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Engineering Economy or Engineering Economics: Economic Decision Making by Engineers

Engineering Economy: An Explanation

An engineering economy study involves technical considerations and it is a comparison between technical alternatives in which the differences between the alternatives are expressed so far as practicable in money terms (Grant and Ireson, 1960).
Every engineerng decision must be subjected to the question "Will it pay?"
The late General John J.Carty, Chief Engineer of the New York Telephone Company, had asked three questions for every engineering proposal that came to him for review.
1. Why do this at all?
2. Why do it now?
3. Why do it this way?
The first question makes an enquiry regarding profit. In business you do a thing because it is profitable to do so.
The second asks whether the person proposing the investment or expenditure has considered the time alternatives. Can we postpone the investment/expenditure and make more profit?
The third question forces the concerned person to consider all other alternatives to the issue at hand and certify that the solution proposed is the most profitable proposal.
Thus General John Carty made sure that engineering economy studies were done by his technical departments.


Economic Decision Making

Every dollar an executive proposes to spend or proposes not to spend has to be subjected to economic decision making. If an executive decides to keep a machine in service even though it has frequent breakdowns, giving more number of defective items and consuming more energy, he is making an economic decision. A decision to do nothing is a decision to continue the present production equipment or the system and to reject all alternatives, those which were known and those which were not searched for if he has not searched for them.

Most executives agree that the decision to invest Rs. 5,00,000 for the purchase of a new machine is a typical example of an economic decision. But they do not consider their choice not replacing a machine as an economic decision.

Executives are Unprepared for Economic Decision Making

George A. Taylor in his text book, Managerial and Engineering Economy emphasizes that executives are unprepared for their responsibility in generating and examining alternatives by economic criteria. Most of the executives seldom justify their actions and the resulting expenditure by adequate economic criteria. Too many executives do not a feel a true responsibility for the costs they create or the costs they protect by maintaining the status quo. A designer may take it granted that he has the privilege of creating any cost that may result from is design. He feels costs are the responsibility of the company or somebody else in the company. Proper reflection will make him conclude that costs that result from design are in his sphere of management and hence are his responsibility, because he and not somebody else selected the proposed design from all the possible alternative designs.

If an executive disregards the economic effects of a decision, he is disregarding the cost commitments that will result from his decision.

Engineering Efficiency Versus Financial Efficiency

In 1923, O.B. Goldman, who wrote the book, Financial Engineering,  said that the primary duty of the engineer is to consider costs in order to obtain real economy – to get the most power, for example, not from the least number of pounds of steam, but from the least possible number of dollars and cents: to get the best financial efficiency.”
The goal of equipment selection in a business system is acceptable financial efficiency, not engineering efficiency.

Searching for  Low Engineering Efficiency Alternatives

If the final choice is based on financial efficiency alone, the search for alternatives must be conducted on either side of current engineering efficiency. Search for higher financial efficiency is not necessarily a search for higher engineering efficiency.

Cost Reduction Expenditures and Income Expansion Expenditures

 Expenditure and Investment proposals can be for cost reduction or income expansion. In some cases, both may be realized.  A characteristic of cost reduction expenditure is that the decision does not affect the gross income. A decision in which the gross income increases is an income expansion proposal. For both the proposals, economic decision making is essential.  

Rate of Return on Capital (Finance)

Finance is the money resources of a business organization. Money resources of an organization consist of equity capital contributed by owners of the firm and loans (short-term as well as long-term) given by various  banks, other firms and individuals. All the entities who provide finance to a firm expect to get back the principal and additional return on principal. The business operations of a firm need have the ability to generate that return or more than that return to acquire capital or finance in the first place and then generate the return to satisfy the expectations afterward. This idea gives rise to cost of capital.

Cost of Capital

The user of capital must satisfy the profit motive of the supplier of capital. This obligation of the user of capital is termed as the cost for using capital or cost of capital. Hence all expenditure proposals need to include an evaluation mechanism that considers the cost of capital for the capital required to implement the proposal.

Profit: Accounting and Economics Viewpoints

Profits are measured by accountants. But they are evaluated by economists, engineering economists and financial executives.

The accountant computes profit earned during past periods after incomes and expenses are known. The accountant subtracts expenses from revenue to find the profit on the owner’s investment.
The economy analyst or engineering economy analyst tests the profitability of a proposed operation.

Engineering Economy Study

The process of engineering economy study will include data gathering and data analysis.
Analysis requires analytical methods and Engineering Economy texts mainly concentrated on analytical techniques. The analytical techniques express the alternatives in comparable measures of money with respect to their cost, revenue or return on capital.
Data gathering will include some current estimates made by engineers by combining the technical information and costs/prices relevant to the materials and processes used to provide goods or services. The data gathering effort cannot be a one time effort and systems are to be put in place to record appropriate data as and when it first appears. For this purpose accounting sections or departments (financial, cost and management accounting) and technical departments have to jointly work out the need for future engineering economy studies and instal appropriate recording systems.

Is There a Need for Engineer to Involve Themselves in Financial Calculations?

While the financial calculations that necessarily follow the engineers designs and technical estimates are in no sense an exclusive engineering function. Such calculations can be done by persons with accounting background and business administrators.
However, these calculations are such a necessary part of the numerous choices between technical alternatives that every engineer has to do as a part of his design function or process that an engineer who is not equipped to make them is a  poor choice for the job. A deficiency in this matter is particularly serious in an engineer who has administrative responsibility for technnical matters (Grant and Ireson, 1960).


George A. Taylor, Managerial and Engineering Economy, Van Nostrand Reinhold Company, New York, 1964.
Grant, Eugene, L., and W. Grant Ireson, Principles of Engineering Economy, 4th Ed., The Ronald Press Company, 1960, P.3.

Engineering Economics is an Efficiency Improvement Tool for Industrial Engineers

Engineering Economic Appraisal - A Special Role for Industrial Engineers

Engineering economic analysis is to be carried out by all engineers. These analysis reports must be appraised by IE department engineers. IEs can evaluate whether sufficient technical alternatives were considered in proposing the technical solution now recommended and then check the data and calculations of the economic analysis. From IE department, the proposal can go the project appraisal committee.

Engineering Economics is part of Industrial Engineering Tool Kit

Industrial Engineering Tool Kit


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Originally posted in

Introduction to Engineering Economics

Engineering Economics Revision Article Series

Engineers must decide if the benefits of a project exceed its costs, and must make this comparison in a unified framework. The framework within which to make this comparison is the field of engineering economics, which strives to answer exactly these questions, and perhaps more.

It seems peculiar and indeed very unfortunate that so many authors in their engineering books give no, or very little consideration to costs, in spite of the fact that the primary duty of the engineernig is to consider costs in order to obtain real economy- to get the most possible number of dollars and cents: to get the best financial efficiency.

O.B. Goldman, Financial Planning, John Wiley & Sons, New York, 1920.

It would be well if engineering were less generally thought of, and even defined, as the art of constructing. In a certain important sense it is rather the art of not constructing; or, to define it rudely but not ineptly, it is the art of doing that well with one dollar which any bungler can do with two after a fashion.

A.M. Wellington, The Economic Theory of the Location of Railways, John Wiley, New York, 1887

The subject confines of engineering economy were staked out in 1930 by Eugene L. Grant in his book 'Principles of Engineering Economy".


Ages ago, the most significant barriers to engineers were technological. The things that engineers wanted to do, they simply did not yet know how to do, or hadn't yet developed the tools to do. There are certainly many more challenges like this which face present-day engineers.

But now, natural resources (from which we must build things) are becoming more scarce and more expensive. We are much more aware of negative side-effects of engineering innovations (such as air pollution from automobiles) than ever before.

For these reasons, engineers are asked more and more to place their project ideas within the larger framework of the environment within a specific planet, country, or region. Engineers must ask themselves if a particular project will offer some net benefit to the people who will be affected by the project, after considering its inherent benefits, plus any negative side-effects (externalities), plus the cost of consuming natural resources, both in the price that must be paid for them and the realization that once they are used for that project, they will no longer be available for any other project(s).

Simply put, engineers must decide if the benefits of a project exceed its costs, and must make this comparison in a unified framework. The framework within which to make this comparison is the field of engineering economics, which strives to answer exactly these questions, and perhaps more.

The Accreditation Board for Engineering and Technology (ABET) states that engineering "is the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind".


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa
McGraw Hill, New York, 1996

MIT Open Courseware
ESD.70J / 1.145J Engineering Economy Module, Fall 2008, Excel based course

Basic Engineering Economics - a PDH Online Course for Engineers

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Engineering Economics or Economy - Typical Problems

1. Repairs to a factory roof can be made today for $4,000. If repairs are postponed, it will have to be replaced in 3 years for $6,000. Both the repaired roof and new roof will have similar technical life and last long. If the company's minimum required rate of return is 30%, should the repairs be made?

Sppwf (32%, 3 years) = 0.435

2. By spending $30,000 for a conveyor, a factory expects to save $6,000 a year for the next 7 years in the cost of handling material. The conveyor belt will have zero salvage value at that end of 7 years. If the cost of capital for the project is 18%, should the company invest in this project?

Uspwf(18%,7 years) = 3.812

3. A company can overhaul a machine now for $2000. It can wait unit the end of the year also. But during the year it will suffer a cost $400 due to idle labor. If the cost of capital is 20%, what is the right decision?

Spfwf(20%,1year) = 1.2

4. A machine needs to be maintained at a cost of $500 at the end of the year, and this cost is expected to increase by $50 a year over its 10 years further life. A overhaul of the machine costs $2000$ and this will reduce the maintenace expenditure to $100 per year. Should the company go for the overhaul if its minimum rate of return required is 20%?

Uspwf (20%,10 years) = 4.193

5. A company can purchase a new special-purpose lathe for $7,500 installed cost. The annual cost of running this machine that includes labor, power, and maintenance, is $2,500. The other alternative is a general purpose machine that can be installed for $4,500 and the anual cost is $3,250 a year. The life of both the machines is expected to be 10 years and the salvage values are expected to be $750 and $500. If the company's minimum required rate of return is 15%, which machine should be recommended?

Sppwf (15%,10years) = 0.247; Uspwf (15%,10 years) = 5.019

Originally posted in

Time Value of Money

Engineering Economics Revision Article Series

This topic explains the various concepts used to calculate future values or present values of a series of cash flows that result from engineering decisions to buy new equipment or replace old equipments.


In one has money in his hand, he can invest it in a bank deposit and after one year he gets back his principal amount and in addition some interest. Therefore $1 today, deposited in a bank at 3% interest per annum will become $1.03 after one year. This is the concept of time value of money. Over time, money increases due to accumlulation of interest. Compound interest formula A = P(1 +i)n represents the future value of money.
P = A (1+i)-n represents the present value of money received after n years.
This topic explains the various concepts used to calculate future values or present values of a series of cash flows that result from engineering decisions to buy new equipment or replace old equipments.
Time Value can be present value of a series of future cash flows or future value of  series of future cash flows.

Single Payment Cashflow 

For a single payment now made, one can calculate a future value. This is done by compounding using the formula  A = P(1 +i)n
For a payment to be received in the future, one can calculate the present value. This is done by using discounting formula P = A (1+i)-n

Uniform Periodic Payments

For uniform periodic payments, one can calculate the present value or future value. The payments are assumed to be made at the end of period.
Compounding of uniform series of cash payments
S = R [(1+i)n - 1]/i
where S = Compound amount or future amount at the end of n periods
R = Periodic cash payment at the end of the period
i = rate of interest or required rate of return
n = number of periods for payments are made


Discounting of uniform series of cash payments


P = R [(1+i)n - 1]/[i 1+i)n ]


P = Present Value

R = Uniform series of periodic payments

i = interest rate

n = number of periods of payments

These time value formulas are expressed in factors

A = P*Single payment future worth factor  =P*Spfwf

P = A* Single payment present worth factor = A*Sppwf

S = R* Uniform series future worth factor = R*Usfwf

P = R*Unform series present worth factor = R*Uspwf


Two More Factors


Sinking Fund Deposit Factor

Sfdf = 1/Usfwf

Sinking fund is fund accumulated with periodic payments for incurring a lumpsum expenditure at the end of a long period. Sfdf gives the amount to be deposited at the end of each period for n period to accumulate one dollar at the end n periods.

Capital Recovery Factor

Crf = 1/Uspwf

Capital recovery factor gives the uniform payment to be received by you at the end period of n years to get recover back the investment you made today.

 The factor tables are available and factors depend on interest rate i and term n.

Factors for a required rate of return of 10% and 5 years term.


Spfwf - 1.6105

Sppwf - .62092

Usfwf - 6.1051

Uspwf - 3.7908

Sfdf - 0.16380

Crf -  0.26380



Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996



Visit http://nraomtr.blogspot.com/  for Management Knols of Narayana Rao

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Present-Worth Comparisons

Engineering Economics Revision Article Series

Net present worth (NPW) or Net present value (NPV) is the difference between the present worths of benefits and costs of an engineering decision. It is the most widely used present-worth model.

Illustrative Problem

A single underground transmission circuit is needed immediately, and load studies indicate the need for a second circuit in 6 years. If provision is made for a second conduit when the conduit for the first circuit is installed, there will be no future need for reopening, trenching, backfillng, and repaving.

the cost of installing a single circuit wiht minimum preparation for the eventual second circuit is $850,000. the installation of the second circuit will be considered to cost $800,000 at the end of year 6 in order to be in operation by the beginning of year 7. If the second circuit is installed immediately, the total cost will be $1.4 million.

Constant annual operating and maintenance costs of the circuits are 8 percent of the first cost. The average life of a circuit is 20 years. The required rate of return on such investments is 10 percent before taxes.

To take a decision, Comparison of the deferred investment with the immediate investment needs to be made.
(Exercise Problem 3.25, Riggs)

Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996


Updated 21.4.2012

Required Rate of Return for Investment or Expenditure Proposal

Engineering Economics Revision Knol Series
Each business expenditure proposal that holds forth prospects of profits can be termed as investment. Investment is defined as spending money with the expectation of profits.

Business firms are users of capital. The user of capital has to satisfy the profit motive of the suppliers of capital. There is cost for using capital.

Introduction - Business Expenditure or Investment

Each business expenditure proposal that holds forth prospects of profits can be termed as investment. Investment is defined as spending money with the expectation of profits.

Deferment of present ability to consume to a future period is done by persons due to profit motive. The profit motive can be explained as the inducement that causes man to forego satisfying his present desires based on the prospects of satisfying greater ones in the future. Thus, every individual is motivated by profit for his personal investment decisions or deferment of consumption decisions. Professional managers of corporations are being paid to perform activities that satisfy the profit motive of the corporation's shareholders.

Cost of Capital and Profit Motive

Business firms are users of capital. The user of capital has to satisfy the profit motive of the suppliers of capital. There is cost for using capital. The cost may be a contractual obligation in case of loans and bonds. It good be a good faith obligation in case of equity capital. The manager is charge of the firm is expected to undertake activities in line with the business plans and execute them to obtain the expected profit.

Sources of Return

Capital is productive. It is continuously invested in fresh investment or expenditure opportunities that yield more profit than the current projects. From this statement, the concept of opportunity cost arises. Whenever any person is contemplating a new expenditure proposal money is being diverted to the new proposal from an old project or currently planned project. The return anticipated from the current project is the floor for the new project. The new project has to give a rate of return that is higher than that of the current selected opportunity. Thus every new proposal has an opportunity cost of capital.

Every proposal that clears the test of opportunity cost of capital is giving profit. Thus owners of capital or professional managers invest their capital in efficient proposals that give profits.

Determination of Cost of Capital

A corporation's capital is sourced from variety of suppliers. Equity Capital, Preferred Share Capital, Profits Retained or Ploughed back and debt capital are the main instruments through which capital is acquired by companies or corporations. To estimate the total cost of capital, the cost of each source of capital is to be first estimated. Then the weight of each source of capital in determined and the weighted average of various costs of capital gives the company cost of capital. This exercise can be done for each proposed project.

Originally posted in

Rate-of-Return Calculations

Engineering Economics Revision Article Series

Internal rate of return (IRR) of an engineering decision can be compared with the minimum acceptable rate of return set by the organization.

IRR is calculated by equating the annual, or present, or future worth of cash flows to zero and solving for the interest rate that allows the equality


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

Online Resources

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Originally posted in
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Equivalent Annual-Worth Comparisons

Engineering Economics Revision Article Series

With an annual worth method, all the receipts and disbursements occuring over a period of time due to an engineering alternative are converted to an equivalent uniform yearly payment. Such a calculation can give annual cost of various alternative engineering alternatives.


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

For more details


Problems and Solutions on Equivalent Annual Worth

Originally posted in
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Replacement Analysis

Engineering Economics Revision Article Series

Replacement refers to a broad concept embracing the selection of similar but new assets to replace existing assets as well as selection of entirely different ways to perform the function supported by the earlier asset.

Replacement decisions are a choice between the present asset, called defender and currently available alternatives termed as challengers.

Varieties of Replacement Necessity

Replacement due to deterioration

Replacement due to obsolescence

Replacement due to inadequacy


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

Online Material

Automobile replacement case studies for engineering economy classes
Engineering Economist, The, Spring 1998 by Hartman, Joseph C


Originally published in
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Replacement Problem - Engineering Economy Analysis

An existing compressor will supply only 60% of the predicted future compressed air requirements of the plant. Its net realizable value is $2,000 with operating disbursementsof $5,000 a year at that load. A new compressor that will just furnish the required 40% additional air can be purchased for $9,000. Its operating disbursements are $3,100 a year.

A full sized machine can be purchased for $15,000 with operating disbursements of $7,600.

The economic life of all three machines is estimated to be 10 years with salvage values equal to 10% of the present values.

Compare the machines and determine the best option for the company.

Assume any data you need.


Taylor, George A., Managerial and Engineering Economy, Van Nostrand, 1964.

Originally posted in

Machine Selection Problem for an Engineer - Engineering Economic Analysis

A machine shop engineer has to recommed a machine for his shop.

He has two alternatives.

The new machine costs Rs.3,33,800. At the end of each year of use its market value is estimated to be Rs. 2,75,000, rs.2,20,000, Rs.1,71,000, Rs.1,29,000, Rs.89,000, Rs.57,500, Rs.30,000 and Rs.20,000.

In the first year the operating cost will be Rs.30,000. In the subsequent years it keeps increasing to Rs.30,500, Rs,32,500, Rs.37,000, Rs,48,000, Rs.60,500, Rs.75,000 and Rs.92,500.

The alternaive is a second hand machine. it costs 1,29,000. Its resale value infuture years will be Rs.89,000, Rs.57,100, Rs.30,000 and Rs.20,000.

The operating cost will be 57,000 in the first year, and will be Rs.62,000, Rs.68,000 and Rs. 75,000 in future years.

What should be the recommendation of the engineer?

Originally posted in

Depreciation and Income Tax Considerations

Provisions for recovering capital invested in income-producing assets are made by charging depreciation against current income.

Depreciation charges are not actual cash flows.

Engineering economic analysis needs to take into consideration the depreciation methods that can be used by the organization.


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

Originally posted in

Sensitivity Analysis

Engineering Economics Revision Article Series

Sensitivity analysis provides a second look at an economic evaluation.

Lurking behind every decision are "what if" doubts?

What if sales are less than forecasts?

What if a new, far better challenger becomes available?

Sensitivity analysis involves repeated computations with different cash flow elements and analysis factors to compare results obtained from these substitutions with results from the most likely scenario incorporated into the original plan.

Sensitivity analysis gives an estimate of the risk of the proposed decision.


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

Orinigally posted in

Structural Analysis of Alternatives

Engineering Economics Revision Article Series

Selection of engineering alternatives from a set of alternatives depends on the structure of the set.

Independent alternatives are those wherein the acceptance of one alternative has no effect on the acceptance of the any other alternative in the group.

In the dependent group of alternatives there may be mutually exclusive alternatives and contingently dependent alternatives.

Mutually exclusive alternatives means, when one alternative is selected, the other alternative cannot be employed.

In contingently dependent alternatives, if one is selected the other one or others have to implemented.


Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996

Originally posted in

Peter Drucker - Business Organization - Economic Function - Social Responsibility

In the book, In The End of Economic Man, published in 1939, Drucker explained what had happened when central European managers had failed to meet social responsibilities. The managers had valued people only for their labor and treated them as factors of production. As they were treated like things, people had felt isolated and governed by irrational, "demonic forces" that do not think of their weillbeing. Society had ceased to be a community of individuals bound together by a common purpose in various institutions.

In a desperate situation, some were drawn to Marxism, which in turn undercut traditional values and institutions and paved the way for Fascist dictatorships. Both Fascism and Marxism, as Drucker saw them, were escapist; they could thow out established order using existing discontent as leverage but never fulfill human needs.

People need a society that could provide freedom, "status," and "function," and it is the task of business managers to help create such a society by shaping the workforce into the industrial citizens and the company into a community.

In subsequent works, particularly in The Future of Industrial Man (1942), Concept of the Corporation (1946), and The New Society (1949), Drucker emphasized that only satisfying work could fulfill the needs of individuals for autonomy, security, dignity, usefulness, belonging, and peer respect. Work was needed as much to provide "status and function" as income. People will be frustrated when managers valued labor only as a commodity. Through responsible acts of "citizenship" by manager and worker alike, the social and the economic needs of the individual, could be brought into "harmony" and thus fulfilled in the business organization.

In the case of managerial goals, Drucker acknowledged that economic goals must come before social ones. If the firm went bankrupt, managers would be unable to sutain the corporate community. Corporate "survival" depended on making a profit that not only covered costs but provided insurance against future risks. To make such a profit, managers must "create" customers by providing them with useful products and services.

The primacy of economic performance, however, should not obscure the thought that the business corporation was "as much a social organization, a community and society" as it was "an economic organ." In the "new society," which was an employee society, the firm had a responsibility to realize social values and fulfill individual needs.

Drucker expanded his ideas in later years by insisting that managers select socially responsible goals for the enterprise. He rejected the power of the market and the notion that a "hidden-hand" in the marketplace naturally converted "private vices" into "public virtues." He had never believed that competition automatically solved social problems. He diagreed with Milton Friedman's argument that businessmen should stick to "business" and should refrain from appointing themselves guardians of the common good. According to Drucker, business men were running social organizations that could help society and realize "social values." Like anyone else, they also had "a self-interest in a healthy society," and so they should follow normal ethical imperatives. Moreover, for Drucker, managers were the only true "leadership group" in modern society. If they did not "take responsibility for the common good," then no one else could or would.

Stephen P. Waring, "Peter Drucker, MBO, and the Corporatist Critique of Scientific Management" in

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Marketing Strategy - Differentiating and Positioning the Market Offering

Marketing Strategy

Philip Kotler discussed five issues of marketing strategy in his 9th edition of Marketing Management

Differentiating and Positioning the Market Offering
Developing New Products
Managing Life cycle Strategies
Designing marketing Strategies for Market Leaders, Challengers, Followers, and Niches
Designing and Managing Global Marketing Strategies
These issues are covered in different knols by me. 

 (Author's personal note: Management Theory Revision, a new blog will have all the management articles published by me on Knol and will be come MBA Revision Guidebook, the project that I started on Knol. 

This knol describes differentiating and positioning. 
Differentiating and Positioning the Market Offering

The issues discussed in the area of differentiating and Positioning the market offering are:

  • Tools for Competitive Differentiation
  • Developing a Positioning Strategy
  • Communicating the Company’s Positioning

Tools for Competitive Differentiation

Differentiation - Definition: is the act of designing a set of meaningful differences to distinguish the company's offering from competitor's offerings.

Boston Consulting Group's differentiation opportunities matrix: Actually it is a competitive advantage matrix applicable to differentiation opportunities.
Four types of industries identified by BCG matrix are:
Volume industry: only a few but very large competitive advantages are possible. The benefit of the advantage is proportional with company size and market share. Example given - construction industry
Stalemated industry: in this type there are only few opportunities and the benefit from each is small. The benefit is also not proportional to the size or market share.
Example: Steel industry - It is hard to differentiate the product or decrease its manufacturing cost.
Fragmented industry: in this type, there are many opportunities, but the benefit of each of them is small. Benefit does not depend on size or market share.
Specialized industry: in this type, the opportunities are more and benefit of each opportunity is high. The benefit is not related to size or market share.
Kotler mentions, Milind Lele's observation that companies differ in their potential maneuverability along five dimensions: their target market, product, place (channels), promotion, and price. The freedom of maneuver is affected by the industry structure and the firm's position in the industry. For each potential competitive opportunity or option limited by the maneuverability, the company needs to estimate the return. Those opportunities that promise the highest return define the company's strategic leverage. The concept of maneuverability brings out the fact that a strategic option that worked very well in one industry may not work equally well in the other industry because of low maneuverability of that option in the different industry and by the firm in consideration.

Five Dimensions of Differentiation

Regarding the tools of differentiation, five dimensions can be utilized to provide differentiation.
Services that accompany marketing, sales and after sales services.
Personnel that interact with the customer
Differentiating a Product

Quality:  performance and conformance

Performance - the performance of the prototype or the exhibited sample,
Conformance - The performance of every item made by the company under the same specification


Services differentiation

Ordering ease
Customer training
Customer consulting
Miscellaneous services
Personnel Differentiation
Channel differentiation
Expertise of the channel managers
Performance of the channel in ease of ordering, and service, and personnel
Image differentiation
First distinction between Identity and Image - Identity is designed by the company and through its various actions company tries to make it known to the market.
Image is the understanding and view of the market about the company.
An effective image does three things for a product or company.
1. It establishes the product's planned character and value proposition.
2. It distinguishes the product from competing products.
3. It delivers emotional power and stirs the hearts as well as the minds of buyers.
The identity of the company or product is communicated to the market by
Written and audiovisual media
Atmosphere of the physical place with which customer comes into contact
Events organized or sponsored by the company.
Developing a Positioning Strategy

Levitt and others have pointed out dozens of ways to differentiate an offering(Theodore Levitt: "Marketing success through differentiation-of anything", Harvard Business Review, Jan-Feb, 1980)
While a company can create many differences, each difference created has a cost as well as consumer benefit. A difference is worth establishing when the benefit exceeds the cost. More generally, a difference is worth establishing to the extent that it satisfies the following criteria.
Important: The difference delivers a highly valued benefit to a sufficient number of buyers.

Distinctive: The difference either isn't offered by others or is offered in a more distinctive way by the company.
Superior: The difference is superior to the ways of obtaining the same benefit.
Communicable: The difference is communicable and visible to the buyers.
Preemptive: The difference cannot be easily copied by competitors.
Affordable: The buyer can afford to pay the higher price
Profitable: The Company will make profit by introducing the difference.
Positioning is the result of differentiation decisions. It is the act of designing the company's offering and identity (that will create a planned image) so that they occupy a meaningful and distinct competitive position in the target customer's minds.

The end result of positioning is the creation of a market-focused value proposition, a simple clear statement of why the target market should buy the product.

Volvo (station wagon)
Target customer-Safety conscious upscale families,
Benefit - Durability and Safety,
Price - 20% premium,
Value proposition - The safest, most durable wagon in which your family can ride.

How many differences to promote?
Many marketers advocate promoting only one benefit in the market (Your market offering may have many differentiators, actually should have many differentiators in product, service, personnel, channel, and image).
Kotler mentions that double benefit promotion may be necessary, if some more firms claim to be best on the same attribute. Kotler gives the example of Volvo, which says and "safest" and "durable".
Four major positioning errors
1. Underpositioning: Market only has a vague idea of the product.

2. Overpositioning: Only a narrow group of customers identify with the product.
3. Confused positioning: Buyers have a confused image of the product as it claims too many benefits or it changes the claim too often.
4. Doubtful positioning: Buyers find it difficult to believe the brand’s claims in view of the product’s features, price, or manufacturer.
Different positioning strategies or themes
1. Attribute positioning: The message highlights one or two of the attributes of the product.

2. Benefit positioning:  The message highlights one or two of the benefits to the customer.

3. Use/application positioning: Claim the product as best for some application.

4. User positioning: Claim the product as best for a group of users. - Children, women, working women etc.

5. Competitor positioning: Claim that the product is better than a competitor.

6. Product category positioning: Claim as the best in a product category Ex: Mutual fund ranks – Lipper.

7. Quality/Price positioning: Claim best value for price

Which differences to promote:

This issue is related to the discussion of worthwhile differences to incorporate into the market offering done earlier. But now competitors positioning also needs to be considered to highlight one or two exclusive benefits offered by the product under consideration.
Communicating the Company’s Positioning
Once the company has developed a clear positioning strategy, the company must choose various signs and cues that buyers use to confirm that the product delivers the promise made by the company.


Philip Kotler - Marketing Management

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Peter Drucker on Scientific Management - Industrial Engineering

"Scientific management is our most widely practised personnel management concept" said Peter Drucker in his book The Practice of Management. The concepts of scientific management underlie the actual management of worker and work in American Industry.

"Scientific management is our most widely practised personnel management concept" said Peter Drucker in his book The Practice of Management. The concepts of scientific management underlie the actual management of worker and work in American Industry. The core of scientific management is the organized study of work, the analysis of work into its simplest elements and the systematic improvement or design of each of these elements. Drucker emphasized that scientific management has both basic concepts and easily applicable tools and techniques to carry out it intended job. Its contribution is visible in the form of higher readily measurable output.

Scientific management is a systematic philosophy of worker and work. As long as industrial society endures, we will not forget the insight that human work can be studied systematically, can be analyzed, can be improved by work on its elementary parts. Scientific management was a great liberating and pioneering insight. Without it a real study of human beings at work would not have been possible. Scientific management or industrial engineering has penetrated the entire world. Yet is has been stagnant for a long time. From 1890 to 1920 Scientific Management produced one brilliant insight after the other and creative thinkers like Taylor, Gantt and Gilbreths. During the last thirty years, it has given us little. There are exceptions like Mrs Lillian Gilbreth and the Late Harry Hopf.

According to Drucker, the lack of progress is due to two blind spots. One was the thinking that each element has to be done by one worker. Taylor saw the need to integrate and Harry Hopf certainly advocated it. According to Drucker, IE has not provided good integration tools or concepts, both individual elements and the special qualities of each man.

The second blind spot according to Drucker is insistence on divorce of planning and doing.

Drucker concluded his discussion of the topic with the statement, 'We must preserve the fundamental insights of Scientific Management - just as we must preserve those of Human Relations. But we must go beyond the traditional application of Scientific Management, must learn to see where it has been blind. And the coming of the new technology makes this task doubly urgent."


Peter Drucker in his book The Practice of Management, First Edition, 1955, Current Print 2006, Butterworth Heinemann, .pp.273-281

Plant Layout - Efficiency

Efficiency Measures of a Layout

Minimum Floor space: Efficient layout engineering can minimize floor space for a specified production output.

Minimum Materials Handling: Efficient layout results in minimum amount and cost of materials handling.

More Efficient Utilization of Machinery and Labor: An efficient layout eliminates general production delays, occasioned by congested aisles, cramped storage areas, crowding of machine layout, and improper materials handling devices, all of which lead to a slowing down of the production process as a whole and in general reduction in the output of goods from a given quantity of production machinery and labor.

Maximum flexibility of production facilities consistent with low cost of production: Production facilities and layout can be designed to attain flexibility and adaptability to meet changing economic and technological conditions.

Reference: John A. Shubin and Huxley Madeheim, Plant Layout: Developing and Improving Manufacturing Plants, Prentice Hall of India, New Delhi, 1965.


Plant Layout Optimization


Clever layout enhances bottling efficiency, 2002

Plant Layout Analysis

The Dynamics of Plant Layouts
Management Science, January 1986. (Interesting paper)

An Interesting Book in NITIE library
John A. Shubib, Ph.d and Huxley Madeheim, Plant Layout: Developing and Improving Manufacturing Plants, Prentice Hall, 1963. (658.23/742)

Originally posted in Knol number 2800

Updated 2 August 2012

Private Equity - Business concept

Private equity firms exit from their investments through one of three ways:

an IPO,
a sale or merger of the company,
or a recapitalization.

Leading investment banks are committing their own capital or principal money to PE investments. Also various sponsors are floating PE funds to attract funds from HNIs into PE investments.

Most private equity funds require significant initial investment (usually upwards of $1,000,000) plus further investment for the first few years of the fund.

Limited partnership interest is the dominant legal form of private equity investments.

Once invested, money is locked-up in long-term investments which can last for as long as twelve years. Distributions are made only as investments are converted to cash; limited partners typically have no right to demand that sales be made.

If a private equity firm can't find good investment opportunities, it will not draw on an investor's commitment.

The risk of loss of capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development, and lower in mezzanine capital funds, which provide interim investments to companies which have already proven their viability but have yet to raise money from public markets.

Consistent with the risks outlined above, private equity can provide high returns, with the best private equity managers significantly outperforming the public markets.

The potential benefits of annual returns can range up to 30% for successful funds. It may not be the average return on PE funds.

PE Roots

The roots of PE and venture capital are same. In 1946, the American Research and Development Corporation (ARD) was formed to encourage private sector institutions to help provide funding for soldiers that were returning from World War II. They had an operating philosophy that was to become significant in the development of both private equity and venture capital: they believed that by providing management with skills and funding, they could encourage companies to succeed and in doing so, make a profit themselves. ARD succeeded in raising approximately $7.4 million, and they did have one rousing success; they funded Digital Equipment Corporation (DEC). By the 1970s such private participation had permeated into the private enterprise formation, but till in the late 1970s, the task was being largely carried out by investment arms of a few wealthy families, such as the Rockefellers and Whitneys. In the 1980’s, FedEx and Apple were able to grow because of private equity or venture funding, as were Cisco, Genentech, Microsoft, Avis, Beatrice Foods, Dr. Pepper, Gibson Greetings, and McCall Patterns.

Most private equity funds are offered only to institutional investors and individuals of substantial net worth. This is often required by the law as well, since private equity funds are generally less regulated than ordinary mutual funds. For example in the US, most funds require potential investors to qualify as accredited investors, which requires $1 million of net worth, $200,000 of individual income, or $300,000 of joint income (with spouse) for two documented years and an expectation that such income level will continue.


Private Equity Funds: Business Structure and Operations,
By James M. Schell, Published 1999, Law Journal Press.
Gives attorneys, investment professionals, tax practitioners, and corporate lawyers the tools and guidance needed to handle various aspects of a private investment fund.

Private Equity: Fund Types, Risks and Returns, and Regulation
By Douglas Cumming
John Wiley, 2010

Product Design Efficiency Engineering

Industrial engineers are system efficiency designers. They evaluate the efficiency of various functional system designs proposed by functional designers and managers and wherever inefficiencies are found, will facilitate removal of them.
Product design efficiency engineering is an activity of industrial engineers.

Industrial engineers are system efficiency designers. They evaluate the efficiency of various functional system designs proposed by functional designers and managers and wherever inefficiencies are found, will facilitate removal of them.

Product design efficiency engineering is an activity of industrial engineers. As a part of the method study, the techniques of methods efficiency engineering, industrial engineers examined the efficiency of design. The development of value engineering systematized the product design efficiency engineering process. L.D. Miles started the value engineering process and did an immense service to the society.

Efficiency of the designs is analyzed with respect to its functions, its features, subassembly design, component specifications including tolerances and fits, material specifications, use of standard boughtout parts, and manufacturing processes employed in value engineering. Value engineering practice has given immense savings in the product costs in various industrial sectors.

Knol: Part of Industrial Engineering Course Page -
Introduction to Industrial Engineering - Course at NITIE
Web Page Related to Design Efficiency

Design Efficiency Will Keep Your Product From BOMing Out

Fitting Product Design to Production Efficiency

Shaping Efficiency Using CHiL Semiconductor Digital Algorithms

Palletisation efficiency as a criterion for product design
By Eberhard E. Bischoff
Journal: OR Spectrum, Issue Volume 19, Number 2 / April, 1997, Pages:139-145

Design Efficiency of Market Seeker Strategy and Marker Leader Strategy

Bob Jensen, Technical Support Team Engineer, Sauer-Danfoss
December 14, 2009

Project Management - Introduction - Revision Article

Based on Meredith and Mantel Book

Definition: The Project Management Institute has defined a project as "A temporary endeavor undertaken to create a unique product or service."

Program refers to an exceptionally large, long-range objective that is broken down into a set of projects. The projects are divided into tasks. Tasks are further broken down into work packages. Work packages contain work units.

Project Management - Definition and Objectives

In the past several decades many organizations are using project management as a basis to achieve the objectives of the organzation. Project management approach is providing organizations with powerful tools that improve the ability to plan, implement, and control activities as the utilization of resources.

The development of the techniques and practices of project management were developed more in the military organization. Meredith and Mantel give credit to government and military organizations for developing project management approach.

The three project objectives are stated as performance (scope), time and cost.

Definition: The Project Management Institute has defined a project as "A temporary endeavor undertaken to create a unique product or service"

Distinction Between Program, Project, Task and Work Packages: The military is the source of these terms. Program refers to an excetionally large, long-range objective that is broken down into a set of projects. The projects are divided into tasks. Tasks are further broken down into work packages. Work packages contain work units.

Attributes That Characterise A Project:

Purpose: A project has a well-defined set of desired end results.

Life cycle: Project will have slow beginning, size gets buildup. Peaks, then declines and has to be terminated on some day. Either it is handed to the client or it is phased into the normal, ongoing operations of their organization itself.

Interdependencies: A project has relations with other project being undertaken by the organization for various facilities. It also will have relations with various functions of the organization like marketing, accounting, finance, human resoures management etc.

Uniqueness: every project being a one time activity has some elements that are unique. Project managers will have many exceptions or new issues that crop up that they have to manage.

Conflict: Projects compete with other projects as well as requirements of various functional departments of the organization for resources and personnel. Also, project managers have to manage the conflict between the demands of the client for more and features and changes, parent organization for profit, some demands made by public where the project is located, and the project employees’ demands.

Why Project Management?

Project management focuses the responsibility and authority for the attainment of the goals of the project on an individual or small group. The project form of organization allows the manager to be responsive to:
1. the client
2. environment
3. identify problems at an early and correct them in a timely fashion.
4. ensures that managers of the separate tasks or activities of a project do not optimize their individual tasks at the expense of the total project. Suboptimization is avoided.
The Structure of the Textbook by Meredith and Mantel
It begins with the creative idea that launches most projects and end with termination of the project. The authors wrote in the 5th edition that creation of initial concept of the project was universally ignored in books project management. In their book , Meredith and Mantel included two appendices on topics creativity and idea generation and technological forecasting. In the 5th edition they moved these topics from the textbook to internet. The appendices are now available in http://www.wiley.com/college/projectmgt/

12 Vital Rules for Project Managers

1. You have to understand the project purpose and context.
2. You need to identify the stakeholders in the project and understand their wants.
3. You have to accept and use the political nature of organizations in allocation of resources.
4. You have to recognize the conflicts that are arising as the project is progressing.
5. As a project manager you need to lead from the front.
6. You have to understand what “success” means for the project every day.
7. You have to build and maintain a cohesive team.
8. Remember enthusiasm and despair are both infectious.
9. Looking forward and planning is important. One look forward is worth two looks back.
10. Always be sure of what you are trying to do.
11. Manage time – Use time carefully or it will use you.
12. Plan, plan, plan
Based on the reading given in the book “Lessons for an Accidental Profession,” by J.K. Pinto and O.P. Kharbanda, Business Horizons, March-April 1995.

Software Project Management - Summar Artlces
Chapter 1
Chapter 2 Software Lifecycle
Chapter 3 Project Planning
Chapter 4 Requirments Management
Chapter 5 Risk Management
Chapter 6 Cost Management
Chapter 7 Time and Schedule Management
Chapter 8 Measurement and Metrics
Chapter 9 Configuration Management
Original post http://knol.google.com/k/narayana-rao/project-management-introduction/ 2utb2lsm2k7a/ 2140

Selling Process - 10 Steps

Selling Skills - Process - Article - Series

Steps in selling process

1. Prospecting

2. Call planning

3. The visit – preliminaries

4. Presentation

5. Trial close

6. Listening to the objections

7. Objection handling

8. Trial close

9. Close

10. Follow-up and service

Description and explanation of each step - Knol References

Selling Process – Prospecting

1. Prospecting

Selling Process – Prospecting

2. Call planning

Sales Process – Call Planning


3. The visit – preliminaries

Approaching the Prospect

What should I wear for sales calls?


4. Presentation


5. Trial close


6. Listening to the objections


7. Objection handling

8. Trial close

9. Close

10. Follow-up and service


Additional web references on Selling

Selling Skills: Strategies and Methods - Online Book

10 greatest salesmen of all time
Business Development Mindset:Small Business Sales Planning and Execution



Welcome to Visitors from Knol.
As Knol is being discontinued from 1 May 2012, the article is moved here. The layout of this blog is made similar to Knol layout. Please subscribe to this site/blog and write your comments. This blog will management revision articles in core curriculum of MBA course. Suggestions welcome


Selling Process – Prospecting

Prospecting is an important part of selling process

Steps in selling process

1. Prospecting

2. Call planning

3. The visit – preliminaries

4. Presentation

5. Trial close

6. Listening to the objections

7. Objection handling

8. Trial close

9. Close

10. Follow-up and service


Prospecting identifies potential customers. Lead generation is a step prior to prospecting. A lead is also referred to as suspect. The term suspect indicates that a person is suspected of being a prospect. For every lead (or suspect), a salesman has to ask some questions and satisfy himself that there is chance that he may become a customer. Then that lead is categorized as qualified prospect.

The questions used in qualifying a lead as a prospect are:

1. Does the person need the products or services that I am offering?

2. Does the person perceive the need?

3. Does the person have sincere desire to fulfill his need?

4. Can this person’s need be converted into a want for the products that I am offering?

5. Does the individual have the ability to pay?

6. Will the transaction with this person be profitable?

The sales person will generate a list of prospects or qualified prospects for each period say for each day and make sales visits. Every salesman needs adequate list of prospects to earn his daily bread through sales.

How to generate leads and prospects?

The sources which provide leads can be categorized as follows:

· Cold calls

· Personal acquaintances

· Bird dogs

· People with influence in a locality

· Exhibitions and public events

· News paper and other media

· Lists and directories (telephone directory)

· Old accounts

Cold calling is door-to-door visit by the salesman to each house in a neighborhood to locate people with a need for the product he is offering.

Personal acquaintances can be the leads. They can also suggest their neighbors as leads.

Bird dogs are people, who know residents well such as real estate sales person, gas station attendant, medical shop person, etc. who can give some information.

People with influence in a locality like social workers, political leaders can be approached to get suggestions regarding persons who are likely to have the need for the product.

Exhibitions and public events can be used to attract leads. The salesman can distribution some literature or pamphlet or exhibit the product and the persons who approach him become the leads.

Newspapers and other media like internet can be gleaned to locate persons.

Telephone directory provides scope for cold calling through phone. Similarly other directories of various professionals etc. are a useful source for leads.

Old customers can be requested to suggest their friends who may have a need for the product.

Sales Process – Call Planning

Steps in Sales/selling process

1. Prospecting

2. Call planning

3. The visit – preliminaries

4. Presentation

5. Trial close

6. Listening to the objections

7. Objection handling

8. Trial close

9. Close

10. Follow-up and service

Step 2. Sales Call planning

Except in retail counter sales, and selling situations similar to this wherein the customer himself walks up to the salesman, salesman has to meet the prospect and interact with him to offer his product as a solution to the prospect’s need and want. Getting an opportunity to meet the prospect is the first step in this process. Cold calling can be tried, but for many items, the prospect may not be able to spare time at the instant the salesman barges in. the practice of making an appointment before calling on a prospect can save the salesperson hours in time wasted in traveling and waiting to see a person who is absent or busy.

Appointment making is often associated with a serious professional image, and it is treated as a gesture of respect toward a prospect. If the prospect gives an appointment, he will spare more time to interact with the salesperson and listen to his point of view, his presentation. A list of appointments aids a salesperson in allocating his day’s selling time. Appointments can be arranged by postcards & letters, telephone, emails, or during cold calls.

For making an appointment over telephone, it is advisable to plan and write down what is to be said. This will help in presenting the message concisely. The sales person has to identify himself clearly, state the purpose of the call and present interesting information about his product and seek the interview. The interview seeking sentence is preferably put forward as a question giving a choice of time to the prospect. Can I come today or is it more convenient to you tomorrow? Could it be in the morning or you prefer evening?

Appointments are easy to come by if your old satisfied customers talk to the prospect on behalf of you and arrange the interview.

A salesman has to believe in himself. You have a good offer for the prospect and he will benefit by accepting your offer. Confidence can be developed by knowing your products better and customer needs better. When you are seeking appointment, you have to be internally confident.

Successful salespeople make friends with people around the prospect. Car sales people speak to drivers as equals. The security persons of a building need to kept in good humor. They can make entry into the building easy and can even give some information on leads.

A salesperson need not waste time in endless waiting. Once an acceptable amount of waiting time has passed, he can inform that he has another appointment to make and can fix another time for the appointment.

The actually sales call needs to be planned. By planning the sales call the sales person becomes confident. As a part of the planning, an attempt is made to understand the need of the prospect. The prospect appreciates a salesman who shows an understanding of his need. A salesperson’s ability to be fluent in his interaction creates a professional image. This professional image increases sales.

The sales call plan has four components.

1. The call objective

2. The customer profile

3. The customer benefit plan

4. Presentation that takes into consideration the call objective, customer profile and the benefit plan.

The presentation that is planned must capture and maintain the prospect’s attention. It has to lead to prospect’s showing interest. It then has to increase his desire to own the product. Then only the action to buy will be undertaken by the prospect.

The salesperson has to ensure that the presentation/interaction that he has planned has statements, exhibits, and actions that result in attention, interest, desire and action on the part of the prospect. _____________________________


Originally posted on Knol http://knol.google.com/k/ sales-process-call-planning#
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