Castrol Ind

Case Analysis I

Dinesh K GuptaProfessorUniversity Business SchoolPanjab University, Chandigarhe-mail: [email protected]

Castrol India Limited: Managing in Challenging Times is a rich case havingstrategic, marketing, financial, and control dimensions. The focus of thisdiagnosis is on the redesign of the management control system in the light

of the changing competitive environment of an enterprise.

BACKDROP

Castrol India Limited (CIL) started its business operations in India way back in 1919and established itself as a dominant brand in the premium automotive lubricantssegment 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 focusedon its survival as there was a complete dominance of public sector oil companiescornering 90 per cent of the market share. While the raw material (base oil) supplywas canalized through a public sector oil company, the demand was sluggish as theeconomy growth rate was low and this resulted in ‘under-investment and underutilization of plant capacity’ by CIL (p. 107).

After liberalization in 1991, CIL found itself in a growth phase — its businessenvironment was driven by great growth prospects, private players were allowedto import base oil, administered pricing system was discontinued, and the economystarted growing at a higher rate. CIL increased its market share from 6 per cent to20 per cent and its focus shifted towards ‘creating more capacity, modernizinginfrastructure, and improving quality’ (p. 107). As it is obvious, in the high growthphase, ‘cost efficiency and cost effectiveness of the operational aspects were ignored’(p. 103).

Castrol India Limited:Managing in Challenging Times

Manoj Anand

D I AGNO S E S

presents analyses of themanagement case by

academicians and practitioners

The January-March 2005(Vol. 30 No. 1) issue ofVikalpa had published amanagement case titled‘Castrol India Limited:

Managing in ChallengingTimes’ by Manoj Anand.

This issue features sixresponses on the case by

Dinesh K Gupta,Anupam Bawa and Ajay

Garg, Deepak SagarSudam, V K Vasal,

Chhavi Mehta and RajatGera, and Satya PrakashSingh and Manoj Anand.

VIKALPA • VOLUME 30 • NO 3 • JULY - SEPTEMBER 2005 135

135

After 1997, CIL faced slow growth in its sales re-venue because of intense competition, decline in thegrowth of automotive transportation and general indus-trial sectors, heavy increase in the prices of raw materialsdue to huge increase in oil prices after 1997, and changein engine technology requiring lesser consumption oflubricants and landed itself in a cost-effective phase. Thisresulted in ‘more emphasis on infrastructure and con-solidation’ (p. 108). In the year 2000, CIL was acquiredby British Petroleum (BP). The acquisition by BP had animpact on the control system of CIL. CIL originallyenvisioned itself to be ‘a market leader in the lubricantindustry’ (p.106) and accordingly put in place a controlsystem. However, after BP’s acquisition, the focus shiftedto ‘value creation’ (p. 107). In order to create value, CILfocused on efficient supply chain management knowingthat more than 90 per cent of its cost is the cost of rawmaterial and that it has to reach more than 70,000 retailoutlets across the country. It realized that its controlsystem must respond to dramatic and fast-paced changesin the operating environment in order to steer the or-ganization to achieve its cherished goal of value creationby ensuring that the strategies adopted to achieve thegoal are being implemented properly. Therefore, it putin place a new control system driven primarily by non-financial parameters in order to effect change in the cultureof the organization. The new control system was ablysupported by ‘total quality management, business pro-cess reengineering, and activity-based cost managementsystem’ (p. 103).

BALANCED SCORECARD

In order to respond to the current realities and to prepareitself for the emerging challenges, CIL designed andimplemented a new performance management systemcalled the balanced scorecard.

The traditional performance measures like cost,revenue, profits, and ROI (Return on Investment), beingfinancial and tangible in nature, are based on the his-torical financial accounting system. As a result, thesemeasures are considered to be the lag indicators becausethey capture and communicate the outcomes of pastactions. In order to successfully steer an organizationinto the future punctuated with intense global compe-tition, fast-paced advances in manufacturing and infor-mation technologies, unpredictable changes in the ex-pectations of the customers, and changing social andcultural values, the need of the hour is to depend on

indicators of performance which do not look to the pastand which lean to the future. These lead indicators, beingfuturistic and intangible, are bound to emanate fromnon-accounting domains. To quote Lev (2004): “Intan-gible assets which include a skilled workforce, patentsand know-how, software, strong customer relationships,brands, unique organizational designs and processes,and the like generate most of corporate growth andshareholder value. They account for well over half themarket capitalization of public companies… In fact, these‘soft’ assets are what give today’s companies their hardcompetitive edge.”

Research shows that non-financial measures fromother domains are good predictors of financial perform-ance (Banker, Potter and Srinivasan, 2000). These do-mains are focused on customers, internal business proc-esses, and learning and growth (Kaplan and Norton,1992). Survey results show that the measures focusedon customers were highly valued by 85 per cent man-agers of the participating organizations, financial meas-ures 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 non-financial performance indicators in a manner that futur-istic perspective of the organization is not affected bythe historical outlook of financial measures.

Experimentation with balanced scorecard results inthe introduction of four new processes (Kaplan andNorton, 1996), viz., translating the vision, communicat-ing and linking, business planning, and feedback andlearning. The strategy map is prepared next based onfinancial, customer, internal business process, and learn-ing and growth perspectives. For each perspective, onehas to define the objectives, develop measures, fix upthe targets, and decide about the initiatives to be takento nurture the perspective.

The major advantage of the balanced scorecard isthat it clearly communicates the strategy to all theconstituents of the organization so that people becomesensitive to the realities. The understanding and discus-sion of strategy does not remain the preserve of board-room alone; in fact, it becomes the subject of concern foreach and everyone in the organization. Further, manag-ing an organization on the basis of financial indicatorsalone is not going to help the business survive in thelong run as they are more focused on the short term.Moreover, it will be better if one manages the drivers

136 CASTROL INDIA LIMITED

136

of financial outcome that are embedded in the base ofdelighted customers, quality of internal business pro-cesses, and capability to learn and grow.

BALANCED SCORECARD OF CIL:AN EVALUATION

Vision

The vision of the organization has changed over a periodof time. This is obvious for an organization like CILwhich has been recently acquired by BP. As discussedearlier, CIL was traditionally a marketing-driven com-pany. It had a vision of being a leader of the lubricantindustry. However, after acquisition by BP, the focus ofthe top management shifted from high growth to effi-cient supply chain management in order to create valuefor the customer. Further, the case highlights that CILis currently facing a challenge: “How to cohere the valuecreation in the premium sector” (p. 107) as CIL tradi-tionally has dominance in the premium automotivesegment. However, the lower-end segment has alsoopened as BP brand has a sound presence in that seg-ment.

On the basis of this, it can be logically inferred thatthe focus of the top management is on creation of valuefor the customer. A marketing-driven company, CIL,after acquisition by BP, is struggling to come to therealities of change in focus. As depicted in Figure 4 ofthe case, the focus of the top management is onmaximization of shareholders’ wealth. The dilemma getsreflected even in the statement of Naveen K Kshatriya,Chief Executive and Managing Director, when he statesthat “…Performance contract is what BP has adopted.We, in Castrol, followed a different system – MBO. Itdid not quantify. It did not have granularity” (p. 114).

The change in focus requires totally differentmindsets, organizational structures and architectures,and control systems. A strategy map could be designedonly on the basis of a clear choice of focus.

Strategy Map

The top management of CIL should have clarity of visionbefore proceeding to design the strategy map. The strat-egy map captures elements critical for success. The choiceof these elements, called KPIs, is squarely dependent onhow the success of the organization is envisioned. Theperformance of the organization will be monitored onKPIs over a period of time. Further, with changes in the

competitive environment, the KPIs may also undergo achange.

Kaplan and Norton (1992) provide a framework forthe strategy map which focuses on four perspectives,viz., financial, customer, internal business process, andlearning and growth. However, CIL has grouped KPIsin six perspectives, viz., increased customer emphasis,financial, people, HSSE (health, safety, security, envi-ronment), ethics, and supply chain (Figure 4 of the case).The strategy map of CIL is presented in Exhibit 1. Itcarries a list of KPIs grouped in four categories keepingin view the focus of the management to maximize share-holders’ value. The list of objectives and measures isonly illustrative. The other two components, i.e., targetsand initiatives, are also to be worked out. No attempthas been made to fix up the targets based on the ini-tiatives taken by the organization. Fixation of targetsrequires that the organization has in place a vibrantprocess of benchmarking and benchtrending. Further,depending on a different focus of the management, say,maximization of market share, the structure of thebalanced scorecard of CIL will undergo a change.

Financial Perspective

This perspective signals whether the strategy and itsimplementation are contributing to the bottom line ofthe organization. CIL has identified four KPIs for thisperspective, which are as follows:• Replacement cost operating profit as a measure of

financial performance is unique in nature. Thismeasure should be used by organizations whichhave significant investment in assets whose marketvalue is highly volatile because of price-level fluc-tuations. However, Annexure 3 of the case does notclarify how CIL calculates this measure.

• Overhead cost as a percentage of gross margin isa measure relevant for organizations having highincidence of overhead cost. CIL has low incidenceof overheads in its cost structure (p. 108). So, utilityof this measure could be questioned.

• Net cash flow is a relevant measure for the survivalof an organization.

• Total cost per litre is a relevant cost measure formonitoring the cost of production.

Additional measures: CIL can supplement its existingfinancial measures with some (or all) of the measuressuggested below:• As CIL is facing slow growth in revenue, it should


137


Exhibit 1: Strategy Map of CIL

Vision and Strategy

Financial Perspective

Objectives Measures Targets Initiatives

Increase of number of new products % revenue from new products

Develop new customers % revenue from new customers

Develop new markets % revenue from new markets

Reduce customer cost Unit customer cost

Reduce distribution channel cost Cost per distribution channel

Improve fixed assets utilization Sales/fixed assets

Customer Perspective


Increase market share Market share (% of market)

Increase customer retention % growth (existing customers)% growth (repeating customers)

Increase customer acquisition Number of new customers

Increase customer satisfaction Ratings of customer surveys

Improve product quality % returns

Internal Business Process Perspective


Increase product innovation Number of new products/Total productsR & D expenditure

Reduce process time Cycle time

Increase process efficiency Cost per litre

Enhance process quality Quality costs% defective units

Learning and Growth Perspective


Increase motivation and alignment Suggestions per employeeSuggestions implemented per employee

Increase employee capability Training hours

Turnover rate

Enhance employee morale % absenteeism

Empower workforce % line workers empoweredto manage processes

138

focus on market modification. The strategies for thisinclude expanding its brand users by convertingnon-users into users, capturing new market seg-ments, increasing volume usage, and productmodification. To service some of these strategies,CIL can use measures like ‘percentage revenue fromnew products,’ ‘percentage revenue from new cus-tomers,’ and ‘percentage revenue from new mar-kets.’

• CIL is already calculating TCPL. This measure canbe supplemented with measures like ‘unit customercost’ and ‘cost per distribution channel’ as it isfocused on better management of its supply chain.

• CIL should also focus on better management of itsnet fixed assets. Figure 2 of the case carries the valuedriver analysis. A closer look at the analysis showsthat as compared to working capital, the fixed assetsare not being managed optimally over a period oftime. In order to sensitize better management offixed assets, a new measure ‘sales/fixed assets’ couldbe added.

Customer Perspective

This perspective focuses on measures of company per-formance in identified target market segments. CIL iscurrently using five KPIs to handle this perspective.These are: better customer service, brand health index,consumer’s share of mind, consumer’s share of attitude,and growth in market share. It seems that it is notpossible to clearly capture most of these measures. Forexample, how do we measure if CIL is serving its cus-tomers in a better manner? Same is the case with meas-ures like consumer’s share of mind, consumer’s shareof attitude, and brand health index.Additional measures: CIL can use simple measures whichare easy to understand and operationalize in order tostrengthen the customer perspective.

In order to monitor the market share, ‘market share(% of market)’ could be used as a measure. In order tomonitor customer retention, ‘percentage growth of ex-isting customers’ and ‘percentage growth of repeatingcustomers’ could be calculated. Further, any addition tothe existing customer base could be captured through‘number of new customers.’ Customer satisfaction couldbe monitored through ‘ratings of customer surveys.’Similarly, quality could be monitored through ‘percent-age returns.’

Internal Business Process Perspective

This perspective captures the resilience and robustnessof the internal processes of the organization to delivervalue. CIL has not labelled any category of KPIs asinternal process-focused measures. However, HSSE,ethics, and supply chain-based KPIs could be clubbedand called internal process KPIs. Specific focus on ethicalissues happens to be the uniqueness of CIL’s balancedscorecard.Additional measures: The current set of measures canbe strengthened with additional measures. For example,innovation of new products has not been focused. How-ever, rating agencies like CRISIL consider CIL to have“…. demonstrated product innovation ability which willenable it to maintain its market position in the mediumterm” (p. 106). In the light of this, it is prudent to focuson a measure which is reflective of innovation of pro-duction process. ‘Number of new products/total prod-ucts’ could be one such measure. ‘R & D expenditure’could be another measure. Process quality could bemonitored on the basis of ‘quality costs,’ and ‘percentageof defective units.’ Manufacturing excellence could beattained by reducing ‘cycle time,’ while final efficiencyof the production process could be reflected by ‘cost perlitre.’

Learning and Growth Perspective

This perspective focuses on the capabilities of the organ-ization to create superior internal business processes tocreate value. CIL has not designated this perspectiveseparately. However, it has identified three KPIs, viz.,achievement of compliance on all HR basics, targetimprovement in ESI score, and value added per emplo-yee, under the people perspective.

These KPIs should have clear and focused meas-ures. For example, calculation of value added peremployee may not be an appropriate measure reflectiveof employee contribution because more than 90 per centof the cost happens to be the cost of bought-out itemsin case of CIL. As a result, value addition in the organi-zation is bound to be low. This measure is more usefulin highly labour-intensive production settings.Additional measures: This building block of the bal-anced scorecard happens to be the most important andfundamental block in the sense that all other blocks arenurtured by the strength of this block. So, the best-runcompanies are highly focused on this. In order to in-


139

Case Analysis II

Anupam Bawa Ajay GargReader LecturerUniversity Business School University Business SchoolPanjab University, Chandigarh Panjab University, Chandigarhe-mail: [email protected] e-mail : [email protected]

crease motivation and alignment of the workforce, someorganizations use measures like ‘suggestions per em-ployee,’ ‘suggestions implemented per employee,’ etc.To build employee capabilities, measures like ‘traininghours,’ and ‘turnover rate’ could be included. Employeemorale could be captured through ‘percentage absentee-ism’ and empowerment of workforce could be moni-tored through ‘percentage line workers empowered tomanage processes.’

Compensation

A control mechanism will lose its teeth until it is usedfor performance evaluation. So, in order to use thebalanced scorecard for performance evaluation, it be-comes necessary that four perspectives and the chosenmeasures be assigned weights. For example, it can bedecided by CIL that all the four perspectives will beweighted equally. So, each perspective gets a weightageof 25 per cent. Further, specific measures under eachperspective will be assigned weights depending on theurgency and importance of the objective. For example,under financial perspective, in order to sensitize peopleto innovate, the first objective (increase in number ofnew products) could be assigned a higher weight, say,25 per cent, as compared to fixed asset utilization ob-jective which can be assigned a weight of, say, 5 per cent.Further, the weights of the perspectives and the meas-

ures are bound to change with changes in the compet-itive environment of CIL and the time horizon underfocus.

CONCLUSION

The case provides exhaustive information about one ofthe dominant players of the lubricant industry in India.From the control angle, the case sensitizes us to under-stand what performance measurement is, what are thedifferent bases of performance evaluation, why tradi-tional measures of performance lost ground in moderntimes, and how in a globally competitive environment,balanced scorecard system helps in better managing abusiness enterprise because ‘whatever gets measuredgets done’ in an organization. This also adds a dimensionof the impact of control system on the culture of anorganization. With the change in the dynamics of valuedrivers of modern knowledge-driven economy, the roleof soft and non-financial measures of performance hassignificantly increased. This case helps us to understandthe constructs of the balanced scorecard and demon-strates how to experiment with different designs of thebalanced scorecard not only on the basis of the under-standing of the current competitive environment of theorganization but also on the basis of the prospectivechanges in the business environment.

REFERENCESBanker, Rajiv D; Potter, Gordon and Srinivasan, Dhinu

(2000). “An Empirical Investigation of an Incentive Planthat Includes Nonfinancial Performance Measures,”Accounting Review, 75(1), January, 65-92.

Kaplan, R S and Norton, D P (1992). “The Balanced Score-card: Measures that Drive Performance,” Harvard Busi-ness Review, 70(1), January-February, 71-79.

Kaplan, R S and Norton, D P (1996). “Using the Balanced

Scorecard as a Strategic Management System,” HarvardBusiness Review, 74(1), January-February, 75-85.

Lev, B (2004). “Sharpening the Intangibles Edge,” HarvardBusiness Review, 82(6), May-June, 109-118.

Lingle, J H and Schiemann, W A (1996). “From BalancedScorecard to Strategic Gauges: Is Measurement WorthIt?” Management Review, 85(3), March, 56-61.


CIL is one of the large manufacturers and mar-keters of lubricants, especially automobile lu-bricants, in India (for the year 2001, sales and

other income were Rs. 13,729.4 million; profits aftertaxation were Rs. 1,534.2 million). It has had a chequeredhistory since it was first set up in India in 1919 as the

140

Indian branch of Castrol. In 2001, it became a part ofBP, a leading lubricant company in the world market.Liberalization of the Indian economy in 1991 changedthe fortunes of CIL which had hitherto been a smallcompany restricted by controls and quotas and earninginadequate profits. The period 1991 to 1996 saw thecompany growing explosively from a Rs. 1.5 billioncompany to a Rs. 10 billion company. From 1997 on-wards, the company has had to focus on consolidationand efficiency rather than growth. It has taken manylaudable initiatives in the areas of supply chain man-agement, computerization, total quality management,business process reengineering, working capital man-agement, performance measurement system, brand man-agement, etc.

Though the absolute profits of CIL are going up,profit as a percentage of sales, net worth, and capitalemployed is going down despite an increase in assetturnover ratio. CIL has a declining incremental capital-output ratio and its financial leverage is low. The neg-ligible debt insulates the company from the risks thatcome with debt and gives it an opportunity to raise fundsif needed.

CHALLENGES BEFORE CIL

The challenge before CIL is to succeed in an industrythat has evolved, and made the transition from the growthstage to the maturity stage. The period of rapid growthin demand accompanied by rapid expansion in revenuesand profits is over. The growth in demand has sloweddown because of factors like hike in oil prices, introduc-tion of Euro II compliant vehicles, and problems in theagriculture sector. Moreover, competition has increased.New competitors have entered — the MNC competitorsand the now invigorated PSUs are fighting for marketshare.

ALTERNATIVES AND RECOMMENDATIONS

Out of the three generic strategic alternatives of expan-sion, stability, and retrenchment discussed in detail byJauch and Glueck (1988), we recommend that CIL pursuestability in the present so that it can successfully adoptexpansion later on. This course of action would enablethe company to achieve its ambition of becoming ‘amarket leader in the lubricant industry.’

Retrenchment as an option is ruled out for CIL asit is neither a poorly performing company nor a companyin a very threatening environment. Here it is pertinent

to recall that CIL held 17.48 per cent of the market sharein 2001-2002. CIL is not facing a major crisis currentlyand it is possible for the company to meet its objectivesby following one of the other generic strategies. More-over, there are indicators that point to the growth of themarket for lubricants — the increase in personal vehiclesin India and the completion of the mammoth GoldenQuadrilateral Project by 2007 which will give a fillip tothe road transport industry. The growth in the 4-strokemotorcycle segment is seeing a shift in lubricant con-sumption from petrol stations to retail outlets where CILhas a significant distribution advantage. The lube oilbusiness in the passenger car segment is driven to a largeextent by the workshop channel where superior servicepropositions along with strong brands has led and shouldcontinue to lead CIL towards making significant busi-ness gains.

The opening up of petrol pumps by Essar andReliance is an opportunity for a lubricant company likeCIL because it will give the company access to a channelof distribution that was hitherto denied to it.

The circumstances at CIL indicate that stability isthe best option for the company at present. The strategyof stability is good for those companies which are in amature product market evolution and for companieswhich have expanded fast and are in danger of becomingunmanageable and inefficient especially because of costshaving gotten out of hand. This strategy is also appro-priate when it appears that the company is likely to facedifficult times ahead. The continuing rise in crude oilprices and base oil prices, the introduction of Euro IIIcompliant vehicles, introduction of VAT, and expansionplans of oil PSUs, will add to the pressures exerted bythe environment on CIL. Price undercutting by smallregional competitors and the tendency of public sectorplayers to absorb the high raw material costs to gaincompetitive advantage can also put stress on CIL’smargins and market share. The rise in fuel prices hasadversely affected costs of all segments of consumers,especially the small fleet operators, and this has had anadverse impact on their use of lubricants.

The pursuit of stability strategy by CIL will meanthat the company remains in its present scope of productmarkets and functions. It should seek to improve itsefficiency and use its assets effectively. Admittedly, thecompany has already taken many steps in this direction.In addition, it should go in for increased product dif-ferentiation and market segmentation.


141

Product differentiation and market segmentationhave also been recommended by Hill and Gareth (1998)who have identified four non-price competitive strate-gies as part of the strategies to manage rivalry in matureindustries (Figure 1).

Pursuing these recommendations may be easier forCIL than for its competitors in a similar situation. CILshould tap its corporate parent’s (BP’s) portfolio ofproducts and list of market segments identified in themore developed markets of the world. It should alsoserve the marine segment and industrial segment of thelubricant market apart from finding out new uses forlubricants. The cost minimization efforts of the companyshould not extend to promotion activities of the com-pany. It should, in fact, spend money to enhance itsbrand awareness and brand image and thus help cul-tivate brand loyalty for its products.

Stability is not a glamorous strategy but an effectivestrategy. Maruti Udyog Limited and Hero group ofcompanies are two examples of companies that success-fully and diligently followed this strategy after a periodof rapid expansion. By adopting this strategy, CIL willbe in a very good position to pursue its ambition ofbecoming a market leader in the lubricant industry. Ithas a strong competitive position in a mature industrybut will need to invest further to increase its capacityas it has operated at more than 100 percent capacity forthe past few years. It can do so by using retained earn-ings and partly taking debt as, at present, the companyhas very little leverage. CIL is currently following thegeneric strategy of differentiation. It can invest to tapmore sources of differentiation. Additionally, it shouldact to develop both low cost and differentiation strate

gies simultaneously. This will give it more sources ofcompetitive advantage. Following the generic strategyof low cost should not be difficult for CIL as it has ahigh market share, large capacity, long experience in thisproduct and market, and a parent company that is notonly large but also vertically integrated.

CONCLUDING REMARKS

There are a few decisions taken by Castrol on which wecannot help but comment. For a company ‘that is essen-tially a marketing company,’ the choice of a brand name‘Vanellus’ for a product positioned at the trucking seg-ment is surprising. This is not a segment that has globalawareness or transnational homogeneity. It is not theappropriate segment for leveraging a brand name thatthe company uses in other markets.

While one understands the need for growth, one hasreservations about the efficacy of a system that ‘will startby multiplying your targets by two.’ Surely, this willpenalize those who performed well to the best of theirability in the base year. Employees, functional areas, andperformance units will learn to reduce their ‘tension’ byunder-performing.

Paucity of information prevents us from usingconcept/tools of analysis that could have been helpfulto Castrol — the most significant tool being Michael EPorter’s ‘The Five Force Model.’ We feel the case shouldhave supplied information, among other things, aboutthe extent of backward integration, ownership of refin-eries and oil wells by BP, capacity utilization at CIL, andlevel of sophistication of technology used to producelubricants.

Figure 1: Four Non-price Competitive Strategies

ProductsExisting New

Existing

Market Segments

New

Market penetration Product development

Market development Product proliferation

Source: Hill and Jones (1998).


142

REFERENCESHill, Charles W H and Jones, Gareth R (1998). Strategic

Management Theory: An Integrated Approach, 3rd Edition,All India Publishers and Distributors.

Jauch, Lawrence R and Glueck, William F (1988). BusinessPolicy and Strategic Management, 5th Edition, McGrawHill Series.

Case Analysis III

Deepak Sagar SudamManagement TraineeCoromandal Fertilizers Ltd.Secunderabade-mail: [email protected]

• 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.

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.

SHRINKING MARKET SIZE FORLUBRICANTS

Of the three broad segments of the lubricants industry(automobile, industrial, and marine), the automobilesegment constitutes around 60 per cent of the lubes. Theautomobile segment can further be classified as:

• commercial transportation (HCVs and LCVs)

• personal four-wheelers and two-wheelers

• agricultural (tractors and threshers).

Due to the advancement in the engine technologyand not so favourable conditions in the transport indus-try, the consumption of lubricants has been going down.Under these circumstances, the organizations in thelubricants industry should look for new markets and

CIL was set up in 1919 as a specialist lubricantcompany committed to premium quality, highperformance, and leading-edge technology. Over

the years, the company has achieved a significant pres-ence in the premium automotive segment. The acqui-sition of CIL by BP and the amalgamation of TATA BPLubricant India Ltd. have provided the company witha new line of products to enter the lower segments ofthe market.

CIL has gone through three phases during the lastdecade and a half as given in the case. The company hasstrategically shifted its focus from survival to growthin volumes to supply chain and cost management. Also,the acquisition of CIL by BP has brought about a culturalchange in the company from chasing production targetsto cost effectiveness. The case provides a perfect exam-ple of how the strategic management of a company helpsin responding to the changes in economic policies andcompetitive scenario.

The total market size of the Indian lubricant indus-try has been growing both in terms of value and volume.CIL has a stable market share of around 16 per cent,which has shrunk to 12.03 per cent in 2000-01. Table 3of the case also indicates that the market share for thesample of 73 companies has shrunk from 97 per cent to70.93 per cent, which can be seen as either the entry ofnew companies or as increasing market share of smalland local niche players.

As illustrated by the case, the demand for lubricantsis primarily driven by:

• overall growth of economy


143

new segments, on the one hand, and try to increase theirshare in the existing segments, on the other.

Finding New Segments

So far, CIL has been focusing more on the HCVs. Itshould now focus on new segments like LCVs and theagriculture and the rural sectors. The agriculture and therural sectors offer quite a good volume for lubricantsas indicated by a survey done in the tractor showroomsof Sagar town in M.P. the details of which are as follows:

Number of tractors 30 lakh

Frequency of engine oil change 200 hrs of running

Average running hours in a year 1,000 hrs

Average consumption per oil change 7-10 litres

Average consumption of lubricants in a year 25 litres

Total market size (‘000 litres) 75,000

CIL should try to build relationships with the end-customer (farmer) and increase its presence and brandcommunication in rural areas. It should also realize thatthere is a market, which is equal in size to tractors, inthe diesel engine (used for irrigation) segment.

The personal vehicles and LCV segments requireeducation regarding regular use of lubricants. These aresegments where brand communication and brand recallare very important. They can be tapped only by buildingbrand loyalty (for this, freebies and loyalty buildingprogrammes like membership clubs have to be devel-oped).

Industrial and marine segments are more institu-tional in nature and require building long-term relation-ships and creating win-win situations.

COST MANAGEMENT

The cost structure of CIL indicates that raw materialsconstitute around 90 per cent of the total cost. As rightlyindicated in the case, scale, simplicity, and standardi-zation of requirements will reduce the raw material cost.Another important observation is that the excise dutyas a percentage of sales has gone up (from 0.89% in 1991to 16.9% in 2001). The companies in this sector, as awhole, need to negotiate with the government for reduc-ing the excise duty. Inventory management, supply chain

efficiency, procurement, and manufacturing costs arevery important in cost management.

As rightly mentioned in the case, the economies ofscale would play a key role and BP being a dominantplayer in the world lubricant industry can always ne-gotiate for the best deals for all the SBUs (which meansa common supplier/suppliers for all the BUs will givethe advantage of scale and negotiating power).

INCREASING COMPETITION

While the market is limited, the number of players hasincreased leading to severe competition and erodingmarket shares. Sustaining market share is the key forreducing overhead cost per unit and being profitable inthe business. One can withstand competition by gettinginto deals with the channel customers. Branding will bethe differentiating factor in this competitive scenario.

CIL should consider having tie-ups with influencerslike mechanics, service centres, automobile company-owned garages to address the issue of competition. Atthe same time, the company has to be focused on thesegments in which it is already operating.

CHOICE OF PERFORMANCE INDICATORS

The performance contract signed by the AMESA-BU ofBP is broad-based and robust. The performance score-card of CIL-PU covers almost all the aspects of business.But, quantification and measurement of these KPIs ischallenging because not only it is difficult to quantifybut also the measurement of these KPIs can restrictcreativity.

BP is a performance-driven organization and theperformance contract system will certainly help inimproving sustainable real performance and integratingCIL into BP’s systems (BP is known more for cost-effec-tiveness and performance management systems).

CONCLUSION

CIL’s objective of becoming the undisputed leader in thelubricant market can be achieved by venturing into newsegments, product innovation, value partnerships, andefficient cost and performance management. In theprocess, it is very important for the company to maintainits relationship with the government, suppliers, channelpartners, and customers.


144

Case Analysis IV

V K VasalReader (Associate Professor)Department of Financial StudiesUniversity of Delhi-South CampusNew Delhie-mail: [email protected]

CIL is a prominent publicly traded business entityin India. It belongs to the lubricants segment ofthe ‘oil and gas’ industry. Equity securities of

CIL are listed for trading on the Bombay Stock Exchange,Mumbai (BSE). In July 2000, BP acquired a controllingstake in CIL and since then CIL is a subsidiary companyof BP.

With the liberalization of the Indian economy sinceJuly 1991, the factors as well as the product markets haveundergone structural changes. And ‘oil and gas’ indus-try is no exception to these general trends. In the chang-ing business scenario(s), CIL, a significant player in thelubricants segment of the ‘oil and gas’ industry with avision to be an undisputed leader in the premiumautomotive lubricant market has formulated and imple-mented varied business strategies. The present manage-ment case, inter alia, has discussed the changes in inputsand product (lubricants) markets, strategic optionsexercised by the CIL, and the payoffs (actual and ex-pected) of distinct business strategies of CIL in the post-reform era. Also, the case has discussed six strategicthemes that CIL has developed for meeting the chal-lenges of contemporary business environment.

DIAGNOSIS

During the last one-and-a-half decades, as stated in themanagement case, CIL has gone through three distinctphases. The case has identified and discussed businessstrategies adopted by the CIL corresponding to each ofthese three phases. Phase I refers to period prior to 1991and has been termed as ‘survival phase.’ In this phase,CIL had focused on managing within the limited avail-ability of the prime raw material — base oil. The com-pany had no strategic thrust on supply chain manage-ment. Rather, the thrust was on ‘how to get the next baseoil consignment.’ In this phase, CIL was effectively asmall company struggling for survival. It focused onmargins, made entry into the top-end and value added

products, and controlled costs. But, it had insufficientprofits and inadequate infrastructure (under-investmentin the plants) in this phase.

Phase II, termed as ‘growth phase,’ began with theeconomic reform measures initiated by the Governmentof India in July 1991. In this phase, private sector lubri-cant companies, inter alia, were allowed to import baseoil. CIL took a strategic decision in this phase to shiftits focus from ‘survival’ to ‘growth.’ That is, the com-pany planned for ‘growth in market share and 30 percent growth in volume terms’ and a transition from aRs.1.50 billion business to Rs.10 billion business in a timespan of six years, say by 1997. At the back end of thebusiness, CIL’s strategy in the supply chain was to keeppace with the explosive growth. And, at the marketingend, it focused on creating new opportunities/brands,segmenting the market, and packaging of the products.By focusing on volume growth, it achieved a marketshare of 20 per cent in this phase though by ignoringcost efficiency and cost effectiveness aspects of its ac-tivities.

As stated above, CIL had reached a market shareof 20 per cent by 1997. In the late 1990s though, thecompany found it difficult to sustain the double-digitgrowth rate of the past owing to significant structuralchanges in inputs and product markets. With environ-mental changes such as increased competition in theproduct market and introduction of advanced enginetechnology in the automotive sector, CIL shifted its focusin phase III from ‘growth’ to ‘consolidation.’ In thisphase, the strategic thrust of the company was on makingsupply chain management more efficient and effective.Hence, phase III is termed as ‘cost-effective phase’ inthe case.

The case cites that phase III has brought about a seachange in the cost and performance management sys-tems at CIL. A feature of phase III is the introductionof a ‘performance contract system’ in CIL. Instead of


145

relying on a few financial measures, the ‘performancecontract system’, emulating BP’s tradition, focuses ona broad set of perspectives and at all the levels of theorganization. Under this system, achievable (stretched)targets are set for a year in the areas of finance, strategydevelopment, health, safety, security, and environment(HSSE), people, brand and customer, ethics andefficiencies. However, given the fact that all manage-ment systems and strategic initiatives are only meansto an end, the most relevant issue/question that meritsprime attention is, arguably, the impacts of a shift inbusiness strategy from phase II (growth) to phase III(consolidation) on business performance. As CIL is apublicly traded company, its performance should alsobe evaluated in terms of the value that a shift in itsbusiness strategy creates/destroys in the capital market.

ANALYSIS

The financial highlights of CIL are presented in Annex-ure 2 of the case. In the Annexure, data are presentedfor a period of ten years, 1992 through 2001.1 Data fromthis Annexure, supplemented through other sources,have been processed to produce results on managementof working capital (Table 5), operating performance(Table 6), profitability performance (Table 7), value driveranalysis (Figure 2), and stockholder value analysis (Fig-ure 3). Importantly, the results have been depicted anddiscussed for the years 1998 onwards, that is the phaseIII (cost-effective phase). The salient features of thisdiscussion are as follows. First, the management of theworking capital has improved over the period 1998 to2001. Second, despite an increased focus on efficient costmanagement and supply chain management, the bottomline of the company has suffered as against an annualincrease in sales during the period 1998 to 2001. Third,the company has been able to optimize its base oil cost.Fourth, the staff and other operating expenses haveballooned. Fifth, overall, the company has created sub-stantial shareholder value. Lastly, the case concludes bystating that CIL has been able to maintain its strong

financial performance (in phase III) by unit price im-provement, lower material costs, efficiencies in supplychain, and cost reduction initiatives.

With respect to the above, we feel that there are twoshortcomings in the findings discussed in the case. First,the case has not adequately utilized the data exhibitedin Annexure 2 to learn about the extent of improvementsor otherwise in the performance indicators in phase III(1998-2001) vis-à-vis phase II (1992-1997). Since thesephases are characterized by two distinct business strat-egies, it is considered worthwhile to compare the payoffsof dissimilar strategies. Using data from Annexure 2,common-size statement and cumulative annual growthrate (CAGR) on select data items for two phases of CILare summarized in Table 1.

The results presented in Panel A of Table 1 showthat in phase III, cost efficiency in the consumption ofraw materials, as expected, has been accomplished tothe extent of 12 per cent. However, efficiencies in theusage of raw materials have not translated into im-proved profit margins. In fact, profit before-tax (PBT)as a per cent to sales is 2.4 per cent lower in phase III.Some further insights regarding the impact of twobusiness strategies on operating performance are ob-tained by examining the findings presented in Panel Bof Table 1. Panel B shows that the cost of raw materialsin phase III has grown at a lower CAGR of 7.7 per centas against almost 20 per cent in phase II. This findinghas provided additional evidence on the cost efficienciesrelated to the use of raw materials in phase III. Also,it is found that CAGR is negative for both PBT and profitafter-tax (PAT) in phase III. Obviously, business strat-egies in phase III have not added to the bottom line. Fromthe viewpoint of shareholders, an interesting finding iswith respect to ‘dividend pay-out’ ratio. Table 1 (PanelA) shows that CIL has distributed an average of 82 percent of its PAT in phase III as against 41 per cent in phaseII. Additionally, Table 1 (Panel B) shows that CAGR of‘dividend pay-out ratio’ in phase III is 16 per cent vis-à-vis 14 per cent in phase II. In view of the fact that CAGRof PAT is 9 per cent (negative) in phase III, a dividendpay-out of more than 80 per cent cannot be sustainedby the CIL without compromising its needs for replace-ment and expansion of capital assets and eventuallyusing accumulated free reserves.

Second, shareholders are an important stakeholdergroup in a company. And, strategies adopted and im-plemented by all the publicly traded companies should

1Data in Annexure 2 are presented for ten years — 1991 to 2001 (with datafor the year 2000 apparently missing). Seemingly a data gap, this has prompteda validity check on the data set. By accessing data on ‘sales and other income’and ‘profit after taxation’ for four years — 1998 to 2001 (CIL follows calendaryear as its financial year) — from BSE’s website, the following is inferred.There is a coding/typographical error and data for aforesaid two items foryears 1998 to 2000 have been incorrectly displayed in Annexure 2 with columnheadings 1997 to 1999 (Data for 2001 are, though, displayed correctly). Byextrapolation, data exhibited in Annexure 2 are re-designated as pertainingto ten-year period, 1992 to 2001. Thus, discussion in the following paragraphshas used data from Annexure 2 by re-designating columns 1991 to 1999 as1992 to 2000.


146

necessarily aim at creating wealth for the shareholders.2

The case has performed ‘shareholder value analysis’ byusing select accounting and market value-based indica-tors but only for the time period 1998-2001 (phase III).Based on the analysis, the case has inferred that ‘overallthe company has created substantial shareholder value.’

The aforesaid inference of the case on creation ofshareholder value has, however, neither used a com-parative setting (phase II vis-à-vis phase III) nor has itreported and discussed the CAGR at which CIL has

created wealth against a ‘benchmark asset,’ an objectivemeasure for assessing the effectiveness of business strat-egies. Hence, additional analysis has been performedhere by collecting data on the year-end market value ofequity of CIL as well as ‘benchmark asset(s)’ for thesample period of ten calendar years, 1992-2001. Relevantdata for this purpose have been collected from the BSE.For assessing the extent of wealth created/destroyed byCIL business strategies, ‘benchmark return’ has beenmeasured by using year-end values of three indexportfolios for which data for the period 1992 to 2001 areavailable. These are, ‘Sensex’, ‘BSE 100’ index and ‘BSE200’ index. Table 2 summarizes the results on the CAGRat which wealth has been created by CIL vis-à-vis three‘benchmark asset(s)’ in two distinct time periods (phasesof business strategies).

The results presented in Table 2 show that CIL hadcreated wealth in excess of the ‘benchmark assets’ duringthe period 1992-97 (phase II). The excess CAGRs foundfor this phase are 16.7, 17.6, and 21.2 per cent againstSensex, BSE 100, and BSE 200, respectively. For theperiod 1997-2001 (phase III), however, the results showthat market value of CIL equity has eroded at a rate fasterthan the ‘benchmark assets.’ The CAGRs of erosion inwealth are 12.9, 15.3, and 14.8 per cent higher for CILas against those observed for Sensex, BSE 100, and BSE200, respectively. This finding is in direct conflict withthe inference drawn in the case that ‘overall the companyhas created substantial shareholder value ‘ in phase III.

In order to validate the finding obtained for phaseIII above, a comparison of CAGRs in market value ofCIL vis-à-vis ‘benchmark assets’ has been attempted fora time-period subsequent to the sample period coveredin the case: 2001-2004. Results for this period show thatthe market value of CIL equity has grown at a CAGRof 5.1 per cent during this period. This rate is much lowerthan the CAGRs of 26.5, 32.0, and 37.4 per cent found

Table 1: Business Strategies and Operating Performance

Panel A: Common-size Statement

Items 1992-1997 1998-2001 Difference(%) (%)

(1) (2) (3) (4)= (3)-(2)

Sales and other income 100.00 100.00 0.00Raw materials consumed 58.55 46.72 (11.83)Excise duty 7.20 15.46 8.26Expenses 13.33 20.27 6.95Interest 1.78 0.39 (1.39)Depreciation 0.49 0.87 0.38Profit before extraordinaryitems and taxation 18.66 16.29 (2.37)Taxation (includingdeferred taxation) 6.51 3.40 (3.11)Profit-after-taxation 12.26 12.90 0.64Dividends pay-out 41.29 81.82 40.53

Panel B: Cumulative Annual Growth Rate

Items 1992-1997 1997-2001 Difference(1) (2) (3) (4)= (3)-(2)

Sales and other income 0.2823 0.0796 (0.2027)Cost of raw materials 0.1985 0.0768 (0.1216)Excise duty 1.1929 0.1527 (1.0403)Expenses 0.4226 0.1585 (0.2641)Interest (0.0395) 0.0520 0.0915Depreciation 0.3777 0.1813 (0.1965)Profit before extraordinaryitems and taxation 0.3122 (0.0706) (0.3829)Taxation (includingdeferred taxation) 0.1842 (0.0133) (0.1975)Profit-after-taxation 0.3726 (0.0901) (0.4627)Dividends pay-out 0.1405 0.1624 0.0219

Source: Annexure 2 of the case.

Table 2: Business Strategies and Market Performance — Cumulative Annual Growth Rate (CAGR)

Portfolio of Assets Benchmark Market Value - CIL Differential Return1992-97 1997-2001 1992-97 1997-2001 1992-97 1997-2001

(1) (2) (3) (4) (5) (6)=(4)-(2) (7)= (5)-(3)

Sensex 0.0695 (0.0283) 0.2365 (0.1576) 0.1670 (0.1293)BSE100 0.0602 (0.0047) 0.2365 (0.1576) 0.1763 (0.1529)BSE200 0.0240 (0.0094) 0.2365 (0.1576) 0.2124 (0.1481)

Source: BSE, Mumbai (www.beindia.com).

2List of KPIs of CIL does not include market value-based metrics.


147

for Sensex, BSE 100, and BSE 200, respectively.3 Thesefindings suggest that the strategy of consolidation (phaseIII) has not created adequate wealth for the equity holdersof the CIL. This inference is further supported by thefollowing facts concerning the market rating of the equityof CIL.

Historically, equity of CIL has been rated very highin the Indian capital market. This is evident from thefact that it entered into the elite list of Sensex (a basketof 30 ‘large, liquid, and representative companies’ listedon the BSE) in November 1998 (early stage of phase IIIbusiness strategy of CIL). But, within a period of fiveyears, it started yielding ground to equity of othercompanies and, in November 2003, it ceased to be aconstituent of Sensex. Since then, the scrip has ceasedto be a constituent of BSE 100 (effective September 2004),and BSE ‘oil and gas’ sector index (effective June 2005).Currently, equity of CIL forms a part of the BSE 200 indexand is classified as a ‘midcap’ stock at BSE. The foregoingdevelopments imply that CIL is not a ‘large, liquid, andrepresentative company’ anymore. These facts lendqualitative (indirect) support to the inference that CIL,by using its current business strategy (phase III), is notable to create wealth in the capital market at a rateachieved by assorted securities constituting a generalindex or by its peers in the ‘oil and gas’ industry.

SUMMARY, CONCLUSIONS, ANDRECOMMENDATIONS

CIL is a prominent publicly traded business entity inIndia. Over a time span of about a decade-and-a-half,CIL had travelled through three distinct phases. Usingdata for the years 1992 to 2001, the case had presentedthe facts and findings on the distinct business strategiesand their outcomes in phase II and phase III. An analysisof the results in the case had shown that CIL, inter alia,had ‘created substantial shareholder value’ in phase III.However, an extensive and deeper analysis performedhere has led to the following conclusions. First, theprofitability performance of CIL has not improved inphase III (cost-effective phase) vis-à-vis phase II (growthphase). Second, contrary to the inference drawn in thecase, phase III has not created shareholder value. Rather,CIL has destroyed shareholders’ wealth in phase III ata rate faster than the select ‘benchmark assets.’ Since‘cost-effective/consolidation’ strategy has not producedshareholder value matching the expectations of the capitalmarket thus impairing its market standing, it is recom-mended that CIL should effectively leverage the powerof their two brands — Castrol and BP — to continuouslygrow in all segments of the ‘oil and gas’ industry.Otherwise, the company is destined to be a ‘niche’ playerin the lubricants market with progressively lower rat-ings in the Indian capital market.

The issues facing Mr. Naveen Kshatriya, CEO andManaging Director of CIL, in October 2002 arehow to:

• decide on the strategic direction for long-termsustainable and profitable growth

• cohere the Castrol and BP brands value creationprocess especially within the diesel engine oil (DEO)segment

• achieve top line growth while maintaining profit-ability

• identify the relevant performance indicators toenable strategy implementation.

STRATEGIC DIRECTION

CIL has a vision to be the undisputed leader in the

Case Analysis V

Chhavi Mehta Rajat GeraSenior Lecturer Assistant ProfessorFore School of Management Fore School of ManagementNew Delhi New Delhie-mail: [email protected] e-mail: [email protected]


3Subsequent to the beginning of phase III of CIL in 1997, BSE has launched‘oil and gas’ sector index. CAGR of oil and gas index for the period 2001to 2004 is 57.4 per cent. This is 52.2 per cent higher than the CAGR ofCIL.

148

premium automotive lubricant market. It has achievedits objective in some market segments by performance-based sub-brands, i.e., Castrol -Activ 4T/GTX Magnatec/CRB Plus which deliver segment-specific product ben-efits such as superior engine protection within the firstten minutes of a start-up or longer engine life, etc. Dueto structural changes in the market, these segments whichexperienced high volume and value growth may not beable to deliver the same volume or value growth. CILcan evaluate its growth options using the Ansoff (1957)matrix:• New products-same markets: Launch new products

aligned with the current desired product attributessuch as fuel efficiency in current market segmentssuch as DEO.

• Same products-new segments: Identify new marketsegments which would be willing to pay a premiumfor performance-based products under the Castrolmaster brand.

• Same products-same segments: Intensify marketingefforts to increase lubricant consumption per vehi-cle especially within the DEO segment throughincreased communication and distribution efforts.

• New products-new segments: Identify new prod-ucts or services targeted at new customer segments.Indian players intend to leverage both economies

of scale and scope and compete in the high productquality space (except for HP) though only IOL intendsto compete on high price (Figures A and B). Since CILdoes not have the economies of scale or scope of theseplayers in base oil processing and petroleum productsdistribution, it should identify and exploit multiple nichesto achieve pricing freedom and cost effectiveness at thesame time through its retail distribution network.

Given the predominance of DEO segment in thelubricant market for both volumes and value growth,CIL needs to maintain its predominance in this segment.The BP master brand affords CIL an opportunity tolaunch new products with the generic value propositionof fuel efficiency at lower prices which is also likely toenable the company to maintain its market share andvolume growth rate. To maintain its predominance inthe premium segment, the company needs to developnew products (sub-brands) with specific product bene-fits targeted at niche customer segments, which can be,for example, manufacturer/vehicle specific and for whichcustomers are willing to pay more. For example, a sub-brand with the promise of superior engine performance

may be developed for the SUV vehicular segment bothcommercial and passenger. This would need to be basedon market research. The company can also explore thepossibility of launching new services such as innovativeworkshops or distribution innovations for discerningcustomer segments.

Overall, CIL would have to undertake significantproduct and/or distribution innovation to retain itsleadership in the premium and popular segment, whichis facing commoditization due to increasing competi-tion, and the customer becoming price-sensitive accom-panied by rising input costs. It cannot compete primarilyon volumes as discussed. The company has managed toacquire a strong market share based on distributioninnovation, i.e., developing a strong alternative retaildistribution network and product innovation based ontangible benefits while scaling up its supply chain tomatch the high growth rate experienced by the lubri-cants market in the nineties.

VALUE CREATION

Both the brands, i.e., BP and Castrol, deliver uniqueproduct benefits targeted at different customer segmentsthough BP may cannibalize Castrol especially in theDEO segment in line with the emerging market trends.There is therefore, a need to micro segment the marketand develop segment-specific products and sub-brandswithin the DEO space. For example, CIL can develop asub-brand targeted at the commercial DEO segment inthe desert terrains of Rajasthan and Gujarat for superiorengine protection, if required. The mass of the DEOsegment is likely to value fuel efficiency and may shiftto BP thus helping CIL retain its overall market share,which is critical for cost efficiency. Needless to say, boththe brands should share the same supply chain anddistribution chain for cost effectiveness.

PROFITABLE VOLUME GROWTH

CIL has been facing eroding margins in spite of costmanagement measures as the bottom line of the com-pany has suffered a loss by 8.5 per cent on an annualizedbasis between 1998-2001 despite the increase in sales by7.99 per cent. Though staff and other operating costshave gone up disproportionately, i.e., by 8.25 per centand 12.97 per cent respectively, the company has beenable to increase the price marginally, i.e., by 3.5 per centannually between 1998 and 2001 (Table 1).


149

A look at the income statement (Table 2) and costmanagement measures between 1998 and 2001 showsthat expenses as a percentage of net sales has increased

from 18.3 per cent to 22.6 per cent due to annual increaseof staff expenses (8.25%-case p-110) and other operatingexpenses (12.97%-case p 110) which includes selling andadministrative expenses(S&A).

Thus, PBIT (net sales-excise-RM cost-expenses-de-preciation) as a percentage of net sales has decreasedfrom 18.6 per cent to 10.7 per cent. A look at CILs Silvassaplant KPIs shows that almost all the KPIs are directedat other manufacturing expenses and plant manpowerexpenses which is 10 per cent of the total cost structure

Table 1: Sales Realization of CIL — 1998-2001

1998-99 1999-00 2000-01

Sales revenue (Rs in million) 12,186.4 12,565.1 13,729.4Volumes (‘000 litre) 2,08,690 2,18,541 2,18,972Average selling price (Rs/litre) 58.39 57.49 62.69

Note: This table is based on data from Table 2 and Annexure 2 ofthe case.


Figure A: Strategic Group Analysis based on Annexure 1 of the Case

Price position relative to product quality

Level of product quality in terms of features

Low Medium High

Low

Medium

High

HP

GOCL, BPCL

IOCL

Figure B: Strategic Group Analysis based on Annexure 1 of the Case

150

(p.108). Thus, almost all the KPIs at plant level aredirected at 5-10 per cent of the cost structure and thesame have increased as percentage of net sales withinthe given period due to increased staff and perhaps S&Aexpenses which may have increased due to increasedcompetition. Raw material cost, which constitutes 90 percent of total costs, has not changed from 48 per cent (as% of net sales) in spite of the increased base oil pricesfrom 2000 onwards (p.108) perhaps due to global pro-curement efficiency in the base oil and additives.

STRATEGY IMPLEMENTATION

There is a need to identify the relevant value drivers andperformance measures based on the identified valuedrivers for CIL.

Table 3 shows that between 1998 and 2001, ROAcalculated on productive capital employed has remainedat 44.8 per cent while EVA has declined. Thus, thoughthe company is creating shareholder value, the amountof annual economic value created has declined by almost50 per cent. This is primarily due to decline in NOPATby 28.8 per cent and increase in WACC by 39.7 per centin spite of the decrease in net capital employed by 6.64per cent and sales increase by 25.7 per cent. Thus, thoughCIL improved the efficiency of its net fixed assets andworking capital through cost control and performancemeasures which has contributed to ROA remaining thesame, EVA has declined due to increased operatingexpenses, marketing expenses, and tax outflow leadingto reduced NOPAT and increased cost of capital leading

Table 2: Income Statement of CIL (from Annexure 2 of the Case): 1998-2001

2001 2000 1999 1998 1998-2001% Change

Sales and other Income(Rs in million) 13,729.4 12,565.1 12,186.4 10,994.1

Net sales (Rs in million) 13,573.7 12,378.1 1,1955.5 10,792.1 25.7

Excise duty 2,327.8 2,177.5 1,681.0 1,512.9

Raw material cost 6,579.3 6,048.0 5,300.1 5,203.9

Raw material/Net sales 48.4 48.8 44.3 48.2 0.2

Expenses 3,081.1 2,514.3 2,517.5 1,976.6 55.8

Expenses/Net sales 22.6 20.3 21.05 18.3 4.3

Depreciation 132.4 114.4 100.8 84.3

Depreciation/sales 0.975 0.924 0.843 0.78 0.195

PBIT (Rs in million) 1,453.1 1,523.9 2,356.1 2,014.4

PBIT/Sales 10.7 12.3 19.7 18.6

Table 3: Financial Measures of CIL — 1998-2001

Rs in million

2001 2000 1999 1998 % Change1998-2001

Net fixed assets 1,806.3 1,726.6 1,709.8 1,567.9 15.2Net current assets 515.8 1566 572.2 1400.3 -63.1Net sales 13,573.7 12,378.1 11,955.5 10,792.1 25.7%PBIT 1,453.1 1,523.9 2,356.1 2,014.4 -27.8NOPAT 944.7 990.2 1,531.5 1,328.5 -28.8Productive capital employed 2,107.5 3,261.8 2,251.1 2,918.1 -27.78Net sales/Net fixed assets 7.6008x 7.2774x 7.1274x 7.0120xNet sales/Net current assets 26.3158x 7.9043x 20.8939x 7.7070xNet sales/PCE 6.44x 3.79x 5.24x 3.65xNOPAT/Net sales (%) 0.0696 0.08 0.1281 0.1231Sales/NCE 3.2x 3.0x 3.2x 2.4x 33.3ROA i.e., 9*10 in % 44.8 30.3 67.1 44.9 0PBIT/NCE .3877 .4194 .6878 .4991Net capital employed 4,192.6 4,109.8 3,792.0 4,490.9 -6.64EVA/NCE 0.1243 0.1671 0.3504 0.2241EVA 521.1 686.7 1,328.8 1,006.4 -48.2WACC i.e., NOPAT-EVA 423.4 303.8 202.7 302.9 39.7

Note: This table is derived from Figure 3, Tables 5, 6, and 7 and Annexure 2 of the case.


151

to increase in WACC.This may be due to lack of effective KPIs linked to

operating and marketing expenses or uncontrollableoperating costs. CIL has been able to control the RM costsdue to its efficient procurement strategy though thereis no KPI based on the same.

CIL, therefore, needs to improve its operatingmargins through cost control and increased prices basedon new product/service development. There is no KPI(Figure 4 of the case) based on new product developmentor sales from new products in the process or customerdimensions. There is a noticeable lack of KPIs in the salesand marketing function, which is critical for the long-term performance of the company in the emerging sce-nario. Almost all the supply chain KPIs are focused onreducing plant cost per litre (p.113), which is only 5 percent of the total cost and may be partially uncontrollable,i.e., based on global economies of scale. It is not clearhow the ethics, HSSE, and people KPIs contribute tofinancial performance or shareholder value. It is alsonot apparent how the customer KPIs which are focusedon volume growth and strengthening the brand will

enhance shareholder value as the company is losingpricing flexibility. There is also a noticeable lack of KPIsbased on long-term competence creation. The financialKPIs focus on operating profits (RCOP), total cost/grossmargins, and net cash flows do not necessarily lead tomarket share or shareholder value and seem to be tac-tical rather than strategic.

CONCLUSION

CIL is achieving volumes and market share growth whileshareholder value created is decreasing due to commod-itization, rising operating costs, and lack of innovation.As discussed earlier, the company cannot have a pre-dominantly volume-based strategy and needs to identifyand exploit its strength in product innovation and dis-tribution to identify multiple niches for its premiumbrand Castrol. At the same time, it needs volume growthto manage its costs that could be achieved through theBP brand. However, there is a need to identify the relevantKPIs in all the functional areas aligned with the selectedstrategy, which will enable implementation of the sameboth in the short and long term.

CIL began operations in India in 1919 and steadilyestablished a reputation for high quality lubricant products and marketing prowess. It had

market capitalization of Rs. 29.54 billion with sales ofRs. 13.57 billion for the calendar year ending 2001. It hadgone through three phases during the last one and a halfdecades: the survival phase prior to 1991, a dramaticgrowth phase during the period 1991 to 1996, and thesupply chain and cost management phase.

Before 1991, CIL was constrained in its growth dueto base oil controls and its canalization through theIndian Oil Corporation Ltd. (IOCL). The Indian economywas characterized by moderate gross domestic productgrowth rate and dominance of nationalized oil compa-nies. CIL’s focus was on managing within the limitedavailability of base oil rather than growth in terms ofvolume. It focused on margins, made entry into the top-

end and value-added products, and controlled cost. Theissue was that of survival and how to get the next baseoil consignment.

In 1991, the oil sector was deregulated. In the firstphase of deregulation, the private sector lubricant com-panies were allowed to import base oil. Subsequently,MNCs such as Shell (with Bharat Petroleum Corpora-tion Limited (BPCL) being the Indian partner), ExxonMobil (with Hindustan Petroleum Corporation Limited(HPCL) being Indian partner), and Gulf Oil (withHindujas being the Indian partner) ventured into thissector. CIL changed its focus from ‘survival’ to ‘growthin market share in volume terms.’ At the marketingend, it focused on creating new opportunities and newbrands, segmenting the market, and packaging of theproducts. At the back-end of the business, the strategyin the supply chain was to keep pace with the explosive


Case Analysis VI

Satya Prakash Singh Manoj AnandProfessor (Retired) Professor of Finance & AccountingUniversity Business School University Business SchoolPanjab University, Chandigarh Panjab University, Chandigarhe-mail: [email protected] e-mail: [email protected]

152

growth by upgrading quality and service to competewith Shell and other major players, revamping thepackaging completely, and modernizing all filling linesin the plant.

THE SITUATION

In 1997, CIL took a hard look at the economic scenarioand its competitive position. There had been an unpre-cedented increase in the base oil cost and sales volumepressure because of reduced oil usage rates of newer andmore efficient engines. The growth rate in the agricul-tural sector had become negative. The competition fromthe PSUs had increased as they prepared themselves fordismantling of the administered pricing mechanism(APM). The challenge before CIL was to grow on a

sustainable basis. It effectively responded to the chal-lenge by changing its focus from ‘chasing capacity/chasing growth’ to ‘cost effectiveness.’

The range of BP lubricants in the diesel engine oilsegment (mainly in the trucking segment) was launchedin India in 2001 after CIL’s acquisition by BP in March2000. The BP brand has delivered its promise for volumegrowth for CIL in the ‘popular’ price segment with asignificant presence in the premium automotive seg-ment and progress in the new generation commercialvehicles, passenger cars, and motorcycle oils.

Table 1 provides CIL’s sales value, volume, andcost of materials data for the period 1998 to 2004. Ta-ble 2 provides capacity and sales volume data of keyplayers.

Table 1: Sales and Material Cost Data of CIL

Year Sales Value Including Sales Volume Cost of Materials Gross Sales valueExcise Duty (Rs. in billion) (in million litres) (per litre) (per litre)

1998 10.79 213 24.1 50.7

1999 11.96 220 24.0 54.4

2000 12.38 214 29.9 57.9

2001 13.57 219 31.7 62.0

2002 13.39 209 28.7 64.1

2003 13.61 212 31.8 64.2

2004 15.23 224 34.7 67.9

Source: CIL’s Annual Report, 2004, pp 12-13.

Table 2: Indian Lube Industry Data of Key Players

Lubricants Sales Volume (tonnes)

2000-01 2001-02 2002-03 2003-04

BPCL 99,841 104,532 117,276 111,704

Castrol 213,846 219,099 209,066 211,840

Gulf Oil 51,878 10,744 33,089 51,511

HPCL 253,600 259,670 329,230 334,080

IBP 30,820 30,538 29,602 32,567

IOCL 359,000 345,000 339,000 389,000

Tide Water Oil 31,696 30,747 31,153 34,999

Lubricants Installed Capacity Volume (tonnes) Per Shift

2000-01 2001-02 2002-03 2003-04

BPCL 90,000 90,000 90,000 90,000

Castrol 164,426 148,806 148,806 148,806

Gulf Oil 86,179 86,179 67,328 67,328

HPCL 319,779 319,779 319,779 319,779

IBP 35,010 35,010 35,010 35,010

IOCL 226,000 286,000 286,000 286,000

Tide Water Oil 82,648 82,648 82,648 82,648

Castrol figures are for the calendar year ending December 31. HPCL operates in two shifts. Tide Water oil capacity data include greaseproduction capacity.Source: CRIS INFAC Refining and Marketing Annual Review, January 2005, pp 217-218.


153

ANALYSIS OF INDIAN LUBE INDUSTRY INTHE FIVE FORCES FRAMEWORK

The lubricant industry is now a global business and themajor international players are ExxonMobil, Shell, BP,and ChevronTexaco. Economies of scale are an advan-tage that these leading players are achieving in this verycompetitive market. Industry consolidation continues tohave a major impact on the company market share andranking, manufacturing and business economics, baseoil supply positions, and competitive environment. Themarket share (in quantity terms) of CIL during the year2003 - 2004 was 18.2 per cent as against 33.4 per centof IOCL, 28.7 per cent of HPCL, 9.6 per cent of BPCL,4.4 per cent of Gulf Oil, 2.8 per cent of IBP and 3 percent of Tide Water Oil.1 An analysis of the Indian lubeindustry in terms of Porter’s (1985) ‘Five Forces’ frame-work is as under:

Force 1: Degree of Rivalry

The intensity of rivalry will determine the value lostin industry through cut-throat competition. It is onlyone of the five factors that determines the industryattractiveness. The Indian lube industry is profitableas all the players have realized higher gross sales valueper litre during the period 2000–2001 to 2003–2004 andhave passed on the incidence of base oil price increaseto the ultimate consumer. It is a more concentratedindustry and competitors appear to have realized theirmutual interdependence and have restrained them-selves from price rivalry. The competition is basedmore on brand identification with respect to perform-ance rather than on price. The major components ofcosts are base oil cost; marketing, sales, and distribu-tion costs; and an after-tax operating margin. TheIndian lube industry neither has excess capacity noris characterized as capital-intensive (Table 2). Theswitching costs are low.

Force 2: Threat of Entry

The average industry profitability expressed in terms ofeconomic value added (return on assets greater than costof capital) determines the interest of potential newentrants. All through the last decade, CIL has had positiveeconomic value added.2 The lube industry averageprofitability provides entry threat. The major entry

barriers are strong distribution system of existing play-ers, brand loyalty, and economies of scale in sourcingthe base oil. The IOCL, BPCL, and HPCL distribute theirlube products through their own petrol pumps situatedall over the country. CIL has access to over 70,000 retailoutlets in the country.

Force 3: Threat of Substitutes

The petroleum-based lube industry may face possiblethreat of demand-side substitutes such as synthetic motoroils in the foreseeable future. The future of threat isdependent on price-to-performance ratio of syntheticoils vis-à-vis petroleum-based lubes. The supply-sidesubstitutability, if any, will influence suppliers’ willing-ness to provide the base oil.

Force 4: Buyer Power

The customers’ awareness of brands in the lube industryis high. They look at price performance and value pro-positions of different brands in the lube industry andmake informed decisions. All the players in the lubeindustry are seeking low-cost position through invest-ment in cost- minimizing facilities and equipments. Themajority of sales in the lube industry are retail sales. Thefuel-efficient and emission compliant engines have re-sulted in lower lubricant consumption. The lube demandis derived demand and depends on sales growth in theautomotive transportation and the agricultural sector.The industrial lubricant demand is reflective of theindustrial production and growth trend in the economywhich has declined during the years 2000-2001 to 2001-2002.

Force 5: Supplier Power

The considerations of supplier power such as relativesize and concentration of base oil suppliers and degreeof differentiation in base oil are present in the lubeindustry to a greater extent. The base oil is generallyprocured globally. Base oil slates are changing. Theseoils require different types of pour point depressant(PPDs). The development of PPDs as a part of totallubricant formulation differentiates one brand of lubefrom another. Lubrizol is a leading supplier of PPDs.The ExxonMobil, world’s leading producer of polyal-phaolefins (PAO), alkylated naphthalenes (AN), blend-stocks and esters, provide synthetic lubricant base-stocks.ChevronTexaco base oils are 100 per cent hydro-pro-cessed for maximum quality and purity. The oil price

1 CRIS INFAC Refining and Marketing Annual Review, January 2005, p 218.2 Due to non-availability of lube segment data of competitors, industry averagescould not be worked out.


154

increase in the past had an adverse impact on the pro-fitability margins of the lube industry.

THE STRATEGY

In the maturity phase, CIL rolled out a new strategy —consolidation and operational excellence — and thechallenge was how to make its supply chain more cost-effective. The company now sought to maximize returnon assets, reduce days’ operating cycle and days’ work-ing capital, reduce logistics cost by identifying ‘supplychain efficiency drivers’ such as standardization, scale,and reengineering of processes; and achieve volumesgrowth by entering into strategic partnerships withoriginal equipment manufacturers such as Tatas, EscortsAgri machinery group, L&T Komatsu, Tata Cummins,and JCB.

Following the acquisition of Burmah Castrol in 2000and as a result of global merger, Castrol India becamepart of BP with 71 per cent of equity holding with BP.With two great brands — BP and Castrol — in its portfolio,CIL positioned them differently to provide better choiceto its customers and to achieve sales volumes growththrough its brand communication strategy. The essenceof the Castrol brand was ‘winning performance.’ Itfocused on the premium segment of the market. The BPbranded lubricant in India, which offered a 5.1 per centsavings on diesel fuel consumption, targeted thoseconsumers focused on cost savings and fuel effective-ness.

CIL introduced the performance contract system forcommunicating strategy, resource allocation, perform-ance evaluation, and linking compensation with per-formance at all organizational levels following BP’stradition. It is similar to Kaplan and Norton’s (1996a andb) balanced scorecard. The performance scorecard setsthe key achievable objectives for the year in the areasof finance, strategy development, HSSE, people issues,brand and customer, ethics, and efficiencies. Naveen KKshatriya, the Chief Executive and Managing Directorof the company, led CIL through its transformation.

STRATEGY MAP

Though operational excellence, marketing prowess, andconcern for stakeholders were present in CIL’s initialstrategy, the performance contract system has beenimplemented in the company not only for improvingsustainable real performance but also for dovetailing

Castrol India into BP’s system. Prior to CIL’s acquisitionby BP, it followed management by objectives as themanagement control system.

The balanced scorecard strategy map of Kaplan andNorton (2004) has been drawn based on the inputsavailable in the case to illustrate how CIL has possiblylinked its brand, information capital, and knowledgeassets to the value creating processes (Figure 1).

The financial perspective describes tangible outcomesof the strategy in traditional financial terms. Measuressuch as RCOP, shareholder value, net cash flow, revenuegrowth, days’ working capital, and overhead costs asa percentage of gross margins are lag indicators thatshow whether CIL’s strategy is succeeding or failing.

The customers’ perspective defines the value propo-sition for targeted customers. Castrol CRB plus has beenrelaunched with a ‘heat-proof’ formula based on con-sumer insight and backed by communication packagespecially designed for tractor owners. It is an exampleof customer valuing innovation and high performance.CILs strength in the range of heavy-duty engine oils isdue to the ‘product plus’ package such as technicalsupport and value-added services. Its goal is to be aleader in driving safety. The BP brand proposition of‘reduced diesel consumption’ is targeted at the BPconsumer who is cost-efficiency-driven and is continu-ously seeking ways to reduce operational expenses.3

These value propositions provide the context for intan-gible assets of CIL to create value.

The internal business perspective identifies a fewcritical processes that are expected to have the greatestimpact on CIL’s strategy. By investing substantially inenvironment, health, safety, employment practices, andcommunity development, it has developed an excellentreputation and in the process has been able to makehuman processes more efficient and effective and reduceoperating costs.

CIL has identified and developed ‘supply chainefficiency drivers’ such as simplicity, standardization,scale, and reengineering of processes. It plans to haveeconomies of scale through standardization of its re-quirements and use the same kind of technology in allits brands across the family. The economies of scale areachieved in procurements through global operations.The company evaluates its procurement strategy on twodimensions — criticality and the scale of spending.


3 CIL’s Annual Report, 2003 and 2004.

155

The learning and growth perspective describes CIL’shuman capital, information capital, and organizationcapital’s role in its strategy. It has implemented two ofthe three modules of the JD Edwards’ Enterprise Re-source Planning (ERP) software package in the areas ofprocurement, inventory control, warehousing, distribu-tion, and sales order processing and is in the processof implementation of i2 software. It captures distribu-tors’ sales data through Turview software at the dis-tributors’ end. The focus is on actual sales loss ratherthan sales loss in the pipeline due to non-availability ofSKUs. It had plans to integrate Turview and JD Edward’ssoftware in the year 2003. It has created alignmentbetween its intangible assets and strategy throughperformance contract as it has granularity. It has enabledthe management to pinpoint the specific human, infor-mation, and organization capital required by its stra-tegy.

BALANCED SCORECARD

Performance scorecard protects the CIL managementfrom information overload by limiting the performancemeasures to only four perspectives, namely, customer,financial, internal business, and learning and growth.The implementation of performance scorecard has en-abled it to translate its strategy into a set of KPIs(Table 3).

CIL has developed the performance scorecard at allthe levels of the organization in order to bridge thelearning gap that exists in most organizations. Thescorecard constructed at the lower level is aligned withthe highest-level scorecard (p. 113) as is evident fromFigure 2 in Niven’s (2003) framework. The challengebefore the company’s leadership team is how to achievebalance between the shareholders’ expectations and thecompetency available within it and to determine the


Figure 1: CIL’s Strategy Map

156

optimal blend of financial and non-financial measures.Further, the distinction between cause-and-effect rela-tionships amongst KPIs is also blurred.

RESULTS

The working capital management performance of CILduring the period 2000 to 2004 has improved substan-tially (Figure 3). The days’ operating cycle and the days’working capital have reduced from 139 to 89 days andfrom 33 to 24 days respectively. The average inventory-holding period has come down from 59 to 37 days. Thesupply chain management initiatives at CIL appear tohave paid rich dividends.

Due to increased focus on efficient cost and supplychain management, CIL has created substantial share-holder value during the period 2000 to 2004 (Figure 4).It has maintained its personnel cost slightly below 5 percent of sales during the period but the effective tax rateshave increased from 18 per cent to 33.5 per cent during


Table 3: CIL’s Performance Scorecard

Financial Customer Internal Business Processes Employee Learning and Growth

Revenues by brand Cost-sensitive products Target zero fatalities Compliance on all HR basicsReplacement cost operating profits Demonstrate distinctive benefits Raise HSSE awareness Target Improvement in ESI scoreOverheads cost as a percentage ofgross margins Serve customers better Continue to challenge the Value added per employee

current ways of workingLogistics cost Growth in market share Strategic partnerships IT usage ratioNet cash flows Brand health index Innovation ratio Networks

Figure 2: Two-way Flow of Knowledge and Information when Cascading the Performance Scorecard

this period. Thus, the operating margins have comedown from 12 per cent to 8 per cent but the asset turnoverratio has improved from 2.9 to 4.9 during this period.The economic value added as a percentage of capitalemployed has improved from 11 per cent to 29 per cent.

CIL has increased its dividends per share from Rs.3.63 in 2000 to Rs 8.25 in 2002 and the same has beenmaintained in 2003 and 2004. It has good quality ofearnings as its cash flow per share has exceeded itsearnings per share (Figure 5). During this period, themarket has valued CIL share at 20 multiple of its earn-ings (year-end valuation) with the exception of 2002when it was 17 multiple. The price-to-book multiple atyear-end for CIL scrip has been around 7 with theexception of 2001 when it was 6 (Figure 6).

CONCLUSION

CIL has been able to sustain its competitive advantageby developing products that have differentiated offer;

157

4 Address by Mr. Naveen Kshatriya, Managing Director to the shareholders,CIL’s Annual Report, 2004.


Figure 3: Working Capital Performance of CIL

Figure 4: Shareholder Value Analysis at CIL

managing costs better; building long-term winningrelationships with its distributors, dealers, and directcustomers; and through innovation. The company’sstrategy has paid off and it has been able to grow con-tinuously on all performance parameters despite in-creasing competition and base oil prices. Kshatriya

attributes the return of CIL to ‘growth path and revivingup to new heights of performance’ and to the ‘innovativeand winning team spirit of Team Castrol.’4

158

Figure 5: Payout Policy at CIL

Figure 6: Share Price Performance of CIL


REFERENCES

Kaplan, Robert S and Norton, David P (1996a). The BalancedScorecard: Translating Strategy into Action, Boston: Har-vard Business School Press.

Kaplan, Robert S and Norton, David P (1996b). “Using theBalanced Scorecard as a Strategic Management Sys-tem,” Harvard Business Review, 74(1), January-February,75-85.

Kaplan, Robert S and Norton, David P (2004). StrategyMaps: Converting Intangible Assets into Tangible Outcomes,Boston, Massachusetts: Harvard Business School Press.

Niven, Paul R (2003). Balanced Scorecard: Step-By-Step forGovernment and Nonprofit Agencies, New Jersey: JohnWiley & Sons, Inc.

Porter, Michael E (1985). Competitive Advantage, New York:Free Press.

Language has created the word “loneliness” to expressthe pain of being alone, and the word “solitude” to expressthe glory of being alone.

Paul Johannes Tillich

159

Documents

Castrol Ind