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Question Paper
Strategic Financial Management-II (MSF3L2) : October 2007
Section D : Case Study (50 Marks)
• This section consists of questions with serial number 1 - 5.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 80 - 90 minutes on Section D.

Case Study
Read the case carefully and answer the following questions:

1. Conduct Michael Porter’s Five Factor Analysis for Indian Power Industry. < Answer >

(10 marks)
2. Analyze the degree of dividend stability maintained by Tata Power during the period under consideration using John < Answer >
Linter Model. (Assume that target dividend pay-out rate of Tata Power is 35% and consider reported profit for
computational purposes.)
(14 marks)
3. Tata Power is considering a power project which involves the cost of Rs.10,000 million. It is planning to procure the < Answer >
required funds either through the issue of 12% debt or through the issue of equity shares at the price which is at a
25% premium to 12 month average closing prices during the period under consideration. Tata Power forecasts to
generate EBIT of Rs.16,456.45 million which is exclusive of EBIT expected to be generated from the proposed
project. Its interest expenses are expected to amount to Rs.1871.1 million and are exclusive of interest to be paid on
new debt issue. Tax rate applicable is 35%.
a. Compute the indifference EBIT between both the alternative financing plans mentioned above.
b. Compute the minimum EBIT to be generated from the project operations, if the company aims to reach
indifference EBIT obtained in (a) above.
(9 + 1 = 10 marks)
4. Tata Power is planning to maintain minimum daily cash balance of Rs.20 million. From the past experience, it is < Answer >
observed that the variance of change in its daily cash balance is Rs.8 million. The annual yield that it can earn by
investing in short term marketable securities is 11%. It incurs Rs.0.16 million as fixed conversion cost for investing
in such marketable securities. Compute the Return Point and Upper Limit of cash balances to be maintained by Tata
Power. (Assume 360 days in a year).
(8 marks)
5. Tata Power is committed to setting high standards in its pursuit of social responsibility and remaining sensitive to the < Answer >
issues of resource conservation, environment protection and enrichment and development of local communities in its
areas of operations. In this context, explain the various types of social responsibilities an organization has and discuss
the various categories of stakeholders to whom an organizations is held responsible.
(8 marks)
With the coming of the Electricity Act, 2003, the power sector, which was highly regulated with lot of licensing requirements, is in the path
of a long awaited change. The licensing requirements have been reduced, as the generation company will be free to enter distribution business
and vice-a-versa. Currently private sector accounts for 10% of the total power generation capacity. The remaining is divided between
the centre and the State owned companies in the ratio of 36:64. The generating capacity in India currently stands at 1,27,672 MW (excluding
captive capacities of around 30,000 MW). Out of this, the country utilises a poor 65% due to inefficient transmission and distribution causing
a lot of power shortage. As a result, it has become necessary to resort to power cuts and other regulatory measures to ration power
supply. Currently Central institutions like National Thermal Power Corporation (NTPC) and the State Electricity Boards (SEBs) dominate the
power scene in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of
electricity. Thermal plants at present account for 66% (83,772 MW) of the total power generation, hydro-electricity plants contribute 26%
(33,192 MW) and the rest comes from nuclear and wind. Average transmission and distribution losses (T&D) exceed 25% of total
power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz.,
substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system,
improper billing and high pilferage. Further, the Government plans to add 150,000 MW of generation capacity over the next decade
(including 100,000 MW thermal capacity and 50,000 MW hydro capacity) in order to bridge the current demand-supply gap. This is
almost 1.2 times the current generation capacity in the country. Also, if India has to achieve a consistent GDP growth, over 8% then
power generation has to grow by around 11% to 12% per annum. The poor performance of India's existing generating units has been
a principal cause of power storages and unreliable quality of power supply. The primary culprits are the coal-fired thermal power stations,
which account for over 65% of total installed capacity. The average Plant Load Factor (PLF) of thermal power stations in India is less
than 60%, but varies considerably across regions. However, not all of the thermal generating stations have such dismal records. For
instance, the performance of 500 MW and 200 MW units has been satisfactory, and their PLFs have been higher than the national average.

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It is, in fact, the thermal units of 120/140 MW and below that are cause for concern. The Electricity Act has proposed significant
policy decisions that could reform the Indian power sector over the long term. Licensing norms for entering generation and T&D business of
power have been eased. Under APDRP (Accelerated Power Development & Reform Program), as a one-time measure, the State
Electricity Boards’ (SEBs) dues to the Central utilities are to be converted into State backed bonds. In exchange, the States have to give
an undertaking that SEB losses will not occur and T&D losses will be checked in a time bound manner.
In FY06, the total power generation figure for the country stood at 617 billion units as compared to 520 billion units in FY05,
thus representing a growth of 19% YoY. This was largely on the back of higher capacity addition and stable Plant Load Factor (PLF) or
capacity utilisation. A capacity addition of nearly 7,900 MW was witnessed during FY06, more than double the addition of 3,500 MW
in FY05. The average industry PLF was maintained at 51.4% during the fiscal. The Government had set a target to add approximately
34,024 MW of generation capacity during 2002-07, out of which, around 62% is likely to be thermal capacity and 30% hydro capacity.
In FY06, though the capacity addition target was achieved, the country still needs to add 17,865 MW of capacity during 2007 to meet
the stated target. This seems a distant possibility considering the past track record of the sector and future challenges in terms of fuel
linkages. The average PLF in the Central Public Sector Undertakings (CPSUs) in FY06 was much higher than that achieved by the State
Electricity Boards as a whole. Wide inter-state variations are noticed in the average PLF of thermal power plants with southern and western
zones having better performances. The average PLF for eastern and northeastern regions continues to be much lower than the all-India level.
If the PLF for Northeast and eastern states is excluded, the PLF of the SEBs is not very different from the central utilities. As far
as transmission and distribution segments of the sector are concerned, there is too little that actually happened in FY06. The country continues
to reel under the pressure of higher T&D losses and with the Government running very slow with the reforms in these segments, the long-
term sustainable growth of the sector seems doubtful.
Recognizing that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the industry has set itself the target
of providing access to all households in next seven years. As per Census 2001, about 44% of the households do not have access to electricity.
Hence, meeting the target of providing universal access is a daunting task requiring significant addition to generation capacity and
expansion of the transmission and distribution network. Restoration of the financial health of SEBs and improvement in their operating
performance continue to remain a critical issue in the power sector. The Electricity Act of 2003 contains provision for securitisation of
accumulated SEB dues. The Government of India has signed MOUs with various states reflecting the joint commitment of centre and States
to undertake reforms in a time bound manner. The guaranteed rate of return has been fixed at 14%. This has been done to encourage
investments in the sector. This is because government does not yet give any incentive returns to companies, which have efficient
performance. Inefficiencies in State sector utilities have adversely affected capacity addition and systems improvement. While the SEBs do not
have enough resources to finance future capacities, they are also unable to raise funds for investment from alternative sources due to their
poor financial and commercial performance. Also, the inability of SEBs to pay their dues, in full, to Central Power Utilities (CPU)
adversely affects the finances and investment plans of these CPUs. On overall basis, power distribution has been loss-making business
in India. But with the privatization coming in, the investment in transmission and distribution networking is expected to improve. Distribution
business has already been privatized in Delhi and a five years target has been set to bring down its T&D losses from 52% to 31%.
Following Delhi's example, many states like Uttar Pradesh, Gujarat and Maharashtra are looking at corporatising their distribution
circles. However, the slow pace of reforms in this segment is expected to continue. Trading in electricity has brought a sea change in the
structure of the industry because some parts of country are power surplus and some are deficient. Power trading company buys power
from surplus area and sells it in deficit area and transfers power through transmission lines. While the potential for power trading is huge, the
regulator has to play a key role in removing all discrepancies that occur in terms of electricity pricing across trading regions.
TATA POWER
Recognized as India’s largest private sector power utility, with a reputation for trustworthiness, built up over nearly nine decades, Tata
Power surges ahead into yet another year with plans of sustained growth, greater value to consumer and reliable power supply. Led by a
powerful vision, Tata Power pioneered the generation of electricity in India. It has now successfully served the Mumbai consumers for over
ninety years and has spread its footprints across the nation. Today, it is the country’s largest private player in the sector. Apart from Mumbai
and Delhi, the company has generation capacities in Jojobera, Jharkhand and Karnataka.
Tata Power has an installed power generation capacity of above 2300 Mega Watts (MWs), with the Mumbai power business, which has a
unique mix of Thermal and Hydro Power, generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at Bhira,
Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability facilitates the company in producing low cost
energy, thereby giving its consumers a greater value for money. Among its many achievements that Tata Power can proudly boast of are
the installation and commissioning of India’s first 500 MW unit (at its Thermal Power Generating Station, Trombay) the 150 MW Pumped
Storage Unit at its Hydro Generating Station, Bhira, and environmental control systems like the Flue Gas Desulphurization plant.
Tata Power has a first of its kind joint venture with Power Grid Corporation of India for the 1200 km Tata Transmission Project.
North Delhi Power Limited
A joint venture with the State Government of Delhi for its North Delhi consumers, the NDPL serves over 8 lakh satisfied consumers with
a peak load of 1050 MW, also providing state-of-the-art technology driven processes for enhancing consumer billing and related services.
Tata Power Trading Company Limited (TPTCL), a wholly owned subsidiary of the Tata Power Company (TPC) has been awarded the
first ever power trading license by the Central Electricity Regulatory Commission (CERC) under section 14 of the Electricity Act 2003,
enabling it to carry out transactions all over India.
International Projects
Leveraging upon its engineering skills and understanding of the power business, Tata Power has carried out several overseas projects
and successfully completed erection, testing and commissioning of major power projects in Saudi Arabia, Bangladesh, Kuwait,
Algeria, Myanmar and Thailand. The company has also undertaken projects pertaining to power plant/operations management and plant
operations training.

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Strategic Electronics Division (SED)

The Strategic Electronics Division of Tata Power has been in operation for over 30 years and has been pursuing development and
production activities for the Indian defence sector. SED successfully developed the Multi Barrel Rocket Launcher, ‘Pinaka’, proven in the
field through extended user trials which led to its induction into the Indian Army. The Division has developed specialized equipment for Air
Defence and Naval Combat systems.
Corporate Social Responsibility
Tata Power is committed to setting high standards in its pursuit of social responsibility and remaining sensitive to the issues of
resource conservation, environment protection and enrichment and development of local communities in its areas of operations. The
company has a simple philosophy that guides its activities in these matters, “Giving back is a means towards going ahead.”
Our widespread programmes on biodiversity conservation, afforestation, pisiculture, family planning, health services, primary and
secondary education and many more have made inroads into the tiny hamlets and tribal regions of our hydro catchment areas and it is
our endeavour to light up these dark and narrow streets to new dawns.
POWER BUSINESS
Operational Highlights
The Company generated a total of 11,782 Million Units (MUs) of power from all its power plants during the year, which is a 17%
increase over 10,031 MUs in the previous year.
Mumbai Power Business
The total power generated in the Mumbai license area during the year was higher by 6% at 9,779 MUs as compared to 9,250 MUs
in the previous year. This increase is a result of increased demand in the license area, which has mostly accrued to the Company and supply to
Maharastra State Electricity Board (MSEB) as and when required.
Trombay Thermal Power Station generated 8,475 MUs during the year as compared to 8100 MUs in the previous year - an increase of
5%. The thermal units operated with an overall on-line plant availability factor of 91.7% as compared to 90.5% in the previous year. Efforts
to optimise the fuel mix have enabled the Company to contain fuel costs.
The three hydro power plants at Bhira, Bhivpuri and Khopoli collectively generated 1,304 MUs during the year, up by 13% as compared
to 1,150 MUs in the previous year.
The ongoing initiatives of the Company in replacing old units with higher efficiency units resulted in improved water rate giving about
15% higher generation from the same quantity of water. During the year, a second 24 MW replacement unit at Khopoli was
successfully commissioned in February 2002 on schedule. Also, the commissioning of the Kundii water augmentation scheme resulted in
additional generation of 46 MUs during the years.
CPP & IPP Power Business
The Company commissioned additional units at its plants at Jojobera and Wadi, a new Wind Power project in Maharashtra and completed the
first full year of operation of its plant at Belgaum. The operational highlights of these units are mentioned hereunder:
Jojobera
With the commissioning of the second 120 MW Unit during the year, the 307.5 MW Jojobera Thermal Power Station more than doubled
its generation to 1226 MUs as against 543 MUs in the previous year. The thermal units operated with an overall plant availability factor
of 92% during the year as compared to 83% in the previous year. Efforts are in hand to market the spare power available to Damodar Valley
Corporation and Jharkhand State Electricity Board.
Wadi
The existing 37.5 MW Power Plant at Wadi continued to supply power to Associated Cement Companies Ltd. (ACC), as per
requirements. The plant generated 233 MUs during the year as compared to 238 MUs in the previous year. The plant operated at an
overall plant availability factor of 87% during the year as compared to 86% in the previous year. The generating capacity has been
further expanded to 50 MW by commissioning an additional boiler in January 2002 and to 75 MW by commissioning another 25 MW Unit
in May 2002.
Belgaum
The Company had entered into the Independent Power Producer (IPP) segment adopting a conservative approach with a 81.3 MW plant at
Belgaum, which generated 541 MUs during the year for the Karnataka Power Transmission Corporation Limited (KPTCL). The plant operated
with an overall availability of 88.7% during the year. To enhance reliability of power supply and insulate its operations from grid disturbances,
an islanding operation for Belgaum city was successfully introduced which functioned well on a number of occasions when the grid
supply failed. This effort of the Company has been appreciated by the consumers and State authorities.
Wind Power
In the sector of renewable energy, the Company commissioned a 17 MW wind power project (consisting of 17 units of 1 MW each) at
Supa near Ahmednagar, Maharashtra during the year. Following its commissioning in the last quarter of the financial year, the
project generated 3.75 million units of green energy during the year at a Plant Load Factor (PLF) of 13%, which is as per plan.
NEW BUSINESS INITIATIVES
The Company has progressively expanded its operations from the licensee power business in Mumbai to other areas as mentioned hereunder:

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Transmission EPC Business Unit, Kolkata

The Company acquired the Power Systems Division of Tata International Ltd., which is engaged in transmission EPC business. This business
unit has international expertise in the supply and execution of high voltage transmission lines and sub-station projects. The annual turnover
of the business unit was approximately Rs. 30 crores, of which Rs. 7 crores accrued to the Company as the takeover became effective
in September 2001. Some of the key orders being implemented by this Division are:
a. Supply and installation of 132 KV Transmission Lines and Sub-station for Kali Gandaki ‘A’ Hydro Electricity Project of the
Nepal Electricity Authority in Nepal.
b. Supply of Transmission Lines and Sub-station Equipment to the Myanmar Electric Power Enterprise, Myanmar.
400 KV Tata Transmission Project
The transmission sector is being privatised by inviting private parties to work in joint ventures with the State-owned Power Grid
Corporation of India Ltd. (PGCIL). The very first privatisation is the 1200 km long 400 KV transmission line from Bhutan to Delhi being built
at an estimated cost of about Rs. 1,200 crores. The Company has been successful in this venture, being selected as a joint venture partner by
PGCIL. The Company has executed a joint venture agreement with PGCIL on a Build, Own, Operate & Transfer basis for a duration of 30
years. The Company, along with its affiliates, will hold a majority stake in the equity capital of the joint venture company.
Distribution Business
The Company is pursuing opportunities in retail distribution outside its license area by actively participating in the privatization process.
In this regard, the Delhi Government has selected the Company’s bid as most suitable for the North and North-West zone and actions are in
hand to conclude the agreements for the same.
The North and North-West zone has approximately 7.4 lakh consumers with a total annual requirement of about 5000 MUs and includes
a 36% industrial load. Since privatization of distribution is all important in the Government`s plans for power reforms, the
Company`s initiative in taking this zone in Delhi is a significant step.
Other Opportunities
The Company continues to pursue and evaluate further opportunities in generation, transmission and distribution, both in India
and neighboring countries.
ENERGY CONSERVATION & ENVIRONMENT PROTECTION
Energy Conservation Measures
At Trombay Unit No. 4, the installation of a vapour absorption type air conditioning system, which utilises waste heat from the power
station, resulted in auxiliary power savings of 1.65 MUs during the year. A similar system of higher capacity is now proposed at Trombay Unit
Nos.5 and 6, which is expected to save 3.18 MUs per year.
Environment
The Company has made arrangements with local refineries to supply fuel oil having lower sulphur content (less than 0.45%). The increased
supply of very low sulphur fuel oil (0.2% sulphur) by the refineries has resulted in higher generation while adhering to the
prescribed environmental norms.
The Company successfully explored the use of very low sulphur (0.1%), low ash (1%) imported coal, which resulted in enhancing
power generation while complying with environmental norms.
As a part of its afforestation programme, the Company planted over 6 lakh saplings in the lake catchment areas of its hydro
generation facilities.

OTHER BUSINESS
Electronics Division
The Electronics Division at Bangalore continued to manufacture rugged professional grade electronic equipment designed by the
R&D Division in Mumbai. In addition, the Division completed development of electronic energy meters as well as smart card based pre-
paid energy meters for single phase and three phase applications. Pilot production of 1,000 single phase electronic energy meters has
been successfully completed.
Broadband & Communications Business
Inline with its objectives of entering complementary value-creating segments, which include the infrastructure part of telecom businesses, the
Company successfully, lit the Mumbai fibre optic network. The Mumbai network carries traffic from its customers who are the major telecom
service providers and carriers (Fixed, Mobile, NLD ILD, ISPs and cable operators). Over 600 km of fibre optic ring network using
Dense Wave Division Multiplexing (DWDM) technology has been created in the Mumbai-Pune region. This is the second
such technologically advanced network in Asia after Tokyo.
In addition to the metro networks, the Company had originally planned to build a national fibre optic backbone, as a Carrier’s
Carrier. However, in view of the prevailing licensing norms and competitive scenario, this business model was suitably modified.
The Company therefore examined the proposal to be a national long distance service provider, building on its earlier business model of being a
Carrier’s Carrier. Subsequently, however, the VSNL opportunity arose and the Company decided to be a strategic investor in this acquisition.
The Company has invested Rs. 500 crores in a Special Purpose Vehicle (SPV) as equity advance against equity for its investment in VSNL.

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VSNL has a NLDO license on a preferred basis with no entry fee and no revenue sharing for five years. VSNL will consequently be able to
provide international and domestic long distance services, ISP and value added data services.
The Company believes that customer ownership is critical to success in the telecom sector; vertically integrated players offering a full range
of telecom services would be able to create long term value. With this in mind, the Company has also made strategic investments in
Tata Teleservices Ltd. (TTL), which will be providing fixed line and limited mobility services in Andhra Pradesh, Maharashtra, Tamil Nadu,
Gujarat, Karnataka and Delhi.
Energy Business
Tata Petrodyne Ltd., the 100% subsidiary of the Company acquired in the previous year, which is engaged in the Exploration and
Production (E&P) business of oil and gas, made a profit after tax of Rs. 12.46 crores in its second year of operation. There has been
an additional discovery of oil below the gas reserves in the Lakshmi field in the Gulf of Cambay. More details of the performance
and prospects of Tata Petrodyne Ltd. are given in the relevant section of this report.
HUMAN RESOURCES DEVELOPMENT
The Company organised in-house training programmes, which were conducted by both internal and external faculty on various
technical, managerial and behavioural aspects. Employees were also nominated for training to external organisations in India and abroad.
In aggregate, during the year the Company conducted for the employees 450 training programmes (218 in the previous year) accounting
for 8970 mandays (6855 mandays in the previous year). The Company also provided assistance in training personnel from Oman Refinery.
HR processes are being aligned to business processes with the help of the Tata Business Excellence Model. Short term and long
term manpower plans have been drawn up to align HR plans with overall business plans. The Company is implementing SAP-HR
to effectively deploy various HR initiatives. The management and workforce continued to maintain a harmonious and healthy
relationship. Through various employee development and training programmes, significant efforts were made to instill an orientation
towards providing a high quality of service to the Company`s consumers, reduce outage time and achieve higher levels of
operational efficiency.
SAFETY
Consistent with the Company’s policy of giving high priority to safety practices, the Company undertook several initiatives to improve safety
standards in its operations. These included organizing safety training programmes, carrying out safety audits by both internal and
external experts and testing the on-site emergency plan drill.
COMMUNITY DEVELOPMENT
Education (Teachers Training) & Environment Fairs
The Company organised eight Environment Education Workshops for teachers at Lonavla, Maval, Mulshi and Bhira. Over 300 teachers
benefited from this initiative. Environment Fairs at Lonavla and Mulshi and a national workshop on ‘Experiences in Environment
Education’ at Lonavla were organised by the Company. The Company constructed one-room schools at Majgaon, Peth Shahapur and Valne.
The Senapati Bapat High School at Male, Mulshi was also expanded by constructing additional rooms. The two schools at Bhira and Bhivpuri,
which are running with a grant from the Company, continue to function efficiently.
Medical Facilities
The Company organised three medical check-up camps for the villagers in Mulshi area with the help of a team of doctors from the
Rotary Club of Khandala in March 2002. About 300 villagers were examined and treated at these camps. Cataract operations and Intra-
Ocular Lens implantation (funded by the Company jointly with the Rotary Club) were also carried out.
Water for Villages
The Company continued to assist in drinking water schemes for villages neighbouring the hydro generation areas. Water tankers were
also used for supplying drinking water to drought affected regions in the Company`s catchment areas of Maval and Mulshi.
Pisciculture
One lakh fish seed of the carp variety were released in 12 village ponds. Fish breeding activities continued at Lonavla and interactions
were maintained with different States for conservation and rehabilitation programmes.
The Company organised a national workshop on the Mighty Mahseer (Biodiversity and Genetic Conservation) on August 24 and 25, 2001,
at Walwhan. Several senior level administrators and scientists from the Ministry of Fisheries, Central Government, Indian Council
for Agriculture Research (ICAR), State Directorates, Agriculture Universities and Fisheries Colleges attended the workshop. The
workshop was well received.
Income Statement of Tata Power for the year ending with 31st
(Rs. million)
Particulars Mar 2007 Mar 2006 Mar 2005 Mar 2004 Mar 2003
(12 Months) (12 Months) (12 Months) (12 Months) (12 Months)
Sales 49,185.30 45,532.30 39,188.50 41,977.30 42,771.10
Other Income 3,358.90 1,704.90 1,431.70 1,436.10 1,217.60
Total Income 52,544.20 47,237.20 40,620.20 43,413.40 43,988.70
Raw Material Cost 34,565.40 31,982.30 24,748.30 23,890.40 25,361.40

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Excise 1.20 4.80 2.90 34.80 7.50

Other Expenses 7,601.30 5,138.80 5,392.40 5,360.50 4,832.30
Operating Profit 10,376.30 10,111.30 10,476.60 14,127.70 13,787.50
Interest 1,871.10 1,526.20 1,797.50 2,799.40 3,249.20
Gross Profit 8,505.20 8,585.10 8,679.10 11,328.30 10,538.30
Depreciation 3,017.40 2,881.60 3,778.20 4,424.70 4,228.40
Profit Bef. Tax 5,487.80 5,703.50 4,900.90 6,903.60 6,309.90
Tax 700.30 1,306.80 1,701.10 2,096.70 1,419.10
Net Profit 4,787.50 4,396.70 3,199.80 4,806.90 4,890.80
Other Non- Recurring Income 2,180.50 1,707.70 2,313.80 461.60 473.40
Reported Profit 6,968.00 6,104.40 5,513.60 5,268.50 5,364.20
Equity Dividend 1,882.20 1,684.10 1,486.00 1,386.90 1,287.80

Balance Sheet of Tata Power as on 31st

(Rs. million)
Mar 2007 Mar 2006 Mar 2005 Mar 2004 Mar 2003
(12 Months) (12 Months) (12 Months) (12 Months) (12 Months)
Liabilities
Share Capital 1,979.20 1,979.20 1,979.20 1,979.20 1,979.10
Reserves & Surplus 57,930.30 53,159.10 48,967.40 48,106.10 44,805.20
Net Worth (1) 59,909.50 55,138.30 50,946.60 50,085.30 46,784.30
Secured Loans (2) 13,543.00 9,460.00 10,590.70 7,217.30 13,403.70
Unsecured Loans (3) 23,212.20 18,508.10 18,427.50 10,415.00 11,006.40
Total Liabilities(1+2+3) 96,664.70 83,106.40 79,964.80 67,717.60 71,194.40
Assets
Fixed Assets
Gross Block 62,297.10 59,247.40 54,658.40 55,347.00 53,707.90
(-) Acc. Depreciation 31,994.00 29,217.20 26,573.70 23,643.60 20,347.40
Net Block (A) 30,303.10 30,030.20 28,084.70 31,703.40 33,360.50
Capital Work in Prgs. (B) 7,810.50 2,118.10 4,381.90 3,063.90 3,379.50
Investments (C) 35,701.50 34,121.70 35,029.20 27,288.30 24,518.30
Current Assets, Loans & Advs.
Inventories 3,964.20 4,422.60 2,970.30 3,132.20 3,309.80
Sundry Debtors 14,782.20 10,582.30 6,932.10 7,182.10 8,890.10
Cash and Bank 13,677.20 9,905.50 9,796.00 519.00 1,264.10
Loans and Advances 8,626.80 5,446.80 6,180.40 9,219.00 11,874.80
(i) 41,050.40 30,357.20 25,878.80 20,052.30 25,338.80
Current Liab. & Provs.
Current Liabilities 11,946.70 7,783.40 7,706.90 9,584.70 11,143.60
Provisions 6,315.80 5,892.00 5,930.00 4,961.70 4,544.30
(ii) 18,262.50 13,675.40 13,636.90 14,546.40 15,687.90
Net Curr. Assets (i - ii) (D) 22,787.90 16,681.80 12,241.90 5,505.90 9,650.90
Misc. Expenses (E) 61.70 154.60 227.10 156.10 285.20
Total Assets (A+B+C+D+E) 96,664.70 83,106.40 79,964.80 67,717.60 71,194.40
Face value of each share is Rs.10.

Market Snapshot of Tata Power

Net
Market Cap. No. of
Month Price - High Price - Low Price - Close Volume Turnover
(Rs. Cr) Trades
(Rs. Cr)
Aug 2007 734.00 666.70 683.75 14,207.64 2,117,269.00 41,328.00 146.58
Jul 2007 760.00 645.00 734.05 15,252.82 1,881,712.00 41,688.00 129.34
Jun 2007 686.50 566.05 670.95 13,278.10 2,672,305.00 47,707.00 165.66
May 2007 623.00 560.00 580.25 11,483.15 1,304,852.00 23,531.00 77.79
Apr 2007 609.00 491.00 591.65 11,708.75 1,962,318.00 33,730.00 106.26
Mar 2007 554.35 483.00 509.45 10,082.02 2,309,432.00 20,113.00 120.29
Feb 2007 625.00 525.60 543.95 10,764.77 1,812,991.00 22,096.00 107.27
Jan 2007 640.00 552.05 606.10 11,994.72 1,770,968.00 16,155.00 103.22
Dec 2006 621.45 525.05 559.85 11,079.43 2,883,622.00 37,658.00 166.42

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Nov 2006 594.90 531.60 581.05 11,498.98 2,651,955.00 25,807.00 150.60

Oct 2006 568.00 524.05 541.25 10,711.34 1,399,422.00 15,738.00 75.32
Sep 2006 572.00 488.00 567.15 11,223.90 1,770,514.00 25,527.00 93.90

END OF SECTION D

Section E : Caselets (50 Marks)

• This section consists of questions with serial number 6 - 11.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 80 - 90 minutes on Section E.

Caselet 1
Read the caselet carefully and answer the following questions:

6. As mentioned in the caselet, India Incorporation has seen several family business splits, most of them have been high < Answer >
profile break ups. In light of this, what are the major reasons for family businesses ending in separation plans?
(10 marks)
7. What kind of strategies do family businesses require to avoid conflicts or handle business feuds? < Answer >
(10 marks)
Family business feuds have been hitting the news headlines regularly for quite sometime now. In fact, in the last two decades, India Inc.
has witnessed more than 20 business feuds. Leading business groups such as the Modis, the Dalmias, the Birlas, the Goenkas and
the Ambanis, with Bajaj being the latest entrant to the list, have all witnessed painful inheritance battles. As a result, today, many of
these family empires that once ruled the Indian business landscape have disintegrated.
According to past research, nearly one-third of family businesses don't survive the transition from the first to the second generation.
According to estimates, family-owned businesses generate about 75% of the overall employment and contribute approximately 65% of
the country's GDP. Besides, they also enjoy close to 71% of the total market capitalization in the country. Another interesting fact is that
they even rule the stock market with 15 of the 30-scrip benchmark index i.e., Sensex, belonging to family-owned businesses. Also, in
NSE, there are more than 25 family-owned businesses in the 50-scrip benchmark index.
India Inc. has seen several family business splits, most of them have been high profile break ups. Post-liberalization, some of the groups
have managed well and others not so well. For instance, the Modi empire that spanned across industries from textiles to
commodity manufacturing was split among five Modi siblings. This family feud then led to court battles, which resulted in loss of focus
and finally led some of the business units getting sick that were eventually closed or sold off. However, Modi's disintegration did not turn
out to be an eye-opener for many family businesses which continued to commit the same mistake. Another case is that of the MP Birla
Group. The billion rupee business is now witnessing fierce court battle between MP Birla family members on the one side and RS Lodha
(an outsider) on the other fighting for the control of the company. The impasse is the result of the late Priyamvada Birla's will, giving
control to an outsider RS Lodha in various MP Birla Group companies. Much before these came into limelight were the feuds at family-
owned businesses that included groups like the Dalmias, the Sarabhais, the Mafatlals, the Shrirams, Walchand and Ranbaxy.
Among the recent family feuds was the one involving the Reliance Group, once a vast conglomerate, which witnessed simmering
rivalry between the two Ambani brothers after the death of its founder and patriarch, Dhirubhai Ambani, which finally led to the division
of family businesses, with Mukesh Ambani taking charge of its flagship Reliance Industries and other petrochemicals operations and
Anil Ambani getting the group's power-utility, financial services and telecom services businesses. The latest to join the list is the Bajaj
family. Sibling rivalry in the Bajaj family has created problems for the patriarch Rahul Bajaj and has resulted in uncertainty in the market,
with a slew of big brokerage houses, including the foreign ones, downgrading the stock.
Most family businesses in India are not only controlled by promoters but also managed by family members. This raises some serious
issues. The major issue is that of ownership, where the promoter genuinely believes that business is an extension of family property that
will give them the freedom to take decisions. In such cases, the existing owner generally fails to separate ownership from
management. However, in the family-owned businesses in the west, the family owns the controlling shares but hires professionals to run
the business. For instance, Wal-Mart has the Walton family with Walton as Chairman and a team of professionals headed by an outsider,
Lee Scott, as CEO.
However, there are some examples where family members have successfully managed the empire without any signs of rivalry or feud
among them. A few sterling examples include the Godrejs, the Daburs, the Murugappas and the Tatas. In the case of the Tatas, the
group chairman, Ratan Tata has initiated measures to restructure his empire by reducing the total number of group firms for easy control.
In fact, a key reason for Tata's success is that it is not run by the family but by a team of professionals. Similarly, the Godrej group opted
to hire professionals for running its group of companies. The Dabur India group has undergone the transition from family business
to professional management while retaining its founder's legacy and tradition. It has redefined the roles of family members and also put
in place a tier of experienced non-family managers to manage business units and functional areas. The Chennai-based Murugappa group
is another example of a family-owned but professionally run business empire. Its strong corporate governance system and its loyalty

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to business ethics have helped it continue the business even in its fourth generation. Recognizing its continuity, value creation and
change management, IMD Switzerland selected the Murugappa Group for the Distinguished Family Business Award 2001, the first
Asian family business to receive this award.
There is no harm in inducting family members or siblings into a family-run business if the candidate is capable enough to contribute with
his skills and experience to improve the business. However, such inductions should be made through proper channels after taking the
board and the shareholders of the company into confidence. Take for example, the manner in which Rishad Premji, son of Azim Premji
of Wipro, was inducted into the company. Though Rishad is the son of the company Chairman and has a degree from Harvard
Business School and a few months' working experience at Bain & Company, London, he was selected to join the company like any
other candidate. Rishad got a formal interview call from Wipro to appear before its governance committee. After a gruelling session in
which three independent directors closely examined Rishad's educational qualifications and experience, he was inducted into the company as
a manager in the banking and financial services vertical. The instance cited above is something similar to that of Wal-Mart. Though
the Walton family is a part of the management of the company, it has opted for the services of a professional CEO to run the affairs of
the company.
As Albert advises, "Adopt a 'business first' approach and ensure that it is given precedence over the 'family first' approach. Family interests
are important, but only if they contribute to the continuity and prosperity of the business in the long run."

END OF CASELET 1

Caselet 2
Read the caselet carefully and answer the following questions:
8. Sprint-Nextel, the third largest wireless telecommunications network player in the US is facing tough times, as it is losing < Answer >
its customers as well as incurring losses. What could be the reasons behind this?
(8 marks)
9. Observe the possible remedies available to Sprint Nextel to come out of the present crisis. < Answer >
(8 marks)
Much to the chagrin of the top brass of Sprint-Nextel, the third largest telecommunications company in the US, a research report from
Probe Financial Associates Inc., voiced concern that the year-old merger of the two carriers might be ripe for a takeover. While not
many would buy this argument, at least for now, a string of developments in recent times does suggest that all is not well with the operator.
In an announcement that dampened investor sentiments, the company said that it incurred losses of $211 million during the first quarter
ended March 31, 2007, while adjusted operating earnings dipped 45%. Besides, it also saw erosion in the subscriber base as
customers migrated to rival carriers, blaming the carrier's faulty network for poor connectivity; it lost about 222,000 post-paid
subscribers during the quarter. Worse, its post-paid ARPU (Average Revenue Per User) too took a beating as it dipped to just over $59,
down nearly 5% a year ago, thus raising concerns about its loss in market share to rivals like Verizon and Cingular, owned by AT&T.
The $43.60 billion carrier is now trying desperately to seek a turnaround through a plethora of measures that involve recent
management reshuffle in marketing and customer services divisions. The signs of which are already visible now. While the New York
based Verizon ended the first quarter with 60.7 million customers with a gain of 1.7 million customers, and the Texas-based AT&T added
1.2 million customers to take its subscriber base to 62.2 million, Sprint Nextel could attract just 0.6 million new subscribers, largely
less-valuable pre-paid customers who tend to move among the carriers and spend less each month, to take its customer base to 53.6
million. Besides, at an average monthly wireless expenditure of $59 (down from $60 in the fourth quarter last year), Sprint Nextel
lagged behind its rivals. Added to it, Sprint Nextel is also experiencing defections from its land-line phone business. About 300,000
customers dropped out of the network in the fourth quarter of 2006, blaming the poor service quality of the Nextel network. What
dampened the market sentiment further was the warning from the company about flat earnings for 2007 as well.
Sprint Nextel is an offshoot of the $35 billion purchase of NEXTEL Communications by Sprint Corporation in August 2005, which were
then ranked No. 5 and No. 3 carriers in the US respectively. Thereafter, the merged entity has been facing several problems and the
most prominent among them is related to merger of the two different networks. Sprint inherited a customer base of Nextel that is
accustomed to a particular network system which is technically known as IDEN (Integrated Digital Network), whereas Sprint's network uses
a completely different wireless technology called CDMA (Code Division Multiple Access). Nourishing and standardizing these
two incompatible networks that use IDEN and CDMA standards would require Sprint Nextel to make huge investments separately in
each network, to keep things running smoothly. Sprint Nextel's troubles have exacerbated since the company tried out too many initiatives
at once. "Sprint Nextel has so many plates spinning in the air at the same time, it's not surprising there would be some breakage along
the way," commented Andrei Jezierski, partner, i2 Partners. Just after completing the merger process, Sprint signed a joint venture with
four cable operators to develop integrated wireless broadband services. It also introduced its over-the-air music service and launched its
data services to attract customers to its new 3G services. Again in a hurried move, in 2006, Sprint initiated a program to upgrade its
existing 3G network to the next version of the technology known as EV-DO (Evolution Data Optimized) Revision A. In the same year,
it publicly announced that it would invest $3 billion to build a new fourth-generation, or 4G, wireless network over the next two years by
using WiMax technology. By trying too many things at the same time, Sprint Nextel has somewhat gone off the track and lost its main
focus. "Trying to create grandiose visionary initiatives, such as a 4G network or a converged cable and wireless service, sounds good, but
it's difficult to implement," opined Albert Lin, an Analyst with American Technology Research.
Ever since the merger, a big chunk of IT persons and technicians who had the expertise to handle IDEN network, were laid off,
which deteriorated the already crumbling customer service system. Analysts say that over a period of time, some sort of indifference

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and apathy have crept into the entire management of the organization. For instance, unlike Verizon and Cingular which were focusing more
on wireless network quality, the marketing message of Sprint Nextel had been confusingly geared to give increased emphasis on the speed
of the data network. Out of the blues, Sprint received a big jolt when the biggest ever $20 billion governmental contract was awarded to
its rivals—AT&T, Verizon and Qwest Communications. Also, it spun off its Local Telephone Division (LTD) into a separate company,
which officially named Embarq Corporation, did not do any good to Sprint Nextel. Embarq, which is now the fifth largest local
exchange carrier in the US and the largest independent local provider, serving customers in 18 states and providing local, long distance
and high-speed data services to residential and business customers, is also eating into Sprint Nextel's market share.

END OF CASELET 2

Caselet 3
Read the caselet carefully and answer the following questions:
10.According to the caselet, there seem to be three philosophies of strategic planning based on the approach, viz., < Answer >
satisficing, optimizing and adaptivizing. Analyze the various values presumed by these three philosophies of strategic
planning.
(8 marks)
11.As mentioned in the caselet, knowledge can be considered as the cognitive capability to perform across different levels of < Answer >
strategic planning. Discuss.
(6 marks)
From the break of the day, right from the first till the last wakeful moment, one is incessantly indulged in planning. One plan leads to
another, the other to the next, the next to the following and so on, forming a seamless web covering the whole fabric of activity. As a part
of the large scheme of affairs, one and all of us are characterized innately with the urge to plan. Therefore, it is evident that strategic
action warrants strategic planning, which also remains a basic element in human behavior.
In the present context, strategic planning can be seen as a rationale backed conscientious necessity for fostering the cause of
humane amelioration. Effective strategic planning remains an intellectual activity as it aims not merely at an enthusiastic anticipation, but
an effective realization of the same. Moreover, strategic planning is never self-contained at any level, as a plan usually emerges from a
larger plan and is in itself the basis of the following plans. However, it is important to note that strategic planning mostly accounts for
fine tunings in the form of contingencies, but adaptive strategic planning comes into picture, when the situation demands for a change that
has a high magnitude and cannot be compensated with a marginal change or fine tunings.
Strategic Planning is an exercise to visualize or anticipate or project the future, and act accordingly. Moreover, it is an intellectual process,
the conscious determination of a course of action, the basis of decision on the purpose, facts and considered estimates. Strategic
planning involves decision making through alternative courses of action, with a view to implement the same in future to synchronize with
the changing environment. It is important to note that action plans should exist to show directions, not to prophesize by rigidly
fixing unalterable boundaries for any action in future. In this context, there is a need to discuss a framework, which is the
compounded Punctuated Equilibrium Model that is extended from the modified form of a classic Punctuated Equilibrium Model.
Punctuated equilibrium holds the potential to understand the whole dynamics of strategic planning process, by considering the
philosophies behind strategic planning, and the cerebral inputs for the arts, science and technology involved, to reinforce or reform
the experience and expertise. There seem to be three philosophies of strategic planning based on the approach, viz., satisficing, optimizing
and adaptivizing. The satisficed strategic planning presupposes slow continuous change compounded with stability, whereas optimized
spirit of strategic planning presupposes optimization through logical reasoning and rational thinking. To explain these further, theories such
as the theory of comparative advantage, extremely popular to describe trade flows can be seen to presuppose satisficed nature of
strategic planning and theory of competitive advantage that accounts for industry structure can be argued to be based on optimized
philosophy of strategic planning. It is important to understand the need for dependence on environments for necessary factors like
resources and adaptation strategy to optimize the same.
From the above, it is obvious that both theories suggest the presence and importance of environmental factors, such as turbulence,
uncertainty and radical change, but have no provision to consider the same. The punctuated equilibrium model of discontinuous
change, effectively accounts for all, static-dynamic, streamline-turbulence, certainty-uncertainty, marginal-radical change, simplex-
complex, low-high magnitude, equilibrium-disequilibrium, stability-instability, rationality-bounded rationality, generic-specific,
similar-diverse, and so on. This suggests, adaptive strategic planning though somewhat complicated, can be addressed through the
punctuated equilibrium model, and the factors that promote adaptivity in strategic planning can be embraced.
It is important to realize that both social-culture and relationship dimensions of the punctuated equilibrium model are normative and
promote inertia to change, yet, the knowledge dimension is the source of disruption that promotes innovation. This means, the
interaction between the three dimensions, viz. relationship, knowledge and social-culture, promotes innovation and also restricts the same
in the form of inertia. However, the composition of adaptive strategic planning process changes when these three dimensions affect and
get affected over different levels at different magnitude. The higher the magnitude, the more fundamental is the level that gets effected in
the strategic planning hierarchy, but across the said three dimensions.
In the Indian context, adaptive strategic planning for firms suits best, as India and its people remain diverse along all the three
dimensions explained above. Relationship and social-culture in India remains complex and idiosyncratic, whereas the knowledge
component makes strategic planning overwhelming. The planning differences in five year plans indicate that India has already
embraced adaptive strategic planning, perhaps unknowingly.

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END OF CASELET 3

END OF SECTION E

END OF QUESTION PAPER

Suggested Answers
Strategic Financial Management-II (MSF3L2) : October 2007
Section D : Case Study
1. Barriers to entry: Barriers to entry are high, especially in the transmission and distribution segments, which are largely state < TOP >

monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel
linkages, payment guarantees from state governments that buy power and retail distribution license.
Bargaining power of suppliers: Not very high as government controls tariff structure. However, this may change in the future.
Bargaining power of customers: Bargaining power of retail customers is low, as power is in short supply. However government
is a big buyer and payment by government can be erratic, as has been seen in the past.
Threat of Substitutes: Threat of substitutes for power is low, as there is no perfect substitute for power.
Competition: Not high currently. The Electricity Act 2003 aims to encourage investments, thereby increasing competition.
2. < TOP >

Period March 2007 March 2006 March 2005 March 2004 March 2003
Reported profit (Rs.mn) 6,968.00 6,104.40 5,513.60 5,268.50 5,364.20
Equity Dividend (Rs.mn) 1,882.20 1,684.10 1,486.00 1,386.90 1,287.80
No. of shares 197.92 197.92 197.92 197.92 197.91
EPS (Rs.) 35.21 30.84 27.86 26.62 27.1
DPS (Rs.) 9.51 8.51 7.51 7.01 6.51
Dt = crEPSt + (1–c) Dt–1
D2007 = c × 0.35 × EPS2007 + (1–c) × D2006
9.51 = c × 0.35 × 35.21 + (1–c) × 8.51
9.51 = 12.3235 c + 8.51 – 8.51c
9.51 = 3.8135 c + 8.51
c = 0.2622
D2006 = c × 0.35 × EPS2006 + (1–c) × D2005
8.51 = c × 0.35 × 30.84 + (1–c) × 7.51
8.51 = 10.794 c + 7.51 – 7.51c
8.51 = 3.284 c + 7.51
c = 0.3045
D2005 = c × 0.35 × EPS2005 + (1–c) × D2004
7.51 = c × 0.35 × 27.86 + (1–c) × 7.01
7.51 = 9.751 c + 7.01 – 7.01c
7.51 = 2.741 c + 7.01
c = 0.1824
D2004 = c × 0.35 × EPS2004 + (1–c) × D2003
7.01 = c × 0.35 × 26.62 + (1–c) × 6.51
7.01 = 9.317c + 6.51 – 6.51c
7.01 = 2.807 c + 6.51
c = 0.1781
Period March 2007 March 2006 March 2005 March 2004
Weight given to earnings of current year (c) 0.2622 0.3045 0.1824 0.1781
Weight given to dividends of previous year (1–c) 0.7378 0.6955 0.8176 0.8219
The Linter Model of corporate behavior states that the current dividend of a firm depends on its current earnings and its past
dividends. The degree of dividend stability can be deduced from the weightages in the model. A conservative firm which prefers
a high level of dividend stability will assign relatively insignificant value to c in the above equation. On the other hand, an

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aggressive firm which does not attach much significance to past dividends would give a high value to c in the equation. The
dividends of such firms would be more reflective of their current earnings. In the present case of Tata Power, it has assigned
relatively less weight to current earnings and more weight to dividends of previous year. From this, it can be interpreted that
Tata Power is conservative and prefers to maintain high level of dividend stability.
3. a. [(EBIT – I1) (1–T)]/N1 = [(EBIT – I2) (1–T)]/N2 < TOP >

EBIT = Indifference EBIT

If it opts for 12% debt issue for financing the project activity, the interest to be paid on its debt = 0.12 × Rs.10,000 million =
Rs.1,200 million
If opts for equity issue at the price which is at 25% premium to the monthly average price during last 12 months = [(683.75
+734.05 +670.95 +580.25 +591.65 +509.45 +543.95 +606.1 +559.85 +
581.05 +541.25 +567.15)/12] × 1.25 = Rs.746.82
The number of shares to be issued = Rs.10,000 million/ Rs.746.82 = 13.39 milion shares
Existing number of shares = 197.92 million shares
The expression for EPS, if funds are raised through equity is as follows:
= =
The expression for EPS, if funds are raised through debt is as follows:
= =
128.648EBIT –240713.2728 = 137.3515 EBIT – 421820.1917
8.7035 EBIT = 181106.9189
EBIT = Rs.20,808.516 million
Indifference EBIT = Rs.20,808.516 million
b. EBIT exclusive of project operations = Rs.16,456.45 million
To reach Indifferene EBIT, the firm should be able to generate (Rs.20,808.516 million – Rs.16,456.45 million)
Rs.4352.066 million from the proposed project operations.
4. Lower limit = Rs.2,00,00,000 < TOP >

Variance of change in daily cash balance = Rs.80,00,000

Annual yield on securities = 11%
Fixed transaction cost = Rs.1,60,000
Return Point (RP) = =
= Rs.2,01,46,462.78 ~ Rs.2,01,46,463
Upper Limit (UL) = 3RP – 2LL
= 3 × 2,01,46,463 – 2 × 2,00,00,000 = Rs.2,04,39,389.
5. Corporate social responsibility is a public movement that has gained momentum over the . past few decades. Citizens have < TOP >

started demanding that corporations be accountable for their actions. This movement has resulted in business managers becoming
more transparent and socially responsible in their actions. Organizations are being pressurized to improve their performance not
only in financial but also in non- financial areas. As a result, organizations have started building social criteria into their strategic
decision-making. Human rights issues and healthy environmental practices are no longer seen as compromising on profitability.
The firms with a good reputation in these areas are regarded highly by the public and are often able to sustain profits even under
adverse circumstances.
Managers of business organizations have four social responsibilities:
Economic: This responsibility deals with producing goods and services of value to society so that the firm may repay its
creditors and share-holders.
Legal: Legal responsibilities are laid down by governments. They are set out as laws that organizations have to obey. For
example, environmental pollution norms have to be adhered to by all factories under the purview of the Pollution Control Board
(PCB). To this effect, the PCB issues compliance certificates to these factories and inspects them periodically to check facilities.
Ethical: Ethical responsibilities involve the widely-held beliefs about behavior in a society. Society expects companies to adhere
to its ethical norms and reacts negatively to what are seen as unethical practices.
Discretionary: Discretionary responsibilities refer to the purely voluntary obligations that a corporation assumes, such as
philanthropic contributions and training the unemployed. Ethical responsibilities are obligatory whereas discretionary
responsibilities are purely voluntary. The four responsibilities are shown according to the priority attached to them, in Figure
below.

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A firm can behave responsibly in the interests of society in a number of ways. Social responsibility is not a one-way process; the
organizations themselves benefit considerably by undertaking greater social responsibility. To whom are organizations
responsible? The answer to this question is: all who come under the category of 'corporate stakeholders'. The stakeholders are
those who affect, or get affected by, the business activities of corporations. The category of stakeholders comprises the following
groups:
Shareholders: Shareholders provide the capital that is necessary for firms to survive and grow. In turn, they expect the
management to operate in ways that bring them the highest possible return on their investment. Shareholders and managements
sometimes hold different perspectives on business opportunities. These different perspectives occasionally lead to conflict.
Employees: Although, managers speak of their organization's employees as "members of the family", their actual treatment of
employees may not always conform to this ideal. One area of concern is the treatment of employees during plant closures. Plant
closures should be accompanied by a degree of managerial concern for employees.
Customers: Several decades ago, words like caveat emptor (let the buyer beware) were used to indicate that the firm had little
responsibility towards its customers. However, this is no longer acceptable as customers punish firms with this attitude by
turning away from their products. Social concerns such as health, safety and quality are also gaining greater prominence.
Local Community: The community in which an organization operates is its local area of influence. While communities usually
want businesses in their areas, businesses in turn expect various forms of infrastructure facilities like adequate transportation
systems, gas, electricity services, etc. Organizations provide goods and services the community needs. They also provide
employment opportunities to its constituents. Thus, organizations cater to the needs of the local community and benefit.
Society: Social responsibility at the societal level encompasses issues that are regional and national in scope. Some organizations
provide training in basic skills to help workers meet the requirements of available jobs. Organizations also take on environmental
responsibilities such as recycling, waste disposal, protecting the ozone layer and energy efficiency.
An interesting question that arises is whether companies that are socially responsible are more successful financially. It is
difficult to arrive at an answer because it is not easy to measure the social responsibility of one firm against that of another.
Research suggests that a firm's financial performance influences its ability to undertake socially responsible activities. Firms
engaged in socially responsible activities build stable relationships with their major stakeholders. This helps them to reduce the
risk of lawsuits and governmental fines that threaten organizational well-being.

Section E: Caselets
6. The reasons are too many to count, but the common pitfalls include succession battles, sibling issues, poor decision- < TOP>

making, resistance to change, business acts leaning towards family, inability to change with the changing business
environment, etc. Furthermore, many Indian business owning families have built conglomerates with sometimes highly
diversified businesses. Due to liberalization and globalization, Indian family businesses are facing more competition not
only from foreign companies which have entered the Indian market but also due to further development and
professionalization of Indian firms themselves. But there are also family reasons. A united family where the eldest son
assumes leadership responsibility in the family and in the business, with the other family members sharing
responsibilities, is the time-tested way to prevent disintegration. But nowadays this principle of primogeniture is not a
leading principle anymore. Children are better educated. Daughters no longer accept that they can't put their education
into practice and make a valuable contribution to their family business or the family business of their husbands. Inefficient
family members in responsible positions in the business are not accepted any longer by talented non-family managers.
When conflicts arise, the easy way out is to separate. But it's not always the best way. Neither for the family nor for the
business.
7. Strategies for avoiding conflicts: < TOP >

• To adopt a `business first' approach and ensure that it is given precedence over the `family first' approach.
Family interests are important but only if they contribute to the continuity and prosperity of the business in the long
run.
• To have a sound business strategy.
• To develop proper governance structures and processes to make decisions, discuss and handle disputes.
• To adopt a clear ownership strategy which includes the vision of the owners and covers issues such as, risk and
diversification, growth, liquidity and the needs of the company and the family.
• To develop a family protocol under which the family agrees on certain principles such as: the relationship
between the family and the business, values, succession rules, next generation entering the business, and who
decides on what.
• To adopt the principle of fair process: allowing stakeholders in the family and the business to have a voice,
asking for their opinion and expectations, and providing proper information to be able to make sound business and

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family decisions.
8. Sprint Nextel has always been an excellent quality service provider and maintains this even today. So, the problem here is < TOP >

not of quality. It provides cutting-edge solutions with features and functionality. It is the first company to have provided
the features of camera facility in its phones. The company has gone through several major transitions. Though Sprint and
Nextel merger took place, yet it is becoming difficult to put together different networks. In addition to it, it spun off its
wireline business, which has taken the name Embarq and is now a separate entity. The company is a vastly different one
from what it was just one or two years ago. As such, this is a short-term issue which involves merging networks and
repositioning themselves in the wireless marketplace.
9. Advertising and marketing are very important as the marketplace changes and competition intensifies. Until now, most < TOP >

customers used to buy a separate wireless phone from their wireline service. Going forward, the major competitors are
going to start marketing a big bundle that includes wireline and wireless. As more customers move to this model the
marketing mix intensifies. Sprint will market their services as a stand-alone wireless carrier for customers, who still want
a separate wireless service. And for the others they will offer a combined wireline and wireless bundle in partnership with
the cable television industry. It’s network system is to keep its customer base intact. Also, in order to reinvigorate the
somewhat lost brand image of the mobile marketplace, Sprint has to reconsider its important portfolios such as company's
national marketing strategy, which includes brand, media, sponsorships, pricing, market research and CRM.
10. There are three philosophies of strategic planning based on the approach, viz., satisficing, optimizing and adaptivizing. < TOP >

Satisficed strategic planning presumes values such as stream line, status quo, stability, continuity and a slow change.
Optimized strategic planning reflects a scientific attitude that is based on maximizing results, advocating—logic,
reasoning and rational thinking. Whereas, Adaptive strategic planning organizes for dynamism, innovativeness,
complexity, diversity, uncertainty through bounded rationality. Here, the balance is maintained between stability and
change, which remains an inherent characteristic of the punctuated equilibrium model.
11. Knowledge contributes by proposing a way to a way to plan effectively. Knowledge can come in many forms, such as < TOP >

technology, experience, skills, science, arts, tradition, aesthetics, sense, and so on. It is important to note that knowledge
remains the thinking force that results in innovation, and innovation is the way to counter uncertainties that can not be
addressed through the common principles of strategic planning. However, India's self reliant attitude still persists that
again can be seen as a driver of innovation.

< TOP OF THE DOCUMENT >

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