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presents analyses of the management case by academicians and practitioners
Castrol India Limited: Managing in Challenging Times
Case Analysis I
Dinesh K Gupta Professor University Business School Panjab University, Chandigarh e-mail: email@example.com astrol India Limited: Managing in Challenging Times is a rich case having strategic, marketing, financial, and control dimensions. The focus of this diagnosis is on the redesign of the management control system in the light of the changing competitive environment of an enterprise.
Castrol India Limited (CIL) started its business operations in India way back in 1919 and established itself as a dominant brand in the premium automotive lubricants segment over a period of time. Prior to liberalization of the Indian economy in 1991, CIL, like other private sector players in the Indian lubricants industry, was focused on its survival as there was a complete dominance of public sector oil companies cornering 90 per cent of the market share. While the raw material (base oil) supply was canalized through a public sector oil company, the demand was sluggish as the economy growth rate was low and this resulted in ‘under-investment and under utilization of plant capacity’ by CIL (p. 107). After liberalization in 1991, CIL found itself in a growth phase — its business environment was driven by great growth prospects, private players were allowed to import base oil, administered pricing system was discontinued, and the economy started growing at a higher rate. CIL increased its market share from 6 per cent to 20 per cent and its focus shifted towards ‘creating more capacity, modernizing infrastructure, and improving quality’ (p. 107). As it is obvious, in the high growth phase, ‘cost efficiency and cost effectiveness of the operational aspects were ignored’ (p. 103).
The January-March 2005 (Vol. 30 No. 1) issue of Vikalpa had published a management case titled ‘Castrol India Limited: Managing in Challenging Times’ by Manoj Anand. This issue features six responses on the case by Dinesh K Gupta, Anupam Bawa and Ajay Garg, Deepak Sagar Sudam, V K Vasal, Chhavi Mehta and Rajat Gera, and Satya Prakash Singh and Manoj Anand.
VIKALPA • VOLUME 30 • NO 3 • JULY - SEPTEMBER 2005
After 1997, CIL faced slow growth in its sales revenue because of intense competition, decline in the growth of automotive transportation and general industrial sectors, heavy increase in the prices of raw materials due to huge increase in oil prices after 1997, and change in engine technology requiring lesser consumption of lubricants and landed itself in a cost-effective phase. This resulted in ‘more emphasis on infrastructure and consolidation’ (p. 108). In the year 2000, CIL was acquired by British Petroleum (BP). The acquisition by BP had an impact on the control system of CIL. CIL originally envisioned itself to be ‘a market leader in the lubricant industry’ (p.106) and accordingly put in place a control system. However, after BP’s acquisition, the focus shifted to ‘value creation’ (p. 107). In order to create value, CIL focused on efficient supply chain management knowing that more than 90 per cent of its cost is the cost of raw material and that it has to reach more than 70,000 retail outlets across the country. It realized that its control system must respond to dramatic and fast-paced changes in the operating environment in order to steer the organization to achieve its cherished goal of value creation by ensuring that the strategies adopted to achieve the goal are being implemented properly. Therefore, it put in place a new control system driven primarily by nonfinancial parameters in order to effect change in the culture of the organization. The new control system was ably supported by ‘total quality management, business process reengineering, and activity-based cost management system’ (p. 103).
indicators of performance which do not look to the past and which lean to the future. These lead indicators, being futuristic and intangible, are bound to emanate from non-accounting domains. To quote Lev (2004): “Intangible assets which include a skilled workforce, patents and know-how, software, strong customer relationships, brands, unique organizational designs and processes, and the like generate most of corporate growth and shareholder value. They account for well over half the market capitalization of public companies… In fact, these ‘soft’ assets are what give today’s companies their hard competitive edge.” Research shows that non-financial measures from other domains are good predictors of financial performance (Banker, Potter and Srinivasan, 2000). These domains are focused on customers, internal business processes, and learning and growth (Kaplan and Norton, 1992). Survey results show that the measures focused on customers were highly valued by 85 per cent managers of the participating organizations, financial measures by 82 per cent, operations measures by 79 per cent, and learning and innovation measures by 50 per cent (Lingle and Schiemann, 1996). Balanced scorecard balances both financial and nonfinancial performance indicators in a manner that futuristic perspective of the organization is not affected by the historical outlook of financial measures. Experimentation with balanced scorecard results in the introduction of four new processes (Kaplan and Norton, 1996), viz., translating the vision, communicating and linking, business planning, and feedback and learning. The strategy map is prepared next based on financial, customer, internal business process, and learning and growth perspectives. For each perspective, one has to define the objectives, develop measures, fix up the targets, and decide about the initiatives to be taken to nurture the perspective. The major advantage of the balanced scorecard is that it clearly communicates the strategy to all the constituents of the organization so that people become sensitive to the realities. The understanding and discussion of strategy does not remain the preserve of boardroom alone; in fact, it becomes the subject of concern for each and everyone in the organization. Further, managing an organization on the basis of financial indicators alone is not going to help the business survive in the long run as they are more focused on the short term. Moreover, it will be better if one manages the drivers
CASTROL INDIA LIMITED
In order to respond to the current realities and to prepare itself for the emerging challenges, CIL designed and implemented a new performance management system called the balanced scorecard. The traditional performance measures like cost, revenue, profits, and ROI (Return on Investment), being financial and tangible in nature, are based on the historical financial accounting system. As a result, these measures are considered to be the lag indicators because they capture and communicate the outcomes of past actions. In order to successfully steer an organization into the future punctuated with intense global competition, fast-paced advances in manufacturing and information technologies, unpredictable changes in the expectations of the customers, and changing social and cultural values, the need of the hour is to depend on
CIL has identified four KPIs for this perspective. the focus of the top management shifted from high growth to efficient supply chain management in order to create value for the customer. are also to be worked out. financial. The list of objectives and measures is only illustrative. Further.. utility of this measure could be questioned. and learning and growth. maximization of market share. CIL. HSSE (health.. The choice of these elements. It carries a list of KPIs grouped in four categories keeping in view the focus of the management to maximize shareholders’ value. called KPIs. i. Financial Perspective This perspective signals whether the strategy and its implementation are contributing to the bottom line of the organization. with changes in the VIKALPA • VOLUME 30 • NO 3 • JULY . which are as follows: • Replacement cost operating profit as a measure of financial performance is unique in nature. A marketing-driven company. We.of financial outcome that are embedded in the base of delighted customers. and control systems. when he states that “…Performance contract is what BP has adopted. However. the case highlights that CIL is currently facing a challenge: “How to cohere the value creation in the premium sector” (p. safety. is squarely dependent on how the success of the organization is envisioned. Kaplan and Norton (1992) provide a framework for the strategy map which focuses on four perspectives. after acquisition by BP. the structure of the balanced scorecard of CIL will undergo a change. Further. CIL has low incidence of overheads in its cost structure (p. The change in focus requires totally different mindsets.. So. after acquisition by BP. It did not have granularity” (p.e. targets and initiatives. customer. The dilemma gets reflected even in the statement of Naveen K Kshatriya. viz. However. CIL was traditionally a marketing-driven company. 107) as CIL traditionally has dominance in the premium automotive segment. ethics. internal business process.SEPTEMBER 2005 137 137 . in Castrol. it should Strategy Map The top management of CIL should have clarity of vision before proceeding to design the strategy map. No attempt has been made to fix up the targets based on the initiatives taken by the organization. competitive environment. quality of internal business processes. Annexure 3 of the case does not clarify how CIL calculates this measure. say. It did not quantify. • Total cost per litre is a relevant cost measure for monitoring the cost of production. followed a different system – MBO. As depicted in Figure 4 of the case. BALANCED SCORECARD OF CIL: AN EVALUATION Vision The vision of the organization has changed over a period of time. people. organizational structures and architectures. is struggling to come to the realities of change in focus. security. 114). On the basis of this. This is obvious for an organization like CIL which has been recently acquired by BP. the focus of the top management is on maximization of shareholders’ wealth. However. Additional measures: CIL can supplement its existing financial measures with some (or all) of the measures suggested below: • As CIL is facing slow growth in revenue. 108). depending on a different focus of the management. As discussed earlier. Chief Executive and Managing Director. viz. This measure should be used by organizations which have significant investment in assets whose market value is highly volatile because of price-level fluctuations. However. A strategy map could be designed only on the basis of a clear choice of focus. • Net cash flow is a relevant measure for the survival of an organization. The strategy map captures elements critical for success. The other two components. and supply chain (Figure 4 of the case). environment). Further. It had a vision of being a leader of the lubricant industry. CIL has grouped KPIs in six perspectives. financial. The performance of the organization will be monitored on KPIs over a period of time. the KPIs may also undergo a change. increased customer emphasis. it can be logically inferred that the focus of the top management is on creation of value for the customer. Fixation of targets requires that the organization has in place a vibrant process of benchmarking and benchtrending. The strategy map of CIL is presented in Exhibit 1. the lower-end segment has also opened as BP brand has a sound presence in that segment. • Overhead cost as a percentage of gross margin is a measure relevant for organizations having high incidence of overhead cost. and capability to learn and grow.
Exhibit 1: Strategy Map of CIL Vision and Strategy Financial Perspective Objectives Increase of number of new products Develop new customers Develop new markets Reduce customer cost Reduce distribution channel cost Improve fixed assets utilization Measures % revenue from new products % revenue from new customers % revenue from new markets Unit customer cost Cost per distribution channel Sales/fixed assets Targets Initiatives Customer Perspective Objectives Increase market share Increase customer retention Measures Market share (% of market) % growth (existing customers) % growth (repeating customers) Number of new customers Ratings of customer surveys % returns Targets Initiatives Increase customer acquisition Increase customer satisfaction Improve product quality Internal Business Process Perspective Objectives Increase product innovation Reduce process time Increase process efficiency Enhance process quality Measures Number of new products/Total products R & D expenditure Cycle time Cost per litre Quality costs % defective units Targets Initiatives Learning and Growth Perspective Objectives Increase motivation and alignment Increase employee capability Measures Suggestions per employee Suggestions implemented per employee Training hours Turnover rate Enhance employee morale Empower workforce % absenteeism % line workers empowered to manage processes Targets Initiatives 138 138 CASTROL INDIA LIMITED .
In order to sensitize better management of fixed assets. ethics. consumer’s share of mind. consumer’s share of attitude. To service some of these strategies. rating agencies like CRISIL consider CIL to have “…. calculation of value added per employee may not be an appropriate measure reflective of employee contribution because more than 90 per cent of the cost happens to be the cost of bought-out items in case of CIL. target improvement in ESI score.’ Customer Perspective This perspective focuses on measures of company performance in identified target market segments. HSSE. As a result. CIL is currently using five KPIs to handle this perspective. 106). This measure can be supplemented with measures like ‘unit customer cost’ and ‘cost per distribution channel’ as it is focused on better management of its supply chain. capturing new market segments. Internal Business Process Perspective This perspective captures the resilience and robustness of the internal processes of the organization to deliver value. demonstrated product innovation ability which will enable it to maintain its market position in the medium term” (p. how do we measure if CIL is serving its customers in a better manner? Same is the case with measures like consumer’s share of mind. These are: better customer service. The strategies for this include expanding its brand users by converting non-users into users. Figure 2 of the case carries the value driver analysis. and value added per employee. CIL has not designated this perspective separately. For example. CIL can use measures like ‘percentage revenue from new products. A closer look at the analysis shows that as compared to working capital. So. For example.• • focus on market modification.’ CIL is already calculating TCPL. any addition to the existing customer base could be captured through ‘number of new customers. For example. Specific focus on ethical issues happens to be the uniqueness of CIL’s balanced scorecard.’ and ‘percentage of defective units. However. brand health index. the best-run companies are highly focused on this. Additional measures: The current set of measures can be strengthened with additional measures.’ Customer satisfaction could be monitored through ‘ratings of customer surveys.SEPTEMBER 2005 139 139 . and brand health index. However. ‘market share (% of market)’ could be used as a measure. and growth in market share.’ while final efficiency of the production process could be reflected by ‘cost per litre.’ Similarly. However. and supply chain-based KPIs could be clubbed and called internal process KPIs. In order to in- VIKALPA • VOLUME 30 • NO 3 • JULY . it is prudent to focus on a measure which is reflective of innovation of production process. innovation of new products has not been focused. These KPIs should have clear and focused measures. achievement of compliance on all HR basics.’ ‘percentage revenue from new customers. This measure is more useful in highly labour-intensive production settings. ‘percentage growth of existing customers’ and ‘percentage growth of repeating customers’ could be calculated.’ and ‘percentage revenue from new markets. In order to monitor customer retention. under the people perspective. value addition in the organization is bound to be low. ‘R & D expenditure’ could be another measure.’ Learning and Growth Perspective This perspective focuses on the capabilities of the organization to create superior internal business processes to create value. In the light of this.’ Manufacturing excellence could be attained by reducing ‘cycle time. and product modification. ‘Number of new products/total products’ could be one such measure. a new measure ‘sales/fixed assets’ could be added. viz. In order to monitor the market share. quality could be monitored through ‘percentage returns. It seems that it is not possible to clearly capture most of these measures. CIL should also focus on better management of its net fixed assets. Additional measures: CIL can use simple measures which are easy to understand and operationalize in order to strengthen the customer perspective. increasing volume usage.. CIL has not labelled any category of KPIs as internal process-focused measures. Further. it has identified three KPIs. Process quality could be monitored on the basis of ‘quality costs. the fixed assets are not being managed optimally over a period of time. consumer’s share of attitude. Additional measures: This building block of the balanced scorecard happens to be the most important and fundamental block in the sense that all other blocks are nurtured by the strength of this block.
and how in a globally competitive environment. 75(1). 56-61. D P (1996). Potter. 85(3). May-June. each perspective gets a weightage of 25 per cent. as compared to fixed asset utilization objective which can be assigned a weight of. “Sharpening the Intangibles Edge. 75-85. “An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures. balanced scorecard system helps in better managing a business enterprise because ‘whatever gets measured gets done’ in an organization. B (2004). Kaplan. in order to use the balanced scorecard for performance evaluation. With the change in the dynamics of value drivers of modern knowledge-driven economy. the role of soft and non-financial measures of performance has significantly increased. under financial perspective. in India (for the year 2001. in order to sensitize people to innovate. Chandigarh e-mail: anupambawa@gmail.’ etc.” Accounting Review. “The Balanced Scorecard: Measures that Drive Performance. J H and Schiemann. So. the case sensitizes us to understand what performance measurement is. This case helps us to understand the constructs of the balanced scorecard and demonstrates how to experiment with different designs of the balanced scorecard not only on the basis of the understanding of the current competitive environment of the organization but also on the basis of the prospective changes in the business environment. what are the different bases of performance evaluation. 65-92. D P (1992). it can be decided by CIL that all the four perspectives will be weighted equally. 25 per cent. sales and 140 . For example.crease motivation and alignment of the workforce. To build employee capabilities. say. say. some organizations use measures like ‘suggestions per employee. R S and Norton.” Harvard Business Review. For example. 1. Kaplan. January.’ ures are bound to change with changes in the competitive environment of CIL and the time horizon under focus. 5 per cent. why traditional measures of performance lost ground in modern times. Lev. From the control angle. Gordon and Srinivasan. January-February. Employee morale could be captured through ‘percentage absenteeism’ and empowerment of workforce could be monitored through ‘percentage line workers empowered to manage processes.’ and ‘turnover rate’ could be included. measures like ‘training hours. 82(6). the weights of the perspectives and the meas- REFERENCES Banker. Lingle. 70(1).com other income were Rs. W A (1996). 71-79. especially automobile lubricants. it becomes necessary that four perspectives and the chosen measures be assigned weights. CONCLUSION The case provides exhaustive information about one of the dominant players of the lubricant industry in India. 109-118. Compensation A control mechanism will lose its teeth until it is used for performance evaluation. 13.’ ‘suggestions implemented per employee. R S and Norton. the first objective (increase in number of new products) could be assigned a higher weight.” Harvard Business Review.” Harvard Business Review. specific measures under each perspective will be assigned weights depending on the urgency and importance of the objective. This also adds a dimension of the impact of control system on the culture of an organization. Further. It has had a chequered history since it was first set up in India in 1919 as the CASTROL INDIA LIMITED C 140 IL is one of the large manufacturers and marketers of lubricants.729. “From Balanced Scorecard to Strategic Gauges: Is Measurement Worth It?” Management Review. Case Analysis II Anupam Bawa Reader University Business School Panjab University. “Using the Balanced Scorecard as a Strategic Management System. Chandigarh e-mail : ajgarg@lycos. Further.4 million. Dhinu (2000).com Ajay Garg Lecturer University Business School Panjab University.2 million). Rajiv D. profits after taxation were Rs.534. January-February. So. March. 74(1).
etc. we recommend that CIL pursue stability in the present so that it can successfully adopt expansion later on. will add to the pressures exerted by the environment on CIL. It has taken many laudable initiatives in the areas of supply chain management. introduction of VAT.Indian branch of Castrol. CIL has a declining incremental capitaloutput ratio and its financial leverage is low. net worth. it should go in for increased product differentiation and market segmentation. total quality management. and made the transition from the growth stage to the maturity stage. and capital employed is going down despite an increase in asset turnover ratio. Admittedly.5 billion company to a Rs. New competitors have entered — the MNC competitors and the now invigorated PSUs are fighting for market share. profit as a percentage of sales. This course of action would enable the company to achieve its ambition of becoming ‘a market leader in the lubricant industry. Moreover. The period of rapid growth in demand accompanied by rapid expansion in revenues and profits is over. performance measurement system. The growth in demand has slowed down because of factors like hike in oil prices. the company has had to focus on consolidation and efficiency rather than growth. a leading lubricant company in the world market.’ Retrenchment as an option is ruled out for CIL as it is neither a poorly performing company nor a company in a very threatening environment. ALTERNATIVES AND RECOMMENDATIONS Out of the three generic strategic alternatives of expansion. and retrenchment discussed in detail by Jauch and Glueck (1988). working capital management. CHALLENGES BEFORE CIL The challenge before CIL is to succeed in an industry that has evolved. In addition. 10 billion company. Here it is pertinent VIKALPA • VOLUME 30 • NO 3 • JULY . The growth in the 4-stroke motorcycle segment is seeing a shift in lubricant consumption from petrol stations to retail outlets where CIL has a significant distribution advantage. the company has already taken many steps in this direction.48 per cent of the market share in 2001-2002. Though the absolute profits of CIL are going up. This strategy is also appropriate when it appears that the company is likely to face difficult times ahead. computerization. and problems in the agriculture sector. It should seek to improve its efficiency and use its assets effectively. it became a part of BP. and expansion plans of oil PSUs. business process reengineering. Liberalization of the Indian economy in 1991 changed the fortunes of CIL which had hitherto been a small company restricted by controls and quotas and earning inadequate profits. The opening up of petrol pumps by Essar and Reliance is an opportunity for a lubricant company like CIL because it will give the company access to a channel of distribution that was hitherto denied to it. The pursuit of stability strategy by CIL will mean that the company remains in its present scope of product markets and functions. The negligible debt insulates the company from the risks that come with debt and gives it an opportunity to raise funds if needed. competition has increased. stability.SEPTEMBER 2005 141 141 . The circumstances at CIL indicate that stability is the best option for the company at present. In 2001. introduction of Euro II compliant vehicles. brand management. The rise in fuel prices has adversely affected costs of all segments of consumers. The period 1991 to 1996 saw the company growing explosively from a Rs. there are indicators that point to the growth of the market for lubricants — the increase in personal vehicles in India and the completion of the mammoth Golden Quadrilateral Project by 2007 which will give a fillip to the road transport industry. CIL is not facing a major crisis currently and it is possible for the company to meet its objectives by following one of the other generic strategies. The continuing rise in crude oil prices and base oil prices. Price undercutting by small regional competitors and the tendency of public sector players to absorb the high raw material costs to gain competitive advantage can also put stress on CIL’s margins and market share. the introduction of Euro III compliant vehicles. Moreover. 1. especially the small fleet operators. From 1997 onwards. The lube oil business in the passenger car segment is driven to a large extent by the workshop channel where superior service propositions along with strong brands has led and should continue to lead CIL towards making significant business gains. The strategy of stability is good for those companies which are in a mature product market evolution and for companies which have expanded fast and are in danger of becoming unmanageable and inefficient especially because of costs having gotten out of hand. to recall that CIL held 17. and this has had an adverse impact on their use of lubricants.
and level of sophistication of technology used to produce lubricants. CIL will be in a very good position to pursue its ambition of becoming a market leader in the lubricant industry. This will give it more sources of competitive advantage. It can invest to tap more sources of differentiation. functional areas. the company has very little leverage. large capacity. It has a strong competitive position in a mature industry but will need to invest further to increase its capacity as it has operated at more than 100 percent capacity for the past few years. among other things. long experience in this product and market. it should act to develop both low cost and differentiation strate gies simultaneously. this will penalize those who performed well to the best of their ability in the base year.’ We feel the case should have supplied information. in fact. about the extent of backward integration. While one understands the need for growth. For a company ‘that is essentially a marketing company. Stability is not a glamorous strategy but an effective strategy. Maruti Udyog Limited and Hero group of companies are two examples of companies that successfully and diligently followed this strategy after a period of rapid expansion. at present. Following the generic strategy of low cost should not be difficult for CIL as it has a high market share. By adopting this strategy. Employees. 142 142 CASTROL INDIA LIMITED . CONCLUDING REMARKS There are a few decisions taken by Castrol on which we cannot help but comment. and performance units will learn to reduce their ‘tension’ by under-performing. Pursuing these recommendations may be easier for CIL than for its competitors in a similar situation.Product differentiation and market segmentation have also been recommended by Hill and Gareth (1998) who have identified four non-price competitive strategies as part of the strategies to manage rivalry in mature industries (Figure 1). ownership of refineries and oil wells by BP.’ Surely. It should. The cost minimization efforts of the company should not extend to promotion activities of the company. It can do so by using retained earnings and partly taking debt as. Figure 1: Four Non-price Competitive Strategies Products Existing New Existing Market penetration Product development Market Segments New Market development Product proliferation Source: Hill and Jones (1998). spend money to enhance its brand awareness and brand image and thus help cultivate brand loyalty for its products. This is not a segment that has global awareness or transnational homogeneity.’ the choice of a brand name ‘Vanellus’ for a product positioned at the trucking segment is surprising. Additionally. CIL is currently following the generic strategy of differentiation. It is not the appropriate segment for leveraging a brand name that the company uses in other markets. capacity utilization at CIL. Paucity of information prevents us from using concept/tools of analysis that could have been helpful to Castrol — the most significant tool being Michael E Porter’s ‘The Five Force Model. and a parent company that is not only large but also vertically integrated. one has reservations about the efficacy of a system that ‘will start by multiplying your targets by two. It should also serve the marine segment and industrial segment of the lubricant market apart from finding out new uses for lubricants. CIL should tap its corporate parent’s (BP’s) portfolio of products and list of market segments identified in the more developed markets of the world.
CIL has a stable market share of around 16 per cent. All India Publishers and Distributors. The acquisition of CIL by BP and the amalgamation of TATA BP Lubricant India Ltd.REFERENCES Hill. Also. Under these circumstances. William F (1988). Strategic Management Theory: An Integrated Approach. which can be seen as either the entry of new companies or as increasing market share of small and local niche players.03 per cent in 2000-01. Table 3 of the case also indicates that the market share for the sample of 73 companies has shrunk from 97 per cent to 70. Due to the advancement in the engine technology and not so favourable conditions in the transport industry. McGraw Hill Series. Secunderabad e-mail: deepaksagar@gmail. Lawrence R and Glueck. Some of the issues before the management are: • • • • shrinking market size for lubricants eroding margins/cost management increasing competition performance management system and choice of KPIs. the automobile segment constitutes around 60 per cent of the lubes.com IL was set up in 1919 as a specialist lubricant company committed to premium quality. the organizations in the lubricants industry should look for new markets and VIKALPA • VOLUME 30 • NO 3 • JULY . the consumption of lubricants has been going down. The total market size of the Indian lubricant industry has been growing both in terms of value and volume. industrial.93 per cent. The case provides a perfect example of how the strategic management of a company helps in responding to the changes in economic policies and competitive scenario. high performance. Over the years. have provided the company with a new line of products to enter the lower segments of the market. The automobile segment can further be classified as: • • • commercial transportation (HCVs and LCVs) personal four-wheelers and two-wheelers agricultural (tractors and threshers). 5th Edition. Business Policy and Strategic Management. SHRINKING MARKET SIZE FOR LUBRICANTS Of the three broad segments of the lubricants industry (automobile. the company has achieved a significant presence in the premium automotive segment. and marine). the acquisition of CIL by BP has brought about a cultural change in the company from chasing production targets to cost effectiveness. the demand for lubricants is primarily driven by: • overall growth of economy C • • • • • • industrial production conditions of automotive transportation vehicular sales and population structure growth of agricultural sector freight rates (which are affected by diesel prices) government vehicular regulations. which has shrunk to 12. The company has strategically shifted its focus from survival to growth in volumes to supply chain and cost management. Jauch. CIL has gone through three phases during the last decade and a half as given in the case. Case Analysis III Deepak Sagar Sudam Management Trainee Coromandal Fertilizers Ltd.SEPTEMBER 2005 143 143 . Charles W H and Jones. 3rd Edition. As illustrated by the case. Gareth R (1998). and leading-edge technology.
and standardization of requirements will reduce the raw material cost.9% in 2001). and try to increase their share in the existing segments. BP is a performance-driven organization and the performance contract system will certainly help in improving sustainable real performance and integrating CIL into BP’s systems (BP is known more for cost-effectiveness and performance management systems). as a whole. COST MANAGEMENT The cost structure of CIL indicates that raw materials constitute around 90 per cent of the total cost. and efficient cost and performance management. These are segments where brand communication and brand recall are very important. scale. the details of which are as follows: Number of tractors Frequency of engine oil change Average running hours in a year Average consumption per oil change 30 lakh 200 hrs of running 1. service centres. automobile companyowned garages to address the issue of competition. As rightly mentioned in the case. and customers. It should now focus on new segments like LCVs and the agriculture and the rural sectors. It should also realize that there is a market. on the other. The agriculture and the rural sectors offer quite a good volume for lubricants as indicated by a survey done in the tractor showrooms of Sagar town in M. The companies in this sector. In the process. on the one hand. Branding will be the differentiating factor in this competitive scenario. CIL should consider having tie-ups with influencers like mechanics. channel partners. But. Inventory management. CASTROL INDIA LIMITED 144 144 . the economies of scale would play a key role and BP being a dominant player in the world lubricant industry can always negotiate for the best deals for all the SBUs (which means a common supplier/suppliers for all the BUs will give the advantage of scale and negotiating power). The personal vehicles and LCV segments require education regarding regular use of lubricants. the number of players has increased leading to severe competition and eroding market shares. simplicity. Another important observation is that the excise duty as a percentage of sales has gone up (from 0. the company has to be focused on the segments in which it is already operating. Average consumption of lubricants in a year 25 litres Total market size (‘000 litres) 75. in the diesel engine (used for irrigation) segment. which is equal in size to tractors. CHOICE OF PERFORMANCE INDICATORS The performance contract signed by the AMESA-BU of BP is broad-based and robust. At the same time. procurement. and manufacturing costs are very important in cost management. value partnerships. As rightly indicated in the case. CIL has been focusing more on the HCVs. efficiency.new segments. need to negotiate with the government for reducing the excise duty. product innovation. supply chain CONCLUSION CIL’s objective of becoming the undisputed leader in the lubricant market can be achieved by venturing into new segments. One can withstand competition by getting into deals with the channel customers. The performance scorecard of CIL-PU covers almost all the aspects of business. freebies and loyalty building programmes like membership clubs have to be developed). quantification and measurement of these KPIs is challenging because not only it is difficult to quantify but also the measurement of these KPIs can restrict creativity.P. Finding New Segments So far.000 hrs 7-10 litres INCREASING COMPETITION While the market is limited. Industrial and marine segments are more institutional in nature and require building long-term relationships and creating win-win situations. it is very important for the company to maintain its relationship with the government.89% in 1991 to 16.000 CIL should try to build relationships with the endcustomer (farmer) and increase its presence and brand communication in rural areas. They can be tapped only by building brand loyalty (for this. Sustaining market share is the key for reducing overhead cost per unit and being profitable in the business. suppliers.
In this phase. It focused on margins.com IL is a prominent publicly traded business entity in India. made entry into the top-end and value added VIKALPA • VOLUME 30 • NO 3 • JULY . The case cites that phase III has brought about a sea change in the cost and performance management systems at CIL. Mumbai (BSE). CIL shifted its focus in phase III from ‘growth’ to ‘consolidation. CIL’s strategy in the supply chain was to keep pace with the explosive growth. it had insufficient profits and inadequate infrastructure (under-investment in the plants) in this phase. A feature of phase III is the introduction of a ‘performance contract system’ in CIL. Equity securities of CIL are listed for trading on the Bombay Stock Exchange. Phase II. as stated in the management case. a significant player in the lubricants segment of the ‘oil and gas’ industry with a vision to be an undisputed leader in the premium automotive lubricant market has formulated and implemented varied business strategies. But. With the liberalization of the Indian economy since July 1991. it achieved a market share of 20 per cent in this phase though by ignoring cost efficiency and cost effectiveness aspects of its activities.’ In this phase. at the marketing end. BP acquired a controlling stake in CIL and since then CIL is a subsidiary company of BP. With environmental changes such as increased competition in the product market and introduction of advanced engine technology in the automotive sector. and packaging of the products. termed as ‘growth phase. And. The present management case.’ In this phase. In July 2000. and controlled costs.1. CIL took a strategic decision in this phase to shift its focus from ‘survival’ to ‘growth. strategic options exercised by the CIL. the strategic thrust of the company was on making supply chain management more efficient and effective. As stated above.10 billion business in a time span of six years. Phase I refers to period prior to 1991 and has been termed as ‘survival phase. CIL had reached a market share of 20 per cent by 1997. C DIAGNOSIS During the last one-and-a-half decades. CIL had focused on managing within the limited availability of the prime raw material — base oil. CIL was effectively a small company struggling for survival. private sector lubricant companies. Also. it focused on creating new opportunities/brands. Hence. the case has discussed six strategic themes that CIL has developed for meeting the challenges of contemporary business environment. The company had no strategic thrust on supply chain management. phase III is termed as ‘cost-effective phase’ in the case.50 billion business to Rs. the company planned for ‘growth in market share and 30 per cent growth in volume terms’ and a transition from a Rs. In the changing business scenario(s). At the back end of the business. In the late 1990s though. the factors as well as the product markets have undergone structural changes. CIL has gone through three distinct phases. Rather. has discussed the changes in inputs and product (lubricants) markets. inter alia. Instead of 145 145 . inter alia. By focusing on volume growth. The case has identified and discussed business strategies adopted by the CIL corresponding to each of these three phases. were allowed to import base oil. segmenting the market.’ In this phase. And ‘oil and gas’ industry is no exception to these general trends. and the payoffs (actual and expected) of distinct business strategies of CIL in the postreform era. the thrust was on ‘how to get the next base oil consignment. It belongs to the lubricants segment of the ‘oil and gas’ industry. say by 1997.SEPTEMBER 2005 products.Case Analysis IV V K Vasal Reader (Associate Professor) Department of Financial Studies University of Delhi-South Campus New Delhi e-mail: vkvasal@rediffmail.’ That is. CIL. the company found it difficult to sustain the double-digit growth rate of the past owing to significant structural changes in inputs and product markets.’ began with the economic reform measures initiated by the Government of India in July 1991.
The salient features of this discussion are as follows. And. 1 Data from this Annexure. an interesting finding is with respect to ‘dividend pay-out’ ratio. common-size statement and cumulative annual growth rate (CAGR) on select data items for two phases of CIL are summarized in Table 1. it is found that CAGR is negative for both PBT and profit after-tax (PAT) in phase III. despite an increased focus on efficient cost management and supply chain management. shareholders are an important stakeholder group in a company. has been accomplished to the extent of 12 per cent. In fact. overall.relying on a few financial measures. Fourth. Also. cost efficiency in the consumption of raw materials. displayed correctly). this has prompted a validity check on the data set. profit before-tax (PBT) as a per cent to sales is 2. as expected. and environment (HSSE). financial performance (in phase III) by unit price improvement. Thus. though. that is the phase III (cost-effective phase). Obviously. By extrapolation. the ‘performance contract system’. The results presented in Panel A of Table 1 show that in phase III. strategy development. Additionally. Table 1 (Panel B) shows that CAGR of ‘dividend pay-out ratio’ in phase III is 16 per cent visà-vis 14 per cent in phase II. There is a coding/typographical error and data for aforesaid two items for years 1998 to 2000 have been incorrectly displayed in Annexure 2 with column headings 1997 to 1999 (Data for 2001 are. the results have been depicted and discussed for the years 1998 onwards. Second. the case has not adequately utilized the data exhibited in Annexure 2 to learn about the extent of improvements or otherwise in the performance indicators in phase III (1998-2001) vis-à-vis phase II (1992-1997). ethics and efficiencies. First. Under this system. Second. Since these phases are characterized by two distinct business strategies. it is considered worthwhile to compare the payoffs of dissimilar strategies. brand and customer. the management of the working capital has improved over the period 1998 to 2001. Seemingly a data gap. and cost reduction initiatives. data are presented for a period of ten years. security. However. a dividend pay-out of more than 80 per cent cannot be sustained by the CIL without compromising its needs for replacement and expansion of capital assets and eventually using accumulated free reserves. safety. we feel that there are two shortcomings in the findings discussed in the case.7 per cent as against almost 20 per cent in phase II. achievable (stretched) targets are set for a year in the areas of finance. the most relevant issue/question that merits prime attention is. Table 1 (Panel A) shows that CIL has distributed an average of 82 per cent of its PAT in phase III as against 41 per cent in phase II. In the Annexure. 1992 to 2001. the case concludes by stating that CIL has been able to maintain its strong 1 Data in Annexure 2 are presented for ten years — 1991 to 2001 (with data for the year 2000 apparently missing). people. have been processed to produce results on management of working capital (Table 5). the staff and other operating expenses have ballooned. focuses on a broad set of perspectives and at all the levels of the organization. the bottom line of the company has suffered as against an annual increase in sales during the period 1998 to 2001. Using data from Annexure 2. the impacts of a shift in business strategy from phase II (growth) to phase III (consolidation) on business performance. emulating BP’s tradition. By accessing data on ‘sales and other income’ and ‘profit after taxation’ for four years — 1998 to 2001 (CIL follows calendar year as its financial year) — from BSE’s website. operating performance (Table 6). lower material costs. ANALYSIS The financial highlights of CIL are presented in Annexure 2 of the case. efficiencies in supply chain. Third. data exhibited in Annexure 2 are re-designated as pertaining to ten-year period. First. business strategies in phase III have not added to the bottom line. value driver analysis (Figure 2). efficiencies in the usage of raw materials have not translated into improved profit margins. supplemented through other sources. the company has created substantial shareholder value. Some further insights regarding the impact of two business strategies on operating performance are obtained by examining the findings presented in Panel B of Table 1. discussion in the following paragraphs has used data from Annexure 2 by re-designating columns 1991 to 1999 as 1992 to 2000. strategies adopted and implemented by all the publicly traded companies should CASTROL INDIA LIMITED 146 146 . its performance should also be evaluated in terms of the value that a shift in its business strategy creates/destroys in the capital market. Fifth. Importantly.4 per cent lower in phase III. In view of the fact that CAGR of PAT is 9 per cent (negative) in phase III. This finding has provided additional evidence on the cost efficiencies related to the use of raw materials in phase III. the following is inferred. profitability performance (Table 7). Panel B shows that the cost of raw materials in phase III has grown at a lower CAGR of 7. given the fact that all management systems and strategic initiatives are only means to an end. As CIL is a publicly traded company. However. health. With respect to the above. and stockholder value analysis (Figure 3). arguably. Lastly. the company has been able to optimize its base oil cost. 1992 through 2001. From the viewpoint of shareholders.
0520 0.82 Difference (4)= (3)-(2) 0. VIKALPA • VOLUME 30 • NO 3 • JULY .beindia. For the period 1997-2001 (phase III). ‘benchmark return’ has been measured by using year-end values of three index portfolios for which data for the period 1992 to 2001 are available.5.55 7.SEPTEMBER 2005 147 147 .2823 0.46 20.1842 0. Table 2: Business Strategies and Market Performance — Cumulative Annual Growth Rate (CAGR) Portfolio of Assets (1) Sensex BSE100 BSE200 Benchmark 1992-97 1997-2001 (2) (3) 0.2 per cent against Sensex. however. The excess CAGRs found for this phase are 16. Mumbai (www. BSE 100.1763 0.CIL 1992-97 1997-2001 (4) (5) 0. Results for this period show that the market value of CIL equity has grown at a CAGR of 5.0240 (0.’ The aforesaid inference of the case on creation of shareholder value has.66 6.00 (11.20 13.2641) 0. and BSE 200.3. ‘Sensex’.29 3.83) 8. and 37. In order to validate the finding obtained for phase III above.64 40. 15.1 per cent during this period.3829) (0.1624 Difference (4)= (3)-(2) (0.2124 (0.26 41.0283) (0.1293) (0.7. however. This rate is much lower than the CAGRs of 26.1813 (0.72 15. a comparison of CAGRs in market value of CIL vis-à-vis ‘benchmark assets’ has been attempted for a time-period subsequent to the sample period covered in the case: 2001-2004. additional analysis has been performed here by collecting data on the year-end market value of equity of CIL as well as ‘benchmark asset(s)’ for the sample period of ten calendar years.0706) (0.0133) (0. Table 2 summarizes the results on the CAGR at which wealth has been created by CIL vis-à-vis three ‘benchmark asset(s)’ in two distinct time periods (phases of business strategies).0094) Market Value .33 1.27 0. Relevant data for this purpose have been collected from the BSE.1576) (0. For assessing the extent of wealth created/destroyed by CIL business strategies. neither used a comparative setting (phase II vis-à-vis phase III) nor has it reported and discussed the CAGR at which CIL has 2 created wealth against a ‘benchmark asset.29 1998-2001 (%) (3) 100.0395) 0. 1992-2001.0768 0. Hence.2027) (0.4627) 0.78 0.3726 0.39) 0.0901) 0.0403) (0.1216) (1.0047) (0. the results show that market value of CIL equity has eroded at a rate faster than the ‘benchmark assets.37) (3.Table 1: Business Strategies and Operating Performance Panel A: Common-size Statement Items (1) Sales and other income Raw materials consumed Excise duty Expenses Interest Depreciation Profit before extraordinary items and taxation Taxation (including deferred taxation) Profit-after-taxation Dividends pay-out 1992-1997 (%) (2) 100.0796 0.1670 0.87 16. ‘BSE 100’ index and ‘BSE 200’ index. Based on the analysis.9. 2 The case has performed ‘shareholder value analysis’ by using select accounting and market value-based indicators but only for the time period 1998-2001 (phase III). 17. respectively.2365 0.1529) (0.90 81. 32.1576) Differential Return 1992-97 1997-2001 (6)=(4)-(2) (7)= (5)-(3) 0.40 12. and BSE 200. BSE 100.1985 1. This finding is in direct conflict with the inference drawn in the case that ‘overall the company has created substantial shareholder value ‘ in phase III.4 per cent found List of KPIs of CIL does not include market value-based metrics.51 12.39 0.11) 0.1405 1997-2001 (3) 0.1576) (0.1975) (0. The results presented in Table 2 show that CIL had created wealth in excess of the ‘benchmark assets’ during the period 1992-97 (phase II). These are.1585 0. respectively.com).0. and 14.1527 0.3122 0.38 (2.’ an objective measure for assessing the effectiveness of business strategies. the case has inferred that ‘overall the company has created substantial shareholder value.0915 (0.8 per cent higher for CIL as against those observed for Sensex. and 21.53 Panel B: Cumulative Annual Growth Rate Items (1) Sales and other income Cost of raw materials Excise duty Expenses Interest Depreciation Profit before extraordinary items and taxation Taxation (including deferred taxation) Profit-after-taxation Dividends pay-out 1992-1997 (2) 0.’ The CAGRs of erosion in wealth are 12.6.0219 Source: Annexure 2 of the case.00 46.95 (1.26 6.2365 (0.1481) Source: BSE.00 58.2365 0.49 18. necessarily aim at creating wealth for the shareholders.0602 0.3777 0.0695 0.1965) (0.1929 0.4226 (0.
in • • achieve top line growth while maintaining profitability identify the relevant performance indicators to enable strategy implementation. within a period of five years. the profitability performance of CIL has not improved in phase III (cost-effective phase) vis-à-vis phase II (growth phase). contrary to the inference drawn in the case. liquid. T • • he issues facing Mr. Naveen Kshatriya.in Rajat Gera Assistant Professor Fore School of Management New Delhi e-mail: firstname.lastname@example.org per cent higher than the CAGR of CIL. 3 These findings suggest that the strategy of consolidation (phase III) has not created adequate wealth for the equity holders of the CIL. in November 2003. This is 52. it started yielding ground to equity of other companies and. by using its current business strategy (phase III). Otherwise. and BSE ‘oil and gas’ sector index (effective June 2005). it is recommended that CIL should effectively leverage the power of their two brands — Castrol and BP — to continuously grow in all segments of the ‘oil and gas’ industry. an extensive and deeper analysis performed here has led to the following conclusions. in October 2002 are how to: decide on the strategic direction for long-term sustainable and profitable growth cohere the Castrol and BP brands value creation process especially within the diesel engine oil (DEO) segment STRATEGIC DIRECTION CIL has a vision to be the undisputed leader in the CASTROL INDIA LIMITED 148 148 . had ‘created substantial shareholder value’ in phase III. Rather. The foregoing developments imply that CIL is not a ‘large. AND RECOMMENDATIONS CIL is a prominent publicly traded business entity in India. the company is destined to be a ‘niche’ player in the lubricants market with progressively lower ratings in the Indian capital market. the scrip has ceased to be a constituent of BSE 100 (effective September 2004). phase III has not created shareholder value. CIL had travelled through three distinct phases. Since then.for Sensex. the case had presented the facts and findings on the distinct business strategies and their outcomes in phase II and phase III. Second. This is evident from the fact that it entered into the elite list of Sensex (a basket of 30 ‘large. Case Analysis V Chhavi Mehta Senior Lecturer Fore School of Management New Delhi e-mail: chhavi@fsm. This inference is further supported by the following facts concerning the market rating of the equity of CIL. First.ac. and representative companies’ listed on the BSE) in November 1998 (early stage of phase III business strategy of CIL). it ceased to be a constituent of Sensex. inter alia.’ Since ‘cost-effective/consolidation’ strategy has not produced shareholder value matching the expectations of the capital market thus impairing its market standing. and representative company’ anymore. CIL has destroyed shareholders’ wealth in phase III at a rate faster than the select ‘benchmark assets. 3 Subsequent to the beginning of phase III of CIL in 1997. CEO and Managing Director of CIL. CONCLUSIONS. Using data for the years 1992 to 2001. respectively. Over a time span of about a decade-and-a-half. Historically. BSE has launched ‘oil and gas’ sector index. equity of CIL has been rated very high in the Indian capital market. However. CAGR of oil and gas index for the period 2001 to 2004 is 57. But. SUMMARY.4 per cent.ac. is not able to create wealth in the capital market at a rate achieved by assorted securities constituting a general index or by its peers in the ‘oil and gas’ industry. Currently. An analysis of the results in the case had shown that CIL. liquid. equity of CIL forms a part of the BSE 200 index and is classified as a ‘midcap’ stock at BSE. and BSE 200. BSE 100. These facts lend qualitative (indirect) support to the inference that CIL.
i. i. The BP master brand affords CIL an opportunity to launch new products with the generic value proposition of fuel efficiency at lower prices which is also likely to enable the company to maintain its market share and volume growth rate. which is critical for cost efficiency. etc. The company has managed to acquire a strong market share based on distribution innovation.e. It cannot compete primarily on volumes as discussed..e. Though staff and other operating costs have gone up disproportionately. i. • Same products-new segments: Identify new market segments which would be willing to pay a premium for performance-based products under the Castrol master brand. Castrol -Activ 4T/GTX Magnatec/ CRB Plus which deliver segment-specific product benefits such as superior engine protection within the first ten minutes of a start-up or longer engine life. if required. which can be. manufacturer/vehicle specific and for which customers are willing to pay more. a need to micro segment the market and develop segment-specific products and sub-brands within the DEO space. Needless to say.e.premium automotive lubricant market. by 3. it should identify and exploit multiple niches to achieve pricing freedom and cost effectiveness at the same time through its retail distribution network. Given the predominance of DEO segment in the lubricant market for both volumes and value growth. Due to structural changes in the market. To maintain its predominance in the premium segment. these segments which experienced high volume and value growth may not be able to deliver the same volume or value growth. For example. the company has been able to increase the price marginally. developing a strong alternative retail distribution network and product innovation based on tangible benefits while scaling up its supply chain to match the high growth rate experienced by the lubricants market in the nineties. • New products-new segments: Identify new products or services targeted at new customer segments.99 per cent. CIL would have to undertake significant product and/or distribution innovation to retain its leadership in the premium and popular segment. The company can also explore the possibility of launching new services such as innovative workshops or distribution innovations for discerning customer segments. VALUE CREATION Both the brands. Indian players intend to leverage both economies of scale and scope and compete in the high product quality space (except for HP) though only IOL intends to compete on high price (Figures A and B). i. the company needs to develop new products (sub-brands) with specific product benefits targeted at niche customer segments. deliver unique product benefits targeted at different customer segments though BP may cannibalize Castrol especially in the DEO segment in line with the emerging market trends.5 per cent annually between 1998 and 2001 (Table 1). There is therefore. Since CIL does not have the economies of scale or scope of these players in base oil processing and petroleum products distribution. for example. Overall. BP and Castrol. which is facing commoditization due to increasing competition. It has achieved its objective in some market segments by performancebased sub-brands.5 per cent on an annualized basis between 1998-2001 despite the increase in sales by 7. and the customer becoming price-sensitive accompanied by rising input costs. CIL needs to maintain its predominance in this segment.. CIL can evaluate its growth options using the Ansoff (1957) matrix: • New products-same markets: Launch new products aligned with the current desired product attributes such as fuel efficiency in current market segments such as DEO. CIL can develop a sub-brand targeted at the commercial DEO segment in the desert terrains of Rajasthan and Gujarat for superior engine protection.25 per cent and 12. by 8.SEPTEMBER 2005 may be developed for the SUV vehicular segment both commercial and passenger.e. The mass of the DEO segment is likely to value fuel efficiency and may shift to BP thus helping CIL retain its overall market share.. This would need to be based on market research. i. For example.. • Same products-same segments: Intensify marketing efforts to increase lubricant consumption per vehicle especially within the DEO segment through increased communication and distribution efforts.e. 149 149 . PROFITABLE VOLUME GROWTH CIL has been facing eroding margins in spite of cost management measures as the bottom line of the company has suffered a loss by 8.. a subbrand with the promise of superior engine performance VIKALPA • VOLUME 30 • NO 3 • JULY .97 per cent respectively. both the brands should share the same supply chain and distribution chain for cost effectiveness.
7 per cent. A look at CILs Silvassa plant KPIs shows that almost all the KPIs are directed at other manufacturing expenses and plant manpower expenses which is 10 per cent of the total cost structure CASTROL INDIA LIMITED 150 150 .39 1999-00 12.18.541 57.972 62.3 per cent to 22.97%-case p 110) which includes selling and administrative expenses(S&A).565.4 2. PBIT (net sales-excise-RM cost-expenses-depreciation) as a percentage of net sales has decreased from 18. Thus.49 2000-01 13.18.6 per cent to 10. BPCL HP Level of product quality in terms of features IOCL Medium Low Low Medium High Price position relative to product quality Table 1: Sales Realization of CIL — 1998-2001 1998-99 Sales revenue (Rs in million) Volumes (‘000 litre) Average selling price (Rs/litre) Note: 12. A look at the income statement (Table 2) and cost management measures between 1998 and 2001 shows that expenses as a percentage of net sales has increased from 18.Figure A: Strategic Group Analysis based on Annexure 1 of the Case Figure B: Strategic Group Analysis based on Annexure 1 of the Case High GOCL.186.69 This table is based on data from Table 2 and Annexure 2 of the case.08.6 per cent due to annual increase of staff expenses (8.25%-case p-110) and other operating expenses (12.4 2.1 2.729.690 58.
8 per cent while EVA has declined.567.709.5 1.6 0.0 0.1 12. and 7 and Annexure 2 of the case.2x 44.1 423.453. which constitutes 90 per cent of total costs.2 39.7 10.792.2 -63.7 per cent in spite of the decrease in net capital employed by 6.9 1400.1 10. almost all the KPIs at plant level are directed at 5-10 per cent of the cost structure and the same have increased as percentage of net sales within the given period due to increased staff and perhaps S&A expenses which may have increased due to increased competition. though the company is creating shareholder value.573.195 0.64 -48.1 2.9 12.994.4 13.014.1 1.4 0.1955.8 13.726.523.6008x 26. the amount of annual economic value created has declined by almost 50 per cent.9 5.806.1 10.8 6. Table 3: Financial Measures of CIL — 1998-2001 Table 3 shows that between 1998 and 2001.792.05 100. 6.327.328.1 7.3 25.453.SEPTEMBER 2005 151 151 .192.8 0.8 572. though CIL improved the efficiency of its net fixed assets and working capital through cost control and performance measures which has contributed to ROA remaining the same.2 55.729.4991 4.24x 0.79x 0.4 1.e.6878 3.8 per cent and increase in WACC by 39.4 1.7 per cent.378.2241 1.8 0.7 12. STRATEGY IMPLEMENTATION There is a need to identify the relevant value drivers and performance measures based on the identified value drivers for CIL.186.108).4 18.014.1274x 20.6 18.2 11.0120x 7.1671 686.6 1566 12.8 -27.512.3 10.1243 521. Thus. Thus.261.006.565.356.7% -27.7 Note: This table is derived from Figure 3.2 1. ROA calculated on productive capital employed has remained at 44.523.109.955.108) perhaps due to global procurement efficiency in the base oil and additives. This is primarily due to decline in NOPAT by 28.9 48.4194 4.681.7 303.0x 30.0 5.3 0.573.2774x 7.2x 67.6 0.3 0 -6.5 6. marketing expenses.0 48.8 4.3 12.1 7.8 -28.8 2.44x 0.78 33.9043x 3.1 .4 302.08 3.300.048.9 0.2 3.3 84.1281 3.918.5 2.975 1.3504 1.7 1.6 132.843 2.3 2.1 1.081.64 per cent and sales increase by 25.924 1.5 2.517. 9*10 in % PBIT/NCE Net capital employed EVA/NCE EVA WACC i.514.1 25. EVA has declined due to increased operating expenses.3 515.1 944.579.e.1 44. Thus. has not changed from 48 per cent (as % of net sales) in spite of the increased base oil prices from 2000 onwards (p.5 2.1 19.7 1998 1.5 7.7070x 3.9 % Change 1998-2001 15.0696 3.1231 2.177.Table 2: Income Statement of CIL (from Annexure 2 of the Case): 1998-2001 2001 Sales and other Income (Rs in million) Net sales (Rs in million) Excise duty Raw material cost Raw material/Net sales Expenses Expenses/Net sales Depreciation Depreciation/sales PBIT (Rs in million) PBIT/Sales 2000 1999 1998 1998-2001 % Change 13. and tax outflow leading to reduced NOPAT and increased cost of capital leading Rs in million 2001 Net fixed assets Net current assets Net sales PBIT NOPAT Productive capital employed Net sales/Net fixed assets Net sales/Net current assets Net sales/PCE NOPAT/Net sales (%) Sales/NCE ROA i.3 48..8 7.1 2.8 1999 1.1 22.251.9 990.490.4 2000 1.792. VIKALPA • VOLUME 30 • NO 3 • JULY .107.3 .8939x 5.7 2.3158x 6.4x 44. NOPAT-EVA 1.4 3.328.976.203.5 21.378.7 2.9 . Raw material cost.3877 4.3 20.78 2..531.1 1.65x 0.356.3 114.7 (p. Tables 5.8 .8 202.4 0.
and Gulf Oil (with Hindujas being the Indian partner) ventured into this sector. At the back-end of the business. In the first phase of deregulation. CIL. there is a need to identify the relevant KPIs in all the functional areas aligned with the selected strategy. rising operating costs.’ At the marketing end. This may be due to lack of effective KPIs linked to operating and marketing expenses or uncontrollable operating costs. the private sector lubricant companies were allowed to import base oil. made entry into the topManoj Anand Professor of Finance & Accounting University Business School Panjab University. and packaging of the products. 29. and people KPIs contribute to financial performance or shareholder value. which will enable implementation of the same both in the short and long term. which is only 5 per cent of the total cost and may be partially uncontrollable. Almost all the supply chain KPIs are focused on reducing plant cost per litre (p. it focused on creating new opportunities and new brands. Chandigarh e-mail: email@example.com. the oil sector was deregulated. which is critical for the longterm performance of the company in the emerging scenario. It focused on margins. the company cannot have a predominantly volume-based strategy and needs to identify and exploit its strength in product innovation and distribution to identify multiple niches for its premium brand Castrol. As discussed earlier. Subsequently.com IL began operations in India in 1919 and steadily established a reputation for high quality lubri cant products and marketing prowess.113). There is also a noticeable lack of KPIs based on long-term competence creation. and net cash flows do not necessarily lead to market share or shareholder value and seem to be tactical rather than strategic. based on global economies of scale. CIL was constrained in its growth due to base oil controls and its canalization through the Indian Oil Corporation Ltd. It is also not apparent how the customer KPIs which are focused on volume growth and strengthening the brand will enhance shareholder value as the company is losing pricing flexibility. The financial KPIs focus on operating profits (RCOP).ac. and the supply chain and cost management phase.in end and value-added products.54 billion with sales of Rs. It had gone through three phases during the last one and a half decades: the survival phase prior to 1991. At the same time. Exxon Mobil (with Hindustan Petroleum Corporation Limited (HPCL) being Indian partner). needs to improve its operating margins through cost control and increased prices based on new product/service development. total cost/gross margins. It is not clear how the ethics.. it needs volume growth to manage its costs that could be achieved through the BP brand. In 1991. HSSE. segmenting the market. Before 1991. The issue was that of survival and how to get the next base oil consignment. CIL has been able to control the RM costs due to its efficient procurement strategy though there is no KPI based on the same. (IOCL). Chandigarh e-mail: satyapsingh@lycos. CONCLUSION CIL is achieving volumes and market share growth while shareholder value created is decreasing due to commoditization. MNCs such as Shell (with Bharat Petroleum Corporation Limited (BPCL) being the Indian partner).57 billion for the calendar year ending 2001. CIL changed its focus from ‘survival’ to ‘growth in market share in volume terms. and controlled cost.to increase in WACC. CIL’s focus was on managing within the limited availability of base oil rather than growth in terms of volume. However. 13. There is a noticeable lack of KPIs in the sales and marketing function. therefore. and lack of innovation. i. The Indian economy was characterized by moderate gross domestic product growth rate and dominance of nationalized oil companies. It had market capitalization of Rs. the strategy in the supply chain was to keep pace with the explosive CASTROL INDIA LIMITED C 152 152 . There is no KPI (Figure 4 of the case) based on new product development or sales from new products in the process or customer dimensions. Case Analysis VI Satya Prakash Singh Professor (Retired) University Business School Panjab University. a dramatic growth phase during the period 1991 to 1996.
806 86.57 13.000 31.0 64.1 24. Table 2: Indian Lube Industry Data of Key Players Lubricants Sales Volume (tonnes) 2000-01 BPCL Castrol Gulf Oil HPCL IBP IOCL Tide Water Oil 99. and motorcycle oils. sustainable basis. volume.4 57.426 86.000 82.010 286.846 51.SEPTEMBER 2005 153 153 .567 389.0 29.010 226. The BP brand has delivered its promise for volume growth for CIL in the ‘popular’ price segment with a significant presence in the premium automotive segment and progress in the new generation commercial vehicles.153 2003-04 111. VIKALPA • VOLUME 30 • NO 3 • JULY .648 2002-03 90.000 34. HPCL operates in two shifts.38 13.7 Gross Sales value (per litre) 50. CIL took a hard look at the economic scenario and its competitive position.000 164.000 148.670 30.532 219. The growth rate in the agricultural sector had become negative. passenger cars.744 259.511 334.79 11. Table 2 provides capacity and sales volume data of key players.’ The range of BP lubricants in the diesel engine oil segment (mainly in the trucking segment) was launched in India in 2001 after CIL’s acquisition by BP in March 2000.840 51.080 32.growth by upgrading quality and service to compete with Shell and other major players. in billion) 10. and modernizing all filling lines in the plant.841 213.779 35.779 35.230 29.066 33.7 28.179 319.000 148.96 12.779 35. THE SITUATION In 1997.602 339. revamping the packaging completely.600 30.696 2001-02 104. The competition from the PSUs had increased as they prepared themselves for dismantling of the administered pricing mechanism (APM).099 10.276 209.1 64.010 286.9 Source: CIL’s Annual Report.999 Lubricants Installed Capacity Volume (tonnes) Per Shift 2000-01 BPCL Castrol Gulf Oil HPCL IBP IOCL Tide Water Oil 90. 2004. It effectively responded to the challenge by changing its focus from ‘chasing capacity/ chasing growth’ to ‘cost effectiveness.9 62.089 329.704 211.648 2003-04 90.000 30. January 2005. Tide Water oil capacity data include grease production capacity. There had been an unprecedented increase in the base oil cost and sales volume pressure because of reduced oil usage rates of newer and more efficient engines. pp 12-13.328 319. and cost of materials data for the period 1998 to 2004.000 82.820 359.2 67.39 13.648 Castrol figures are for the calendar year ending December 31.747 2002-03 117.9 31.779 35.538 345.7 54.328 319.648 2001-02 90.7 31. Table 1 provides CIL’s sales value.000 82.010 286.878 253. The challenge before CIL was to grow on a Table 1: Sales and Material Cost Data of CIL Year 1998 1999 2000 2001 2002 2003 2004 Sales Value Including Excise Duty (Rs.000 31.000 82.8 34. pp 217-218.806 67.806 67.179 319.000 148. Source: CRIS INFAC Refining and Marketing Annual Review.23 Sales Volume (in million litres) 213 220 214 219 209 212 224 Cost of Materials (per litre) 24.61 15.
Due to non-availability of lube segment data of competitors. The lube demand is derived demand and depends on sales growth in the automotive transportation and the agricultural sector.7 per cent of HPCL. All through the last decade. The base oil is generally procured globally. 4. provide synthetic lubricant base-stocks. and ChevronTexaco. The Indian lube industry is profitable as all the players have realized higher gross sales value per litre during the period 2000–2001 to 2003–2004 and have passed on the incidence of base oil price increase to the ultimate consumer. industry averages could not be worked out. base oil supply positions. and economies of scale in sourcing the base oil. The ExxonMobil. sales. manufacturing and business economics. brand loyalty. The development of PPDs as a part of total lubricant formulation differentiates one brand of lube from another. January 2005. Force 5: Supplier Power The considerations of supplier power such as relative size and concentration of base oil suppliers and degree of differentiation in base oil are present in the lube industry to a greater extent. It is a more concentrated industry and competitors appear to have realized their mutual interdependence and have restrained themselves from price rivalry.minimizing facilities and equipments. BPCL. These oils require different types of pour point depressant (PPDs). Force 4: Buyer Power The customers’ awareness of brands in the lube industry is high. The oil price CASTROL INDIA LIMITED Force 2: Threat of Entry The average industry profitability expressed in terms of economic value added (return on assets greater than cost of capital) determines the interest of potential new entrants. The future of threat is dependent on price-to-performance ratio of synthetic oils vis-à-vis petroleum-based lubes.4 per cent of Gulf Oil.ANALYSIS OF INDIAN LUBE INDUSTRY IN THE FIVE FORCES FRAMEWORK The lubricant industry is now a global business and the major international players are ExxonMobil. 9. and HPCL distribute their lube products through their own petrol pumps situated all over the country. The IOCL. The Indian lube industry neither has excess capacity nor is characterized as capital-intensive (Table 2).1 An analysis of the Indian lube industry in terms of Porter’s (1985) ‘Five Forces’ framework is as under: barriers are strong distribution system of existing players. All the players in the lube industry are seeking low-cost position through investment in cost. Economies of scale are an advantage that these leading players are achieving in this very competitive market. It is only one of the five factors that determines the industry attractiveness. The major entry 1 2 CRIS INFAC Refining and Marketing Annual Review. 154 154 . p 218.6 per cent of BPCL. Base oil slates are changing. They look at price performance and value propositions of different brands in the lube industry and make informed decisions. will influence suppliers’ willingness to provide the base oil. The switching costs are low.8 per cent of IBP and 3 per cent of Tide Water Oil. The major components of costs are base oil cost.2 per cent as against 33. and an after-tax operating margin.000 retail outlets in the country. Industry consolidation continues to have a major impact on the company market share and ranking. alkylated naphthalenes (AN). The market share (in quantity terms) of CIL during the year 2003 . and distribution costs. Shell. world’s leading producer of polyalphaolefins (PAO).4 per cent of IOCL. CIL has had positive economic value added. The fuel-efficient and emission compliant engines have resulted in lower lubricant consumption. Force 1: Degree of Rivalry The intensity of rivalry will determine the value lost in industry through cut-throat competition. Lubrizol is a leading supplier of PPDs. The majority of sales in the lube industry are retail sales. if any. 2 The lube industry average profitability provides entry threat. BP. CIL has access to over 70.2004 was 18. ChevronTexaco base oils are 100 per cent hydro-processed for maximum quality and purity. The industrial lubricant demand is reflective of the industrial production and growth trend in the economy which has declined during the years 2000-2001 to 20012002. The supply-side substitutability. 2. marketing. blendstocks and esters. Force 3: Threat of Substitutes The petroleum-based lube industry may face possible threat of demand-side substitutes such as synthetic motor oils in the foreseeable future. The competition is based more on brand identification with respect to performance rather than on price. 28. and competitive environment.
people issues. The financial perspective describes tangible outcomes of the strategy in traditional financial terms. 3 These value propositions provide the context for intangible assets of CIL to create value. It is an example of customer valuing innovation and high performance. and reengineering of processes. The balanced scorecard strategy map of Kaplan and Norton (2004) has been drawn based on the inputs available in the case to illustrate how CIL has possibly linked its brand. The company evaluates its procurement strategy on two dimensions — criticality and the scale of spending. The company now sought to maximize return on assets. CIL positioned them differently to provide better choice to its customers and to achieve sales volumes growth through its brand communication strategy. reduce days’ operating cycle and days’ working capital. CIL has identified and developed ‘supply chain efficiency drivers’ such as simplicity. it has developed an excellent reputation and in the process has been able to make human processes more efficient and effective and reduce operating costs. marketing prowess. shareholder value. The BP branded lubricant in India. information capital.’ It focused on the premium segment of the market. Naveen K Kshatriya. and reengineering of processes. standardization. and efficiencies. The economies of scale are achieved in procurements through global operations. scale. strategy development. Castrol India became part of BP with 71 per cent of equity holding with BP. The essence of the Castrol brand was ‘winning performance. brand and customer. 2003 and 2004. scale. THE STRATEGY In the maturity phase. and community development. 3 STRATEGY MAP Though operational excellence. and JCB. CILs strength in the range of heavy-duty engine oils is due to the ‘product plus’ package such as technical support and value-added services. Its goal is to be a leader in driving safety. CIL introduced the performance contract system for communicating strategy. By investing substantially in environment. ethics. revenue growth. the performance contract system has been implemented in the company not only for improving sustainable real performance but also for dovetailing VIKALPA • VOLUME 30 • NO 3 • JULY . 155 155 . which offered a 5.increase in the past had an adverse impact on the profitability margins of the lube industry. The customers’ perspective defines the value proposition for targeted customers. and achieve volumes growth by entering into strategic partnerships with original equipment manufacturers such as Tatas. performance evaluation. employment practices.SEPTEMBER 2005 CIL’s Annual Report. and overhead costs as a percentage of gross margins are lag indicators that show whether CIL’s strategy is succeeding or failing. net cash flow. health. the Chief Executive and Managing Director of the company. The performance scorecard sets the key achievable objectives for the year in the areas of finance. Castrol India into BP’s system. It plans to have economies of scale through standardization of its requirements and use the same kind of technology in all its brands across the family. led CIL through its transformation. With two great brands — BP and Castrol — in its portfolio. Prior to CIL’s acquisition by BP. Escorts Agri machinery group. The BP brand proposition of ‘reduced diesel consumption’ is targeted at the BP consumer who is cost-efficiency-driven and is continuously seeking ways to reduce operational expenses. Measures such as RCOP. targeted those consumers focused on cost savings and fuel effectiveness. CIL rolled out a new strategy — consolidation and operational excellence — and the challenge was how to make its supply chain more costeffective. Castrol CRB plus has been relaunched with a ‘heat-proof’ formula based on consumer insight and backed by communication package specially designed for tractor owners. Tata Cummins. reduce logistics cost by identifying ‘supply chain efficiency drivers’ such as standardization. it followed management by objectives as the management control system.1 per cent savings on diesel fuel consumption. resource allocation. safety. Following the acquisition of Burmah Castrol in 2000 and as a result of global merger. and concern for stakeholders were present in CIL’s initial strategy. It is similar to Kaplan and Norton’s (1996a and b) balanced scorecard. HSSE. and knowledge assets to the value creating processes (Figure 1). and linking compensation with performance at all organizational levels following BP’s tradition. The internal business perspective identifies a few critical processes that are expected to have the greatest impact on CIL’s strategy. days’ working capital. L&T Komatsu.
inventory control. warehousing. It has created alignment between its intangible assets and strategy through performance contract as it has granularity. The focus is on actual sales loss rather than sales loss in the pipeline due to non-availability of SKUs. and organization capital’s role in its strategy. distribution. The scorecard constructed at the lower level is aligned with the highest-level scorecard (p. The challenge before the company’s leadership team is how to achieve balance between the shareholders’ expectations and the competency available within it and to determine the CASTROL INDIA LIMITED 156 156 . It captures distributors’ sales data through Turview software at the distributors’ end. It has enabled the management to pinpoint the specific human. information. The implementation of performance scorecard has enabled it to translate its strategy into a set of KPIs (Table 3). internal business. 113) as is evident from Figure 2 in Niven’s (2003) framework. customer. BALANCED SCORECARD Performance scorecard protects the CIL management from information overload by limiting the performance measures to only four perspectives. namely. and sales order processing and is in the process of implementation of i2 software. CIL has developed the performance scorecard at all the levels of the organization in order to bridge the learning gap that exists in most organizations. and learning and growth. and organization capital required by its strategy. financial.Figure 1: CIL’s Strategy Map The learning and growth perspective describes CIL’s human capital. It has implemented two of the three modules of the JD Edwards’ Enterprise Resource Planning (ERP) software package in the areas of procurement. information capital. It had plans to integrate Turview and JD Edward’s software in the year 2003.
9 to 4. the market has valued CIL share at 20 multiple of its earnings (year-end valuation) with the exception of 2002 when it was 17 multiple. It has maintained its personnel cost slightly below 5 per cent of sales during the period but the effective tax rates have increased from 18 per cent to 33. 3. The average inventoryholding period has come down from 59 to 37 days. Due to increased focus on efficient cost and supply chain management.SEPTEMBER 2005 this period.63 in 2000 to Rs 8.25 in 2002 and the same has been maintained in 2003 and 2004. RESULTS The working capital management performance of CIL during the period 2000 to 2004 has improved substantially (Figure 3). The price-to-book multiple at year-end for CIL scrip has been around 7 with the exception of 2001 when it was 6 (Figure 6). CIL has created substantial shareholder value during the period 2000 to 2004 (Figure 4).5 per cent during VIKALPA • VOLUME 30 • NO 3 • JULY .Table 3: CIL’s Performance Scorecard Financial Revenues by brand Replacement cost operating profits Overheads cost as a percentage of gross margins Logistics cost Net cash flows Customer Cost-sensitive products Demonstrate distinctive benefits Serve customers better Growth in market share Brand health index Internal Business Processes Employee Learning and Growth Target zero fatalities Raise HSSE awareness Continue to challenge the current ways of working Strategic partnerships Innovation ratio Compliance on all HR basics Target Improvement in ESI score Value added per employee IT usage ratio Networks Figure 2: Two-way Flow of Knowledge and Information when Cascading the Performance Scorecard optimal blend of financial and non-financial measures. the distinction between cause-and-effect relationships amongst KPIs is also blurred. It has good quality of earnings as its cash flow per share has exceeded its earnings per share (Figure 5). Further. CIL has increased its dividends per share from Rs.9 during this period. During this period. The economic value added as a percentage of capital employed has improved from 11 per cent to 29 per cent. The days’ operating cycle and the days’ working capital have reduced from 139 to 89 days and from 33 to 24 days respectively. Thus. The supply chain management initiatives at CIL appear to have paid rich dividends. the operating margins have come down from 12 per cent to 8 per cent but the asset turnover ratio has improved from 2. 157 157 . CONCLUSION CIL has been able to sustain its competitive advantage by developing products that have differentiated offer.
building long-term winning relationships with its distributors. CIL’s Annual Report. dealers. Kshatriya Figure 4: Shareholder Value Analysis at CIL attributes the return of CIL to ‘growth path and reviving up to new heights of performance’ and to the ‘innovative and winning team spirit of Team Castrol. The company’s strategy has paid off and it has been able to grow continuously on all performance parameters despite increasing competition and base oil prices. Managing Director to the shareholders. Naveen Kshatriya.’ 4 4 Address by Mr. and direct customers. 2004.Figure 3: Working Capital Performance of CIL managing costs better. and through innovation. 158 158 CASTROL INDIA LIMITED .
Robert S and Norton. Robert S and Norton. 75-85. Boston. Balanced Scorecard: Step-By-Step for Government and Nonprofit Agencies.Figure 5: Payout Policy at CIL Figure 6: Share Price Performance of CIL REFERENCES Kaplan. Kaplan. David P (1996a). Niven. Competitive Advantage. New York: Free Press. Kaplan. and the word “solitude” to express the glory of being alone. Robert S and Norton.” Harvard Business Review. Michael E (1985). 74(1). Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Language has created the word “loneliness” to express the pain of being alone. Massachusetts: Harvard Business School Press. David P (1996b). January-February. The Balanced Scorecard: Translating Strategy into Action. David P (2004). Paul R (2003). Boston: Harvard Business School Press. Inc. Paul Johannes Tillich VIKALPA • VOLUME 30 • NO 3 • JULY . “Using the Balanced Scorecard as a Strategic Management System. New Jersey: John Wiley & Sons.SEPTEMBER 2005 159 159 . Porter.
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