Castrol Ind

DIAGNOSES
presents analyses of the management case by academicians and practitioners
Castrol India Limited: Managing in Challenging Times

Manoj Anand
Case Analysis I
Dinesh K Gupta Professor University Business School Panjab University, Chandigarh e-mail: dkgupta@pu.ac.in astrol India Limited: Managing in Challenging Times is a rich case having strategic, marketing, financial, and control dimensions. The focus of this diagnosis is on the redesign of the management control system in the light of the changing competitive environment of an enterprise.
BACKDROP
Castrol India Limited (CIL) started its business operations in India way back in 1919 and established itself as a dominant brand in the premium automotive lubricants segment over a period of time. Prior to liberalization of the Indian economy in 1991, CIL, like other private sector players in the Indian lubricants industry, was focused on its survival as there was a complete dominance of public sector oil companies cornering 90 per cent of the market share. While the raw material (base oil) supply was canalized through a public sector oil company, the demand was sluggish as the economy growth rate was low and this resulted in under-investment and under utilization of plant capacity by CIL (p. 107). After liberalization in 1991, CIL found itself in a growth phase its business environment was driven by great growth prospects, private players were allowed to import base oil, administered pricing system was discontinued, and the economy started growing at a higher rate. CIL increased its market share from 6 per cent to 20 per cent and its focus shifted towards creating more capacity, modernizing infrastructure, and improving quality (p. 107). As it is obvious, in the high growth phase, cost efficiency and cost effectiveness of the operational aspects were ignored (p. 103).
The January-March 2005 (Vol. 30 No. 1) issue of Vikalpa had published a management case titled Castrol India Limited: Managing in Challenging Times by Manoj Anand. This issue features six responses on the case by Dinesh K Gupta, Anupam Bawa and Ajay Garg, Deepak Sagar Sudam, V K Vasal, Chhavi Mehta and Rajat Gera, and Satya Prakash Singh and Manoj Anand.
VIKALPA VOLUME 30 NO 3 JULY - SEPTEMBER 2005
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After 1997, CIL faced slow growth in its sales revenue because of intense competition, decline in the growth of automotive transportation and general industrial sectors, heavy increase in the prices of raw materials due to huge increase in oil prices after 1997, and change in engine technology requiring lesser consumption of lubricants and landed itself in a cost-effective phase. This resulted in more emphasis on infrastructure and consolidation (p. 108). In the year 2000, CIL was acquired by British Petroleum (BP). The acquisition by BP had an impact on the control system of CIL. CIL originally envisioned itself to be a market leader in the lubricant industry (p.106) and accordingly put in place a control system. However, after BPs acquisition, the focus shifted to value creation (p. 107). In order to create value, CIL focused on efficient supply chain management knowing that more than 90 per cent of its cost is the cost of raw material and that it has to reach more than 70,000 retail outlets across the country. It realized that its control system must respond to dramatic and fast-paced changes in the operating environment in order to steer the organization to achieve its cherished goal of value creation by ensuring that the strategies adopted to achieve the goal are being implemented properly. Therefore, it put in place a new control system driven primarily by nonfinancial parameters in order to effect change in the culture of the organization. The new control system was ably supported by total quality management, business process reengineering, and activity-based cost management system (p. 103).
indicators of performance which do not look to the past and which lean to the future. These lead indicators, being futuristic and intangible, are bound to emanate from non-accounting domains. To quote Lev (2004): Intangible assets which include a skilled workforce, patents and know-how, software, strong customer relationships, brands, unique organizational designs and processes, and the like generate most of corporate growth and shareholder value. They account for well over half the market capitalization of public companies In fact, these soft assets are what give todays companies their hard competitive edge. Research shows that non-financial measures from other domains are good predictors of financial performance (Banker, Potter and Srinivasan, 2000). These domains are focused on customers, internal business processes, and learning and growth (Kaplan and Norton, 1992). Survey results show that the measures focused on customers were highly valued by 85 per cent managers of the participating organizations, financial measures by 82 per cent, operations measures by 79 per cent, and learning and innovation measures by 50 per cent (Lingle and Schiemann, 1996). Balanced scorecard balances both financial and nonfinancial performance indicators in a manner that futuristic perspective of the organization is not affected by the historical outlook of financial measures. Experimentation with balanced scorecard results in the introduction of four new processes (Kaplan and Norton, 1996), viz., translating the vision, communicating and linking, business planning, and feedback and learning. The strategy map is prepared next based on financial, customer, internal business process, and learning and growth perspectives. For each perspective, one has to define the objectives, develop measures, fix up the targets, and decide about the initiatives to be taken to nurture the perspective. The major advantage of the balanced scorecard is that it clearly communicates the strategy to all the constituents of the organization so that people become sensitive to the realities. The understanding and discussion of strategy does not remain the preserve of boardroom alone; in fact, it becomes the subject of concern for each and everyone in the organization. Further, managing an organization on the basis of financial indicators alone is not going to help the business survive in the long run as they are more focused on the short term. Moreover, it will be better if one manages the drivers
CASTROL INDIA LIMITED
BALANCED SCORECARD
In order to respond to the current realities and to prepare itself for the emerging challenges, CIL designed and implemented a new performance management system called the balanced scorecard. The traditional performance measures like cost, revenue, profits, and ROI (Return on Investment), being financial and tangible in nature, are based on the historical financial accounting system. As a result, these measures are considered to be the lag indicators because they capture and communicate the outcomes of past actions. In order to successfully steer an organization into the future punctuated with intense global competition, fast-paced advances in manufacturing and information technologies, unpredictable changes in the expectations of the customers, and changing social and cultural values, the need of the hour is to depend on
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of financial outcome that are embedded in the base of delighted customers, quality of internal business processes, and capability to learn and grow.
BALANCED SCORECARD OF CIL: AN EVALUATION

Vision
The vision of the organization has changed over a period of time. This is obvious for an organization like CIL which has been recently acquired by BP. As discussed earlier, CIL was traditionally a marketing-driven company. It had a vision of being a leader of the lubricant industry. However, after acquisition by BP, the focus of the top management shifted from high growth to efficient supply chain management in order to create value for the customer. Further, the case highlights that CIL is currently facing a challenge: How to cohere the value creation in the premium sector (p. 107) as CIL traditionally has dominance in the premium automotive segment. However, the lower-end segment has also opened as BP brand has a sound presence in that segment. On the basis of this, it can be logically inferred that the focus of the top management is on creation of value for the customer. A marketing-driven company, CIL, after acquisition by BP, is struggling to come to the realities of change in focus. As depicted in Figure 4 of the case, the focus of the top management is on maximization of shareholders wealth. The dilemma gets reflected even in the statement of Naveen K Kshatriya, Chief Executive and Managing Director, when he states that Performance contract is what BP has adopted. We, in Castrol, followed a different system MBO. It did not quantify. It did not have granularity (p. 114). The change in focus requires totally different mindsets, organizational structures and architectures, and control systems. A strategy map could be designed only on the basis of a clear choice of focus.
competitive environment, the KPIs may also undergo a change. Kaplan and Norton (1992) provide a framework for the strategy map which focuses on four perspectives, viz., financial, customer, internal business process, and learning and growth. However, CIL has grouped KPIs in six perspectives, viz., increased customer emphasis, financial, people, HSSE (health, safety, security, environment), ethics, and supply chain (Figure 4 of the case). The strategy map of CIL is presented in Exhibit 1. It carries a list of KPIs grouped in four categories keeping in view the focus of the management to maximize shareholders value. The list of objectives and measures is only illustrative. The other two components, i.e., targets and initiatives, are also to be worked out. No attempt has been made to fix up the targets based on the initiatives taken by the organization. Fixation of targets requires that the organization has in place a vibrant process of benchmarking and benchtrending. Further, depending on a different focus of the management, say, maximization of market share, the structure of the balanced scorecard of CIL will undergo a change.
Financial Perspective
This perspective signals whether the strategy and its implementation are contributing to the bottom line of the organization. CIL has identified four KPIs for this perspective, which are as follows: Replacement cost operating profit as a measure of financial performance is unique in nature. This measure should be used by organizations which have significant investment in assets whose market value is highly volatile because of price-level fluctuations. However, Annexure 3 of the case does not clarify how CIL calculates this measure. Overhead cost as a percentage of gross margin is a measure relevant for organizations having high incidence of overhead cost. CIL has low incidence of overheads in its cost structure (p. 108). So, utility of this measure could be questioned. Net cash flow is a relevant measure for the survival of an organization. Total cost per litre is a relevant cost measure for monitoring the cost of production. Additional measures: CIL can supplement its existing financial measures with some (or all) of the measures suggested below: As CIL is facing slow growth in revenue, it should
Strategy Map
The top management of CIL should have clarity of vision before proceeding to design the strategy map. The strategy map captures elements critical for success. The choice of these elements, called KPIs, is squarely dependent on how the success of the organization is envisioned. The performance of the organization will be monitored on KPIs over a period of time. Further, with changes in the
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Exhibit 1: Strategy Map of CIL

Vision and Strategy Financial Perspective Objectives Increase of number of new products Develop new customers Develop new markets Reduce customer cost Reduce distribution channel cost Improve fixed assets utilization Measures % revenue from new products % revenue from new customers % revenue from new markets Unit customer cost Cost per distribution channel Sales/fixed assets Targets Initiatives
Customer Perspective Objectives Increase market share Increase customer retention Measures Market share (% of market) % growth (existing customers) % growth (repeating customers) Number of new customers Ratings of customer surveys % returns Targets Initiatives
Increase customer acquisition Increase customer satisfaction Improve product quality
Internal Business Process Perspective Objectives Increase product innovation Reduce process time Increase process efficiency Enhance process quality Measures Number of new products/Total products R & D expenditure Cycle time Cost per litre Quality costs % defective units Targets Initiatives
Learning and Growth Perspective Objectives Increase motivation and alignment Increase employee capability Measures Suggestions per employee Suggestions implemented per employee Training hours Turnover rate Enhance employee morale Empower workforce % absenteeism % line workers empowered to manage processes Targets Initiatives
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focus on market modification. The strategies for this include expanding its brand users by converting non-users into users, capturing new market segments, increasing volume usage, and product modification. To service some of these strategies, CIL can use measures like percentage revenue from new products, percentage revenue from new customers, and percentage revenue from new markets. CIL is already calculating TCPL. This measure can be supplemented with measures like unit customer cost and cost per distribution channel as it is focused on better management of its supply chain. CIL should also focus on better management of its net fixed assets. Figure 2 of the case carries the value driver analysis. A closer look at the analysis shows that as compared to working capital, the fixed assets are not being managed optimally over a period of time. In order to sensitize better management of fixed assets, a new measure sales/fixed assets could be added.
Internal Business Process Perspective

This perspective captures the resilience and robustness of the internal processes of the organization to deliver value. CIL has not labelled any category of KPIs as internal process-focused measures. However, HSSE, ethics, and supply chain-based KPIs could be clubbed and called internal process KPIs. Specific focus on ethical issues happens to be the uniqueness of CILs balanced scorecard. Additional measures: The current set of measures can be strengthened with additional measures. For example, innovation of new products has not been focused. However, rating agencies like CRISIL consider CIL to have . demonstrated product innovation ability which will enable it to maintain its market position in the medium term (p. 106). In the light of this, it is prudent to focus on a measure which is reflective of innovation of production process. Number of new products/total products could be one such measure. R & D expenditure could be another measure. Process quality could be monitored on the basis of quality costs, and percentage of defective units. Manufacturing excellence could be attained by reducing cycle time, while final efficiency of the production process could be reflected by cost per litre.
Customer Perspective
This perspective focuses on measures of company performance in identified target market segments. CIL is currently using five KPIs to handle this perspective. These are: better customer service, brand health index, consumers share of mind, consumers share of attitude, and growth in market share. It seems that it is not possible to clearly capture most of these measures. For example, how do we measure if CIL is serving its customers in a better manner? Same is the case with measures like consumers share of mind, consumers share of attitude, and brand health index. Additional measures: CIL can use simple measures which are easy to understand and operationalize in order to strengthen the customer perspective. In order to monitor the market share, market share (% of market) could be used as a measure. In order to monitor customer retention, percentage growth of existing customers and percentage growth of repeating customers could be calculated. Further, any addition to the existing customer base could be captured through number of new customers. Customer satisfaction could be monitored through ratings of customer surveys. Similarly, quality could be monitored through percentage returns.
Learning and Growth Perspective

This perspective focuses on the capabilities of the organization to create superior internal business processes to create value. CIL has not designated this perspective separately. However, it has identified three KPIs, viz., achievement of compliance on all HR basics, target improvement in ESI score, and value added per employee, under the people perspective. These KPIs should have clear and focused measures. For example, calculation of value added per employee may not be an appropriate measure reflective of employee contribution because more than 90 per cent of the cost happens to be the cost of bought-out items in case of CIL. As a result, value addition in the organization is bound to be low. This measure is more useful in highly labour-intensive production settings. Additional measures: This building block of the balanced scorecard happens to be the most important and fundamental block in the sense that all other blocks are nurtured by the strength of this block. So, the best-run companies are highly focused on this. In order to in-
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crease motivation and alignment of the workforce, some organizations use measures like suggestions per employee, suggestions implemented per employee, etc. To build employee capabilities, measures like training hours, and turnover rate could be included. Employee morale could be captured through percentage absenteeism and empowerment of workforce could be monitored through percentage line workers empowered to manage processes.
ures are bound to change with changes in the competitive environment of CIL and the time horizon under focus.
CONCLUSION
The case provides exhaustive information about one of the dominant players of the lubricant industry in India. From the control angle, the case sensitizes us to understand what performance measurement is, what are the different bases of performance evaluation, why traditional measures of performance lost ground in modern times, and how in a globally competitive environment, balanced scorecard system helps in better managing a business enterprise because whatever gets measured gets done in an organization. This also adds a dimension of the impact of control system on the culture of an organization. With the change in the dynamics of value drivers of modern knowledge-driven economy, the role of soft and non-financial measures of performance has significantly increased. This case helps us to understand the constructs of the balanced scorecard and demonstrates how to experiment with different designs of the balanced scorecard not only on the basis of the understanding of the current competitive environment of the organization but also on the basis of the prospective changes in the business environment.
Compensation
A control mechanism will lose its teeth until it is used for performance evaluation. So, in order to use the balanced scorecard for performance evaluation, it becomes necessary that four perspectives and the chosen measures be assigned weights. For example, it can be decided by CIL that all the four perspectives will be weighted equally. So, each perspective gets a weightage of 25 per cent. Further, specific measures under each perspective will be assigned weights depending on the urgency and importance of the objective. For example, under financial perspective, in order to sensitize people to innovate, the first objective (increase in number of new products) could be assigned a higher weight, say, 25 per cent, as compared to fixed asset utilization objective which can be assigned a weight of, say, 5 per cent. Further, the weights of the perspectives and the meas-
REFERENCES
Banker, Rajiv D; Potter, Gordon and Srinivasan, Dhinu (2000). An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures, Accounting Review, 75(1), January, 65-92. Kaplan, R S and Norton, D P (1992). The Balanced Scorecard: Measures that Drive Performance, Harvard Business Review, 70(1), January-February, 71-79. Kaplan, R S and Norton, D P (1996). Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 74(1), January-February, 75-85. Lev, B (2004). Sharpening the Intangibles Edge, Harvard Business Review, 82(6), May-June, 109-118. Lingle, J H and Schiemann, W A (1996). From Balanced Scorecard to Strategic Gauges: Is Measurement Worth It? Management Review, 85(3), March, 56-61.
Case Analysis II
Anupam Bawa Reader University Business School Panjab University, Chandigarh e-mail: anupambawa@gmail.com Ajay Garg Lecturer University Business School Panjab University, Chandigarh e-mail : ajgarg@lycos.com other income were Rs. 13,729.4 million; profits after taxation were Rs. 1,534.2 million). It has had a chequered history since it was first set up in India in 1919 as the
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IL is one of the large manufacturers and marketers of lubricants, especially automobile lubricants, in India (for the year 2001, sales and
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Indian branch of Castrol. In 2001, it became a part of BP, a leading lubricant company in the world market. Liberalization of the Indian economy in 1991 changed the fortunes of CIL which had hitherto been a small company restricted by controls and quotas and earning inadequate profits. The period 1991 to 1996 saw the company growing explosively from a Rs. 1.5 billion company to a Rs. 10 billion company. From 1997 onwards, the company has had to focus on consolidation and efficiency rather than growth. It has taken many laudable initiatives in the areas of supply chain management, computerization, total quality management, business process reengineering, working capital management, performance measurement system, brand management, etc. Though the absolute profits of CIL are going up, profit as a percentage of sales, net worth, and capital employed is going down despite an increase in asset turnover ratio. CIL has a declining incremental capitaloutput ratio and its financial leverage is low. The negligible debt insulates the company from the risks that come with debt and gives it an opportunity to raise funds if needed.
to recall that CIL held 17.48 per cent of the market share in 2001-2002. CIL is not facing a major crisis currently and it is possible for the company to meet its objectives by following one of the other generic strategies. Moreover, there are indicators that point to the growth of the market for lubricants the increase in personal vehicles in India and the completion of the mammoth Golden Quadrilateral Project by 2007 which will give a fillip to the road transport industry. The growth in the 4-stroke motorcycle segment is seeing a shift in lubricant consumption from petrol stations to retail outlets where CIL has a significant distribution advantage. The lube oil business in the passenger car segment is driven to a large extent by the workshop channel where superior service propositions along with strong brands has led and should continue to lead CIL towards making significant business gains. The opening up of petrol pumps by Essar and Reliance is an opportunity for a lubricant company like CIL because it will give the company access to a channel of distribution that was hitherto denied to it. The circumstances at CIL indicate that stability is the best option for the company at present. The strategy of stability is good for those companies which are in a mature product market evolution and for companies which have expanded fast and are in danger of becoming unmanageable and inefficient especially because of costs having gotten out of hand. This strategy is also appropriate when it appears that the company is likely to face difficult times ahead. The continuing rise in crude oil prices and base oil prices, the introduction of Euro III compliant vehicles, introduction of VAT, and expansion plans of oil PSUs, will add to the pressures exerted by the environment on CIL. Price undercutting by small regional competitors and the tendency of public sector players to absorb the high raw material costs to gain competitive advantage can also put stress on CILs margins and market share. The rise in fuel prices has adversely affected costs of all segments of consumers, especially the small fleet operators, and this has had an adverse impact on their use of lubricants. The pursuit of stability strategy by CIL will mean that the company remains in its present scope of product markets and functions. It should seek to improve its efficiency and use its assets effectively. Admittedly, the company has already taken many steps in this direction. In addition, it should go in for increased product differentiation and market segmentation.
CHALLENGES BEFORE CIL

The challenge before CIL is to succeed in an industry that has evolved, and made the transition from the growth stage to the maturity stage. The period of rapid growth in demand accompanied by rapid expansion in revenues and profits is over. The growth in demand has slowed down because of factors like hike in oil prices, introduction of Euro II compliant vehicles, and problems in the agriculture sector. Moreover, competition has increased. New competitors have entered the MNC competitors and the now invigorated PSUs are fighting for market share.
ALTERNATIVES AND RECOMMENDATIONS

Out of the three generic strategic alternatives of expansion, stability, and retrenchment discussed in detail by Jauch and Glueck (1988), we recommend that CIL pursue stability in the present so that it can successfully adopt expansion later on. This course of action would enable the company to achieve its ambition of becoming a market leader in the lubricant industry. Retrenchment as an option is ruled out for CIL as it is neither a poorly performing company nor a company in a very threatening environment. Here it is pertinent
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Product differentiation and market segmentation have also been recommended by Hill and Gareth (1998) who have identified four non-price competitive strategies as part of the strategies to manage rivalry in mature industries (Figure 1). Pursuing these recommendations may be easier for CIL than for its competitors in a similar situation. CIL should tap its corporate parents (BPs) portfolio of products and list of market segments identified in the more developed markets of the world. It should also serve the marine segment and industrial segment of the lubricant market apart from finding out new uses for lubricants. The cost minimization efforts of the company should not extend to promotion activities of the company. It should, in fact, spend money to enhance its brand awareness and brand image and thus help cultivate brand loyalty for its products. Stability is not a glamorous strategy but an effective strategy. Maruti Udyog Limited and Hero group of companies are two examples of companies that successfully and diligently followed this strategy after a period of rapid expansion. By adopting this strategy, CIL will be in a very good position to pursue its ambition of becoming a market leader in the lubricant industry. It has a strong competitive position in a mature industry but will need to invest further to increase its capacity as it has operated at more than 100 percent capacity for the past few years. It can do so by using retained earnings and partly taking debt as, at present, the company has very little leverage. CIL is currently following the generic strategy of differentiation. It can invest to tap more sources of differentiation. Additionally, it should act to develop both low cost and differentiation strate
gies simultaneously. This will give it more sources of competitive advantage. Following the generic strategy of low cost should not be difficult for CIL as it has a high market share, large capacity, long experience in this product and market, and a parent company that is not only large but also vertically integrated.
CONCLUDING REMARKS
There are a few decisions taken by Castrol on which we cannot help but comment. For a company that is essentially a marketing company, the choice of a brand name Vanellus for a product positioned at the trucking segment is surprising. This is not a segment that has global awareness or transnational homogeneity. It is not the appropriate segment for leveraging a brand name that the company uses in other markets. While one understands the need for growth, one has reservations about the efficacy of a system that will start by multiplying your targets by two. Surely, this will penalize those who performed well to the best of their ability in the base year. Employees, functional areas, and performance units will learn to reduce their tension by under-performing. Paucity of information prevents us from using concept/tools of analysis that could have been helpful to Castrol the most significant tool being Michael E Porters The Five Force Model. We feel the case should have supplied information, among other things, about the extent of backward integration, ownership of refineries and oil wells by BP, capacity utilization at CIL, and level of sophistication of technology used to produce lubricants.
Figure 1: Four Non-price Competitive Strategies

Products Existing
New
Existing
Market penetration
Product development
Market Segments
New
Market development
Product proliferation
Source: Hill and Jones (1998).
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REFERENCES
Hill, 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). Business Policy and Strategic Management, 5th Edition, McGraw Hill Series.
Case Analysis III

Deepak Sagar Sudam Management Trainee Coromandal Fertilizers Ltd. Secunderabad e-mail: deepaksagar@gmail.com IL was set up in 1919 as a specialist lubricant company committed to premium quality, high performance, and leading-edge technology. Over the years, the company has achieved a significant presence in the premium automotive segment. The acquisition of CIL by BP and the amalgamation of TATA BP Lubricant India Ltd. have provided the company with a new line of products to enter the lower segments of the market. CIL has gone through three phases during the last decade and a half as given in the case. The company has strategically shifted its focus from survival to growth in volumes to supply chain and cost management. Also, the acquisition of CIL by BP has brought about a cultural change in the company from chasing production targets to cost effectiveness. The case provides a perfect example of how the strategic management of a company helps in responding to the changes in economic policies and competitive scenario. The total market size of the Indian lubricant industry 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 3 of the case also indicates that the market share for the sample of 73 companies has shrunk from 97 per cent to 70.93 per cent, which can be seen as either the entry of new companies or as increasing market share of small and local niche players. As illustrated by the case, the demand for lubricants is primarily driven by: overall growth of economy
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 FOR LUBRICANTS

Of the three broad segments of the lubricants industry (automobile, industrial, and marine), the automobile segment constitutes around 60 per cent of the lubes. The automobile 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 technology and not so favourable conditions in the transport industry, the consumption of lubricants has been going down. Under these circumstances, the organizations in the lubricants industry should look for new markets and
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new segments, on the one hand, and try to increase their share in the existing segments, on the other.
efficiency, procurement, and manufacturing costs are very important in cost management. As rightly mentioned in the case, the economies of scale would play a key role and BP being a dominant player in the world lubricant industry can always negotiate for the best deals for all the SBUs (which means a common supplier/suppliers for all the BUs will give the advantage of scale and negotiating power).
Finding New Segments

So far, CIL has been focusing more on the HCVs. It should now focus on new segments like LCVs and the agriculture and the rural sectors. The agriculture and the rural sectors offer quite a good volume for lubricants as indicated by a survey done in the tractor showrooms of Sagar town in M.P. the details of which are as follows: Number of tractors Frequency of engine oil change Average running hours in a year Average consumption per oil change 30 lakh 200 hrs of running 1,000 hrs 7-10 litres
INCREASING COMPETITION
While the market is limited, the number of players has increased leading to severe competition and eroding market shares. Sustaining market share is the key for reducing overhead cost per unit and being profitable in the business. One can withstand competition by getting into deals with the channel customers. Branding will be the differentiating factor in this competitive scenario. CIL should consider having tie-ups with influencers like mechanics, service centres, automobile companyowned garages to address the issue of competition. At the same time, the company has to be focused on the segments in which it is already operating.
Average consumption of lubricants in a year 25 litres Total market size (000 litres) 75,000
CIL should try to build relationships with the endcustomer (farmer) and increase its presence and brand communication in rural areas. It should also realize that there is a market, which is equal in size to tractors, in the diesel engine (used for irrigation) segment. The personal vehicles and LCV segments require education regarding regular use of lubricants. These are segments where brand communication and brand recall are very important. They can be tapped only by building brand loyalty (for this, freebies and loyalty building programmes like membership clubs have to be developed). Industrial and marine segments are more institutional in nature and require building long-term relationships and creating win-win situations.
CHOICE OF PERFORMANCE INDICATORS

The performance contract signed by the AMESA-BU of BP is broad-based and robust. The performance scorecard of CIL-PU covers almost all the aspects of business. But, quantification and measurement of these KPIs is challenging because not only it is difficult to quantify but also the measurement of these KPIs can restrict creativity. BP is a performance-driven organization and the performance contract system will certainly help in improving sustainable real performance and integrating CIL into BPs systems (BP is known more for cost-effectiveness and performance management systems).
COST MANAGEMENT
The cost structure of CIL indicates that raw materials constitute around 90 per cent of the total cost. As rightly indicated in the case, scale, simplicity, and standardization of requirements will reduce the raw material cost. Another important observation is that the excise duty as a percentage of sales has gone up (from 0.89% in 1991 to 16.9% in 2001). The companies in this sector, as a whole, need to negotiate with the government for reducing the excise duty. Inventory management, supply chain
CONCLUSION
CILs objective of becoming the undisputed leader in the lubricant market can be achieved by venturing into new segments, product innovation, value partnerships, and efficient cost and performance management. In the process, it is very important for the company to maintain its relationship with the government, suppliers, channel partners, and customers.
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Case Analysis IV
V K Vasal Reader (Associate Professor) Department of Financial Studies University of Delhi-South Campus New Delhi e-mail: vkvasal@rediffmail.com IL is a prominent publicly traded business entity in India. It belongs to the lubricants segment of the 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 controlling stake in CIL and since then CIL is a subsidiary company of BP. With the liberalization of the Indian economy since July 1991, the factors as well as the product markets have undergone structural changes. And oil and gas industry is no exception to these general trends. In the changing business scenario(s), CIL, a significant player in the lubricants segment of the oil and gas industry with a vision to be an undisputed leader in the premium automotive lubricant market has formulated and implemented varied business strategies. The present management case, inter alia, has discussed the changes in inputs and product (lubricants) markets, strategic options exercised by the CIL, and the payoffs (actual and expected) of distinct business strategies of CIL in the postreform era. Also, the case has discussed six strategic themes that CIL has developed for meeting the challenges of contemporary business environment.
DIAGNOSIS
During the last one-and-a-half decades, as stated in the management case, CIL has gone through three distinct phases. The case has identified and discussed business strategies adopted by the CIL corresponding to each of these three phases. Phase I refers to period prior to 1991 and has been termed as survival phase. In this phase, CIL had focused on managing within the limited availability of the prime raw material base oil. The company had no strategic thrust on supply chain management. Rather, the thrust was on how to get the next base oil consignment. In this phase, CIL was effectively a small company struggling for survival. It focused on margins, made entry into the top-end and value added
products, and controlled costs. But, it had insufficient profits and inadequate infrastructure (under-investment in the plants) in this phase. Phase II, termed as growth phase, began with the economic reform measures initiated by the Government of India in July 1991. In this phase, private sector lubricant companies, inter alia, were allowed to import base oil. CIL took a strategic decision in this phase to shift its focus from survival to growth. That is, the company planned for growth in market share and 30 per cent growth in volume terms and a transition from a Rs.1.50 billion business to Rs.10 billion business in a time span of six years, say by 1997. At the back end of the business, CILs strategy in the supply chain was to keep pace with the explosive growth. And, at the marketing end, it focused on creating new opportunities/brands, segmenting the market, and packaging of the products. By focusing on volume growth, it achieved a market share of 20 per cent in this phase though by ignoring cost efficiency and cost effectiveness aspects of its activities. As stated above, CIL had reached a market share of 20 per cent by 1997. In the late 1990s though, the company found it difficult to sustain the double-digit growth rate of the past owing to significant structural changes in inputs and product markets. With environmental changes such as increased competition in the product market and introduction of advanced engine technology in the automotive sector, CIL shifted its focus in phase III from growth to consolidation. In this phase, the strategic thrust of the company was on making supply chain management more efficient and effective. Hence, phase III is termed as cost-effective phase in the case. The case cites that phase III has brought about a sea change in the cost and performance management systems at CIL. A feature of phase III is the introduction of a performance contract system in CIL. Instead of
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relying on a few financial measures, the performance contract system, emulating BPs tradition, focuses on a broad set of perspectives and at all the levels of the organization. Under this system, achievable (stretched) targets are set for a year in the areas of finance, strategy development, health, safety, security, and environment (HSSE), people, brand and customer, ethics and efficiencies. However, given the fact that all management systems and strategic initiatives are only means to an end, the most relevant issue/question that merits prime attention is, arguably, the impacts of a shift in business strategy from phase II (growth) to phase III (consolidation) on business performance. As CIL is a publicly traded company, its performance should also be evaluated in terms of the value that a shift in its business strategy creates/destroys in the capital market.
ANALYSIS
The financial highlights of CIL are presented in Annexure 2 of the case. In the Annexure, data are presented for a period of ten years, 1992 through 2001. 1 Data from this Annexure, supplemented through other sources, have been processed to produce results on management of working capital (Table 5), operating performance (Table 6), profitability performance (Table 7), value driver analysis (Figure 2), and stockholder value analysis (Figure 3). Importantly, the results have been depicted and discussed for the years 1998 onwards, that is the phase III (cost-effective phase). The salient features of this discussion are as follows. First, the management of the working capital has improved over the period 1998 to 2001. Second, despite an increased focus on efficient cost management and supply chain management, the bottom line of the company has suffered as against an annual increase 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 have ballooned. Fifth, overall, the company has created substantial shareholder value. Lastly, the case concludes by stating that CIL has been able to maintain its strong
1
Data in Annexure 2 are presented for ten years 1991 to 2001 (with data for the year 2000 apparently missing). Seemingly a data gap, this has prompted a 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 calendar year as its financial year) from BSEs website, the following is inferred. There is a coding/typographical error and data for aforesaid two items for years 1998 to 2000 have been incorrectly displayed in Annexure 2 with column headings 1997 to 1999 (Data for 2001 are, though, displayed correctly). By extrapolation, data exhibited in Annexure 2 are re-designated as pertaining to ten-year period, 1992 to 2001. Thus, discussion in the following paragraphs has used data from Annexure 2 by re-designating columns 1991 to 1999 as 1992 to 2000.
financial performance (in phase III) by unit price improvement, lower material costs, efficiencies in supply chain, and cost reduction initiatives. With respect to the above, we feel that there are two shortcomings in the findings discussed in the case. First, the case has not adequately utilized the data exhibited in Annexure 2 to learn about the extent of improvements or otherwise in the performance indicators in phase III (1998-2001) vis--vis phase II (1992-1997). Since these phases are characterized by two distinct business strategies, it is considered worthwhile to compare the payoffs of dissimilar strategies. Using data from Annexure 2, common-size statement and cumulative annual growth rate (CAGR) on select data items for two phases of CIL are summarized in Table 1. The results presented in Panel A of Table 1 show that in phase III, cost efficiency in the consumption of raw materials, as expected, has been accomplished to the extent of 12 per cent. However, efficiencies in the usage of raw materials have not translated into improved 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 two business strategies on operating performance are obtained by examining the findings presented in Panel B of Table 1. Panel B shows that the cost of raw materials in phase III has grown at a lower CAGR of 7.7 per cent as against almost 20 per cent in phase II. This finding has provided additional evidence on the cost efficiencies related to the use of raw materials in phase III. Also, it is found that CAGR is negative for both PBT and profit after-tax (PAT) in phase III. Obviously, business strategies in phase III have not added to the bottom line. From the viewpoint of shareholders, an interesting finding is with respect to dividend pay-out ratio. Table 1 (Panel A) shows that CIL has distributed an average of 82 per cent of its PAT in phase III as against 41 per cent in phase II. Additionally, Table 1 (Panel B) shows that CAGR of dividend pay-out ratio in phase III is 16 per cent vis-vis 14 per cent in phase II. In view of the fact that CAGR of PAT is 9 per cent (negative) in phase III, a dividend pay-out of more than 80 per cent cannot be sustained by the CIL without compromising its needs for replacement and expansion of capital assets and eventually using accumulated free reserves. Second, shareholders are an important stakeholder group in a company. And, strategies adopted and implemented by all the publicly traded companies should
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Table 1: Business Strategies and Operating Performance

Panel A: Common-size Statement Items (1) Sales and other income Raw materials consumed Excise duty Expenses Interest Depreciation Profit before extraordinary items and taxation Taxation (including deferred taxation) Profit-after-taxation Dividends pay-out 1992-1997 (%) (2) 100.00 58.55 7.20 13.33 1.78 0.49 18.66 6.51 12.26 41.29 1998-2001 (%) (3) 100.00 46.72 15.46 20.27 0.39 0.87 16.29 3.40 12.90 81.82 Difference (4)= (3)-(2) 0.00 (11.83) 8.26 6.95 (1.39) 0.38 (2.37) (3.11) 0.64 40.53
Panel B: Cumulative Annual Growth Rate Items (1) Sales and other income Cost of raw materials Excise duty Expenses Interest Depreciation Profit before extraordinary items and taxation Taxation (including deferred taxation) Profit-after-taxation Dividends pay-out 1992-1997 (2) 0.2823 0.1985 1.1929 0.4226 (0.0395) 0.3777 0.3122 0.1842 0.3726 0.1405 1997-2001 (3) 0.0796 0.0768 0.1527 0.1585 0.0520 0.1813 (0.0706) (0.0133) (0.0901) 0.1624 Difference (4)= (3)-(2) (0.2027) (0.1216) (1.0403) (0.2641) 0.0915 (0.1965) (0.3829) (0.1975) (0.4627) 0.0219
Source: Annexure 2 of the case.
necessarily aim at creating wealth for the shareholders. 2 The case has performed shareholder value analysis by using select accounting and market value-based indicators but only for the time period 1998-2001 (phase III). Based on the analysis, the case has inferred that overall the company has created substantial shareholder value. The aforesaid inference of the case on creation of shareholder value has, however, neither used a comparative setting (phase II vis--vis phase III) nor has it reported and discussed the CAGR at which CIL has
2
created wealth against a benchmark asset, an objective measure for assessing the effectiveness of business strategies. Hence, additional analysis has been performed here by collecting data on the year-end market value of equity of CIL as well as benchmark asset(s) for the sample period of ten calendar years, 1992-2001. Relevant data for this purpose have been collected from the BSE. For assessing the extent of wealth created/destroyed by CIL business strategies, benchmark return has been measured by using year-end values of three index portfolios for which data for the period 1992 to 2001 are available. These are, Sensex, BSE 100 index and BSE 200 index. Table 2 summarizes the results on the CAGR at which wealth has been created by CIL vis--vis three benchmark asset(s) in two distinct time periods (phases of business strategies). The results presented in Table 2 show that CIL had created wealth in excess of the benchmark assets during the period 1992-97 (phase II). The excess CAGRs found for this phase are 16.7, 17.6, and 21.2 per cent against Sensex, BSE 100, and BSE 200, respectively. For the period 1997-2001 (phase III), however, the results show that market value of CIL equity has eroded at a rate faster than the benchmark assets. The CAGRs of erosion in wealth are 12.9, 15.3, and 14.8 per cent higher for CIL as against those observed for Sensex, BSE 100, and BSE 200, respectively. This finding is in direct conflict with the inference drawn in the case that overall the company has created substantial shareholder value in phase III. In order to validate the finding obtained for phase III above, a comparison of CAGRs in market value of CIL vis--vis benchmark assets has been attempted for a time-period subsequent to the sample period covered in the case: 2001-2004. Results for this period show that the market value of CIL equity has grown at a CAGR of 5.1 per cent during this period. This rate is much lower than the CAGRs of 26.5, 32.0, and 37.4 per cent found
List of KPIs of CIL does not include market value-based metrics.
Table 2: Business Strategies and Market Performance Cumulative Annual Growth Rate (CAGR)
Portfolio of Assets (1) Sensex BSE100 BSE200 Benchmark 1992-97 1997-2001 (2) (3) 0.0695 0.0602 0.0240 (0.0283) (0.0047) (0.0094) Market Value - CIL 1992-97 1997-2001 (4) (5) 0.2365 0.2365 0.2365 (0.1576) (0.1576) (0.1576) Differential Return 1992-97 1997-2001 (6)=(4)-(2) (7)= (5)-(3) 0.1670 0.1763 0.2124 (0.1293) (0.1529) (0.1481)
Source: BSE, Mumbai (www.beindia.com).

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for Sensex, BSE 100, and BSE 200, respectively. 3 These findings suggest that the strategy of consolidation (phase III) has not created adequate wealth for the equity holders of the CIL. This inference is further supported by the following facts concerning the market rating of the equity of CIL. Historically, equity of CIL has been rated very high in the Indian capital market. This is evident from the fact that it entered into the elite list of Sensex (a basket of 30 large, liquid, and representative companies listed on the BSE) in November 1998 (early stage of phase III business strategy of CIL). But, within a period of five years, it started yielding ground to equity of other companies and, in November 2003, it ceased to be a constituent of Sensex. Since then, the scrip has ceased to 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 index and is classified as a midcap stock at BSE. The foregoing developments imply that CIL is not a large, liquid, and representative company anymore. These facts lend qualitative (indirect) support to the inference that CIL, by using its current business strategy (phase III), is not able to create wealth in the capital market at a rate achieved by assorted securities constituting a general index or by its peers in the oil and gas industry.
3 Subsequent 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 2001 to 2004 is 57.4 per cent. This is 52.2 per cent higher than the CAGR of CIL.
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

CIL is a prominent publicly traded business entity in India. Over a time span of about a decade-and-a-half, CIL had travelled through three distinct phases. Using data for the years 1992 to 2001, the case had presented the facts and findings on the distinct business strategies and their outcomes in phase II and phase III. An analysis of 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 performed here has led to the following conclusions. First, the profitability performance of CIL has not improved in phase III (cost-effective phase) vis--vis phase II (growth phase). Second, contrary to the inference drawn in the case, phase III has not created shareholder value. Rather, CIL has destroyed shareholders wealth in phase III at a rate faster than the select benchmark assets. Since cost-effective/consolidation strategy has not produced shareholder value matching the expectations of the capital market thus impairing its market standing, it is recommended that CIL should effectively leverage the power of their two brands Castrol and BP to continuously grow in all segments of the oil and gas industry. Otherwise, the company is destined to be a niche player in the lubricants market with progressively lower ratings in the Indian capital market.
Case Analysis V
Chhavi Mehta Senior Lecturer Fore School of Management New Delhi e-mail: chhavi@fsm.ac.in Rajat Gera Assistant Professor Fore School of Management New Delhi e-mail: gera@fsm.ac.in achieve top line growth while maintaining profitability identify the relevant performance indicators to enable strategy implementation.
he issues facing Mr. Naveen Kshatriya, CEO and Managing Director of CIL, in October 2002 are how to: decide on the strategic direction for long-term sustainable and profitable growth cohere the Castrol and BP brands value creation process especially within the diesel engine oil (DEO) segment
STRATEGIC DIRECTION
CIL has a vision to be the undisputed leader in the
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premium automotive lubricant market. It has achieved its objective in some market segments by performancebased sub-brands, i.e., Castrol -Activ 4T/GTX Magnatec/ CRB Plus which deliver segment-specific product benefits such as superior engine protection within the first ten minutes of a start-up or longer engine life, etc. Due to structural changes in the market, these segments which experienced high volume and value growth may not be able to deliver the same volume or value growth. CIL can evaluate its growth options using the Ansoff (1957) matrix: New products-same markets: Launch new products aligned with the current desired product attributes such as fuel efficiency in current market segments such as DEO. Same products-new segments: Identify new market segments which would be willing to pay a premium for performance-based products under the Castrol master brand. Same products-same segments: Intensify marketing efforts to increase lubricant consumption per vehicle especially within the DEO segment through increased communication and distribution efforts. New products-new segments: Identify new products or services targeted at new customer segments. Indian players intend to leverage both economies of scale and scope and compete in the high product quality space (except for HP) though only IOL intends to compete on high price (Figures A and B). Since CIL does not have the economies of scale or scope of these players in base oil processing and petroleum products distribution, it should identify and exploit multiple niches to achieve pricing freedom and cost effectiveness at the same time through its retail distribution network. Given the predominance of DEO segment in the lubricant market for both volumes and value growth, CIL needs to maintain its predominance in this segment. The BP master brand affords CIL an opportunity to launch new products with the generic value proposition of fuel efficiency at lower prices which is also likely to enable the company to maintain its market share and volume growth rate. To maintain its predominance in the premium segment, the company needs to develop new products (sub-brands) with specific product benefits targeted at niche customer segments, which can be, for example, manufacturer/vehicle specific and for which customers are willing to pay more. For example, a subbrand with the promise of superior engine performance
may be developed for the SUV vehicular segment both commercial and passenger. This would need to be based on market research. The company can also explore the possibility of launching new services such as innovative workshops or distribution innovations for discerning customer segments. Overall, CIL would have to undertake significant product and/or distribution innovation to retain its leadership in the premium and popular segment, which is facing commoditization due to increasing competition, and the customer becoming price-sensitive accompanied by rising input costs. It cannot compete primarily on volumes as discussed. The company has managed to acquire a strong market share based on distribution innovation, i.e., developing a strong alternative retail distribution network and product innovation based on tangible benefits while scaling up its supply chain to match the high growth rate experienced by the lubricants market in the nineties.
VALUE CREATION
Both the brands, i.e., BP and Castrol, deliver unique product benefits targeted at different customer segments though BP may cannibalize Castrol especially in the DEO segment in line with the emerging market trends. There is therefore, a need to micro segment the market and develop segment-specific products and sub-brands within the DEO space. For example, CIL can develop a sub-brand targeted at the commercial DEO segment in the desert terrains of Rajasthan and Gujarat for superior engine protection, if required. The mass of the DEO segment is likely to value fuel efficiency and may shift to BP thus helping CIL retain its overall market share, which is critical for cost efficiency. Needless to say, both the brands should share the same supply chain and distribution chain for cost effectiveness.
PROFITABLE VOLUME GROWTH

CIL has been facing eroding margins in spite of cost management measures as the bottom line of the company has suffered a loss by 8.5 per cent on an annualized basis between 1998-2001 despite the increase in sales by 7.99 per cent. Though staff and other operating costs have gone up disproportionately, i.e., by 8.25 per cent and 12.97 per cent respectively, the company has been able to increase the price marginally, i.e., by 3.5 per cent annually between 1998 and 2001 (Table 1).
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Figure A: Strategic Group Analysis based on Annexure 1 of the Case
Figure B: Strategic Group Analysis based on Annexure 1 of the Case
High
GOCL, BPCL
HP Level of product quality in terms of features
IOCL
Medium
Low Low Medium
High
Price position relative to product quality
Table 1: Sales Realization of CIL 1998-2001

1998-99 Sales revenue (Rs in million) Volumes (000 litre) Average selling price (Rs/litre) Note: 12,186.4 2,08,690 58.39 1999-00 12,565.1 2,18,541 57.49 2000-01 13,729.4 2,18,972 62.69
This table is based on data from Table 2 and Annexure 2 of the case.
A look at the income statement (Table 2) and cost management measures between 1998 and 2001 shows that expenses as a percentage of net sales has increased
from 18.3 per cent to 22.6 per cent due to annual increase of staff expenses (8.25%-case p-110) and other operating expenses (12.97%-case p 110) which includes selling and administrative expenses(S&A). Thus, PBIT (net sales-excise-RM cost-expenses-depreciation) as a percentage of net sales has decreased from 18.6 per cent to 10.7 per cent. A look at CILs Silvassa plant KPIs shows that almost all the KPIs are directed at other manufacturing expenses and plant manpower expenses which is 10 per cent of the total cost structure
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Table 2: Income Statement of CIL (from Annexure 2 of the Case): 1998-2001

2001 Sales and other Income (Rs in million) Net sales (Rs in million) Excise duty Raw material cost Raw material/Net sales Expenses Expenses/Net sales Depreciation Depreciation/sales PBIT (Rs in million) PBIT/Sales 2000 1999 1998 1998-2001 % Change
13,729.4 13,573.7 2,327.8 6,579.3 48.4 3,081.1 22.6 132.4 0.975 1,453.1 10.7
12,565.1 12,378.1 2,177.5 6,048.0 48.8 2,514.3 20.3 114.4 0.924 1,523.9 12.3
12,186.4 1,1955.5 1,681.0 5,300.1 44.3 2,517.5 21.05 100.8 0.843 2,356.1 19.7
10,994.1 10,792.1 1,512.9 5,203.9 48.2 1,976.6 18.3 84.3 0.78 2,014.4 18.6 0.195 0.2 55.8 4.3 25.7
(p.108). Thus, almost all the KPIs at plant level are directed at 5-10 per cent of the cost structure and the same have increased as percentage of net sales within the given period due to increased staff and perhaps S&A expenses which may have increased due to increased competition. Raw material cost, which constitutes 90 per cent of total costs, has not changed from 48 per cent (as % of net sales) in spite of the increased base oil prices from 2000 onwards (p.108) perhaps due to global procurement efficiency in the base oil and additives.
STRATEGY IMPLEMENTATION
There is a need to identify the relevant value drivers and performance measures based on the identified value drivers for CIL.
Table 3: Financial Measures of CIL 1998-2001
Table 3 shows that between 1998 and 2001, ROA calculated on productive capital employed has remained at 44.8 per cent while EVA has declined. Thus, though the company is creating shareholder value, the amount of annual economic value created has declined by almost 50 per cent. This is primarily due to decline in NOPAT by 28.8 per cent and increase in WACC by 39.7 per cent in spite of the decrease in net capital employed by 6.64 per cent and sales increase by 25.7 per cent. Thus, though CIL improved the efficiency of its net fixed assets and working capital through cost control and performance measures which has contributed to ROA remaining the same, EVA has declined due to increased operating expenses, marketing expenses, and tax outflow leading to reduced NOPAT and increased cost of capital leading
Rs in million 2001 Net fixed assets Net current assets Net sales PBIT NOPAT Productive capital employed Net sales/Net fixed assets Net sales/Net current assets Net sales/PCE NOPAT/Net sales (%) Sales/NCE ROA i.e., 9*10 in % PBIT/NCE Net capital employed EVA/NCE EVA WACC i.e., NOPAT-EVA 1,806.3 515.8 13,573.7 1,453.1 944.7 2,107.5 7.6008x 26.3158x 6.44x 0.0696 3.2x 44.8 .3877 4,192.6 0.1243 521.1 423.4 2000 1,726.6 1566 12,378.1 1,523.9 990.2 3,261.8 7.2774x 7.9043x 3.79x 0.08 3.0x 30.3 .4194 4,109.8 0.1671 686.7 303.8 1999 1,709.8 572.2 11,955.5 2,356.1 1,531.5 2,251.1 7.1274x 20.8939x 5.24x 0.1281 3.2x 67.1 .6878 3,792.0 0.3504 1,328.8 202.7 1998 1,567.9 1400.3 10,792.1 2,014.4 1,328.5 2,918.1 7.0120x 7.7070x 3.65x 0.1231 2.4x 44.9 .4991 4,490.9 0.2241 1,006.4 302.9 % Change 1998-2001 15.2 -63.1 25.7% -27.8 -28.8 -27.78
33.3 0 -6.64 -48.2 39.7
Note: This table is derived from Figure 3, Tables 5, 6, and 7 and Annexure 2 of the case.
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to increase in WACC. This may be due to lack of effective KPIs linked to operating and marketing expenses or uncontrollable operating costs. CIL has been able to control the RM costs due to its efficient procurement strategy though there is no KPI based on the same. CIL, therefore, needs to improve its operating margins through cost control and increased prices based on new product/service development. There is no KPI (Figure 4 of the case) based on new product development or sales from new products in the process or customer dimensions. There is a noticeable lack of KPIs in the sales and marketing function, which is critical for the longterm performance of the company in the emerging scenario. Almost all the supply chain KPIs are focused on reducing plant cost per litre (p.113), which is only 5 per cent of the total cost and may be partially uncontrollable, i.e., based on global economies of scale. It is not clear how the ethics, HSSE, and people KPIs contribute to financial performance or shareholder value. It is also not apparent how the customer KPIs which are focused on volume growth and strengthening the brand will
enhance shareholder value as the company is losing pricing flexibility. There is also a noticeable lack of KPIs based on long-term competence creation. The financial KPIs focus on operating profits (RCOP), total cost/gross margins, and net cash flows do not necessarily lead to market share or shareholder value and seem to be tactical rather than strategic.
CONCLUSION
CIL is achieving volumes and market share growth while shareholder value created is decreasing due to commoditization, rising operating costs, and lack of innovation. As discussed earlier, the company cannot have a predominantly volume-based strategy and needs to identify and exploit its strength in product innovation and distribution to identify multiple niches for its premium brand Castrol. At the same time, it needs volume growth to manage its costs that could be achieved through the BP brand. However, there is a need to identify the relevant KPIs in all the functional areas aligned with the selected strategy, which will enable implementation of the same both in the short and long term.
Case Analysis VI
Satya Prakash Singh Professor (Retired) University Business School Panjab University, Chandigarh e-mail: satyapsingh@lycos.com IL began operations in India in 1919 and steadily established a reputation for high quality lubri cant products and marketing prowess. It had market capitalization of Rs. 29.54 billion with sales of Rs. 13.57 billion for the calendar year ending 2001. It had gone through three phases during the last one and a half decades: the survival phase prior to 1991, a dramatic growth phase during the period 1991 to 1996, and the supply chain and cost management phase. Before 1991, CIL was constrained in its growth due to base oil controls and its canalization through the Indian Oil Corporation Ltd. (IOCL). The Indian economy was characterized by moderate gross domestic product growth rate and dominance of nationalized oil companies. CILs focus was on managing within the limited availability of base oil rather than growth in terms of volume. It focused on margins, made entry into the topManoj Anand Professor of Finance & Accounting University Business School Panjab University, Chandigarh e-mail: manand@pu.ac.in end and value-added products, and controlled cost. The issue was that of survival and how to get the next base oil consignment. In 1991, the oil sector was deregulated. In the first phase of deregulation, the private sector lubricant companies were allowed to import base oil. Subsequently, MNCs such as Shell (with Bharat Petroleum Corporation Limited (BPCL) being the Indian partner), Exxon Mobil (with Hindustan Petroleum Corporation Limited (HPCL) being Indian partner), and Gulf Oil (with Hindujas being the Indian partner) ventured into this sector. CIL changed its focus from survival to growth in market share in volume terms. At the marketing end, it focused on creating new opportunities and new brands, segmenting the market, and packaging of the products. At the back-end of the business, the strategy in the supply chain was to keep pace with the explosive
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growth by upgrading quality and service to compete with Shell and other major players, revamping the packaging completely, and modernizing all filling lines in the plant.
sustainable basis. It effectively responded to the challenge by changing its focus from chasing capacity/ chasing growth to cost effectiveness. The range of BP lubricants in the diesel engine oil segment (mainly in the trucking segment) was launched in India in 2001 after CILs acquisition by BP in March 2000. The BP brand has delivered its promise for volume growth for CIL in the popular price segment with a significant presence in the premium automotive segment and progress in the new generation commercial vehicles, passenger cars, and motorcycle oils. Table 1 provides CILs sales value, volume, and cost of materials data for the period 1998 to 2004. Table 2 provides capacity and sales volume data of key players.
THE SITUATION
In 1997, CIL took a hard look at the economic scenario and its competitive position. There had been an unprecedented increase in the base oil cost and sales volume pressure because of reduced oil usage rates of newer and more efficient engines. The growth rate in the agricultural sector had become negative. The competition from the PSUs had increased as they prepared themselves for dismantling of the administered pricing mechanism (APM). The challenge before CIL was to grow on a
Table 1: Sales and Material Cost Data of CIL

Year 1998 1999 2000 2001 2002 2003 2004 Sales Value Including Excise Duty (Rs. in billion) 10.79 11.96 12.38 13.57 13.39 13.61 15.23 Sales Volume (in million litres) 213 220 214 219 209 212 224 Cost of Materials (per litre) 24.1 24.0 29.9 31.7 28.7 31.8 34.7 Gross Sales value (per litre) 50.7 54.4 57.9 62.0 64.1 64.2 67.9
Source: CILs Annual Report, 2004, pp 12-13.
Table 2: Indian Lube Industry Data of Key Players

Lubricants Sales Volume (tonnes) 2000-01 BPCL Castrol Gulf Oil HPCL IBP IOCL Tide Water Oil 99,841 213,846 51,878 253,600 30,820 359,000 31,696 2001-02 104,532 219,099 10,744 259,670 30,538 345,000 30,747 2002-03 117,276 209,066 33,089 329,230 29,602 339,000 31,153 2003-04 111,704 211,840 51,511 334,080 32,567 389,000 34,999
Lubricants Installed Capacity Volume (tonnes) Per Shift 2000-01 BPCL Castrol Gulf Oil HPCL IBP IOCL Tide Water Oil 90,000 164,426 86,179 319,779 35,010 226,000 82,648 2001-02 90,000 148,806 86,179 319,779 35,010 286,000 82,648 2002-03 90,000 148,806 67,328 319,779 35,010 286,000 82,648 2003-04 90,000 148,806 67,328 319,779 35,010 286,000 82,648
Castrol figures are for the calendar year ending December 31. HPCL operates in two shifts. Tide Water oil capacity data include grease production capacity. Source: CRIS INFAC Refining and Marketing Annual Review, January 2005, pp 217-218.
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ANALYSIS OF INDIAN LUBE INDUSTRY IN THE FIVE FORCES FRAMEWORK

The lubricant industry is now a global business and the major international players are ExxonMobil, Shell, BP, and ChevronTexaco. Economies of scale are an advantage that these leading players are achieving in this very competitive market. Industry consolidation continues to have a major impact on the company market share and ranking, manufacturing and business economics, base oil supply positions, and competitive environment. The market share (in quantity terms) of CIL during the year 2003 - 2004 was 18.2 per cent as against 33.4 per cent of 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 per cent of Tide Water Oil.1 An analysis of the Indian lube industry in terms of Porters (1985) Five Forces framework is as under:
barriers are strong distribution system of existing players, brand loyalty, and economies of scale in sourcing the base oil. The IOCL, BPCL, and HPCL distribute their lube products through their own petrol pumps situated all over the country. CIL has access to over 70,000 retail outlets in the country.
Force 3: Threat of Substitutes

The petroleum-based lube industry may face possible threat of demand-side substitutes such as synthetic motor oils in the foreseeable future. The future of threat is dependent on price-to-performance ratio of synthetic oils vis--vis petroleum-based lubes. The supply-side substitutability, if any, will influence suppliers willingness to provide the base oil.
Force 4: Buyer Power

The customers awareness of brands in the lube industry is high. They look at price performance and value propositions of different brands in the lube industry and make informed decisions. All the players in the lube industry are seeking low-cost position through investment in cost- minimizing facilities and equipments. The majority of sales in the lube industry are retail sales. The fuel-efficient and emission compliant engines have resulted in lower lubricant consumption. The lube demand is derived demand and depends on sales growth in the automotive transportation and the agricultural sector. The industrial lubricant demand is reflective of the industrial production and growth trend in the economy which has declined during the years 2000-2001 to 20012002.
Force 1: Degree of Rivalry

The intensity of rivalry will determine the value lost in industry through cut-throat competition. It is only one of the five factors that determines the industry attractiveness. The Indian lube industry is profitable as all the players have realized higher gross sales value per litre during the period 20002001 to 20032004 and have passed on the incidence of base oil price increase to the ultimate consumer. It is a more concentrated industry and competitors appear to have realized their mutual interdependence and have restrained themselves from price rivalry. The competition is based more on brand identification with respect to performance rather than on price. The major components of costs are base oil cost; marketing, sales, and distribution costs; and an after-tax operating margin. The Indian lube industry neither has excess capacity nor is characterized as capital-intensive (Table 2). The switching costs are low.
Force 5: Supplier Power

The considerations of supplier power such as relative size and concentration of base oil suppliers and degree of differentiation in base oil are present in the lube industry to a greater extent. The base oil is generally procured globally. Base oil slates are changing. These oils require different types of pour point depressant (PPDs). The development of PPDs as a part of total lubricant formulation differentiates one brand of lube from another. Lubrizol is a leading supplier of PPDs. The ExxonMobil, worlds leading producer of polyalphaolefins (PAO), alkylated naphthalenes (AN), blendstocks and esters, provide synthetic lubricant base-stocks. ChevronTexaco base oils are 100 per cent hydro-processed for maximum quality and purity. The oil price
Force 2: Threat of Entry

The average industry profitability expressed in terms of economic value added (return on assets greater than cost of capital) determines the interest of potential new entrants. All through the last decade, CIL has had positive economic value added. 2 The lube industry average profitability provides entry threat. The major entry
1 2
CRIS INFAC Refining and Marketing Annual Review, January 2005, p 218. Due to non-availability of lube segment data of competitors, industry averages could not be worked out.
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increase in the past had an adverse impact on the profitability margins of the lube industry.
THE STRATEGY
In the maturity phase, CIL rolled out a new strategy consolidation and operational excellence and the challenge was how to make its supply chain more costeffective. The company now sought to maximize return on assets, reduce days operating cycle and days working capital, reduce logistics cost by identifying supply chain efficiency drivers such as standardization, scale, and reengineering of processes; and achieve volumes growth by entering into strategic partnerships with original equipment manufacturers such as Tatas, Escorts Agri machinery group, L&T Komatsu, Tata Cummins, and JCB. Following the acquisition of Burmah Castrol in 2000 and as a result of global merger, Castrol India became part 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 choice to its customers and to achieve sales volumes growth through its brand communication strategy. The essence of the Castrol brand was winning performance. It focused on the premium segment of the market. The BP branded lubricant in India, which offered a 5.1 per cent savings on diesel fuel consumption, targeted those consumers focused on cost savings and fuel effectiveness. CIL introduced the performance contract system for communicating strategy, resource allocation, performance evaluation, and linking compensation with performance at all organizational levels following BPs tradition. It is similar to Kaplan and Nortons (1996a and b) balanced scorecard. The performance scorecard sets the key achievable objectives for the year in the areas of finance, strategy development, HSSE, people issues, brand and customer, ethics, and efficiencies. Naveen K Kshatriya, the Chief Executive and Managing Director of the company, led CIL through its transformation.
Castrol India into BPs system. Prior to CILs acquisition by BP, it followed management by objectives as the management control system. The balanced scorecard strategy map of Kaplan and Norton (2004) has been drawn based on the inputs available in the case to illustrate how CIL has possibly linked its brand, information capital, and knowledge assets to the value creating processes (Figure 1). The financial perspective describes tangible outcomes of the strategy in traditional financial terms. Measures such as RCOP, shareholder value, net cash flow, revenue growth, days working capital, and overhead costs as a percentage of gross margins are lag indicators that show whether CILs strategy is succeeding or failing. The customers perspective defines the value proposition for targeted customers. Castrol CRB plus has been relaunched with a heat-proof formula based on consumer insight and backed by communication package specially designed for tractor owners. It is an example of customer valuing innovation and high performance. CILs strength in the range of heavy-duty engine oils is due to the product plus package such as technical support and value-added services. Its goal is to be a leader in driving safety. The BP brand proposition of reduced diesel consumption is targeted at the BP consumer who is cost-efficiency-driven and is continuously seeking ways to reduce operational expenses. 3 These value propositions provide the context for intangible assets of CIL to create value. The internal business perspective identifies a few critical processes that are expected to have the greatest impact on CILs strategy. By investing substantially in environment, health, safety, employment practices, and community development, it has developed an excellent reputation and in the process has been able to make human processes more efficient and effective and reduce operating costs. CIL has identified and developed supply chain efficiency drivers such as simplicity, standardization, scale, and reengineering of processes. It plans to have economies of scale through standardization of its requirements and use the same kind of technology in all its brands across the family. The economies of scale are achieved in procurements through global operations. The company evaluates its procurement strategy on two dimensions criticality and the scale of spending.
3
STRATEGY MAP
Though operational excellence, marketing prowess, and concern for stakeholders were present in CILs initial strategy, the performance contract system has been implemented in the company not only for improving sustainable real performance but also for dovetailing
CILs Annual Report, 2003 and 2004.
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Figure 1: CILs Strategy Map
The learning and growth perspective describes CILs human capital, information capital, and organization capitals role in its strategy. It has implemented two of the three modules of the JD Edwards Enterprise Resource Planning (ERP) software package in the areas of procurement, inventory control, warehousing, distribution, and sales order processing and is in the process of implementation of i2 software. It captures distributors sales data through Turview software at the distributors end. The focus is on actual sales loss rather than sales loss in the pipeline due to non-availability of SKUs. It had plans to integrate Turview and JD Edwards software in the year 2003. It has created alignment between its intangible assets and strategy through performance contract as it has granularity. It has enabled the management to pinpoint the specific human, information, and organization capital required by its strategy.
BALANCED SCORECARD
Performance scorecard protects the CIL management from information overload by limiting the performance measures to only four perspectives, namely, customer, financial, internal business, and learning and growth. The implementation of performance scorecard has enabled it to translate its strategy into a set of KPIs (Table 3). CIL has developed the performance scorecard at all the levels of the organization in order to bridge the learning gap that exists in most organizations. The scorecard constructed at the lower level is aligned with the highest-level scorecard (p. 113) as is evident from Figure 2 in Nivens (2003) framework. The challenge before the companys leadership team is how to achieve balance between the shareholders expectations and the competency available within it and to determine the
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Table 3: CILs Performance Scorecard

Financial Revenues by brand Replacement cost operating profits Overheads cost as a percentage of gross margins Logistics cost Net cash flows Customer Cost-sensitive products Demonstrate distinctive benefits Serve customers better Growth in market share Brand health index Internal Business Processes Employee Learning and Growth Target zero fatalities Raise HSSE awareness Continue to challenge the current ways of working Strategic partnerships Innovation ratio Compliance on all HR basics Target Improvement in ESI score Value added per employee IT usage ratio Networks
Figure 2: Two-way Flow of Knowledge and Information when Cascading the Performance Scorecard
optimal blend of financial and non-financial measures. Further, the distinction between cause-and-effect relationships amongst KPIs is also blurred.
RESULTS
The working capital management performance of CIL during the period 2000 to 2004 has improved substantially (Figure 3). The days operating cycle and the days working capital have reduced from 139 to 89 days and from 33 to 24 days respectively. The average inventoryholding period has come down from 59 to 37 days. The supply chain management initiatives at CIL appear to have paid rich dividends. Due to increased focus on efficient cost and supply chain management, CIL has created substantial shareholder value during the period 2000 to 2004 (Figure 4). It has maintained its personnel cost slightly below 5 per cent of sales during the period but the effective tax rates have increased from 18 per cent to 33.5 per cent during
this period. Thus, the operating margins have come down from 12 per cent to 8 per cent but the asset turnover ratio has improved from 2.9 to 4.9 during this period. The economic value added as a percentage of capital employed 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 been maintained in 2003 and 2004. It has good quality of earnings as its cash flow per share has exceeded its earnings per share (Figure 5). During this period, the market has valued CIL share at 20 multiple of its earnings (year-end valuation) with the exception of 2002 when it was 17 multiple. The price-to-book multiple at year-end for CIL scrip has been around 7 with the exception of 2001 when it was 6 (Figure 6).
CONCLUSION
CIL has been able to sustain its competitive advantage by developing products that have differentiated offer;
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Figure 3: Working Capital Performance of CIL
managing costs better; building long-term winning relationships with its distributors, dealers, and direct customers; and through innovation. The companys strategy has paid off and it has been able to grow continuously on all performance parameters despite increasing competition and base oil prices. Kshatriya
Figure 4: Shareholder Value Analysis at CIL
attributes the return of CIL to growth path and reviving up to new heights of performance and to the innovative and winning team spirit of Team Castrol. 4
Address by Mr. Naveen Kshatriya, Managing Director to the shareholders, CILs Annual Report, 2004.
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Figure 5: Payout Policy at CIL
Figure 6: Share Price Performance of CIL
REFERENCES
Kaplan, Robert S and Norton, David P (1996a). The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Business School Press. Kaplan, Robert S and Norton, David P (1996b). Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 74(1), January-February, 75-85. Kaplan, Robert S and Norton, David P (2004). Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Boston, Massachusetts: Harvard Business School Press. Niven, Paul R (2003). Balanced Scorecard: Step-By-Step for Government and Nonprofit Agencies, New Jersey: John Wiley & Sons, Inc. Porter, Michael E (1985). Competitive Advantage, New York: Free Press.
Language has created the word loneliness to express the pain of being alone, and the word solitude to express the glory of being alone. Paul Johannes Tillich
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DIAGNOSES

presents analyses of the management case by academicians and practitioners

Castrol India Limited: Managing in Challenging Times

VIKALPA VOLUME 30 NO 3 JULY - SEPTEMBER 2005

BALANCED SCORECARD OF CIL: AN EVALUATION

Exhibit 1: Strategy Map of CIL

Increase customer acquisition Increase customer satisfaction Improve product quality

CASTROL INDIA LIMITED

Internal Business Process Perspective

Learning and Growth Perspective

VIKALPA VOLUME 30 NO 3 JULY - SEPTEMBER 2005

CHALLENGES BEFORE CIL

ALTERNATIVES AND RECOMMENDATIONS

Figure 1: Four Non-price Competitive Strategies

Source: Hill and Jones (1998).

CASTROL INDIA LIMITED

Case Analysis III

SHRINKING MARKET SIZE FOR LUBRICANTS

VIKALPA VOLUME 30 NO 3 JULY - SEPTEMBER 2005

Finding New Segments

CHOICE OF PERFORMANCE INDICATORS

Table 1: Business Strategies and Operating Performance

Source: Annexure 2 of the case.

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

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

SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

PROFITABLE VOLUME GROWTH

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

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

HP Level of product quality in terms of features

Low Low Medium

Price position relative to product quality

Table 1: Sales Realization of CIL 1998-2001

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

33.3 0 -6.64 -48.2 39.7

Table 1: Sales and Material Cost Data of CIL

Source: CILs Annual Report, 2004, pp 12-13.

Table 2: Indian Lube Industry Data of Key Players

ANALYSIS OF INDIAN LUBE INDUSTRY IN THE FIVE FORCES FRAMEWORK

Force 3: Threat of Substitutes

Force 4: Buyer Power

Force 1: Degree of Rivalry

Force 5: Supplier Power

Force 2: Threat of Entry

CILs Annual Report, 2003 and 2004.

Figure 1: CILs Strategy Map

Table 3: CILs Performance Scorecard

Figure 3: Working Capital Performance of CIL

CASTROL INDIA LIMITED

Figure 5: Payout Policy at CIL

Figure 6: Share Price Performance of CIL

VIKALPA VOLUME 30 NO 3 JULY - SEPTEMBER 2005

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