Page 114 - DECO405_MANAGERIAL_ECONOMICS

Unit 7: Laws of Production

Notes

Task Production manager of a company estimates that their production process
is currently characterises by the following production functions:
2
Q = 72x + 20x – x 3
1. Determine the equation for the MP and AP of the variable factor.
2. What is the MP when seven units of the variable input are employed?

Case Study Productivity Side of Indian Industries

ompanies that attend to productivity and growth simultaneously manage cost
reductions very differently from companies that focus on cost cutting alone and
Cthey drive growth very differently from companies that are obsessed with growth
alone. It is the ability to cook sweet and sour that undergrids the remarkable performance
of companies like Intel, GE, ABB and Canon.
In the slow growth electro-technical business, ABB has doubled its revenues from $17
billion to $35 billion, largely by exploiting new opportunities in emerging markets. For
example, it has built up a 46,000 employee organisation in the Asia Pacific region, almost
from scratch. But it has also reduced employment in North America and Western Europe
by 54,000 people. It is the hard squeeze in the north and the west that generated the
resources to support ABB's massive investments in the east and the south.
Everyone knows about the staggering ambition of the Ambanis, which has fuelled Reliance's
evolution into the largest private company in India. Reliance has built its spectacular rise
on a similar ability to cook sweet and sour. What people may not be equally familiar with
is the relentless focus on cost reduction and productivity growth that pervades the company.
Reliance's employee cost is 4 per cent of revenues, against 15-20 per cent of its competitors.
Its sales and distribution cost, at 3 per cent of revenues, is about a third of global standards.
It has continuously pushed down its cost for energy and utilities to 3 per cent of revenues,
largely through 100 per cent captive power generation that costs the company 4.5 cents per
kilowatt-hour; well below Indian utility costs, and about 30 per cent lower than the global
average.
Similarly, its capital cost is 25-30 per cent lower than its international peers due to its
legendary speed in plant commissioning and its relentless focus on reducing the weighted
average cost of capital (WACC) that, at 13 per cent, is the lowest of any major Indian firm.
A Bias for Growth
Comparing major Indian companies in key industries with their global competitors shows
that Indian companies are running a major risk. They suffer from a profound bias for
growth. There is nothing wrong with this bias, as Reliance has shown. The problem is
most look more like Essar than Reliance. While they love the sweet of growth, they are
unwilling to face the sour of productivity improvement.
Nowhere is this more amply borne out than in the consumer goods industry where the
Indian giant Hindustan Lever has consolidated to grow at over 50 per cent while its labour
productivity declined by around 6 per cent per annum in the same period. Its strongest
competitor, Nirma, also grew at over 25 per cent per annum in revenues but maintained
its labour productivity relatively stable. Unfortunately, however, its return on capital
Contd...

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