specified then you have to provide the point not
exceeding maximum limit, this determines the
temperature at which the Gasoline will get ignited.
Sulfur content: Sulfur in fuel oils is also undesirable
because of the corrosiveness of sulfur compounds in
the flue gas. Thus, the sulfur content specified by them
is considered maximum it is better if we are providing
lesser sulfur to what is mentioned by them as it is
unwanted but providing higher concentration of sulfur
would be a problem.
Copper corrosion: Determines the corrosiveness of a
sample to copper. A polished copper strip is immersed
in the sample at a specific temperature and time
length.
RON (Research Octane Number): The higher the RON
the better the quality of the oil.
Lead Content: This is an impurity which is avoided in
the oil products as it leads to environment pollution
and has to be in a regulated quantity according to the
government laws and regulations of that country.

Water and sediment content: Should be low to


prevent fouling the facilities. Sediment accumulates on
filter screens and burner parts. Water in distillate fuels
can cause tanks to corrode and emulsions to form in
residual oil.
Ash Content: Ash is the noncombustible material in oil.
An excessive amount indicates the presence of
materials that cause high wear on burner pumps. Thus
it is avoided in the oil so if the buyers required quantity
is lower than refinerys specification then it is needed
to be checked.
Kinematic viscosity: Viscosity is oils resistance to flow.
It is significant because it indicates the ease at which oil
flows or can be pumped and the ease of atomization.
Carbon residue: This has to be low as it states that the
amount of carbon getting deposited after the
combustion. Thus whatever minimum they ask we
have to be less or equal to that or if maximum is stated
then it should not be more than that.

Annexure B
Table I. Annual Consumption of gasoline in Nigeria (NNPC Annual Statistical 2002-2008)
Year

52

2009

Consumption in
million Lts
8,145

2008

9,500

2007

8,859

2006

8,005

2005

8,644

2004

8,676

2002

8,580

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria

Table II. Comparison of Nigerian gasoline typical with ESSARs typical


NIGERIA

ESSAR

Test method
ASTM

Min

Appearance
Odour
Color

Visual
Visual

Clear and bright


Merchantable
Ox blood red

Specific Gravity @ 15 C

D 1298

0.72

Parameters

Unit

Distillation
Distillation Rec. up to 70 C
(E-70)
Distillation Rec. up to 100
C(E-100)
Distillation Rec. up to 180
C(E-180)
FBP

Max

Test
Method

Min

Max

To be stated
To be stated
To be stated

0.78

D 4052

>0.72

<0.78

% vol

10

D 86

10

45

% vol

50

D 86

40

75

% vol

90

D 86

90

D 86

210

D 86

<210

Total Sulphur

wt ppm

D 5453

1000, No. 1
Strip max

D 5453

<1000

Copper Corrosion

D 130

Class 1b

D 130

RON

D 2699

91

D 2699

360

gm/m3

D 525
D 381

Oxidation Stability
Existent Gum

Vapour/liquid ratio:T 36C

Equal
<91

Not in
range

D 381

>4

5 ppm

Not in
range

Equal
>5
ppm

Not in
range

>2

62

D 5191

>62

68

Free water

Nil

Suspended matter
Residue %(viv)

Nil
2

Lead
Benzene

%m/m

RVP

kPa

D 323

Table III. a. All the prices used in the calculation stated in the following table.

Charges

Demurrage calculation

Premium

82

Rate (PDPR)

Benefit

5%

Days

Extra Benefit

2%

Quantity (MT)

Month

Crude Price in
$/bbl

Crude Price in
$/MT
515.93

18000

Aug-09

71.34

10

Sep-09

67.64

489.19

35000

Oct-09

73.15

529.03

$/MT

5.14

Nov-09

77.71

562.03

$/b

0.61

53

TATTVA - Vol. 1 Issue 1 October 2010

Paid price

Freight WCI-WAF

Demurrage

FOB* Vadinar

Product less 15%

SION =a

Crude SION basis=b

Min a Vs b

DBK

With 2% benefit

82

781

28

5.14

747

650

1.27

655

650

32

15

795

94

630

82

712

28

5.14

679

591

1.27

621

591

30

14

722

85

Oct

529

676

82

758

28

5.14

725

630

1.27

672

630

32

14

771

91

Nov

562

706

82

788

28

5.14

755

656

1.27

714

656

33

15

803

94

(*) FOB-free on board


(@) WCI-Vadinar port
(+) MT-metric tonne
WAF-Nigeria port
(**) EPP-Export price parity

**

EPP in $/MT

EPP in $/bbl

Premium

699

489

Market price

516

Sep

Crude Price

Aug

Months 09

b. Nigerias cost calculation

(#) SION-Standard Input Output Norms


(!) DBK-Duty Drawback

Months 09

Crude Price

FOB Sing

Freight WAF-SG

Premium

Demurrage

FOB Vadinar in $/bbl

FOB Vadinar in $/MT

Product less 15%

SION=a

Crude SION basis=b

Min a Vs b

DBK in $/MT=5%

EPP in $/MT

EPP in $/bbl

Benefit for Nigeria in $/bbl

Benefit for Nigeria in $/MT

c. Cost of exporting gasoline to Singapore

Aug

71.34

80.13

1.76

78.37

666

579

1.27

655

579

28.96

695

81.77

11.73

99.73

Sep

67.64

73.84

1.76

72.07

613

533

1.27

621

533

26.64

639

75.21

9.78

83.09

Oct

73.15

76.05

1.76

74.28

631

549

1.27

672

549

27.45

659

77.51

13.14

111.69

Nov

77.71

79.88

1.76

78.12

664

577

1.27

714

577

28.87

693

81.51

12.92

109.83

11.89

101.09

54

Months 09

Crude price

FOB Sing

Freight WAF-AG

Premium

Demurrage

FOB Vadinar in $/bbl

FOB Vadinar in $/MT

Product less 15%

SION=a

Crude SION basis=b

Min a Vs b

DBK in $/MT=5%

EPP in $/MT

EPP in $/bbl

Benefit for Nigeria in $/bbl

Benefit for Nigeria in $/MT

d. Cost of Exporting Gasoline to ARAB GULF

Aug

71.34

80.73

1.18

79.55

676

588

1.27

655

588

29.40

706

83.01

10.49

89.19

Sep

67.64

73.83

1.18

72.65

618

537

1.27

621

537

26.85

644

75.81

9.17

77.98

Oct

73.15

75.83

1.18

74.65

635

552

1.27

672

552

27.59

662

77.89

12.76

108.45

Nov

77.71

80.29

1.18

79.11

672

585

1.27

714

585

29.23

702

82.54

11.89

101.07

11.08

94.17

Evaluating Potential Market for Exporting Gasoline in Perspective with Nigeria

Crude price

FOB Sing

Freight WAF -US

Premium

Demurrage

FOB Vadinar in $/bbl

FOB Vadinar in $/MT

Product less 15%

SION=a

Crude SION basis=b

Min a Vs b

DBK in $/MT=5%

EPP in $/MT

EPP in $/bbl

Benefit for Nigeria in


$/bbl

Benefit for Nigeria in


$/MT

Months 09

e. Cost of Exporting Gasoline to US

Aug

71.34

84.41

5.41

79.00

671

584

1.27

655

584

29.19

701

82.43

11.07

94.14

Sep

67.64

73.91

5.41

68.50

582

506

1.27

621

506

25.32

608

71.48

13.50

114.74

Oct

73.15

79.98

5.41

74.56

634

551

1.27

672

551

27.56

661

77.81

12.85

109.19

Nov

77.71

83.01

5.41

77.60

660

574

1.27

714

574

28.68

688

80.98

13.46

114.39

12.72

108.12

Months 09

Crude price

FOB Sing

Freight WAF-EUR

Premium

Demurrage

FOB Vadinar in $/bbl

FOB Vadinar in $/MT

Product less 15%

SION=a

Crude SION basis=b

Min a Vs b

DBK in $/MT=5%

EPP in $/MT

EPP in $/bbl

Benefit for Nigeria in


$/bbl

Benefit for Nigeria in


$/MT

f. Cost of Exporting Gasoline to Europe

Aug

71.34

82.18

3.76

78.41

667

580

1.27

655

580

28.98

695

81.82

11.68

99.32

Sep

67.64

74.16

3.76

70.40

598

520

1.27

621

520

26.02

624

73.46

11.52

97.96

Oct

73.15

79.49

3.76

75.73

644

560

1.27

672

560

27.99

672

79.02

11.63

98.86

Nov

77.71

83.05

3.76

79.29

674

586

1.27

714

586

29.30

703

82.73

11.70

99.47

11.64

98.90

55

TATTVA - Vol. 1 Issue 1 October 2010

References
Annual Statistical 2002-2008 NNPC, Bulletin Manager GMISCORPORATE PLANNING & DEVELOPMENT DIVISION CPDD),
retrieved from<http://www.nnpcgroup.com/PublicRelations/
OilandGasStatistics/AnnualStatisticsBulletin/MonthlyPerforma
nce.aspx>,<http://www.nnpcgroup.com/PublicRelations/Oilan
dGasStatistics/MPIFigures/MonthlyPetroleum/tabid/130/Fold
erID/54/Default.aspx>
Anonymous. Energy Intelligence Briefing. New York: Apr 15, 2009. West
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Factors Influencing the Purchase of Private Labels:


A Case Study on Roma**
Mahima Gupta*

Abstract
Purpose The purpose is to identify the factors which are considered by Customers while deciding between opting for a national brand and a
private label and how can a company increase the sales of its private labels by working upon these factors.
Design/ Methodology/ Approach The study is descriptive in nature. A case study is conducted on Romas private labels for this purpose. The
data is collected using a structured questionnaire.
Findings The research came out with three parameters of judgment from a customer point of view. These are Merchandise Mix, Brand Equity
and Brand Knowledge. The research shows how a customer makes a purchase decision when private labels come into picture. The parameters change
to some extent due to a completely different value proposition provided by the private labels as compared to national brands.
Research limitations/ Implications A key limitation of this study is the sampling frame. The sampling frame is limited to a certain age group in
a restricted geographical area. The responses are collected in a limited time frame for a particular industry Consumer durables and electronics.
Future research is required in order to test the generalization of the proposed parameters.
Practical Implications - To boost the sales of private labels and enhance their image in minds of the customers, it is important for the company to
focus on few key areas identified in the findings. The merchandising mix of the store should reflect a proper mix of store brands and national brands.
The brand equity of the retailer helps in increasing the private labels sale as the retailer becomes a brand in itself emphasizing the private labels also to
be treated as a brand in the mind of the customer. Knowledge about brand can increase the reliability factor for customers by reducing their perceived
risks about a product. .If worked out properly these parameters can bring out substantial improvements in the sales of private labels.
Key words Private labels, consumer durables and electronics, merchandising mix, brand equity.
Paper type Research Paper

Introduction
We grew in the world dominated by manufacturer
brands, well known as national brands. However, with
time we saw change in the retail landscape. More and
more retail stores were carrying products with their own
label. These products which were manufactured or
provided by the retailers themselves came to be known
as private labels or in house brands or store brands.
Private Labels are often positioned as the low cost
alternatives to the regional, national or international
brands, although some brands have also been
positioned as premium brands due to the strong

image of the retailer. Private labels help retailers to


enhance category profitability, increase negotiation
power of the retailer and create consumer loyalty.
Private labels are growing faster than manufacturer
brands. They are ubiquitous across categories and they
now compete on quality in fact, they are now brands!
(Nirmalya Kumar and Jan-Benedict E. M. Steenkamp,
2007). In developed markets they are eating into a large
chunk of the organized retail sales. They account for 40
per cent of Wal-Mart sales ($126 billion or Rs 5, 16,600
crore), 50 per cent for Tesco ($36 billion or Rs 1, 47,600).
Now a category of private label only retailers has also

*Centre for Retail Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. Pankaj Priya, Centre for Retail Management, Birla Institute of Management Technology
**A Fictitious Firm

57

TATTVA - Vol. 1 Issue 1 October 2010

been created - IKEA, Toys R Us, Zara who sell only


private label brands.
In India, however the contribution of private labels is
just 10 12% of the total organized retail (Images Retail
Report 2009). Positively the growth of private labels in
recent years is phenomenal, giving retailers a lot of
scope to increase their profitability. Many retailers are
making efforts to increase the share of private labels in
their offerings, Roma being one of them. For example
Spencers in India has private labels in 60% of its 650
product categories, and the sales of private labels are
increasing at the rate of 40% annually. In Lifestyle
International private labels contribute to 25% of its sale
etc.
The study thus tries to identify some parameters used
by customers to judge a brand and take its final
purchase decision. The study with the help of those
parameters tries to identify factors which when worked
upon can increase the sales of private labels.

Literature Review
For conducting this research it was important to get an
insight about the concepts of the development of
private labels, their importance, and consumer
perception for brands and store image etc. There are
various factors which can influence a customers
purchase decision. Some of them are discussed below:
A brand-image is defined as the total sum of brand
associations held in consumer memory that lead to
perceptions about the brand (Keller, 1993). These
associations of brand image are multidimensional and
consist of the affective dimension or the attitudes
towards the brand and the perceived quality
dimension (Keller, 1993). Consumer uses different
cues, benefits, symbolic meanings etc. to relate to a
brand. The cues used by the customers can be intrinsic
or extrinsic cues.
Extrinsic cues refer to cues which are extrinsic to a
product and do not have to be experienced in order to
make judgments, like the packaging, brand name, price
and advertising. Intrinsic cues refers to the factors like
58

taste, quality etc. which can be judged only by


experiencing. These two types of cues are also
considered responsible for building brand image. For
national brands it is comparatively easier to develop
the brand image, as they spend more on marketing,
packaging etc. and are always positioned as high
quality offerings.
In case of Private labels its more complex. Here
customers do not have a strong brand association.
However, authors observed that the store image acts as
an important indicator of store brand quality (Semeijn
and al., 2004). Researchers have studied a multitude of
retailer attributes that influence overall store image,
e.g., the variety and quality of products, services, and
brands sold; the physical store appearance; behavior
and service quality of employees; the price levels,
depth and frequency of promotions; and so on (Burt
and Carralero-Encinas, 2000; Ailawadi and Keller, 2004;
Sorrenberg and Erasmus, 2008). In case of private
labels customers tends to go more on the extrinsic
cues. Therefore, factors like packaging, display etc.
have to be taken care of. Although this will increase the
cost for the retailer but he can keep saving margins by
squeezing the supply chain and then play on volumes.
Also for private labels the efficiency of a salesman to
convince the customer plays a major role. Although
there is a causal relationship between the store image
and the salesmans reliability as considered by the
customer.
But then the overall strategy defined by the company
will depend on other factors also. The overall strategy
and positioning of retailer will also define what a
consumer expects and what factors he/she consider
for coming to a conclusion, while selecting a brand.
Here comes the role of the brand architecture. Esbjerg
et al. (2004) adapted Aaker and Joachimsthaler (2000)
brand architecture concept to the retail setting by
defining retailer brand architecture as a retailers
assortment of manufacturer brands, retailer brands
and generic products. The brand architecture can differ
based on two dimensions: the quality of retailer brands
and visibility of retailer brands (Esbjerg et al. 2004).

Factors Influencing the Purchase of Private Labels: A Case Study on Roma

As we saw customer while deciding among the


National Brands and the Store brands consider various
factors. Relying on various literatures discussed above
some of these factors can be identified as are store
image (the trust factor), variety and quality of
products, options available in national brands i.e. The
kind of brand architecture, promotional offers going
on, prices, service, salesmans explanation and
features. So, this research has narrowed down on these
factors.

Demographic Profile

Research Methodology

Results and Analysis

The objectives of this research is to identify factors


which a customer considers for selecting a brand, the
consumer perception for store brands, reasons for low
contribution of private labels in a retail outlet and in
the end coming up with a set of parameters which can
be worked upon to enhance store brands image and
increase their contribution in the total sales.

As shown in Table 2, cross tabulation was done to


identify the level of awareness about Romas private
labels among the male and female respondents. It can
be seen that male customers are comparatively more
aware about Romas private labels, but the difference is
not significant enough. This can be interpreted by the
data that number of male respondents was more than
number of female respondents (refer to Table 1).

For this purpose Roma Specialty retailer for consumer


durables and electronics is considered. Primary data is
collected for which Survey method is used for obtaining
information which is based on questioning the
respondents. Structured questionnaire is used to ask
prearranged questions from the respondents.
Most of the questions are close ended with multiple
choices to assist customers in answering. Most of the
questions are framed on 5 point Likert Scale. The
personal detail of respondents is limited to Age,
Qualification and Area of Residence.
Sampling Design
Sampling Technique: Convenience Sampling
The selection of sampling units is based on
convenience of the interviewer. In this research the
interviews are taken from the customers on the shop
floor at the time when a sale is closed.
Sample Size: 152
Number of Respondents for National brands: 124
Number of respondents for Romas private label: 28
Assumption: Sample Size of 152 respondents is true
representative of the population.

Table 1 : Demographic profile of Customers


Gender
Age
(In years)
15 25
25 35
35 -45
>= 45
Percentage
of Total

Male
Percentage
within Age
group
57
62
53
72
62.5

Female
Percentage
within Age
group
43
38
47
28
37.5

Total
percentage

Percentage
of Total

100
100
100
100

37
54
37
26
100

Table 2: Private label awareness *


Gender Cross tabulation
Gender
Private
label
awareness

Yes

No

Total

Count
% within Private label
awareness
% within Gender
% of Total
Count
% within Private label
awareness
% within Gender
% of Total
Count
% within Private label
awareness
% within Gender
% of Total

Total

Male

Female

48
64.9%

26
35.1%

74
100.0%

50.5%
31.6%
47
60.3%

45.6%
17.1%
31
39.7%

48.7%
48.7%
78
100.0%

49.5%
30.9%
95
62.5%

54.4%
20.4%
57
37.5%

51.3%
51.3%
152
100.0%

100.0%
62.5%

100.0%
37.5%

100.0%
100.0%

59

TATTVA - Vol. 1 Issue 1 October 2010

Table 3: Customers Responses on Factors considered


for preference of National Brand (Percentage)
S.
No.
1.
2.

3.

4.

5.

Factors for
preference to
National Brand
It has high
credibility
This brands
products are of
high quality
The features
available in this
brand were not
available in any
other brand
Prices were
affordable and
less than other
brands
The brand
provides
excellent after
sales services

Strongly
Disagree

Disagree

Neither
agree nor
disagree

Agree

Strongly
Agree

16.93

12.90

22.58

47.58

0.80

6.45

33.06

44.35

15.32

8.06

9.67

9.67

20.16

51.61

after sales support and positive inclination towards


store as a brand. This clearly shows the key areas on
which a retailer should focus on.
Table 5: Customer responses on Factors responsible
for rejecting Romas Private Labels (percentage)
S.
No.
1.
2.

17.74

16.93

12.09

35.48

17.74

20.16

29.03

21.77

12.90

16.12

3.

4.
5.
6.

As shown in Table 3, customers prefer National Brands


as these are more credible and customers can rely on
its quality. Feature play a major role in deciding about a
brand, main reason being the category we are dealing
with. Consumer durables and electronic industry
survive on innovation; where in new technological
changes are very frequent. Customers who are more
national brand prone do not consider prices to be a
determining factor.
Table 4: Customer Responses for factors considered for
preference of Romas Private labels (percentage)
S.
No.

1.
2.

3.

4.
5.
6.

Factors for
preference to
Romas Private
Labels
I found it value for
money
It is a high quality
product
The offer provided
was better than
offers on other
brands
The prices were
affordable
I liked the features
provided in the
private label
I trust the brand
Roma

Strongly
Disagree

Disagree

Neither
agree
nor
disagree

Agree

Strongly
Agree

3.57

14.28

60.71

21.42

3.57

17.85

60.71

14.28

3.57

7.14

39.28

25

21.42

7.14

7.14

3.57

17.85

71.42

3.57

10.71

21.42

28.57

32.14

3.57

21.42

35.71

39.28

As mentioned in Table 4, there are certain factors which


play significant role in generating positive inclination
towards the store brand. Customers preferring store
brand give more importance to factors like price, good
features differentiating them from the national brands,
60

7.

8.

Factors for
rejecting Romas
Private Label
No other option
was available
I was less aware
about Romas
Pvt. Label
CS!s didnt
explained me
about it
Didnt found it
value for money
Did not liked its
quality
Had bad
experience with it
earlier
I am brand loyal
towards the other
brand
I do not trust
Romas Pvt.
Labels ( lack of
credibility)

Strongly
Disagree

Disagree

Agree

Strongly
Agree

20.96

Neither
Agree nor
Disagree
12.90

29.83
2.41

14.51

21.77

9.67

24.19

26.61

37.09

21.77

20.16

29.03

16.93

12.09

22.58

10.48

48.38

16.93

1.61

26.61

8.87

56.45

5.64

3.22

88.70

3.22

4.83

3.22

6.45

25.80

15.32

26.61

25.80

17.74

25.80

10.48

16.93

29.83

As shown in Table 5, 63% respondents didnt purchase


Romas private labels as they didnt found it in that
particular category. This shows that there are many
potential customers for private labels which can be
captured through better product availability. The
statistics also highlights the importance of proving
satisfactory information regarding the product by the
sales executive. 18% customers didnt purchased
Romas private labels because they were not given
satisfactory information regarding them by the
Customer Sales executives. This communicates a lack
of effort by the sales side. As mentioned above the
sales executives assistance plays an important role in
aiding the decision making of the customers, all
possible efforts should be made to minimize this
percentage. Further to identify the relevance of the
factors, Factor analysis has been conducted
considering these set of parameters as mentioned in
Table 5.
Factor Analysis:
Factor analysis has been conducted to categorize these
factors in relevant components based on consumer
perception about the store brands and expectations

Factors Influencing the Purchase of Private Labels: A Case Study on Roma

with them. It can be identified that customers consider


these factors for eliminating an option as well as for
considering one. Therefore, it is to be understood that
these components when applied to the private labels
strategy of a company, can prove beneficial in obtaining
the overall companys objective in the long run.
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of
Sampling Adequacy.
Bartlett's Test of Sphericity

.624

Approx.
ChiSquare
Df
Sig.

280.570
28
.000

Feasibility of the test - KMO test is used to check the


feasibility of the factor analysis. As in given table KMO
is 0.624 which is greater than .5 and Approx chi square
value is 280.70 which is too high, Therefore Factor
analysis can be done on the findings.
Communalities
Initial

Extraction

No of Option
Awareness
CSA's explanation
Value for money
Quality
Experience with the brand

1.000
1.000
1.000
1.000
1.000

.644
.628
.537
.871
.798

1.000

.829

brand loyalty towards other brand


Lack of Trust

1.000
1.000

.542
.626

Extraction Method: Principal Component Analysis.


Rotated Component Matrix
Component
No of Option
Awareness
CSA's explanation
Value for money
Quality
Experience with the brand
Brand loyalty towards other brand
Lack of Trust

.772
-.071
.30
.933
.891
.114
-.209
.121

-.249
.776
.012
.005
.061
.043
.670
.766

.094
.146
.373
.008
-.021
.902
.224
-.154

Extraction Method: Principal Component Analysis.


Rotation Method: Varimax with Kaiser Normalization.
A Rotation converged in 4 iterations.

Variables having value >.3 are grouped in to one


component. Following are the three components
extracted.
Component 1 - No Of Options (.772) + Value for money
(.933) + Quality (.891)
Component 2 - Awareness (.776) + Brand loyalty
towards other brand (.670) + Lack of trust (.776)
Component 3 - CSAs Explanation (.373) + Experience
with the brand (.902)
Above inferred component can be interpreted as
following constructs
Components 1 refer to Merchandising Mix,
Components 2 refers to Brand Equity and component 3
refers to Brand Knowledge.
Merchandising Mix here refers to the options available
for the customer in a particular category that comes
under his/her consideration set. It means private labels
to be available across the category and in a wider price
range. Another important component is the Brand
Equity, which refers to the brand image in case of
national brands and more prominent store image in
case of private labels. Usually the low level of store
brand equity reduces the sales of private labels in a
store. The third component is knowledge about the
brand. For high involvement products with more
technical specifications like electronics, customers
decision is aided by the knowledge about the product.
For customers source of knowledge is either their own
past experience or the reviews coming from the public
and aids given by the sales executives. Therefore, it also
becomes an important consideration.
The above parameters are considered by the
customers for deciding which brand to consider, either
being a national brand or a store brand. The final choice
depends on the best option customer finds after
evaluating the options on the above parameters.

Conclusion
In this fast growing consumer durables industry, if
retailers want to survive and perform well, the only way
is to seek assistance of store brands to create
61

TATTVA - Vol. 1 Issue 1 October 2010

differentiation. The current work provides an insight


about the customers decision making process by
coming up with the consolidated factors responsible
for brand selection by a customer. The study tries to
evaluate factors for both national brands and store
brands, keeping in mind the objective of enhancing the
performance of store brands in a store. The results give
us few parameters for the customers making a
purchase decision for consumer durables and
electronics. Following are the key findings of the study:
High level of credibility which brands develop
through years of marketing and promotional
activities, excellent services and word of mouth, is
an important factor for customers. Therefore, to
attract customers to purchase private labels, it is
important for the store to be strong brand in itself
to pursue them for the first purchase.
In consumer durables and electronics industry
features are one of the most important drivers of
sales. Private labels have a better chance to
differentiate themselves from the store brands by
coming up with new features frequently.
Salesmen play a major role in influencing the
customers, by giving them proper cues to aid the
purchase of customer. They can justify a private
label to a customer and induce him/her to make
the purchase.
Earlier prices used to be the only Unique Selling
Proposition for the store brands, but now other
things like efficient after sales support by the
retailer for its in-house brands, etc. are also
becoming an important parameter to consider by
the customers.
The merchandising mix, brand equity and brand
knowledge are identified as the key components
for consideration of a brand, especially store
brands.

Limitations of the Study

62

Sample Size: The sample size was limited to 152


respondents.
Geographic limitations: The sample is collected in
Rohini store of Roma in Delhi.
Specific Industry: The study is done on Roma
which is electronics and consumer durables retail

chain. Thus focusing on the consumer decision


making parameters, while purchasing products
like consumer durables and electronics. Although
some inferences can be generalized, some cannot
be. This also limits the application of the study to
the Consumer durables and electronics market
only.

Managerial Implications
Consumer durables and electronics are usually low
margin high value products. In such a competitive
environment, it becomes indispensable for companies
to develop strategies and methods to sustain their
position in the market and to generate higher profit
margins. Retailers can achieve it with the help of
private labels. Therefore, private labels form an
integral part of companys overall strategy and
objectives.
The paper discusses few parameters considered by the
customers for evaluating the store brands. How a
retailer can use those parameters to enhance the
overall contribution of private labels in the sales and to
increase its acceptance for the customers is discussed
below:
The merchandising mix at any store should be
complete and satisfying for the customer. The
merchandising mix should have a right mix of national
and store brands i.e. there should be a harmony
between the two offerings and they should be available
in a price range, capable of fulfilling the requirements
of the target market. In addition, the retailer has to
focus on developing the store image as we find there is
a positive correlation between the store brand equity
and sales of private labels. Another important aspect
which was identified in this study was the importance
of knowledge about the brand. For private labels brand
is the retailer itself and functional aspects of a
particular product labeled in - house. For this the most
important role particularly played for store brands, is
by the Customer Sales Executives (CSAs).Other being
the past experience of the customer with the brand,
which can be positive only by providing a good quality

Factors Influencing the Purchase of Private Labels: A Case Study on Roma

product. Thus, retailer has to understand and train


salespeople to focus on effective influencers, and
deliver high quality products. This is because the
quality has a positive correlation with the store image,
and providing a poor quality product would also prove
detrimental for the store image.

Scope for Further Research


The paper discusses the factors influencing the
purchase of private labels in a store. The study is of
continuous importance for the retailers who intend to
increase their store brands acceptance in the market.
As in the present competitive market store brands act
as a differentiator, giving companies a competitive
edge, most of the retailers would come under this
category.
However, as the research is at present restricted to the
consumer durables and electronics industry, need
arises for further research covering other sectors. This
will be able to generalize the proposed parameters
across industries as well as different formats.

References
Aaker, D. A. and Joachimsthaler. E. 2000, Brand Leadership, London,
Free Press.
Esbjerg, Lars ; Grunert, Klaus G. ; Juhl, Hans Jrn. 2004. Retailer brand
architectures: Consumer perceptions of five Danish food
retailers, Konferencen: 8th International Conference on
Corporate Reputation, Image, Identity & Competitiveness, Fort
Lauderdale, USA, , 20 - 23 May 2004.
Keller, K.L. 1993, "Conceptualising, measuring and managing
customer-based brand equity", Journal of Marketing, Vol. 57
No.1, pp.1-22.
Kusum Ailawadi and Kevin Keller 2004, Understanding Retail
Branding: Conceptual Insights and Research Priorities, Journal
of Retailing, Vol. 80, Issue 4 (Winter), 331-342.
Semeijn, J.; Ambrosini, A.B. 2004. Consumer Evaluations of Store
Brands: Effects of Store Image and Product Attributes, Journal of
Retailing and Consumer Services, 11 (4), 247-258.
Sonnenberg, N.C. and Erasmus, A.C. 2008, Exploring the role of retailer
image and store brands as extrinsic cues in young urban
consumers choice of interior textile products, Latin American
Advances in Consumer Research, 2.
Steve Burt, Jose Carralero-Encinas, 2000 "The role of store image in
retail internationalisation", International Marketing Review, Vol.
17 Iss: 4/5, pp.433 453

Further research can also be conducted to correlate


the consideration of these parameters based on
customers socio demographic profiles.

63

TATTVA - Vol. 1 Issue 1 October 2010

64

Competitive Analysis of New Holland Tractors


in Western U.P. and Haryana
Vijay Gaur*

Abstract
Problem Statement: Competitive Analysis of New Holland Tractors was done among six domestic competitors. For this customer and dealer
perception was taken in the area of Western U.P. and Haryana. Eight different variables were identified and position of each competitor was analyzed
on the basis of that. These variables are: Price, Finance (Loans), Availability of spare parts, after sale service, Brand Name, Design/Style, Power (Lifting
capacity) and Sales Promotion.
Approach: A questionnaire was designed with above set of variables and responses from 164 customer and 20 dealers was recorded.
Results: Using Analytical Hierarchy Process (AHP) market share was determined on the basis of above variables among six competitors in
western U.P. and Haryana. Using one way ANOVA it was checked whether there is a significant difference between six competitors with respect to each
variable. Perceptual maps with combination of up to two variables (attributes) were drawn to infer about the positioning of six competitors.
Conclusion: This study will help manufacturer of tractors to improve on the variables on the basis of which they are lagging their respective
market share with respect to competitors.
Key words: Analytical Hierarchy Process (AHP), Customer and Dealer perception, One way Anova

Introduction
India is mainly an agricultural country. Agriculture in
India accounts for approximately 15.7 percent of Indias
GDP in 2009 and employs about 52 percent of the
population (Refer website of Agricultural and Processed
Food Products Export Development Authority - APEDA).
The agri-biotech sector in India has been growing at a
whopping 30 per cent since the last five years, and it is
likely to sustain the growth in the future as well.
Agricultural biotech in India has immense potential and
India can become a major grower of transgenic rice and
several genetically engineered vegetables by 2010.
According to the Centre for Monitoring Indian Economy
(CMIE), crop production is expected to rise by 1.7 per
cent during FY 10 and food grain production is expected
to increase by 1.1 per cent and wheat production is
projected to remain at the same level of 80 million
tonnes as estimated for FY 09 while rice production is

projected to increase by 1.1 per cent to 98.8 million


tonnes. Production of coarse cereals and pulses is also
expected to rise in FY 10.

Overview of Tractor Industry in India


The Indian tractor industry has around 13 national
players and a few regional players. The industry is
dominated by Mahindra and Mahindra (M&M) with a
market share of around 42.04%, followed by Tractors
and Farm Equipments TAFE, which holds around 22.32%
of the market. The other major players include Escorts
(13.03%), L&T-John Deere (7.02%), and International
Tractors Limited (8.71%) and New Holland Fiat India Pvt.
Ltd. (5.0%). During the last few years, the industry has
seen some consolidation with M&M acquiring Punjab
Tractors (PTL) and TAFE acquiring Eicher Tractors. Most
of the tractors sold in India are in the 21-50 HP range,

*Centre for Business Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. R.J. Masilamani, Centre for Business Management, Birla Institute of Management Technology

65

TATTVA - Vol. 1 Issue 1 October 2010

with the 31-40 HP category alone accounting for


around 50% of this.
Market Share of various competitors in Indian Tractor
Industry
Total domestic tractors sold in 2009 from January to
December was 361,141 with a growth of 17.2 % over
what sold in 2008 i.e. 308173.
Table 1: Maket Share of Tractor Industry:
Jan Dec 2009
JAN-December
Manufacturer
M&M GROUP
TAFE GROUP
ESCORTS
ITL
NHFI
JOHN-DEERE
HMT
FML
SAME
TIV

Calendarised- Only Domestic


Jan-December
M.S.%
2009
2008
GR%
2009
2008
151807 125795
20.7%
42.1%
40.8%
80609
70178
14.9%
22.3%
22.8%
47046
42876
9.7%
13.0%
13.9%
31462
27426
14.7%
8.7%
8.9%
18030
16342
10.4%
4.9%
5.3%
25342
15783
60.6%
7.0%
5.1%
4694
4114
14.1%
1.3%
1.3%
614
1471
-58.3%
0.2%
0.5%
1537
4188
-63.3%
0.4%
1.7%
361141 308173
17.2% 100.0% 100.0%

Literature Review
Analytical Hierarchy Process (AHP) is an approach to
decision making that involves structuring multiple
choice criteria into a hierarchy, assessing the relative
importance of these criteria, comparing alternatives
for each criterion, and determining an overall ranking
of the alternatives as defined by DSS Resources. The
AHP is a structured technique for dealing with complex
decisions. Rather than prescribing a "correct decision,
the AHP helps the decision makers find the one that
best suits their needs and their understanding of the
problem.

Procedure
The procedure for using the AHP can be summarized
as:
1) Finding factors affecting the decision.
2) Assigning them weights.
3) Pair wise comparison.
4) Forming matrix with respect to various factors for
66

5)
6)
7)
8)

different alternatives.
Formation of normalised matrix.
Consistency check.
Check for consistency criteria, if any of the
matrixes found inconsistent.
Evaluating final ranks.

Perceptual mapping has been used as a strategic


management tool for about thirty years (Green and
Wind, 1975). Perceptual mapping has been used to
satisfy marketing and advertising information needs
related to product positioning (DeSarbo and Rao, 1984;
Wind, 1982), competitive market structure Srivastava,
Alpert and Shocker, 1984), consumer preferences and
brand perceptions (Cooper, 1983; Pegels and Sekar,
1989; Dowling, 1988; Day, Shocker and Srivastava,
1979).
It offers a unique ability to communicate market
structure analysis-i.e., the complex relationships
among marketplace competitors and the criteria used
by buyers in making purchase decisions and
recommendations. Its powerful graphic simplicity
appeals to senior management and can stimulate
discussion and strategic thinking at all levels of all types
of organizations. Perceptual mapping has been used to
satisfy marketing and advertising information needs
related to product positioning, competitive market
structure, consumer preferences and brand
perceptions. Perceptual maps satisfy these types of
information needs by analyzing and then translating
consumers' numeric ratings, brand similarity data and
brand preference data into a visual representation of
how those consumers view the set of brands and
products.
The most common use of perceptual mapping in
advertising and marketing research relates to brand
perceptions. However, perceptual mapping is
appropriate for exploring perceptions of any set of
objects, for example, types of television programs or
political candidates. Perceptual maps can also be used
to determine similarities and differences across groups
of consumers. There are two approaches to perceptual
mapping: attribute based and non-attribute based.
Attribute based approaches, used in this study, require

Competitive Analysis of New Holland Tractors in Western U.P. and Haryana

a respondent to evaluate a set of brands on a large


number of specific attributes, typically those attributes
felt to influence how consumers perceive, evaluate and
distinguish among brands and products. All mapping
techniques attempt to show the comparative
differences in how products or services are rated on a
given set of attributes. The validity of a map depends
on both the overall set of attributes and brands in the
study as well as the subset of attributes and brands
evaluated by each respondent.

Research Objectives and Focus Issues


The main objective of this case study is to determine
the position of each tractor manufacturer with respect
to its competitors according to customer perception on
the basis of eight significant variables. This case
attempts to seek answers to following questions:
What is the Market Share of each player according
to customer perception on the basis of eight
different variables?
On which factors New Holland Tractors are lagging
behind the others?
Do manufacturers have significant difference
among them on the basis of each variable?
How to carry out comparison between six
different manufacturers?

Materials and Methods


Questionnaire design and pre-testing
In this project the kind of research design used is
Descriptive type. The Idea behind this type of research
is to study frequencies, average and other statistical
calculations. Although this research is highly accurate,
it does not gather the causes behind a situation.
Descriptive research design is a scientific method
which involves observing and describing the behavior
of a subject without influencing it in any way. The
subject is being observed in a completely natural and
unchanged environment. During the Project aim was to
study position of New Holland Fiat India Pvt. Ltd. with
respect to competitors and perception of customer
about the company and product.

Project analyses the condition of dealers with respect


to infrastructure and view point of dealers about the
company with respect to support on promotion and
service. It further analyses dealers view point on sale
of different horse-power (HP) segment. Surveys,
panels and various quantitative methods were used to
describe, record, analyze and interpret the data.
Data Collection from secondary Resources
Data have been collected through various secondary
resources like articles published in different newspaper
about tractor industry, books, Tractors Manufacturer
Association (TMA) report, and ICRA report May 2010
on Indian tractor Industry.
Data Collection from Primary Resources
Survey through questionnaires
As mentioned earlier, in total two surveys were
conducted:
Questionnaire 1: for Customer (Both of New Holland
and Competitors)
Data Collection: In total 164 customers, selected on
the basis of convenience sample, were interviewed
from different places in Western U.P. and Haryana.
Questionnaire 2: For the Dealers
Data Collection: In total 20 dealers (convenience
sample) were interviewed from various parts of
western U.P. and Haryana.
For further reference, Questionnaire for the Dealers is
attached as Appendix 2
The respondents were asked to evaluate the position of
New Holland Fiat India Pvt. Ltd. and its product range
with respect to its competitors on the basis of six
different attributes. Perceived quality of each variable
was measured through questions designed on 5-point
Likert type scale ranging from Excellent to Poor. For
example, Availability of spare parts was measured
through the question, How do you rate availability of
spare parts in comparison to five other competitors
with Excellent as the best positive response and Poor as
the worst negative response, any other response can
be recorded between Excellent and Poor on the
scale. Similarly, other attributes like After sale service
and Price of Product were measured with the same
67

TATTVA - Vol. 1 Issue 1 October 2010

scale. Responses were also captured on a five point


Likert scale, for the fuel efficiency and power of the
product.
Further, customers were asked to weigh New Holland
Fiat India Pvt. Ltd. with respect to other competitors on
a scale of 10 for six different attributes. On the basis of
these weights and using Analytical Hierarchy Process,
rankings were determined for all the six competitors in
the region of Western UP and Haryana.

Results
The statistical analyses used are Analytical Hierarchy
Process (AHP), Single Factor ANOVA, Tukey-Kramer
Test and Perceptual Mapping. Where ever applicable,
= 0.05 was used as the level of significance for the
analysis.

Table 2: Evaluating Final Rank: (Normalized Weighted matrix b/w variables)


Brand
Name

Design/
Style

Sales
promotion

Sales
Force

Finance

Price

Power

Finance

0.06122

0.06122

0.06122

0.06122

0.06122

0.06122

0.06122

0.06122

Price

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

Power

0.18367

0.18367

0.18367

0.18367

0.18367

0.18367

0.18367

0.18367

Brand Name
Spare
parts/After
Sale service

0.14285

0.14285

0.14285

0.14285

0.14285

0.14285

0.14285

0.14285

0.10204

0.10204

0.10204

0.10204

0.10204

0.10204

0.10204

0.10204

Design/Style
Sales
promotion

0.02040

0.02040

0.02040

0.02040

0.02040

0.02040

0.02040

0.02040

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

Sales Force

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

0.16326

Evaluation of rank on the basis of eight factors


When we do the sum product of average of every factor
in above matrix with average weight of all companies
for every individual factor we will get the actual rank on
the basis of eight factors.
ANOVA Single Factor
Table 3: Sorted weight & Final Ranks
Sorted data
0.2063 M&M
0.1802 Escorts
0.1685 Tafe
0.1626 ITL
0.1482 JD
0.1343 NHFI

Rank
1
2
3
4
5
6

Single factor ANOVA if applied for all the variables will


help us in establishing if there is significant difference in
perception of the respondents between brands or not.
If it found that the perception about the brands
68

Spare
Parts/After
Sale service

significantly differ, Tukey Kramer test would be


conducted to find out which Tractor company is
significantly different from others.
Ho1: Based on the respondents perception, there is no
significant difference between six competitors as far as
interest rate and eligibility criteria about availability of
finance (Loans) is concerned.
Similarly, five more hypotheses were formed for price,
power, availability of spares, brand name and
design/style.
a)

Finance (on the basis of interest rate and


eligibility criteria for the loan):

Competitive Analysis of New Holland Tractors in Western U.P. and Haryana

Table 4: Single Factor ANOVA


SUMMARY
Count

Sum

Average

Variance

M&M Fin.

Groups

164

1300

7.926829

0.816699

Escorts Fin

164

968

5.902439

1.536436

NHFI Fin

164

785

4.786585

1.751721

JD Fin.

164

804

4.902439

1.879994

Tafe Fin.

164

785

4.786585

1.751721

ITL Fin.

164

804

4.902439

1.879994

ANOVA
Source of Variation
Between Groups

SS

df

MS

P-value

F crit

1275.325

255.065

159.1411

9.2E-124

2.223254

1567.5

978

1.602761

2842.825

983

Within Groups
Total

Result:
Since the F (Observed value is greater than the F critical
value the null hypothesis is rejected. This implies that

there is a significant difference between six tractor


companies as far as Finance is concerned.

Table 5: Tukey-Kramer minimum significant difference

actual difference
('*' if significant)

M&M

Escorts

NHFI

JD

Tafe

ITL

M&M
Escorts
NHFI

2.0244*
3.1402*

0.3992
1.1159*

0.3992
0.3992
-

0.3992
0.3992
0.3992

0.3992
0.3992
0.3992

0.3992
0.3992
0.3992

JD

3.0244*

1*

0.11585

0.3992

0.3992

Tafe

3.1402*

1.1159*

0.11585

0.11585

0.3992

ITL

3.0244*

1*

0.11585

0.11585

0.11585

Result:
As far as Finance is concerned:
M&M is significantly different from Escorts, New
Holland Fiat India Pvt. Ltd., John Deere, TAFE, and ITL
(Sonalika).
Escorts is significantly different from New Holland Fiat
India Pvt. Ltd., John Deere, TAFE, and ITL (Sonalika).
This implies that M&M and Escorts are significantly
different from the rest.
Similarly, other five variables were analysed and
conclusions drawn.
Perceptual Mapping for various Tractor Companies
This has been done by taking two attributes (Variables)

at a time and plotting the mean values on the graph.


Taking two values would give us better results which
can be easily analyzed on the perceptual space.
For combining variables meaningful combinations
have been considered which would be simultaneously
considered by any tractor customer. They are:
a) Finance Vs Price
b) Brand Name Vs Price
c) After sale service/Availability of Spare Parts Vs
Price
d) Design/Style Vs Price
e) Power Vs Price
f) Sales Promotion Vs Price
g) Sales Force Vs Price

69

TATTVA - Vol. 1 Issue 1 October 2010

a)
Finance Vs Price
Result: From the perceptual map obtained (Figure 1)
we can see that
Fig: 1. Perceptual Mapping with respect to
Finance and Price

interviewed in Western U.P. and Haryana and the


analysis and NHFI position was based on that only.
Some of the dealers in this area were satellite dealers
like a sales point, so we were not able to get the
perceptions of the main dealers and was also not able
to cover other part of India in terms of Dealers.

Conclusion
New Holland Fiat (India) Pvt. Ltd. 100% subsidiary of
CNH Global is operating in India since 1998 in the
business of tractors and Agri-machinery. The Plant is
situated at Greater Noida, Uttar Pradesh, producing a
range of tractor from 32 HP to 75 HP in over 90 variants
and marketing other Agriculture Equipments.

JD and NHFI lie very close to each other or we can


say that they are perceived to be similar by the
tractor customer.
M&M and Escorts are perceived to be different
ITL and TAFE are perceived to be different

Similar plots showed proximity of companies for


different pairs of variables.

Limitations and Caveats


The research done under this Project is limited to
Tractor Industry of India and under the study we were
able to cover only six of the major competitors. We
have mainly concentrated on marketing strategies of
all the six competitors and their dealers. We were not
able to cover the details of production of all the
companies except New Holland Fiat India Pvt. Ltd.
The survey was conducted in Western U.P. and Haryana
and on the basis of that we have tried to analyzed the
Customer perception about all the major six
competitors. We were able to cover only 164
customers on random basis and the complete analysis
was based on that. The analysis was representing the
tractor industry trend in Western UP and Haryana.
Another survey was done with respect to dealers
where Dealers, (a Sample size of 20) was also

70

The present study has been conducted on


Competitive Analyses of New Holland Tractors in
western U.P. and Haryana markets in which both
Customers and Dealers were interviewed. The primary
survey of customers done on 164 customers clearly
shows that 47 were having New Holland Tractor while
rests were having other manufacturer tractors. In case
of competitors out of 117 customers surveyed, the
most popular & salable model is Mahindra &
Mahindra; around 42% of customers were having it.
Mahindra & Mahindra is having an edge over others
because of its large Dealer network, Sales Force and
Mahindra Finance. TAFE is the second largest salable
model in this area with its brand Messey Ferguson,
around 23% of customers having it.
When 117 competitors customers were asked about
brand awareness, it was found that there is a lack of
awareness among the customers about brand New
Holland. Only 39% of total 117 customers were aware
of it and those who have heard, they have heard it from
their relatives/friends/existing users.
When asked to 47 New Holland tractor customers
about different model they own, it was determined
that the most popular and salable model in this region
is 55 HP NH 3630. Around 49% of total 47 NHFI
customers were having it. Regarding the effectiveness
of various sources of information in purchase decision,
it was determined that customers purchase a tractor

Competitive Analysis of New Holland Tractors in Western U.P. and Haryana

either by testing it in person or though a


demonstration/ Road show/van campaign by which
they can see a live performance and awareness of the
product. It was found that mostly people use the
tractor in both Agriculture as well as Commercial use.
When asked about importance of factors in purchase
decision it was found that mainly customer are
concerned about Power.
Through Analytical Hierarchy Process on the basis of
eight factors we determined that Mahindra &
Mahindra was ranked at the top while NHFI at the sixth
position.
When 20 NHFI Dealers were interviewed it was
determined that the dealerships are easily accessible,
but there is a lack of infrastructure. Also eight dealers
out of twenty were not having point of purchase
material like leaflet, brochure, poster, price board etc.
When dealers were asked about popularity of brands,
Mahindra & Mahindra was found to be at the top
position
When comparison was done between different
competitors from dealers point of view and on the
basis of their perception it has been found that New
Holland tractor is most dominating, in Power, Running
speed, Design/style and operator comfort while lacking
in areas like, Engine noise, differential performance
problem (Customer find problem in application like
haulage). Also the company is lacking in areas like
availability of spare parts, after sale service and
availability to develop strong consumer promotion.

References
Cooper, L.G., 1983. A review of multidimensional scaling in marketing
research. Applied Psycholog. Measure., 7: 427-450. DOI:
10.1177/014662168 300700404
Day, G.S., A.D. Shocker and R.K. Srivastava, 1979. Customer-oriented
approaches to identifying product markets. J. Market., 43: 8-20.
http://search. ebscohost.com/login.aspx?direct=true
&db=bth&AN= 5004693&site=ehost-live
DeSarbo, W.S. and V.R. Rao, 1984. GENFOLD2: A set of models and
algorithms for the general unfolding analysis of
preference/dominance data. J. Classif., 1: 147-186. DOI:
10.1007/BF01890122
Dowling, G.R., 1988. Measuring corporate images: A review of
alternative approaches. J. Bus. Res., 17: 27-34. DOI:
10.1016/0148-2963(88)90019-7
Green, P.E. and Y. Wind, 1975. New way to measure consumers
judgments. Harvard Bus. Rev., 53: 107-117.http://search.
ebscohost.com/login.aspx? direct=true &db=bth&AN=
3867280&site=ehost-live http://search.ebscohost.com/
login.aspx?direct=true &db=bth&AN=9084110&site=ehost-live
New Holland MIS Report
Pegels, C.C. and C. Sekar, 1989. Determining strategic groups using
multidimensional scaling. Interfaces, 19: 47-57. DOI:
10.1287/inte.19.3.47
Srivastava, R.K., M.I. Alpert and A.D. Shocker, 1984. A consumer
oriented approach for determining market structures. J. Market.,
48: 32-45. http://search.ebscohost.com/login.aspx?direct=true
&db=bth&AN=5004394&site=ehost-live
Wind, Y., 1982. Product Policy: Concepts, Methods and Strategy.
Addison-Wesley Publishing, Reading, MA., ISBN: 10:
0201083434.

71

TATTVA - Vol. 1 Issue 1 October 2010

72

Underwriting of Female Lives vis--vis


Underwriting Practices in General
(A Case Study of underwriting practices in Orissa the LIC of India,
Sambalpur Divisional Office)

Sweta Behera*

Abstract
In todays world women are given equal status as men. But when it comes to life insurance, the criteria used to provide insurance coverage to
women is different from that of others. The underwriting of female lives is not the same as the general underwriting practices in a life insurance
company. This is because the risks associated with female lives are not similar to their male counter parts. This study was undertaken in Life Insurance
Corporation (LIC) of India, which is the largest life insurance company in India. It was aimed to understand the underwriting practices of LIC of India and
compare the underwriting of male and female lives. It gives an idea about how the underwriting of female lives is based on different parameters. This
paper also focuses on different classifications used by LIC of India for underwriting female lives and the variation of risk in each class. An attempt has
been made to find insurability of female lives with respect to underwriting guideline of LIC of India.
Keywords: Life insurance, Underwriting, Female Lives, Category I, Category II, Category III, Category IV

Introduction
Life insurance is not a new term. It has been present in
the Indian market since 1818. Privatization has
promoted it more. So, today most of us can nod their
heads when asked if they have heard the name life
insurance. A life insurance policy provides protection
against financial loss caused by death.
Insurance underwriting is the process of classification,
rating, and selection of risks. This consists of evaluating
information and resources to determine how an
individual will be classified (standard or substandard
risk). While underwriting, a persons health (morbidity)
or how long they may live (mortality), or both are
scrutinized. It depends on the cover wanted. The goal of
life insurance underwriting is to accurately assess an
individuals risk level for the purposes of assigning the
correct rate for life insurance. Some of the factors
affecting life insurance underwriting include age, sex,
health status, physical features, family history, built,
occupation, past history of insurance, personal medical
history, hobbies and personal habits. An underwriter is

the person authorized to accept, reject or fix terms for


accepting a risk. The life insurance agent also plays a
significant role in the process of underwriting. He is in a
position to actually see and talk to the proposed insured,
ask the questions contained in the application and
record the clients information on the application form
for insurance (proposal form) accurately and completely.
There are two aspects of life insurance underwriting.
The first one is Financial Underwriting where the
underwriter ensures that the amount of coverage
applied for is not in excess of the amount of the potential
economic loss else poor persistency or adverse selection
may occur. The second aspect of life insurance
underwriting is Medical Underwriting where the
medical reports of the proposer and questionnaire filled
in by the attending medical practitioner are examined.
Based upon medical factors extra mortality rating for
each condition, other than normal is determined.
Insurance coverage can also be provided under nonmedical schemes for certain cases up to a specific limit.

*Centre for International Business & Policy 2009-11, Birla Institute of Management Technology
Under the guidance of Prof. K.K. Krishnan, Centre for Corporate Relations, Birla Institute of Management Technology

73

TATTVA - Vol. 1 Issue 1 October 2010

In India, in the early years of the insurance industry, the


trend was to insure only male lives. The logic was that
the female of the species was home-bound anyway,
wasn't exposed to any risk and didn't earn an income.
Therefore her death didnt pose any economic loss to
the family which is the rationale behind life insurance.
The bread winner was the male and it was against his
lost income that cover was required. An additional
disincentive was the extra risk to female lives that was
an inevitable part of the childbirth process. All that has
changed with women rivalling men at the workplace. In
addition, better education for the female child,
increased economic contribution by women, better
medical facilities for safer childbirth and post-natal
care have all contributed to more and more insurance
products that are women-specific.
All basic covers such as life, personal accident, mediclaim, critical illness etc. form a part of women's life
insurance policies too. There are also some special
covers offered in women's life insurance policies that
include:
Cover for certain female critical illnesses (ovarian
cancer, etc.)
Occurrence of certain congenital disabilities in
new-borns (Down's Syndrome, Spina Bifida, Cleft
Palate, Club Feet, etc.)
Cradle care - covers the newly born child's defects,
deformity, malformation, congenital abnormality
of any kind at time of delivery.

Review of Literature
Black and Skipper (1994) have explained the purpose of
underwriting in modern life and health insurance;
discusses underwriting philosophy, including the
distinctions between standard and substandard
classes and smoker/non-smoker differentials in
standard classes; analyzes factors that affect life and
health risk classification; and explains substandard
classification methods. In USA, there is not much of a
difference in the underwriting of male and female lives
are followed unisex mortality tables.
Morton (1977) has discussed the relevancy of risk
factors and mortality data to underwriting; analyzes
74

the economic aspects of underwriting; examines the


impact of rapid social and business changes on
individual life insurance principles; and speculates
about future effects on market competition and
underwriting.
Balay (1981) has brought the reader into the decisionmaking process used by the underwriter to select and
classify an individual applicant for life insurance. The
importance of judgment, honed by a framework of
knowledge about medicine and some basics of
accounting, actuarial science, marketing, and
economics, is individually and collectively essential in
developing an under-writer who can serve
autonomously and creatively. Fiederlein (1991) has
discussed about life insurance companies granting
premium discounts to individuals who are in
exceptional good health and do not participate in
activities or exhibit lifestyle factors that increase the
risk of violent death.
Subramanian et al (1999) have conducted simulations
of the cost of adverse selection in life insurance if the
results from genetic tests for breast and ovarian cancer
could not be used in setting premiums. They found that
an important determinant of the cost of adverse
selection is the extent to which those who test positive
for a genetic defect purchase additional cover.
Many insurers would say that their very soundness
depends on "the right to underwrite", and thereby to
protect their existing policyholders from adverse
selection (Leigh, 1996)

Objectives
The study was undertaken with the following
objectives:
Understand the life insurance underwriting of LIC
of India with respect to female lives.
Compare underwriting of male and female lives.
Comprehend the necessity of classifying female
lives for underwriting.
Find out the insurance dynamics of life insurance
underwriting and death claims and to examine
death claim ratio of male and female lives.

Underwriting of Female Lives vis--vis Underwriting Practices in General

Methodology
Although this is a piece of descriptive research, the
study was dependent on primary as well as secondary
data. Secondary data was collected from the records of
Divisional Office, LIC of India, Sambalpur, Orissa (where
this study was undertaken) regarding business
underwritten during past five years. The death claim
records of past three years were procured to find out
the dynamics of life insurance underwriting and death
claims. The death claim ratio of male and female lives
was also examined. Secondary data was also collected
through desk research from literature and statistics in
the internet, books, reports and journals dealing with
underwriting and its related concepts.
Primary data was collected from sample of sixty-seven
women drawn from SRIT colony, located in the centre
of Sambalpur city (Total population-935613, Male475112, Female-460491: Source- Official website of
Sambalpur-www.sambalpur.nic.in) in order to find out
the incidence of insurance among these people and
their insurability with respect to the underwriting
guidelines of LIC of India. SRIT colony was selected as
the sample area. This was due to some of the reasons
like, it was the only planned housing colony under
Sambalpur Municipal Corporation housed by people
from different income brackets. The inhabitants of the
colony are from varied educational and occupational
background and one would find here all categories of
women such as working women, housewives and
students. Over here Lastly, this area is adjacent to LIC of
India, Divisional Office, Sambalpur thereby it was likely
to have many actual and prospective customers.
A semi-structured questionnaire was administered for
the purpose of collecting primary data. The names of
all the female land telephone subscribers living in that
area were identified from the telephone directory of
the current year for collecting primary data. Numbers
were selected randomly and calls were made to these
people. Appointment for a formal house visit was fixed
over phone. All the female members of the sample
household who were above 18 years of age and agreed
to be interviewed were included as sample
respondents. The reason for not including females

below 18 years of age was that they might not be able


to understand and answer all the questions correctly. A
total number of 67 respondents were covered for the
purpose of data collection. Of the 70 selected
respondents, though a random sampling method; the
researcher couldnt contact 3 respondents despite
repetitive visit to their homes. More than one female
respondent was covered from a single household in
certain cases.
The collected primary and secondary data were
analysed with the help of Microsoft Office-Excel
software. The tabulated data were presented through
computation of percentage in graphs, charts and tables
for easy comprehension of our analysis by the readers.

Research Findings
LIC of India has 4 different categories for classifying
female lives while underwriting. The first three
categories contain single, married or widow women.
These categories are:
Category I- employed or self-employed women
filing Income Tax Returns
Category II- Women having unearned income
filing Income Tax Returns
Category III- Housewives with or without income
Female students from 18 years to 25 years (This
category is not addressed as Category IV by LIC of
India but has been named so for its convenient use
in this present study)
Primary Data
Sample respondents were divided into 4 classes
depending upon their age viz. up to 25, 26-40, 41-55,
55 and above. A majority of the sample respondents
fell under the age groups 26-40 years (37.31%) and 4155 years (40.31%). It was evident within these two age
groups 17 (25.38%) respondents belong to Category I
and 32 (47.76%) respondents belong to Category III.
And Category IV (7.46%) was applicable only in case of
respondents upto 25 years of age because this category
of LIC (for females) has only female students upto 25
years of age. Although a big percentage of respondents
belong to these two age-groups but it can be seen that
respondents are spread across all age-groups because
random sampling was done for the study.
75

TATTVA - Vol. 1 Issue 1 October 2010

The study showed that in terms of different categories


(for financial underwriting) as per LIC guidelines that
highest percentage of sample respondents (i.e. 61%),
belong to Category III followed by sample respondents
from Category I (28%) where Category I represents
women having some permanent source of income and
filing Income Tax returns. Category III represents
women with or without income who do not file Income
Tax returns.

mentioned here that as per the LIC guidelines, an


overweight person will attract some debits according
to the range of overweight. The case of an underweight
person below a particular level has to be referred by
the branch to the division for underwriting. The total
percentage of underweight and overweight sample
respondents was approximately 50%. In case they are
insured at standard rates it will be an adverse selection
for the company.

Incidence of Life Insurance


Incidence of life insurance among female lives is not
very high in the Sambalpur district. Still there is a
perception among women that Life Insurance falls in
the domain of males. The sample revealed that 36
(54%) of the sample respondents had life insurance
cover by one or the other company. The remaining 31
(46%) of the sample respondents did not have any life
insurance cover. There were only 5 respondents in
category IV (i.e. female students upto 25 years of age)
did not have any life insurance cover. The existence of
very high percentage of uninsured population close to
LIC Divisional Office seems to provide a wonderful
prospect to target this population for covering their
lives in LIC. This finding can be extrapolated to similar
categories of population elsewhere.

About one-fourth of the sample respondents and half


of their parents suffered from high blood pressure. It
was observed that many of the overweight sample
respondents had high blood pressure. Similarly those
respondents, whose either of the parents had got high
blood pressure were also having the same problem. A
high percentage of women from Category I (approx.
65%) suffered from high blood pressure. This may be
attributed to the lifestyle and multiple obligations at
home and workplace.

Among the 67 sample respondents, 16 (44.44%)


females had a life insurance coverage upto Rs. 1 lakh
and 14 (28.89%) women had total life insurance on
their lives in between Rs.1-5 lakhs. On the other hand,
very few of them bought policies of Rs. 5 lakhs and
above. This can be attributed to the fact that majority
of the sample respondents drawn from the sample
area belonged to middle class families. It is also
interesting to note that respondents belonging to
Category IV did not have life insurance coverage of
more than Rs.1 lakh. This can be seen as an opportunity
by LIC of India to provide more coverage to this
category of lives.
Health Profile
It was found that 33 (49.25%) of the sample
respondents had standard build followed by 27
(40.30%) overweight respondents. Only 7 (10.45%)
respondents were found to be underweight. It may be
76

Only 6 out of 67 sample respondents were diabetic. All


these 6 respondents had a family history of diabetes.
The actual cases of diabetes may be more as majority of
the sample respondents confessed that they had never
gone for a diabetes check-up. It may be mentioned
here that a person suffering from diabetes or having a
family history of diabetes is charged with some debit
during numerical rating. As more and more people
including women are prone to have diabetes due to
changing lifestyle and increasing anxieties, this
parameter should me more carefully examined by the
underwriter.
The prevalence rate of high cholesterol was
insignificant in the sample respondents and their
parents. Only 7.46% of the respondents and 11.94% of
their parents had high cholesterol. Like the previous
case, here also majority of the sample respondents
reported that they had never gone for any cholesterol
testing. As many of our sample respondents fall under
overweight category, there is a possibility of high
cholesterol in this group. So this under-reporting also
provides a clue for the underwriter to take up this
matter more seriously and ask the agents to furnish
correct information in the Moral Hazard Report to
prevent adverse selection.

Underwriting of Female Lives vis--vis Underwriting Practices in General

A good number of sample respondents and their


parent(s) had other health problem(s). Some of the
other health problems reported by our sample
respondents were Arthritis, Cancer, Tuberculosis,
Kidney stone etc. A comparative analysis of all diseases
showed that, the highest percentage of respondents
(26.87%) and their parents (49.25%) suffered from high
blood pressure. So the study points out the fact that
any life insurer should give heavy emphasis on the
present health status and family history of the
potential customer failing which it would lead to
adverse selection and increase in claims. Many of the
insured sample respondents revealed that the
concerned agent did not take up this matter seriously
while proposing for their life insurance cover. Therefore
the concerned agents should be given proper training
and orientation to understand the implication of
providing erroneous information.
The nature of death (early or non-early) occurred in the
family (parents or siblings) of the person to be insured
has a bearing in the process of medical underwriting.
However the agents of a life insurer do not give much
emphasis to this and thereby do not mention these
facts correctly. It is important to note here that the in
case there is no death in the family of the person to be
insured, he is allowed some credits in the Numerical
Rating. Contrary to this, in case of early death of
parents or siblings, the concerned person is charged
with some debits. Against this backdrop, our analysis
on the nature of death in the family of the sample
respondents revealed some interesting facts. In case of
8 respondents there were early deaths in their families.
In case of 1 respondent, there were 2 cases of early
death in the family. Similarly, in case of 11 respondents
there were non-early deaths in their families. It may be
added here that in case of 1 sample respondent, there
was one early and one non-early death in her family. In
case of 47 respondents (70.15%) there were no deaths
in their families. So in the event of taking a policy from
LIC, 10 respondents (13.43%) would be charged be
charged with debits under the Numerical Rating
System.
Saving Profile
The two important means of saving in our present day
society are life insurance policy and bank deposit.

Though many of the sample respondents had both life


insurance policy and bank deposit, 38 (57%) of the
sample respondents still preferred saving in the form of
bank deposit to life insurance policy. Only 29 (43%)
preperred life insurance policy as a better means of
saving to bank deposit. Those who opined in favour of
bank deposit felt that it is easier to draw and deposit
money in a saving account compared to LIC policy.
Further they were of the opinion that the minimum
term of life insurance is of longer duration compared to
that of bank deposit. Many of the sample respondents
said they had no idea as to whether it was possible to
close a policy in between the term and get back the
deposited within a short span of time. Those
respondents who preferred life insurance policy said
that though bank transactions were easier yet banks
did not provide life insurance cover.
It is generally noticed that a person planning to take a
life insurance policy doesnt pay much attention to
provide authentic material information required for a
policy. Further, it was noticed that the concerned agent
furnished the required information in a casual manner
without any verification. In case of furnishing of
wrong/false information in the proposal form, any
death claim is likely to be repudiated by the life insurer.
Keeping this trend in view, an analysis was made to see
the sample respondents knowledge about providing
authentic information in the proposal form. It was
found that only 25 (35%) sample respondents had
adequate knowledge about providing authentic
information in the proposal form. On the other hand,
as many as 42 (63%) sample respondents did not know
about the importance of providing authentic
information in the proposal form. The low knowledge
level about this critical aspect of life insurance may be
attributed to the higher percentage of Category III
housewives (approx. 70%). Most of these women
remain housebound and keep themselves engaged in
household activities. As a result, they do not pay much
attention to understand the implication of furnishing
erroneous information in the proposal form.
Secondary Data
The trend of policies underwritten for males and
female lives in the past three years starting from 200708 and ending with 2009-10 showed that policies
77

TATTVA - Vol. 1 Issue 1 October 2010

underwritten for female lives were significantly lesser


compared to male lives. In this male dominated society
life insurance is generally regarded as the domain of
man and therefore a substantial variation is noticed in
the number of male policy holders and female
policyholders of life insurance. Accepting their
subservient position, women in general do not express
their desire to get their lives insured. Lack of awareness
about the benefits of life insurance among women is
another reason for the lower number of female
policyholders. There was an increase of 11.97% policies
of male lives in the year 2008-09 than the previous
year. And the corresponding percentage for female was
13.23%. However, there has been a decline of 3.33%
polices of male lives in the year 2009-10 as compared
to the previous year. More or less in a similar manner
there was a negative growth of 0.33% of female lives in
2009-10. The initial increase in the number of the
policies of male lives in 2008-09 and subsequent
decrease in the number of policies in the number of
policies in 2009-10 may be attributed to the period of
recession.
The difference in number of policies of male and
female lives was 119522 in 2007-08 went up to 132367
in the year 2008-09. It gradually came down to 126422
in the year 2009-10. The high increase and relatively
lower decrease in the difference is due to substantial
difference in the absolute number of policies of males
and females in all the three years. The high increase in
the difference was primarily because of the
phenomenal rise in the absolute number of policies of
male lives in 2008-09 compared to the preceding year;
however the increase in the number of policies for
female lives was not at a matching pace.
The records of two branches under LIC Divisional
Office, Sambalpur i.e. Branch office I and II showed that
number and percentage of death claims is always
higher in men than women (Refer Tables 1 and 2). The
obvious reason for this is that there is more number of
male policy holders compared to women. Further it
indicates that the mortality is higher in case of men
than women. In Branch I, there has been a gradual
decline in the ratio of death claims of men: women
from 19.67 to 15.63. This is because of the increase in
78

*Comparison of Death Claims of Men and Women assured in


Branch Office I and Branch Office II.
Table 1: Death Claims of Men and Women
in Branch Office I
Year

Death claims
Women
Total
Number (%)
16 (6.02%)
266

2009-10

Men
Number (%)
250 (93.99%)

Ratio

2008-09

241 (94.14%)

15 (5.86%)

256

16.07:1

2007-08

236 (95.16%)

12 (4.84%)

248

19.67:1

15.63:1

Table 2: Death Claims of Men and Women


in Branch Office II
Year

Death claims
Women
Total
Number (%)
12 (8.16%)
147

2009-10

Men
Number (%)
135 (91.84%)

Ratio

2008-09

104 (87.40%)

15 (12.61%)

119

6.93:1

2007-08

110 (90.91%)

11 (9.09%)

121

10:1

11.25:1

number of death claims in women. Whereas in case of


Branch II the ratios of death claim of men: women has
initially decreased from 10 to 6.93 and then increased
to 11.25. It could be probably due to adverse selection
of female lives and insuring standard male lives.
Category- Wise Death Claims of Females
There is variability in risk factor for different categories
of female. The recorded death claims in the past 3 years
in the two branches under LIC Divisional Office,
Sambalpur were analysed (Refer Tables 3 and 4). Data
showed that the number of death claims for Category
III female lives was higher compared to other
categories of female lives for both Branch I and II in the
calender years 2007-08, 2008-09 and 2009-10. The rate
of death claim differed from one category to other
Table 3: Female Death Claims Paid in Branch I
Year

Frequency of Death Claims for Each


Category of Females (Percentage)
I
II
III

2009-10

5 (31.25%)

4 (25.00%)

7 (43.75%)

2008-09

5 (33.33%)

4 (26.67%)

6 (40.00%)

2007-08

3 (25.00%)

2 (16.67%)

7 (58.33%)

Underwriting of Female Lives vis--vis Underwriting Practices in General

Table 4: Female Death Claims Paid in Branch II


Year

Frequency of Death Claims for Each


Category of Females (Percentage)
I
II
III

2009-10

4 (33.33%)

3 (25%)

5 (41.67%)

2008-09

4 (26.67%)

3 (20%)

8 (53.33%)

2007-08

2 (18.18%)

3 (27.27%)

6 (54.55%)

(categories of LIC). Thus it can be derived that there is


variation in insurability of female lives in each category
of LIC (with respect to financial and medical
underwriting) which is primarily due to variation in risk
factor of each category. Risk factor differs due variation
in their income and social standing. It can also be
inferred that the risk factor for Category III female lives

is much higher compared to other categories of


females in case of LIC of India. Educational status plays
a very important role while deciding the limit of
insurance for Category III female lives. The limit of
coverage for this category is increased if the female is a
graduate and holds either a credit card, medi-claim
policy or a driving license.

Conclusion
Female lives are divided into four distinct categories for
the purpose of underwriting in LIC of India depending
on the risk they bring to the pool of insurance. Risk
factor differs from one category to other in case of
female lives due variation in their income and social
standing. Each category has different limit for

Table 5: Underwriting of Females vis--vis general Underwriting (LICs practices)


Item
Categorisation
Equivalence of underwriting

Male
No
Major males ( and or
students) equivalent to
female category I and IV
Same
Same
Same (own income)

Children
No
Different

Financial underwriting
(Maximum coverage allowed)
MHR Requirement

Female
Yes
Category I and IV
female lives equivalent
to male lives
Same
Same
Same(own/husbands
income)
Different for each
category
MHR

Same for all

Same for all

MHR

MHR limits

MHR limits-same

Same

MHR on child if
above 12 years
else MHR on
parent
12 yrs and above

Max. Age at entry

Up to 65 years (age
nearer birthday)

60-70 years (age nearer


birthday)

18 yrs (age last


birthday)

Medical underwriting

FMR

FMR

EMR

Same

Same

ACR / Juvenile
FMR/ school
report
Same

Special Reports

Same

Same

Different

Same
Same
Same
Same
Same
1 month
Same
4(b) on Married women
Category III

Same
Same
Same
Same
Same
3 months
Same
N/A

Can be Applicable
N/A
Can be Applicable

Can be Applicable
N/A
Can be Applicable

N/A
N/A
N/A
N/A
Same
N/A
N/A
10(a) and 76 (76
is applicable
where SA is Rs. 1
crore or less)
N/A
Applicable
N/A

Proposal Form
Age Proof
Income Proof

Non-medical business limit


Professionals
Major students
Major males and
literate females
Non Medical(Special)
KYC/AML
DGH
PP Extra
Imposition of Clauses

Critical Illness Rider


Premium Waiver Benefit
Accident Benefit

Different
Same
Parents income

Abbreviations: MHR: Moral Hazard Report, FMR: Full Medical Report, ACR: Agents Confidential
Report, EMR: Extra Mortality Rate, KYC: Know Your Customer, AML: Anti-Money Laundering, DGH:
Declaration of Good Health, PP Extra: Previous Policy Extra and SA: Sum Assured

79

TATTVA - Vol. 1 Issue 1 October 2010

insurance cover. Thus the insurability of each female


differs as it is dependent on the risks related to her life
and economic loss to others due to her death. The main
difference between underwriting of male and female
lives is categorisation of female lives which is nonexistent in male lives. Other differences are related to
financial underwriting, underwriting of pregnant
women, imposition of clause 4 (B) for Category III
married women and the validation of DGH (Declaration
of Good Health). Underwriting of Category I women
and female major students are treated equivalent to
their male counterparts. Many a times agents are not
able to comprehend the importance of providing the
correct information material to the life to be insured.
Even at the branch level, underwriters of LIC many a
times are not very careful while underwriting policies
so they are not able to maintain a proper balance
between conservativeness and aggressiveness.

80

References
Balay, Ken, "Mastering the Underwriting Decision," Reinsurance
Reporter No. 96 (Summer, 1981): p.9.
Black, Kenneth, Jr. and Harold Skipper, Jr., "Life and Health Insurance
Underwriting: I," pp. 639663 and "Life and Health Insurance
Underwriting: II," (pp.664691) In Life Insurance, 12th (ed.)
Englewood Cliffs, N.J.: Prentice Hall, 1994.
Fiederlein, W. Taylor, "Preferred Risk Underwriting, Reinsurance
Section News No. 29 (December 1991): p. 8.
Gopalakrishna, G. 2010. The Universe of Underwriting: Priorities in
Life Insurance, IRDA Journal, VIII (5): 16-19.
Knoppers Bartha M and Yann Joly. 2004. Physicians, Genetics and Life
Insurance, Canadian Medical Association Journal, 170 (9):
1421-1423. Available: http://www.cmaj.ca/cgi/reprint/170/
9/1421
Leigh, T.S. 1996. The Freedom to Underwrite, Presented to the Staple
Inn Actuarial Society, London, 9 January 1996.
Morton, Alton P., "Individual Life Insurance Underwriting Principles and
Practices: A 1976 Review," Transactions of the Society of
Actuaries Vol. XXIX (1977): p. 315.
Subramanian, K., J. Lemaire, J. Hershey, M. Pauly, K. Armstrong and D.
Asch 1999. Estimating Adverse Selection Costs from Genetic
Testing for Breast and Ovarian Cancer: The Case of Life
Insurance, Journal of Risk and Insurance, 66 (4): 531-550.

Fast Fashion Retail Strategy Based on Consumer


Perception: An Empirical Research in Delhi NCR
Rahul Goyal*

Abstract
This study analyzes the factors influencing fast fashion retail based on consumer perception for designing of brand strategies based on the
research result. Focused on the apparel industry, the study examines factors of consumer preferences, marketing tools, accessibility, media richness
and product attributes.
The result of the study suggests the importance of brand attributes and various marketing and expansion strategy to be successful in fast fashion
environment. The Study will benefit various upcoming brands and existing brands in India for designing their entry strategies, marketing activities and
various bases for business planning.
Keyword : Apparel industry, Fast fashion retail, Consumer perception & behavior, Marketing strategy, Media richness, store locations and
expansion strategies.

Introduction
Fast fashion, which has been growing rapidly abroad,
offers on-trend, in season apparel at lower prices.
What's more, these retailers stock stores more
frequently, but with limited quantities of merchandise,
giving shoppers a reason to visit stores more often. Such
a retail concept depends on the regular creation and
rapid replenishment of small batches of new goods.
Such a retailer creates a large number of designs; some
of them may resemble the latest couture creations, but
often beats the high-fashion houses to the market and
offers almost the same products, made with less
expensive fabric, at much lower prices. This "fast
fashion" system depends on a constant exchange of
information throughout every part of retailers supply
chainfrom customers to store managers, from store
managers to market specialists and designers, from
designers to production staff, from buyers to
subcontractors, from warehouse managers to
distributors, and so on. Most companies insert layers of

bureaucracy that can bog down communication


between departments, thus killing the concept of fast
fashion. Two pillars of fast fashion are Small lot sizes
and Lead time optimization.
U.S. fast fashion retailers include Charlotte Russe
CHIC.O, Bebe Stores Inc (BEBE.O), Mango, as well as
H&M (HMb.ST), and Inditex (ITX.MC) unit Zara. These
names cater mostly to young women, but it has an
influence on all ages. In India fast fashion is in a nascent
stage.
Fast fashion could also be a beacon of hope for local
textile mills and manufacturers, since these
manufacturers can turn designs around for domestic
market faster than an imported fashion items produced
in distant foreign land.
Fast fashion works for retailers who do it well, because it
helps drive customer loyalty. It forces a retailer to make
sure the entire machine is running smoothly.

*Centre for Retail Management 2009-11, Birla Institute of Management Technology


Under the guidance of Prof. Pankaj Priya, Centre for Retail Management, Birla Institute of Management Technology

81

TATTVA - Vol. 1 Issue 1 October 2010

Fast fashion brands convey different meaning to


different people. Unique Consumer-Brand
relationships are established by developing specific
strategies for the rapidly changing environment.
In such a scenario the meaning of products may
ultimately depend more on the nature of consumers
rather than the nature of products (Martin, 1998;
Csikszentmihalyi and Rochberg-Halton 1981).
Understanding how involved consumers become in
their apparel - that is, their attachments to themprovides a deeper understanding of the dynamics of
consumer behavior and the nature and role of the
product category of fashion (Martin, 1998).
Fast fashion also taps into a desire to have a unique look
while staying current with trends. There is a trend
toward individuality. People want to be unique. It
shows up in how order your breakfast to how you dress
to which accessories you carry. This trend has been
around for a couple of years and it's taking off in fast
fashion because of the scarcity element.
According to fashion experts Consumers are often
distributed across a wide range of fashion
consciousness and behaviors. It is important to
understand fashion customers to develop business
strategies.
Fast Fashion Apparel Retail Industry:
The Indian retailing industry, which was traditionally
dominated by small and family-run stores, has come of
age. Fashion element and design content was minimal
in the pre-1990s, owing mainly to the lack of national
level brands. At the turn of the century some retailers
would have a storefront where people could browse,
and new pieces being sewn or customized in the back
rooms.
Among the few players who had been catering to the
branded market are Park Avenue, Charagh Din, Liberty,
Double Bull, Proline and Snowhite. It took a quite long
time for brands such as Allen Solly and Van Heusen to
create a respectable market share in the ready-to-wear
market. Big players like Tata, Raheja, Biyani, etc have
intensified the competition with their professional
82

retail chains like Westside, Shoppers Stop and


Pantaloons. Recently, India is increasingly being looked
upon as a major supplier of high quality fashion
apparels and Indian apparels have come to be
appreciated in major markets internationally.
Brands like Van Heusen, AllenSolly, Arrow, Parx, Park
Avenue, Color Plus, Manzoni, Wills Lifestyle, Levis,
Wrangler, United Colors of Benetton (UCB) etc are
major players in the current fashion apparel industry.
Zara is the retailer which just now entered in Indian
market and brought a new revolution in Indian fast
fashion industry. According to a retail analyst, Zara's
entry will give a thrust to the concept of fast-fashion.
Zara's unique service proposition is its ability to design,
manufacture and ship new clothing designs to its shops
within two weeks, compared to the industry average of
eight-nine months. Three pillars of ZARAs success are
variety, scarcity and quick response. The fashion retail
market in India has a slew of multinational players
including Debenhams, Marks and Spencer and Tommy
Hilfiger among others operating in the same category.
Hence existing brands are facing a big challenge in the
present Indian apparel industry.
Growth Patterns in the Industry
Wave 1 represents the entrance of Readymade
garment Industry in India and Wave 2 is representing
the Fast Fashion Change in India.
Cumulative Apparel
and Accessories Brands

Wave 2

Wave 1

Y 1987

Y 1990

Y 1993

Y 1996

Y 1999

Y 2002

Y 2005

Fig 1.1: International fashion brands


growth pattern

Y 2008

Fast Fashion Retail Strategy Based on Consumer Perception: An Empirical Research in Delhi NCR

Opportunities and Potential for Future


Growth
Indian Fast fashion Industry facts:
1. Indian fashion is seeing exponential growth driven
by established and new designers
2. The emergence of India as a source of inspiration
for Indian & International designers - surge in
popularity of Indo-western garments
3. Greatly increased awareness of fashion; birth of
new groups influenced by cultural, social and
economic factors.
But Still Indian Fast Fashion retail Industry is lacking as:
1. The sector seems to lack an in-depth
understanding of new domestic target-groups.
2. There is a visible inability to predict fashion
adaptations across a diverse map. Brands still see
great dependence on adaptations of western
trends
3. Business houses are still following old methods of
trend analysis. Brands believe the need is for a
cohesive design and business strategy that is
borne out of a combination of trend, consumer &
shopper research.

Literature Review
Clothing in general and fashionable clothing in
particular, is a publicly consumed good that signals to
other people information about the personality and
status of its wearer (Dodd, Clarke, Baron, Houston,
2000). Consumer got the knowledge of fashion product
from various media. Social influence, caused by word
of mouth, plays a very important role in fashion buying.
Some consumers become especially interested in and
preoccupied with clothing and fashion so that their
interest, experience, and knowledge lead them to
become opinion leaders for others (Goldsmith and
Hofacker 1991).
Fashion always works on forecasting of future
consumer trends. Fashion and trend forecasting is the
prediction of mood, behavior and buying habits of the
consumer at particular time of season. It is no longer a
question of finding fashion markets or consumers by

age, geography or income, but looking into how and


what they buy, based on their culture, mood, beliefs,
occasion & geographic locations, it is also dependent
on fashion cycle and plays a major role in introductory
phase of recurring fashion cycles.
Fashion trend forecast calculates as following: Season >
Target Market > Consumer > Colors > Fabrics >
Silhouette > Texture > Usage.
Fashion consumer behavior can be determined asConsumer involvement
Consumer involvement incorporates the consumer
perspective into the process of planning and decision
making. Creighton (1981) gave a helpful working
definition of consumer involvement as: "a process, or
processes by which interested and affected individuals
are consulted and included in the decision making of an
agency, planning group or collaborative entity".
Consumer involvement Theory - CIT - is one way to
understand the psychology and behavior of your target
audience it is very simple and insightful. Involvement
refers to how much time, thought, energy and other
resources people devote to the purchase process.
Consumer involvement is defined as the consumers
perceived relevance of an object (e.g. product or
brand, advertisement, or purchase situation) based on
the inherent needs, values, and interests of the person.
Fashion involvement
The Concept of Fashion Involvement
Given a number of empirically defined, distinct fashion
behavioral dimensions, what is the joint and
simultaneous interaction effect of that intersection?
Baumgarten (1975) explored this question in part, by
researching the intersection of the fashion innovator
and the fashion opinion leader, the innovative
communicator. The focus was on two dimensions of
fashion related activity and behavior. It logically follows
that there are several other additional dimensions
which should also be included in this kind of analysis.
The concept of "fashion involvement" is based
essentially on three propositions:
83

TATTVA - Vol. 1 Issue 1 October 2010

1.

2.

3.

The population is distributed along a broad


continuum in terms of fashion behavioral
activities;
The population is also distributed on a
unidimensional continuum for each of these
fashion behavioral activities;
For several specific fashion behavioral activities,
these continuums have been and can be
researched and identified for specific geographic
submarkets.

Theoretically, an overall fashion involvement


continuum can be defined based on the aggregate
effect of a variety of important fashion behavioral
activities.
OCass (2001) defined fashion involvement as a
consumers perceived importance of fashion clothing.
Success of a fast fashion brand depends on uniqueness
of the brand, awareness in market, location &
accessibility, front store attributes and product
purchase & usage Experience.
Fig 1.2 explains the brand success in fashion
market drive through various factors.

sustains itself on the image of the brand rather than


aspects inherent to the product. Objectively Armani
jeans are just another pair of jeans. Yet, as we all know
this isnt the case because they carry a high fashion
brand. With the label the fashion item takes on a role
communicating style, preference, social status and
discernment.(Auty and Elliot, 1998).
Brand marketing is facing a power-shift in today's
marketplace. Customers want to be part of a brand's
direction and development. Listening to their
expectations can determine your firm's level of
success. To take full advantage of today's market share,
companies will need to "lose" control of their
marketing strategy to ultimately gain it, by embracing
this powerful dynamic of understanding ad managing
customer expectations. Competition mapping is the
one way to get success in fashion market.

Research Objective

To draw the Competition Map in the existing


Indian fast fashion retail market.
To study consumer response to fast fashion
concept and finding equilibrium between price,
quality and style.
To study the promotional and branding activities
and their effectiveness.
To identify the factors contributing to Purchase
Decision.

Brand Success in Fast


Fashion Retail

Brand
Uniqueness

Brand
Awareness

Marketing &
Media Richness

Merchandising

Advertising tools

Service

Effectiveness of
Media

Accessibility
& Location

Frontend
Attributes

Product Purchase &


usage Experience

Value

Product Quality

Sample
A random sample of 150 fashion consumers. Table1.1
explains the demographics of respondents classified
under three groups.

Store Ambience
Price
Selling Staff
Purchase
Experience
After Sale
Service

Fashion brands are the acme of brand management.


More than any other type of brand, the fashion brand

Table 1.1 : Respondents demographics

Gender
Group
1
2

Age
15-25

Monthly Income

Male

Female

<25000

25000-50000

27

17

31

23

12

25-35
29
17
8
35and
3
7
3
7
above
Note Income is in Rupees and results are in %age
84

50000-1 Lac

>1 Lac

Fast Fashion Retail Strategy Based on Consumer Perception: An Empirical Research in Delhi NCR

Research Methodology
Descriptive Research
The complete study is based on two components of the
market
1.

2.

Analysis According to fig 1.3, it can be inferred that no


brand is perfect in the market. Each brand is master in
one or other area. Table 1.2 shows the highest Rateing
brand among different factors.
Table 1.2 Brand toppers

Retailers Perspective - There are two ways to


analyze other retailers presented in the
catchments area
i.
Observation for exploration of product
categories, price range and target group.
ii. Interviewing store managers
Consumers Perspective - To study purchase
decision factors and the effect of promotional
offers on consumer through market research.
Respondents of survey are fashion customers as
well as working people in the Delhi NCR region.

Factor
Product Design
Quality
Price
Service Experience
Ambience

Highest Rateing Brand


Levis
UCB
UCB
Wills Lifestyle
Levis

Fig 1.3 Competition map

Scope of the study


Geographical scope Research covers the
respondents from Delhi NCR region.
Consumer Response Findings
Table 1.3 Consumer research findings and inferences
Factor

Response

Inference

Most preferred
brand

Wills Lifestyle
UCB
Van Heusen
Arrow
Allen Solly
Tommy Hilfiger
Peter England
Levis
Louis philippe
Others

18%
20%
15%
6%
4%
8%
2%
8%
10%
9%

USB and Wills Lifestyle are top


choices of fashion consumers.
Levis is mostly preferred in denim
section and it is found to have best
ambience by 26% of respondents.

Reason Behind
not buying from
a branded store.

Lack of awareness
Lack of availability
You find it expensive
You dont like the product
Others
Newspaper advertisements
Radio
T.V. advertisements
Word of mouth
Magazine
Others

27%
13%
36%
7%
17%
30%
0%
14%
27%
22%
7%

Out of 28% respondents who do not


buy from branded stores most of
the respondents find branded
products expensive or they are not
aware.

Source of
Awareness

Companies should focus on Print


media as well as Customer service
to influence WOM in favour of the
brand.

85

TATTVA - Vol. 1 Issue 1 October 2010

Do you
remember TV
advertisement
of your favorite
brand

Yes
No

30%
70%

Tried new
variants of after
viewing the
advertisements
Promptness of
purchase due to
association with
fashion shows
Most
influencing offer

Yes
No

36%
64%

Yes
No

42%
58%

Fashion shows always increase the


brand equity and promote designer
wear in the market.

Discounts offer during Sale


High level offers
Loyalty point redemption
Micro Marketing
Others

68%
11%
8%
9%
4%

Discount offer more prompt the


customers to walk in the store. So
Brand should provide discount for
its slow moving categories.

Every week
Every forth night
Every month
Occasionally
Others
Genuine need
Depletion of old products
Liking a product instantly
Buying for an occasion.
Brand name
Offers/ Discounts
Unique designs
Highly Accessible
Far off
Accessible
Stand alone outlet
Multi brand outlet
Outlet inside the mall

0%
2%
12%
74%
12%

Most of the consumer buy


occasionally, so it is difficult to
predict future demand of fashion
merchandise.

18%
5%
25%
18%
20%
13%

1/4 of the respondents buy the


product when instantly they like it.
So Design is the topmost priority for
a buyer in fast fashion market,
hence Players should more focus on
product design.

13%
17%
70%

Branded Fast fashion Stores


accessibility is fair enough in India.

31%
30%
39%

Mall Outlets are most preferred


Location of purchase, So Brands
should focus more on Mall Stores.

Reason behind
your purchase
of fast fashion
product

Accessibility of
branded stores
in India
Preferred
location of
purchase

Cross tabulation between store accessibility and outlet


type
From the Fig 1.4 following inferences can be taken out
17.4% Standalone outlet are highly accessible and
82.6% standalone outlet are accessible. There is
no standalone outlet which is far off. It shows the
strategic nature of brands in opening of flagship
stores.
32% MBOs are found to be far off, because MBO
location is not analyzed by brands. MBOs are the
main profit center for companies because
companies are not responsible for the operation
part or non selling product.
As we have already analyzed that outlet within the
mall are mostly preferred by the respondents and
86

th

Fig 1.4 Store accessibility versus Outlet type


Bar Chart
Rate the accessibility

40

Highly Accessible
30

Count

Purchase
Frequency

Out of 14% respondents who prefer


TV advertisement, only 30% of the
respondents were able to recall the
TV advertisement of their favorite
brand. Companies should look into
TV advertisement strategy as it is
one of the most expensive media.
it is the ideal effect of
advertisement. Brands should focus
strategically for their media plan.

Far off
20

Accessible

10

Stand alone outlet

Multi brand outlet

Outlet inside the mall

To purchase the lifestyle products what do you usually prefer

still 16% outlet are far off. So companies should


think about the location of mall for further
expansion.

Fast Fashion Retail Strategy Based on Consumer Perception: An Empirical Research in Delhi NCR

Table 1.4 shows the importance of various purchase factors on likert scale.
Factor

Importance of factor

Rateing of Respondent preferred brand

Extremely
important

Very
important

Somewhat
important

Not very
important

Not at all
important

5(very
High)

66%

31%

2%

0%

0%

37%

40%

17%

4%

18%

37%

34%

27%

27%

27%

Quality of
the product
Price of the
product
Reputation
of the
company
Purchase
experience
first use
experience
Usage
experience
After
purchase
service

1(Very
Low)

35%

42%

20%

0%

1%

0%

35%

38%

22%

2%

0%

8%

1%

22%

52%

18%

5%

1%

36%

8%

0%

15%

38%

28%

11%

5%

31%

27%

8%

4%

17%

34%

28%

11%

7%

23%

41%

27%

5%

2%

14%

44%

28%

5%

7%

34%

25%

23%

12%

4%

15%

33%

43%

4%

3%

Feasibility of the TestBecause KMO value is .847 which is greater than 0.6
and Bartletts test is rejected, carrying out Factor
analysis is appropriate tool for data reduction.

Factor analysis
KMO and Bartlett's Test
Table 1.5 Validity test of Factor analysis
Kaiser-Meyer Olkin Measure of
Sampling Adequacy.
Bartlett's Test
Approx. Chiof Sphericity
Square
Df
Sig.

.847
405.905
21
.000

Total Variance Explained


Table 1.6 Extraction of Principle components
Com
pone
nt

Initial Eigenvalues
% of
Cumulative
Total
Variance
%

Extraction Sums of Squared


Loadings
% of
Cumulative
Total
Variance
%

Rotation Sums of Squared


Loadings
% of
Cumulative
Total
Variance
%

3.950

56.428

56.428

3.950

56.428

56.428

3.408

48.692

48.692

1.044

14.918

71.346

1.044

14.918

71.346

1.586

22.654

71.346

.682

9.742

81.088

.498

7.110

88.199

.370

5.286

93.484

.256

3.661

97.146

.200

2.854

100.000

87

TATTVA - Vol. 1 Issue 1 October 2010

In Table 1.6, there are two components whose Total


Initial Eigenvalues are greater than one. So there are
two principle components are extracted.
Table 1.7 Rotated Components Matrix
Rotated Component Matrix

Component
1
2
.520
.609
.028
.895
.299
.538

Rate Your brand For Its Quality


Rate Your brand For Its Price
Rate Your brand For Its Reputa tion
Rate Your brand For Its Purchase
Experience
Rate Your brand as per the first use
experience
Rate Your brand for its Usage
Experience
Rate Your brand for its After Purchase
Experience

.868

.227

.839

.160

.856

.084

.836

.202

Method of variable division


In table 1.7, Variable which holds the values >.3 in
rotated component matrix will be covered in the
respective component.

Inference
Component 1 referred to as a new construct brand
experience and Component2 referred to brand image.
To get success in Fast Fashion Apparel It is very
important to focus on both these aspects.

Component 1 include
1) Quality
2) Purchase Experience
3) First use experience
4) Usage Experience
5) After Purchase Experience
Component 2 include
1) Quality
2) Price
3) Reputation

Component Score Coefficient Matrix


Table 1.8 Components Score of
Extracted Factors

Quality
Price
Reputation
Purchase Experience
first use experience
Usage Experience
After Purchase
Experience

Component
1
2
.033
.361
-.256
.747
.044
.308
.271
-.050
.279
.306
.266

-.098
-.166
-.062

From Table 1.8 following factors can be evaluated as Brand Experience = 0.033*Quality + 0.271*Purchase
Experience + 0.279* First use Experience + 0.306*
Usage Experience + 0.266*After Purchase Experience

88

Brand Image = 0.361*Quality + 0.747*price + 0.308*


Reputation
Media Effectiveness
Table 1.9 Media effectiveness
You came to know
about your brand from :
Positive(a)
Negative
Missing

Valid N
(listwise)
50
88
12

ROC Curve - Case Processing Summary


Larger values of the test result variable(s) indicate
stronger evidence for a positive actual state. a. The
positive actual state is Newspaper Advertisements.
The test result variable(s):
Do You remember any of the T.V. advertisements
of your brand
Does Association with fashion shows prompt you
to purchase

Fast Fashion Retail Strategy Based on Consumer Perception: An Empirical Research in Delhi NCR

Fig 1.5 Coverage of various media tools and their effectiveness


ROC Curve

1.0

Recall of TV Advertisement
0.8

Fashion show effect

Sensitivity

Media Effectiveness

0.6

0.4

0.2

0.0
0.0

0.2

0.4

0.6

0.8

1.0

1 - Specificity
Diagonal segments are produced by ties.

Area under the curve shown in Fig 1.5 can be explained in table 1.10.
Table 1.10 Coverage of various media tools and their effectiveness
Test Result Variable(s)
Do You remember any of the T. V. advertisements of your brand

Area
.425

Does Association with fashion shows prompt you to purchase


from Your brand
Have you tried new variants after viewing the advertisements?

.539

Have you tried new variants after viewing the


advertisements?
has at least one tie between the positive actual state
group and the negative actual state group. In the
explained result it can be easily seen that news paper
advertisement and fashion shows are the major
marketing tools used for branding and promotion.
Comparatively customers are very less affected by TV
advertisement.

Conclusion
The purpose of the study was to analyze fast fashion
apparel market in India for a successful business
planning. Following are the conclusion that can be
drawn from the findings Brand Experience and Brand Image are the major
factors which influence the consumer buying
behavior. So, a company should look into these

.490

aspects while forming any business policy or


strategy.
As Discount sale is the most preferred offer for
customer, but Discounts should be planned in a
strategic way otherwise it may dilute brand image
in the market.
Companies should analyze the location not only
for their flagship stores or company owned outlet
but also for MBO before expansion. Otherwise it
will lead to negative perception in the mind of
consumers.
Company should design their marketing strategy
as per target customers and should use print
media & online communication for promotional
strategies.
Company should design their TV advertisement as
per mission objective to enhance the brand
image.
While designing their product planning, company
should go for competition analysis and consumer
89

TATTVA - Vol. 1 Issue 1 October 2010

behavior analysis in the catchment area.


Media usage is a predictor of fashion involvement.
If product involvement is high, research has
shown that the consumer may be more interested
in purchasing the product.

investigate relationships between business outcomes


with consumer perception using structural equation
modeling technique. Such an analysis might also
include a behavioral dimension, i.e. Fashion product
purchased, as the final outcome variable.

Managerial Implication

References

Fast fashion is a dynamic industry, which change with


time very frequently. To be successful in the market, It
is very important for a player to sustain its position and
to develop their business strategies which enhance the
brand image. Companies should look after the
expansion strategy or new market entry by analyzing
the current market scenario and changing consumer
behavior.

Auty, S. and Elliot, R. (1998). Fashion involvement, self-monitoring and


the meaning of brands. Journal of Product and Brand
Management 7 (2), 109-123.
Baumgarten, Steven A. "The Innovative Communicator in the Diffusion
Process." Journal of Marketing Research, 12 (February 1975), 1218.
Creighton, James. 1981. The Public Involvement Manual, Cambridge:
Abt Books.
Csikszentmihalyi, M. and Rochberg-Halton, E. (1981). The Meaning of
Things. Cambridge University Press: Cambridge.
Dodd, C.A., Clarke, I., Baron, S., Houston, V. (2000), "Looking the part:
identity, meaning and culture in clothing purchasing
theoretical considerations", Journal of Fashion Marketing and
Management, Vol. 4 No.1, pp.41-8.
Goldsmith, R. E. and Hofacker, C. F. 1991. Measuring Consumer
Innovativeness Journal of the Academy of Marketing Science
June 19: 209-221, doi:10.1177/009207039101900306
Martin, C. (1998). Relationship marketing: A high-involvement product
attribute approach. Journal of Product and Brand Management,
7 (1), 6-26.
OCass, A. (2000). An assessment of consumers product, purchase
decision, advertising and consumption involvement in fashion
clothing. Journal of Economic Psychology, 21, 545-576.
OCass, A. (2001). Consumer self-monitoring, materialism and
involvement in fashion clothing. Australian Marketing Journal 9
(1), 46-60.

Limitation and Future Scope


A key limitation of this study is the sampling frame. The
sampling frame is limited to a certain age group in a
restricted geographical area. The responses are
collected in a limited time frame. Future research is
required in order to test the generalization of the
proposed parameters. Fashion behavior is influenced
by social pressure hence there is a future scope to
extend this research to test the hypothesis on the basis
of consumer perception. Future studies should

90

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