Customers value expectations (CVE) and suppliers value propositions (SVP) in developing new services and relationships: Case

study from natural gas industry Copyright: Pramod Paliwal & Ramendra Singh Analyse and discuss the case in the context of market development for natural gas/natural gas based applications. You may also bring in the reference of similar instances in natural gas/energy industry for a broader perspective.

1. Introduction While deciding about products and services, customers always value certain specific criteria in them. Features, service quality and reliability and service guarantees are examples of attributes that represent value to customers. Customers incur real costs (and opportunity costs) when acquiring offerings and hence these are important elements of customer value. Customer value expectations thus have a very important role to play in developing offerings by marketers. Value proposition is an offer that describes the quantifiable benefits that individuals or organizations making an offer promise to deliver. Its development is based on a review and analysis of the benefits, costs and value that an organization can deliver to its customers, prospective customers, and other constituent groups within and outside the organization. It is also a positioning of value, where value is a function of benefits and associated costs. The significance of the case study stems from the unique context of the case study, i.e., the natural gas distribution business. Distance between the supplier and consumers and creation of natural gas transmission and distribution infrastructure form major contours of this business. Moreover natural gas once explored and produced from the wellhead, cannot be stored easily. Further the creation of storage infrastructure entails significant capital expenditure and given the
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physical & chemical properties of natural gas, considerable space is taken up in storing the gas. Therefore, ideally end-to-end supply tie-ups have to be in place between suppliers and customers, before the first cubic meter of gas is sold to the customer. In the absence of such tieups, the entire business model becomes unviable as return on investment in creating pipeline network for transportation and distribution until last mile becomes inadequate. It is a challenge for any business marketer to operate under such a business model, unless it finds a match between CVE and SVP for the target market. This case study illustrates how the environmental variables such as competitive intensity that affects profit margins necessitates an industry (in the case study, ceramic industry at Morbihenceforth, CERACO), to review internal cost-structure and manufacturing processes, and design elements of CVE. GASCO finds a latent opportunity for matching CVE while planning a market entry using piped natural gas (PNG) as total fuel solution, replacing LPG as a previous solution. 2. The GASCO-CERACO Case Study

2.1.1. Data Collection To enable data collection for the case study, representatives from supplier, GASCO and the buyers in CERACO were interviewed to understand the sequence of steps that preceded the entire market development. Twenty key ceramic manufacturers (customers) were visited that represent CERACO. We conducted semi-structured interviews with few key representatives of ceramic manufacturers, equipment supplier representatives, and GASCO representatives. Two vendors of GASCO and a representative of the gas pipeline (infrastructure) company close to GASCO were also interviewed. Themes were identified in the analysis of the semi-structured
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interview transcripts, focused group discussions and the documented information. The research thus involved the examination of supplier-customer interaction activities, and the benefits of making it an integral part of new service relationship strategy. From both theoretical as well as the practitioners perspective, it would be important to gain insights into the phenomenon of market development for GASCO by co-creating value by managing the CVE- SVP (Supplier Value Proposition) interaction process. If value co-creation as a market entry strategy can be successfully demonstrated in a relatively complex environment such as the natural gas market in terms of logistics, infrastructure, and technology-, then it should be useful for business marketers in terms of contextualizing the case findings in various other (and maybe less complex) business marketing situations. 2.2 The Ceramic Industry at Morbi (CERACO) 2.2.1. Background Morbi, 210 km from Ahmedabad, the commercial capital of western Indian state of Gujarat, has a unique distinction for being host to around 400 ceramic units of various capacities. Almost two-thirds of these units manufacture floor and wall tiles and remaining are vitrified tile and sanitaryware manufacturers. The typical production levels for ceramic manufacturing plants in Morbi range from 70 to 1800 metric tonnes/month for sanitaryware and 180 to 4500 metric tonnes /month for ceramic tiles. The ceramic tile and sanitary wares manufacturing consists of basic raw clay minerals mixed with other additive minerals that are used for the firing/fusion process. In the firing /fusion process, the raw materials are transformed in a glassy phase (vitrification) at temperatures between 1,000C and 1,400C. The vitrification process causes the ceramic products to have certain chemical and physical properties, including resistance to heat and fire, high strength, and chemical inertness. The major manufacturing processes include raw
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material storage, preparation of raw materials, shaping, drying, surface treatment (glazing or enamelling), firing, treatment (polishing), sorting, and packaging (Source: UNIDO- DIPP). The products mainly consist of a mixture of clay minerals complemented with other minerals such as additives, fillers and fluxing agents, and glaze components. When received from the extraction- sites, raw materials are prepared through several processes (primary and secondary crushing, grinding, screening, dry or wet milling, dry screening and spray drying), mixed and pressed, and extruded or slip cast into shape using shaping/forming. Glaze -preparation is conducted using silica (as major glaze component), fluxing agents (alkalis, alkaline earths, boron, lead, etc.), pacifiers (zirconium, titanium, and so on), and colouring agents (iron, chromium, cobalt, manganese, etc.). Water is used frequently for a thorough mixing and shaping, followed by aeration stage. Surface treatment and decoration of the clay products may follow later. The products are then placed in kilns for firing/ vitrification. (UNIDO- DIPP) The firing process allows the vitrification of the shaped and dried clay products. The continuous kilns include tunnel kilns for sanitary ware, and roller hearth kilns for tiles. Firing is produced by burners located at the sides of the kiln. The manufacture of ceramic products is complicated due to the sensitive nature of the numerous chemical reactions that occur during the manufacturing process. Therefore, manufacturing is a complex operation that involves massive supply of heat. Usage of cheaper fuels may lead to technical problems, which may result in poor quality of the end products. The use of a clean fuel such as natural gas enhances the product quality by reducing technical problems in the manufacturing process. Ceramic products depending upon their finished quality of the final products are generally categorized as follows: 1. Category A: These command a premium price 2. Category B: These are sold at a discount of 20-25% as compared to category A
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3. Category C: These fetch a price that ranges between 10-50% of the discounted price of A. 4. The average daily production from Morbi ceramic cluster reflects a clear pattern, as shown in Table 2:
Fuel Used End-Product Quality Coal Gas/CBFS Category A Category B Category C Total 50% 40% 10% 100% LPG 52-55% 42-45% 0-6% 100% Natural Gas 52-55% 42-45% 0-6% 100%

Table 2: Product quality wise distribution based on type of fuel used in Morbi Cluster
Kiln/Equipment maintenance Health, safety & environment issues 4 3 2 1

Fuel cost per unit of production Coal Gas CBFS LPG Natural Gas 2 1 3 4

Supply security

Final product quality 3 2 1 1

3 4 2 1

2 3 1 1

Note: Ranking: 1-4 (Highest to lowest) Table 3: Comparative analysis (ranking) of fuels used for kiln firing at Morbi Thus, natural gas has the potential to increase the production of category- A and B products, which commanded significantly higher premiums in the market. Incidentally, using LPG also
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brings down the rejections of end product, but since LPG, compared to natural gas, scored less on other major underlying parameters (Table 3); natural gas became the preferred heating fuel in the Morbi ceramic industry. As shall be also seen in the subsequent sections, the intensive interactive engagement of GASCO with CERACO players was extremely useful in understanding this phenomenon, and eventually the adoption of natural gas as a preferred fuel, was beneficial for the end customers. Both the major stakeholders in the process i.e. customers, and the business marketer reported that they had intensive interactions with each other during the entire process i.e. from the beginning of the business discontinuance till the adoption process for natural gas as the new fuel for kiln firing was complete. 2.2.2. The Fuel Crisis: Business discontinuity and a latent opportunity for CVE-SVP interaction process between GASCO and CERACO Ceramic manufacturing is highly energy intensive, where energy costs account for 15% to 40% of the total production cost. The existing fuels being used are fuel oil, producer gas, natural gas and liquefied petroleum gas, which mainly used for firing the burners. A key aspect of the process involves drying, which is followed by firing at temperatures between 800 centigrade and 1,250 centigrade. Surplus heat is often recovered from ceramic dryers, using hot air recovered from the cooling zones of tunnel kilns, supplemented with hot air from the burners. This requires careful consideration of plant layout, because low-temperature excess heat can be managed usefully, provided that the distance between excess heat generation and use (and therefore piping length) is limited. Over the last few years, the Morbi ceramic cluster (CERACO) had been experimenting with Carbon Based Feedstock (CBFS), Liquefied Petroleum Gas (LPG)
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and Coal Gas for firing the kilns that also shifted from conventional tunnel kilns to roller kilns over the years. Between 1992 and 2002, CERACO units were largely roller kilns based, using LPG as a fuel, which was a cleaner and less polluting fuel that also addressed the issue of consistency of temperature required in the kilns. However, in 2002, the price of commercial LPG increased to the extent of 130%, and suddenly the ceramic units found the LPG economically unviable as it resulted in a substantial increase in their cost structure. This led to a fuel crisis. 2.2.3. Customers Value Expectations: Looking inwards for solutions CERACO manufacturers taking a cue from their Chinese counterparts, explored the technology available in China and looked at the option of adopting the coal gas based gassfier mechanism, for kiln firing. The CERACO units had a unique distinction for adaptability, and true to this spirit, within few years of the fuel crisis; a majority of units converted their kiln firing process into coal gas based gassifiers, and also developed indigenous technology for manufacturing these gassifiers. However, the coal gas fuel failed to bring about a consistent kiln temperature, which resulted in variation in the quality of their product range i.e. vitrified, floor and wall tiles. This inconsistency in product quality led to higher rejections, and dropping revenues from the customers, most of whom purchased in bulk. The customers of CERACO further used their bargaining power to drive down the contracted price with the CERACO units, who were left with little or no option to wriggle out this situation. Moreover, coal gas production involved multiple mechanical steps, which made the process complicated. Between 2002 and 2007, while the installed capacity went up by almost 40%, the CERACO units were still struggling with finding an appropriate fuel solution to fire their kilns. The fuel crisis was blowing out of proportion, and

the solution seemed out of sight. This was a latent opportunity for GASCO to engage in CVESVP interaction process. 2.2.4 GASCO GASCO is a subsidiary of a large public sector petroleum company (2009-10) sales, USD 1.6 billion) promoted by the state government of Gujarat, India. The role of the natural gas marketing company is complementary to another group company that operates one of the largest gas transmission pipeline networks in India. At every location where the transmission network ends, GASCOs retail network starts. This has resulted in a strong synergy in network management besides ensuring that gas is adequately available to all retail segments in Gujarat that comprise industrial, commercial, transportation and residential customers. GASCO provides last mile linkage to small consumers by way of networks. The company is supplying Piped Natural Gas (PNG) to nearly 30000 domestic households, 125 commercial establishments and about 400 industrial customers. It handles sales volume in tune of 2 MMSCMD (Million Metric Standard Cubic Meters per Day). Understanding the complexities of Natural Gas business, the promoter company, apart from collaborating with Canada based Niko Resources, has forged strategic business alliances with international partners like Heramec Limited, UK, GeoGlobal Resources (Barbados) Inc, Canada, Hallworty Shipping Limited SA, Panama, Oilex, Australia, Petrogas E & P LLC, Oman and Silverwave Energy Pte Limited, Singapore. 2.2.4.1 The New Service Natural Gas is a safe, efficient, and economical fuel to use in different forms by different set of users, either as Piped Natural Gas (PNG) or as Compressed Natural Gas (CNG). Unlike LPG, CBFS and Coal Gas, the PNG Fuel Service needs an extensive infrastructure for reliable service, which means substantial upfront investments. Natural Gas is supplied to the customers at the
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usage point through linear gas pipelines, as this cannot be stored in cylinders like LPG. Gas flows to customers premises going through various stages of pressure reduction. These pipelines take their supplies from cross-country trunk pipelines. Apart from these trunk lines, the PNG infrastructure include heavy-duty compressing units at various points, a deodorization plant, and a city gate station from where the trunk line is connected to pipelines for intermediate and last mile connectivity. The pipelines network, and the city gate station requires a continuous monitoring with state-of the -art hardware and software. Though PNG was seemingly a logical fuel for CERACO units because they have already traversed on the Liquid (CBFS) to Gas (LPG/Coal Gas) curve, and with minimal need for retrofitting, the SVP was still not free from challenges. For ensuring the switch to an alternative core activity in the manufacturing process for CERACO, in this case from the usage of Coal Gas to Natural Gas for kiln firing GASCO crafted its SVP in the following way: 1) Adequate distribution infrastructure for consistency in supplies: Unlike oil that can be managed in batches, gas requires a constant flow and requires complex pipeline networks right through upstream (exploration & production) and midstream (transmission at high pressure) to downstream (distribution at last mile) even for minimal usage. GASCO being a downstream company needs to create the infrastructure to handle the high-pressure natural gas coming from the cross-country trunk line transportation network of midstream companies. Thus GASCO takes the rights of natural gas at the city- gate- station (CGS) and distributes gas to end-consumers at low pressures through an intensive network of low pressure pipelines.

At a very conservative estimate, CERACO entails an investment of USD 60 Million for creation of a city gas distribution network. In addition, the creation of such distribution network also involves tackling a host of regulatory issues and managing Health, Safety & Environment (HSE) norms. 2) Justify relatively high prices for natural gas: Natural Gas is benchmarked with

international crude oil prices and hence relative to Coal Gas and Carbon Based Feed Stock (CBFS), is priced higher. The higher price in part also stems from a substantial investment in infrastructure. Its price may be at par with or slightly higher than LPG. However, a customer making a decision about choice of fuel only because of price grossly overlooks the other advantages of natural gas, i.e. high calorific value, clean (less polluting) fuel and above all the assurance of adequate supplies at all times. 3) Availability of adequate quantities of natural gas for CERACO: / Consistency of Natural Gas Supply: Reliability of gas supply is a paramount issue for a ceramic customer. As also discussed earlier, it is relatively expensive for both, the buyer as well as supplier- to store adequate quantities of natural gas. Therefore, in the event of disruption of supplies, the customer shall be at a loss-both in terms of downtime in manufacturing operations, and costs involved in maintaining and (short-term) switchover to alternate fuels. For reliable and secured gas supply, city gas distribution networks should have a network system with minimum of two sources from different trunk lines. GASCOs marketing strategy of diversifying its natural gas supply sources such as spot gas etc. to hedge against volatility of natural gas prices combined with the professional and forward looking approach of the top management also helps in contributing to a unique SVP of ensuring
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perennial gas supply. GASCO has a lot of support from the government the majority shareholder- to enable it to take calculated yet bold business risks on gas sourcing and distribution infrastructure creation. 4) Safety issues: The properties of natural gas at times makes its customers vulnerable to potential mishaps and hence it is imperative that a downstream company (GASCO) adopts good industry practices in design and construction of facilities, laying of pipelines, infrastructure and in selection of equipment. These practices are as also per the mandate of Oil Industry Safety Directorate (OISD) of the government of India. Further, it is also required to implement

engineering and management measures based on the outcome of internationally accepted tools like Quantitative Risk Assessment (QRA) and Hazard & Operability Studies (HAZOP). Other measure- which is also mandatory- such as use of odorants is also a safeguard to enable early detection of leakages of natural gas. Consumer safety measures are required to be implemented including provision of information on safe practices, emergency response, dos and donts at the time of connection and in subsequent customer-visits. To address these concerns, GASCO regularly engages with key CERACO customers in order to understand the salient features about fuel consumption by the units. GASCO also has a state of the -art Supervisory Control & Data Acquisition (SCADA) mechanism in place which aids to better monitoring of the gas distribution networks. To address these concerns, GASCO regularly engages with key CERACO customers in order to understand the salient features about fuel consumption by the units. The following are the identified aspects from the perspective of customer value expectations (CVE):

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a) b) c) d)

The fuel usage patterns Details of kiln firing mechanism Their cost structure, rejection rate and associated opportunity costs. Ceramic manufacturers end -customers expectations in terms of quality & consistency.

The CERACO units were well networked among themselves, extremely cost-conscious, and were always looking to improvise their processes by rising up on the learning curve. These factors made GASCO to take a deep look into their operational details, since given the distinct nature of its customers who have high prior knowledge, any new proposed fuel based solution would need to be sustainable and of higher perceived value. It is imperative or any supplier to develop a solution that is perceived valuable by its customers, besides being sustainable in the medium to long-term horizon. This perceived value also needs to be successfully communicated e.g., the short-term price differentials need to be explained with reference to the overall customer-benefits. This also presented another challenge for GASCO- in terms of dealing with customers influenced by their intense prior knowledge and experience. This prior experience of customers aspect is an important one when dealing with such customers and has implications for customer judgments (Jiewen and Sternthal, 2010), and value expectations. 2.2.5. CVE-SVP Interaction process GASCO engaged with its customers on a continuous basis, tackling the concerns enlisted above, and looked at the issues from the customers perspective, as well as from customers end-

e.g. At the intermediate Spray Drier stage (that involves drying of raw material and intermediates and which has no direct bearing on the quality of end product), the ceramic units can continue with the option using Coal Gas due to its economical availability.

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consumers perspective, to arrive at the following salient issues that needed to be addressed to match the CVE with SVP: 1. Look beyond the short-term profitability of CERACO manufacturing units. ; 2. Bring down rejections due to inconsistent quality, and to ensure consistently good quality and to be able to compete internationally; 3. Ensure that high initial investment are set-off by the benefits such as zero storage requirements for LPG, or the need to install and operate complicated mechanical processes required for coal gassifiers; 4. Ensure that CERACO units need not make any major process related changes for adopting the new proposed fuel solution based on natural gas for kiln firing. The interaction process was perceived by one of the key customers as:

The gas company (GASCO) officials have been very proactive in working with us, understanding our problem-areas and devising solutions that were customized for our operations. In addition, another customer mentions: Sometimes, we do have anxiety over probable increase in natural gas prices and its consistent availability. But that is certainly less than the one we used to have when we used LPG and Carbon feedstock for our kiln firing earlier. Moreover, we are confident that after having made a substantial investment in creating huge gas transportation and distribution infrastructure, the gas company shall do all the needful to address our anxieties.
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2.2.6. CVE-SVP Interaction results GASCOs efforts indeed brought some encouraging results. Within a year, almost 80% of the CERACO units in Morbi signed up for Piped Natural Gas supply by GASCO. 64% of the total units use PNG for up to three-fourths of their total requirements. The consumption of Natural Gas increased from zero to 0.9 MMSCMD in about two years time. In the meantime, the gas transmission company from the GASCO group, which is into pipeline transmission network business, was working simultaneously to ensure the availability of adequate supply infrastructure for the CERACO ceramic units. GASCOs endeavour of working closely with the customers therefore transcended from mere transaction based interactions to long-term win-win customer partnerships. Thus, besides co-creating a new value (in form of PNG) that had more long-term benefits, the business marketer also advised the customers to continuing with maintaining LPG storage facilities (with marginal investment). That was because in the eventuality of disruption in natural gas supplies, the last-mile pipeline network can carry LPG and rotary kilns can alternatively be fired by LPG, reducing the possibility of another business discontinuity, as faced by customers earlier. GASCO realized that any disruption in manufacturing activity due to disruption in the supply of natural gas could be much more costly for CERACO units than temporarily switching to a competing fuel (LPG). As GASCO was not supplying LPG, suggesting LPG as an alternate fuel to avoid business discontinuities meant that the supplier was de-facto decreasing its customers switching costs. Therefore, accepting competition(from alternate suppliers or product substitutes), even in the face of creating value for customers is also an integral aspect of matching CVE with SVP, since customers perspective out sizes that of the suppliers own perspective. The CERACO units were a happy lot. Another customer for instance mentioned:
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After switching over from coal gas to natural gas, the rejection rate per box of manufactured tiles has reduced drastically! In addition, our clients are extremely happy with our production quality, which, now is more accepted in terms of premium grade rather than relatively substandard as was the case earlier.
Morbi Case: Exercise Note: For the sake of brevity and avoiding repetition, you are expected to NOT mention any kind of background etc. to the case while answering the following questions. Exercise: Having gone through the case in detail, you are required to answer the following questions: 1. What is the key learning from the case? 2. Enlist major concerns/issues that you feel that have not been addressed in the case but may be crucial for the success of such efforts. 3. What according to you are the challenges to be encountered by either of the entities i.e. natural gas marketer as well as consumer in the process of co-creation of such natural gas based solutions? What, in your opinion can be done to make this more effective? 4. Enlist a few successful examples of such natural gas/LPG based novel applications that may (or may not have) involved the processes of co-creation of solutions.

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