Research Project

Research Project

Individual Assignment

BTEC EDEXCDEL HND DIPLOMA IN BUSINESS (MANAGEMENT & HUMAN RESOURCES) OFFERED BY INTERNATIONAL COLLEGE OF BUSINESS AND TECHNOLOGY

RESEARCH PROJECT

NAME: ADIL MUHAMMED NAZEER

BATCH NUMBER: BM-25

ICBT KANDY CAMPUS

SUBMITTED TO: MR. SUBODHA PERERA

DATE OF SUBMISSION: 31st-JANUARY-2014

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Acknowledgment It is with heartfelt gratitude and appreciation I place on record the unstinted guidance of lecturer, Mr. Subodha Perera, all my batch mates for the valuable ideas we exchanged with each other on the assignment and my parents who have been behind my every effort. Sincerely, Adil

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The impact of an increase in fuel prices on the commuters of the Kandy suburb of Akurana and automobile dealers.

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Contents Abstract .......................................................................................................................5 Introduction .................................................................................................................6 Research problem: ........................................................................................................7 Research questions:.......................................................................................................8 Research objectives:......................................................................................................9 Brief Literature review ................................................................................................ 10 Methodology .............................................................................................................. 13 Data analysis .............................................................................................................. 15 Recommendations ...................................................................................................... 21 Conclusion................................................................................................................. 22 References ................................................................................................................. 23

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Abstract

The rising fuel prices since the past decade has resulted in the demotivation of daily commuters in using private transport, as these had high running costs and many resorted to travelling by public transport, and as a result, the demand for petrol and diesel based fuel vehicles started to decline. This had majorly effected the sales and profitability levels of Royal Auto Mart who specialize in the import and sales of motor vehicles. This has resulted in the major parts of Royal Auto Mart’s annual profits being eaten away. Therefore, the organization is considering importing a new range of vehicles in the hybrid category, and this will result in positive implications for both the organization and the commuters as the use of ultra cheap fuel methods will motivate customers to purchase these vehicles and secondly also expand the profitability and sales levels of the organization. CEYPETCO, being the suppliers, may also be effected due to the lower demand of vehicles and thereby lower demand for fuels such as petrol, diesel or octane. One other stakeholder group that is affected and is to be taken note of are the commuters who find it difficult not being able to travel safely in the luxury of their own vehicles.

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Introduction

Daily thousands of commuters in the Akurana suburb travel hitherto work and back home using different modes of transportation ranging from personal transportation modes to public transportation modes. These vehicles use all sorts of fuel ranging from octane, diesel, petrol and kerosene. However, with the increase in prices of all sorts of fuel by CEYPETCO, a major impact was created on the demand of motor vehicles by daily commuters as they shifted to public transportation which was comparatively cheaper. This had gotten me to look into certain visible symptoms the business faced. Through the research, the business was found to be having cashflow problems and was found to be as a result of the low demand for vehicles that use such fuel modes. Furthermore, the study was focused on commuters of a specific area; Akurana, which is bustling suburb town 12 Km’s away from the Kandy centre. Another symptom was the congestion noted in the town which clearly meant that more and more people were using lesser private vehicles and have switched to travelling by cheaper means such as public transport and walking. The core underlining problem for the both individuals is the increase in the price of fuel by CEYPETCO. To carry out this study, the effects were studied using the sales and profitability reports of Royal Auto Mart by identifying the lowered demand they have had experienced in the past few years compared to earlier years which were comparatively better. However, the impact on automobile dealers as a whole couldn’t be justified due to the fact that I lacked looking into the performance of other major automobile dealers and had taken into account the performance of only Royal Auto Mart to give a general idea. To study the effect on commuters, the residents of Akurana were interviewed informally to identify the impact they have received solely with the increase of fuel prices. However, the limitations faced were the mode of sampling used, which was informal and people may give biased or un true views out of anger or frustration that we were interfering with their days routines. Another possible limitation was that out of the 35 divisions within Akurana, only certain districts were gone through for the interviewing process, with some being upper class districts and may contradict to views given by other district commuters. 6 BM-25

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From the process of the study, it is necessary to find a solution to the problem of constant fuel price hikes and find alternatives to it or as well as to settling on constant prices by CEYPETCO. This would also push up the sales of vehicles for automobile dealers as commuters will be more motivated to using private vehicles at their own comfort. Furthermore, this will give the business the potential to earn profits by moving into specializing in selling a new category of vehicles. Also, if CEYPETCO happens to regulate the prices of fuel, this will help the sales of other petrol and diesel vehicles of the organization as well as make it more affordable and attractive for commuters to purchase vehicles and travel at their own comfort. Therefore both stakeholder groups, the organization, and its customers will be benefited by the regulation of fuel prices. The knowledge gap that exists is that CEYPETCO may perceive the views of the upper class who find the high fuel prices affordable as a general perspective. This will result in CEYPETCO not having any knowledge on the majority of commuters who find it unaffordable, which creates a knowledge gap on their real consumer base. By trying to regulate, the knowledge gap closes as they identify the high cost that poorer commuters find.

Research problem: The lack of understanding of CEYPETCO that commuters who find fuel unaffordable is the core reason why CEYPETCO doesn’t have proper regulation, which leads to the continuous price hikes, resulting in an impact on the way commuters travel and the demand they have for automobile, thereby effecting automobile dealers.

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Research questions:

Supplier: What are costs of price regulation that interfere with survival? Is monitoring of customer satisfaction done throughout the customer base or only on the elite of the society?

Commuters/Customers: How does the price hikes in fuel effect the purchasing power? What mode of transportation do you use for daily commuting? With the price hikes intact, do you prefer travelling privately or by public transport?

Automobile dealers/organization: Has the sales of automobile declined or improved? What is your growth strategy to bring up demand again, IF price hikes remain unchanged?

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Research objectives: SMART Specific

The research is carried out specifically to find out the effect of price hikes of fuel on related stakeholder

Measurable

The research can be can be measured through the use of the proposed method of interviews

Achievable

The research can be achieved by carrying them out in the specified suburb of Akurana

Relevant

The

relevance

is

significant

as

it

highlights the impact of price hikes on standard of living Timely

The set research along with its interviews are set to be done along a time span of 7 days/ 1 week

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Brief Literature review Fuel price hikes’ effect on commuter and public transportation Previously, there have been a few studies carried out on the subject based on the research of finding how an ordinary person gets affected due to price hikes in fuel. Raye (2009) studied the relationship of impact of price hikes on transit ridership, which means the use of public transportation to commute, and concluded that there was a negative correlation between rising fuel prices and commuter ridership. The study was quite effective as he has used various techniques to carry out short term commuter forecasts. He also noted a previous study where given how much our transportation systems and attitudes have changed in the last 30 years, it seems realistic to expect consumers to react differently today. One study determined that a shift in that reaction has occurred since the oil crises, and found that short-run price elasticities have fallen from a range of -0.21 to -0.34 between 1975 and 1980 to a range of -0.034 to -0.077 between 2001 and 2006 (Hughes et al., 2007). Thus, consumers are much less sensitive to price changes today when it comes to purchasing automobile fuel than they were 30 years ago. He also stressed out that the price elasticity during the long run is more positive, making the consumers more price sensitive if a price hike persists for a long period of time, referring to a previous research (Basso & Oum). An earlier research by Wadud (2007) found the sensitivity to fuel price as it pertains to gasoline demand is also affected by household income. The study found that, interestingly, the lowest and highest income groups respond most strongly to higher fuel prices (price elasticities of 0.35 for the lowest income group and 0.29 for the highest), while households falling into mid-range income groups react less strongly (price elasticity of demand of 0.20), thereby further stressing the fact I previously pointed that the purchasing power of consumers reduces as fuel prices hike and thereby demand for private motor vehicles decrease as they opt for alternate methods.

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To stress on the impact of fuel price hikes on private transportation, a research finding carried out by Barla (2009) concluded that an increase in the fuel price will result in lesser commuters driving personally during their daily routine. Another review carried by Rotterdam (2006) which attempted to study the effect society has by the impact of rising oil prices on various stakeholder units such as public transport companies, private commuters and car manufacturers and dealers. The study portrays the responses taken by each of these stakeholders as a result of rising fuel prices and the crises faced. The study interprets that most public transportation companies are seeking to alternative methods of servicing to their customers by shifting to cheaper alternatives such as electric trains, trams and light railways. Another alternative was to move from gasoline to natural gas and hydrogen which are more cost effective and efficient. It also suggests that on the medium term a rise of ticket prices due to high fuel costs might lead to substitution effects. A user of public transport may ‘switch’ to another mode to compensate for the extra costs of public transport. In conclusion the study states that most public transport companies do not take a huge toll on their activities as the cost of fuel can be passed on to the user and spread out.

Furthermore, the study looks at the impact of fuel prices on private transport in two different perspectives, short term and long term. The short term findings prove that due to an increase in energy efficiency of the newer generation vehicles, the number of vehicles purchases have increased although the prices of fuel have kept increasing, and this suggests that the price increase of fuel is not very sensitive for owners who have energy efficient cars as these costs are minor. Further down, the impact of fuel prices on private transport on the long term perspective states that the demand of vehicles reduced as the fuel prices kept increasing. This means the impact is felt during the long run and demotivates most commuters from purchasing vehicles as the overall cost is high. The study also states that diesel vehicles gained a popularity as fuel price increased due to them being cheaper than petrol based vehicles and more fuel efficient and have a better technology. 11 BM-25

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The behavioural impact is also highlighted where it states that as fuel prices increase, the behaviour of commuters adjust by shifting their trips pattern which includes them travelling lesser or the use of the mode of public transport.

Fuel price hikes’ effect on automobile dealers The study also states the following: With regard to new (fuel) technology, the main developments are the introduction of hybrid cars by Japanese car manufacturers and bio-fuel cars in Brazil. European car manufacturers also followed the hybrid-fuel path, but at the same time endeavoured to improve fuel efficiency of for instance diesel cars. This improved fuel efficiency of diesel cars combined with prices of diesel being lower than prices of petrol has resulted in an increasing market of diesel cars in all EU countries.

There was a higher demand for hybrid and diesel technology cars from manufacturers which were in turn a necessity to be imported and sold in order to gain profit and sales to dealers in the automobile industry.

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Methodology The method used for the testing and measuring the concepts is stratified sampling where instead of distributing questionnaires, it was found that it is more effective to carry out surveys in the form of interviewing, and most of them were open ended questions where the interviewees were able to give out lengthy analysis rather than one word answers. The following were the questions used in the informal interviews for the different categories; To CEYPETCO; -

What sort of customer base are you targeting?

-

What are the costs you will come across if you have to subsidize and reduce the prices of fuel you offer?

To Commuters; -

How does the price hikes in fuel effect the purchasing power?

-

What mode of transportation do you use for daily commuting?

-

With the price hikes intact, do you prefer travelling privately or by public transport?

To automobile dealers; -

Have you been making losses or profits recently since the price hikes of fuel started?

-

What will you try to specialize in newly to carry out your strategies?

Data collection plan Primary data needed: Financial reports of the automobile dealer, fresh interview answers from the interviews carried out during the process.

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Secondary data needed: Fuel price information from the websites of CEYPETCO, and the statistical information of districts in Akurana from its respective website. In order to carry out an analysis on the research being done, a gantt chart was created to monitor and ensure the progress of the research was being done properly. The steps of the process of the research were sorted out with how much time should be allocated to each activity. The following is the Gantt chart created;

The activities will be done after every other activity finished, rather than starting them on the same day, as this will improve efficiency.

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Data analysis In order to gather results for our project, the method of surveys which is a form of stratified sampling was used rather than questionnaires due to many advantages that we found were useful in our point of view, such as less biasedness from the people getting questioned. Furthermore, there were more chances of noticing the actions and clarity of the person being questioned as we are meeting them face to face. As a result, the answers of the survey were to be taken in an open ended format rather than short, one word answers. Another reason for choosing surveys was because these were carried out in the open environment, meaning that we surveyed passers by on the streets and shops of Akurana as well as gaining open detailed answers along with certain places where smaller direct answers were needed. from automobile dealers and CEYPETCO officials. These open ended answers were essential for us to carry out an detailed research into the matter taken, which is the effect of an increase in fuel prices on commuters in the specified areas. The following are the results of the survey research. It was found that more than 500 people were surveyed in the project. As it would be too lengthy too describe the answers taken for each surveyed person, the answers were generalized into categories and views with similar answers and were converted into shorter answers to make analysis easier:

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Suppliers (CEYPETCO and others): What are costs of price regulation that interfere with survival? Less profits

60%

Creation of external conflicts

5%

Excess demand

35%

70% 60% 50% 40% 30% 20% 10% 0% Less profits

Creation of external conflicts

Excess demand

The results received from the suppliers side showed that most of them were in fear of being less profitable, as just only 26% (EIA) is the left out amount for suppliers and oil distributors. So the majority of the suppliers would be left with less profits for them as they reduce the prices of fuel making the difference between the price they sell and buy very low. The second highest mentioned problem was the excess demand, as with the demand law, the low prices would create an extremely high demand from customers and thereby make the supply unreachable to the levels of demand. The least mentioned was the creation of external conflicts, which meant that the negotiation of lower fuel prices will result in the creation of further political unrest in oil supplying nations. Is monitoring of customer satisfaction done throughout the customer base or only on the elite of the society? Throughout customer base

40%

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Elite of the society

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60%

Once the results were received, it was clear as to why there wasn’t enough price regulation as because most of the survey were done on the elite of society who may accept these high prices as a norm. Only 40% of survey was done throughout the customer base which isn’t enough to give a detailed end result to the suppliers.

Throughout customer base Elite of the society

Commuters/Customers: How does the price hikes in fuel effect the purchasing power? Less retained earnings

60%

Less resource allocation for other costs

30%

Less earnings allocated for fuel purchase

10%

It was found that 60% of the consumers found it to be a strain in their earnings as felt as though they had even lesser earnings retained for other purposes. The second most chosen answer was the inability to allocate funds for other miscellaneous costs while the remaining of them mentioned that due to the constant price hikes, they were left with the choice of spending lesser on fuel and resorting to other alternates.

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Less earnings allocated for fuel purchase

Less resource allocation for other costs

Less retained earnings

0% 10% 20% 30% 40% 50% 60% 70%

What mode of transportation do you use for daily commuting? Bus

59%

Private vehicles (Cars/SUVs/Motorcycles/etc)

17%

Train

15%

Taxis (Taxicabs/three-wheelers/etc)

9%

80% 60% 40% 20% 0%

In this survey, it was found out that the majority of the people from the suburb resorted to using buses for travelling and second to that were private cars used for travelling purposes. The third most used were trains to travel intercity and the least used at 9% were taxis.

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With the price hikes intact, do you prefer travelling privately or by public transport? Private transport

15%

Public transport

85%

Private transport Public transport

The results of this survey would give the suppliers and automobile dealers a clear image as to the effect of these price hikes. Three quarters of them resorted to using public transport as this was a cost conscious method rather than their own modes of transportation. This would also give an image to automobile dealers as to why they are performing poorly, and this can be due to lesser demand for private automobiles. Automobile dealers/organization: Has the sales of automobile declined or improved? Improved

18%

Declined

82%

100% 80% 60% 40% 20% 0% Improved

Declined

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Again in conjunction with the previous results, this gave a more supportive idea to the impact of price hikes and can be clearly seen that the sales have declined due to this as more people prefer public transport rather than bearing costs of their own transport.

What is your growth strategy to bring up demand again, IF price hikes remain unchanged? Change sales category specialization

58%

Import newer models

25%

Reduce prices of stock

17%

Reduce prices of stock

Import newer models

Change sales category specialization

0%

10% 20% 30% 40% 50% 60% 70%

This survey question was asked in order to get an idea as to what these automobile dealers were to do if the price hikes remained. And most of them have chosen to change their specialization, which may mean that they may import other categories of automobiles that may be an alternate to fuel usage, such as electric cars and hybrid cars. The second most chosen option was the importing of newer models, may they be fuel consuming or other models, these dealers may want to target only the elite with premium vehicle models. The least given answer was the reduction of prices of vehicles and few resorted to this as this may attract customers, and the reason why this was the least resorted method was maybe due to the profitability and effect on the business it had. 20 BM-25

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Recommendations Although this research has gotten the information needed in order to analyse the data in a proper way, it had certain limitations that may have reflected a wrong perspective. Some of the limitations can be as mentioned, such as the survey only being conducted in one suburb rather than many, as the perspective of various suburbs may vary. Basically, the views of only this single suburb was generalized as the views of the whole consumer base. Furthermore, the data analyzed in the end were briefed in our own words as to why the people surveyed may have chosen a certain answer rather than others, The use of the word 'maybe' meant that our answers were unsure of and may have been identified wrongly.

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Conclusion From the above analysis of the research, it can be said that there is an adverse significant impact on the rising fuel prices and demand of vehicle, although may not be visible in the short run. From the other studies and researches mentioned above, it was signified that the demand for diesel and hybrid cars were greater than demand for vehicles based off other fuel types. Also in the medium and long term the impacts of rising fuel prices may be small. Other cost factors intervene in the long term, which may neutralize the negative effects of rising energy costs. This holds in particular for urban or suburb public transport improvement in the service supply and in the quality of equipment, which could neutralize the negative effects of increased energy costs. So in favorable terms with both stakeholder units, the customers will be benefitted either by the direct interference and regulation of prices by CEYPETCO, or alternatively be able to purchase hybrid or diesel cars. Automobile dealers will find this an opportunity to gain on the loss it has incurred by low sales of petrol vehicles and find it profit making in the category of hybrid and diesel vehicle sales.

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References: Case studies, research and journals)Fiona M, Scott M 'The problems of price controls' Yale University (2001 )Nate W ' Do high gas prices sell small cars?' IWU (2004 Raven M, Hui S 'The effect of gasoline prices on household location' Federal reserve )(2010 Kenneth A 'Long run trends in transport demand, fuel price elasticities and implications of the oil outlook for transport policy' International Transport Forum )(2007 Rotterdam, 'Analysis of the impact of oil prices on the socioeconomic situation in the )transport sector' ECORYs (2006 Nicola J, Caroline H, et al 'Impact of the ecnomic crisis and food and fuel price )volatility on children and women in the MENA region' UNICEF (2009 Ashley R 'A methodology for incorporating fuel price impacts into short term transit )ridership forecasts' University of Texas (2009

Websitesheadlinesindia.mapsofindia.com. Effect of rising fuel prices on car sales. Available: http://headlinesindia.mapsofindia.com/cars/fuel-prices-rise.html. Last accessed 15/12/2013 ceypetco.gov.lk. Current Product Prices. Available: http: http://www.ceypetco.gov.lk/Marketing.html. Last accessed 17/12/2013 akurana.ds.gov.lk. District secratariat statistical information. Available: http://www.akurana.ds.gov.lk/index.php. Last accessed 16/12/2013

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