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Som_Organizational Redesign at BPCL The Challenge of Priva…

Som_Organizational Redesign at BPCL The Challenge of Priva…

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 1
Organizational Redesign at BPCL:The Challenge of Privatization
Ashok SomESSEC Business School, Paris
During his yearly inspection visit to one of the refineries during mid 2001, S. Behuria, thechairman of BPCL wondered if he would be able to see his employees as a part of the same company or would they be working in the same refinery, but under a different company name? How could hemotivate his employees to be ready for the upcoming competition within a year’s time when the stateowned enterprises in India would be privatized? Can his employees handle the momentum of the proposed organizational redesign process or would everything crumble with full deregulation of the petroleum industry in 2002?
Background History of the Company
Bharat Petroleum Corporation Ltd. (BPCL), a government owned company incorporated under the Companies Act, 1913, is in the business of refining, storing, marketing and distributing of petroleum products. The paid up capital of BPCL is Rs
1
.300 million of which Government of India (GOI) holds66.2% and the balance 33.8% equity are held by foreign institutional investors, financial institutions,employees and other investorsThe history of BPCL dates back to 1975 when the Government of India, pursuant to an agreementacquired 100% equity of Burmah-Shell Refineries Limited (BSR). The Burmah-Shell Oil Storage &Distributing Company of India Ltd. (BSM), a foreign company, established in England in 1928, was inthe business of distribution and marketing of petroleum products in India. BSR was renamed as BharatRefineries Limited (BRL) in 1976 and to BPCL in 1977. BSR was incorporated in 1952 as a Companyunder the Companies Act 1913, in Bombay. The company set up a refining plant at Mahul. Between 1991to 1994, Government of India (GOI) had disinvested part of its holdings to financial institutions andemployees of BPCL as a result the equity holding of the GOI was reduced to 66.2%. GOI planned to fullydivest its share by the end of 2002.
Crisis
BPCL operates in the retail, lubricant, liquid petroleum (LPG) and aviation fuel sector. With theongoing liberalization process in India, sectors like LPG and lubricants have been deregulated. BPCLowns one refinery in Mumbai, which has a capacity of 7-8 million tons, and it sells about 16 to 18 milliontons of crude per year. As the market is controlled in the retail business, there is a national pool of oil,controlled by the Oil Coordination Cell (OCC) which distributes crude to the three main players in India.There is one private firm in the industry, Reliance Petroleum, which cannot openly compete in themarket, but has its own refinery. The output generated from its refinery is bought and distributed by oneor more of the three state owned enterprises (SOEs) i.e., BPCL, Hindustan Petroleum (HPCL) and IndianOil (IOL), had enjoyed a monopoly under the administered pricing mechanism of the government. Withfull deregulation of the industry in 2002, the market structure will change and there will be opencompetition in the industry. One of the senior managers reflected:
"In the lubricants sector BPCL had a market share of 12 to 16%. In 1999, when the Lubricantsmarket was deregulated, BPCL's market share came down to 4%. There is a worry of what will entail when the entire sector is deregulated" 
1
1 US $ = Rs 50
 
 2Retention of market share would be a serious threat with anticipation of entry of new local(private) and global players in this sector in the country. BPCL ought to redesign itself shifting from astate-owned enterprise mindset operating under a regulated market to lean, agile, competitive, customer oriented player in order to compete for its market share.
Industry Environment and Market Structure
The business environment saw many changes after the initial phase of deregulation. India's petroleum retail sector (see
Exhibit 1
) is currently dominated by SOEs, and private domestic firms suchas Reliance and Essar Oil have been barred from tapping the market directly. This market structure isfacing impending change. With new private investment, both BPCL and HPCL will be well positioned toattract investment and increase their market share at the expense of the leader Indian Oil Corporation(IOL). Naturally the concern remains that the strategic sale of HPCL will simply be palmed off to SOE,as in the case with Indo Burmah Petroleum (IBP).With liberalization, India’s demand for petroleum products is expected to increase in the futureand is therefore attracting the attention of multinational oil companies and other private Indian players.The domestic private firms are trying to complete the construction of their refineries for the future prospects. This is bound to increase competition in this lucrative sector. For the existing SOEs this willmean a significant loss in their market share. Deregulation would also bring other changes such as product prices will be determined by the import parity prices. Margins set by competitive pressures will be more volatile and highly uncertain. Dealers and distributors may shift their allegiance andconsequently, the existing firms may lose retail sites and LPG go-downs. Firms may react by offeringminimal facilities in their highway segment of retail outlets to keep costs low and reduce lead times.Trained and experienced manpower in the industry will be lured away by the new entrants. Non-fuel offerings (for e.g., convenience stores, and automated teller machines) are likely to be thresholdactivities especially in metros and urban markets. One of the managers summed up:
"The increasing demand for hydrocarbons in India is a tremendous opportunity. The major concern is the possible and inevitable loss of market share due to an increase in the number of  players in the market place. The greatest challenge will be to retain our customers and to remain profitable" 
Redesign Strategy
On strategy one of the managers reflected:
"Our broad strategy is to win in the deregulated environment, to focus on customer service and improve our profitability. In order to beat the competition, a very strong customer focus in thewhole organization is needed. It is necessary to understand and respond quickly to the customers’ needs and expectations. The speed at which the staff responds in the market will determine the success of the Corporation. The measures of success in the competitive scenario will be customer loyalty. The whole organization has to align itself to meet the customer requirements and toacquire new competencies and skills" 
In the refinery sector, which is still regulated, BPCL has a capacity of 7 to 8 million tons, whereasit sells about 16 to 18 million tons of crude per year. To address this gap, BPCL acquired KochiRefineries, which has a capacity of about 8 million tons and is looking forward to expand opportunities inthe refinery business. Following the international model, opportunities are experimented into related andunrelated diverse fields in the non-fuel sector.BPCL hired the internationally renowned consultancy firm McKinsey on formulating an effectiveretailing strategy and opening of convenience and grocery stores.
 
 3The deregulation of the industry forced the top-management to realize that BPCL had to becustomer focused, its decision making process had to be faster which would be possible only by de-layering the hierarchical organization and by empowering its staff. Two of the senior managers pointedout:
"Most employees do not understand the nature of the business, what we are doing. Our corecompetence is not refining crude oil but selling products. This is where the market will be after deregulation. The aim of redesign was to be ready for change. This meant changing ourselves tobe tuned to the external changes. Our national competitors are Reliance and MRPL (a Joint Venture by the Birla Group of Companies) and foreign competitors will be Castrol, TotalElfFina, British Petroleum, Mobile as was witnessed with the deregulation of the Lubricants " 
Organization redesign started in 1998 with the help of consultant Arthur D. Little and its group of consultants. They formed a Project Group with over 30 people drawn from different functions and regionswith a General Manager as their leader. It was called Project CUSECS meaning customer satisfaction.Their main thrust areas were better customer service, profitability, creation of strategic business units(SBUs) and dividing the organization into regions.The redesign of BPCL saw the change of the organization structure from a functional to adivisional enterprise with strategic business units (see
Exhibit 2
and
Exhibit 3
). The six SBUs spreadover four geographical regions (North, South, East & West) are refinery, retail, industrial / commercial,lubes, LPG and aviation. The entities that support the strategic business units (SBUs) are HumanResource Services (HRS), Human Resource Development (HRD), Finance, Planning, Brands, Audit,Vigilance, Corporate Affairs (Legal, PR, Health, Safety, Environment), Strategy, IS and Project Entrance.HRM (both HRS and HRD) played a critical role in the redesign process. As one of the member of the board of directors pointed out:
"BPCL has undergone a very interesting HRD-powered transformation process […] It wasorchestrated by Arun Maria and his team from Arthur D. Little. […]Instead of providing Bharat  Petroleum with a package of vision, strategy, structure, processes […] he asked the management to carry through a very broad envisioning exercise. Some 2500 managers participated. It resulted not only in a clear corporate vision, identification of shareholders, and statement 
 
of core values,but visions were collectively evolved by each function, department, branch and section. Thisenvisioning and agenda setting was facilitated by trained individuals, many of them volunteers from functions other than HRM" 
The main theme of the vision is
“Business partner first, business partner last.
” The themes varyfor each SBU. For example, the theme of HRM department is
“It is a great place to be”
, for the Lubes it
is "Survive today, to be there in the future" 
while for the retail SBU it is
"People above oil; We care for  you; We exist because of you" 
(see
Exhibit 4
to view the corporate vision of BPCL).The necessity and the competencies required for the redesign was summed up by a senior manager:"
 It is because we have to compete! Competition is with both national and multinational companies.The key to compete is to deliver quality product at cheaper price, cut costs and keep costs in control.There should be a concern for financials by all the stakeholders with a profit building motive and  sustaining the bottom line.The required functional competency is in selling required is selling and distributing products.Customers, both internal and external, should be satisfied. The situation to manage is very fluid. Thechallenge is to manage this situation with effective leadership at all levels." 
The functional structure of the organization consisting of functions of sales & distribution, IS,Marketing and HRM, was dismantled to form the following SBU structure: (a) The Refinery SBU (b) TheRetail SBU (c) The Lubricant SBU (d) The LPG SBU (e) The Aviation SBU. The structure before the

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