IBSH/AFM029

Zion Infotech
Having tasted success in the private label space in quite a few products, Croma (Consumer
Durables and Electronics Chain from the House of Tatas) had launched its own brand of
notebooks. “We will launch those products which we can source in bulk and can be converted
into commodity. We will go for such products which are specialized and niche. It is a good time
to launch private labels. If you give good quality products at the right price, people will buy
them,” said Ajit Joshi, CEO of Infiniti Retail, a part of Tata Sons, which runs Croma stores1.

These newly introduced notebooks were expected to support basic necessities as well as diverse
home-entertainment requirement. Further, these notebooks were competitively priced between
Rs. 32,999 and 42,999, at least 8-10 percent lower than the competition2. Of the two planned
variants, Croma introduced the first one and tasted success immediately. Within three weeks
around 125 pieces were sold, confirmed Ajit Joshi. They were keen to launch the second variant
as well. Croma’s management narrowed down on list of potential suppliers based on a host of
parameters. Zion Infotech, one of the prominent suppliers from this list was approached by
Jayesh Thakur, Croma’s buyer for Notebooks and other Computer products.

Zion Infotech, located at Woollen Industrial Estate, Mahalaxmi (Mumbai), has been
manufacturing and supplying ‘Zion’ notebooks for the past six years to Colleges, Business
Schools and SME’s through their own network. Sales for the recently completed year were about
Rs 196 million. (Exhibit 1) Against their budgeted capacity of 4800 units3, the sales team
managed to achieve a target of 4450 units. Though these notebooks were not an international
brand, they were respected as a good value for money by the customers. According to Ranjit
Lohia, VP Marketing, though the sales team managed to achieve 93% of the target, the market
was getting increasingly difficult. The falling prices of offerings of Dell, HP and IBM only made
things worse.

Ranjit was glancing through the notes (Exhibit 2) he had scribbled while discussing with Jayesh
the other day regarding Croma’s requirements. Given the fact that Zion Infotech had never tried
selling their wares through third party chains, Ranjit wanted to give a fair chance to this deal.
Besides Croma’s rising popularity was also playing on his mind. To analyze the matter further,
he called up his accountant to provide additional inputs on viability. Within an hour, the
accountant sent a note (Exhibit 3) explaining why this offer was not viable.

The marketing team had not revised its target from 4800 units for this year as well. On second
thought, Ranjit realized that if Zion Infotech accepts the offer by Croma, its own sales could get


This case was prepared by Professor Vishwanthan Iyer of IBS Hyderabad. This case is intended to be used for class discussion
and is in no way designed to present illustrations of either correct or incorrect handling of administrative problems.
1
“Tata’s Croma plans growth on pushing products and presence”, Business Standard, April 07, 2009
2
“Croma to consolidate private label sales”, Channeltimes.com, March 19, 2009
3
80% of the Full Capacity

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 IBSH/AFM029

affected. Given the lower price and impressive offering, he felt that on a worst case scenario,
Zion’s sales would drop by one notebook for every 10 notebooks sold by Croma. On the other
hand, given the visibility and popularity offered by Croma, the overall latent demand for
notebooks could go up and all players could benefit from this increased pie. May be we would
sell an additional notebook for every 20 notebooks sold by Croma, he thought. However he was
not sure whether this range (10% loss to 5% gain) of secondary impact meant anything while
deciding the fate of the deal offered by Croma.

EXHIBIT 1 Income Statement for the year ended March 31, 2009

(Fig in 000)
Sales 195800
Cost of Sales 183900
Gross Margin 11900
Non operating Gains 200
Profit Before Tax 12100
Tax (35%) 4235
Profit After Tax 7865

EXHIBIT 2 Notes taken down by Ranjit Lohia while discussing the deal with Jayesh Thakur

i. Croma is looking for a three year contract. For the first year they need 2400
notebooks. For the second and third year, the numbers shall be decided based
on first year’s response.
ii. Specification
a. Operating System: Genuine Microsoft® Windows® Vista® Business
b. Processor: Intel® Core TM2 Duo Processor
c. Memory: 2048 MB DDR2 RAM,
d. Hard Disk Capacity: 320 GB
e. Screen size: 35.81 cms (14.1 inch)
iii. The notebooks shall have the word “Croma” inscribed similar to Sony’s ‘Vaio’
iv. Quoted price: 41000 (absolutely non negotiable)

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EXHIBIT 3 Economics of Croma’s offer

Price offered by Croma 41000

Cost of Components* 36800
Direct Labour 2000
Overheads (50% variable)** 3200 42000
Net Gain / (Loss) (1000)
*Based on specification for Croma (different from standard models)
**@160% of DL based on 2008-09 budgeted volume

Although the present level of fixed cost can easily accommodate full capacity, it will shoot by
10% for every subsequent 20% increase in capacity. As the price offered is not enough even to
absorb the present level of overheads, there is no point in incorporating this additional fixed cost
in the computation. This offer therefore does not make any economic sense.

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