bombay oil industries ltd

BornbayOil Industries Ltd :Cortsumer Products Division

I n April 1990, Harsh Mariwala, the head ofthe consumer products divisionofBombayOil, was revi8wing the draft proposal for the second stage of business restructuring inBombay Oil. The company was about to take significant decisions to reorganise itself

to meet the cha~1ging needs in the market. The decisions were going to affect the BombayOil's corporate strategy, as well as the consumer products divisional strategy. Reorganisationhad surfaced because of the changing market demands, as well as due to the growth of thegroup and family lineage. Harsh, being the senior entrant in the business among hisgeneration of cousins, was directly concerned about any decisions which would change thecomplexion of the business.

The story of Bombay Oil began way back in 1862, when Kanji Moorarji travelled toBombay from Kutch and started a modest business oftrading spices and other goods fromKerala. Much later, in the early part of the 20th century, he inducted his young nephew,Vallabhdas Vasanji into his business. Together, they built up expertise in the export ofpepper and -ginger to the European continent. Other agricultural commodities, mainlycopra and coconut oil, were added on in time. Their expertise in the pepper trade gave thefamily the appellation of'Mariwala' (marimeans pepper in Gujarati). Vallabhdas Vasanjiwas thereafter known as Vallabhdas Mariwala. .

Vallabhdas Mariwala had four sons, who in 1992 were in the age group of 55 -70 years.All of them were active in the business and other philanthropic activities. The eldest,Charandas Vallabhdas Mariwala (72) was the chairman and managing director of BombayOil Industries Limited. His younger brothers, Hansraj (60), Jayasinh (59) and Kishore (57)were on the boards of directors of Bombay Oil Industries Ltd. and its subsidiary companies.

This case has LCe).. written by Mr Jeswant Nair and Mr Shyam Sutaria with the support ofMr S Balachandrun and Dr Nirmal K Gupta under the overall guidance of Dr M B Athreya.This case is a part of a case-writing project which was financially supported by ITC Limited.It is an attempt at describing the managerial context only for the purposes of analysis and learning.@ 1993, Management Development Institute, Gurgaon (India).

Bombay Oil Industries Ltd : Consumer Products Division 39

Vallabhdas Mariwala believed in the value oHormal education. So, he ensured, that hissons got the most contemporary form of education that made them believe that the futurewas in manufacturing and value addition. Thus in 1947, they set up Bombay Oil IndustriesLtd., which sought to convert their traditional buying strengths in the commodities area tovalue-added manufactured products and intermediates. The shares of Bombay Oil wereheld within the Mariwala family.

Between 1947 and 1971, Bombay Oil Industries Limited set up four manufacturingfacilities, which are as follows.

1. A plant at Sewree, Bombay, to extract coconut oil from copra.

2. A refinery at Mazgaon, Bombay, to refine vegetable oils.

3. A chemical plant at Bhandup, Bombay.

4. A plant near Cochin, Kerala, for spice extracts.

The plants based at Sewree and Mazgaon produced bulk coconut oil and refinedvegetable oils from groundnut, coconut and safflower. The chemical plant at Bhandupmanufactured fatty acids from vegetable oils while the plant near Cochin manufacturedextracts from spices and exported its entire produce to Europe and North America. In1980-81 Bombay Oil divisionalised to create three profit centres-the consumer productsdivision, the fatty acids and chemicals division and the spice extracts division.

Harsh Mariwala, the only son of Charandas among four children, -joined the business in1971 at the age of 20. He was subsequently joined by his cousins - Sanjay and Ajay, sonsof Jayasinh; Madhav, son of Hansraj; and Rajendra, son of Kishore, through the eighties.Exhibit 3.1 gives the family lineage.

ICharandasMariwala(b.1921)

I

Harsh(b.1951)Joined thebusinessin 1971

Kanji Moorarji-Vallabhdas (Vasanji) Mariwala(Uncle-Nephew Team)

I I

JayasinhMariwala(b.1933)

J

HansrajMariwala(b.1932)

IKishoreMariwala(b.1935)

Sanjay Ajay Madhav Rajendra(b.1960) (b.1963) (b.1960) (b. 1962)Joined the Joined the Joined the Joined iliebusiness business business busin'"in 1981 in 1988 in 1986 in 191:V

Mohan Shyam Ravi(b. 1967) (b. 1967) (b; 1966)

Exhibit 3.1 Lineage of the Mariwala Family

40 Cases in Stwtt:{;icManagement

The company's headquarters were located in the heart of the commodities market, at aplace called Masjid in Bombay, alongside the Bombay Port. The locale was characterisedby narrow lanes, huge godowns, dilapidated buildings, street-side vendors, shops andpavement-slums, all juxtaposed cheek-by-jowl. Alongside were trucks, handcarts, hordesof people and traffic jams. In the office, one could find dhoti-clad employees with workstations consisting of gaddhis, takiyas and pedhies, usually for sitting cross-legged.Harmonizing with this office environment were also tables, chairs and cabins which couldhardly be called contemporary even in those days. These were occupied by the Mariwalasand the few trouser-clad gentry around. Harsh would rather have liked a modern office inpleasant surroundings. Over the years and well into the eighties, though the Bombay Oilheadquarters remained at Masjid, he had transformed the space that his business occupied,into a modern, contemporary office facility.

CONSUMER PRODUCTS BUSINESS

The consumer products business grew out of the two factories at Sewri and Mazgaon,Bombay. These factories produced raw oils and refined oils, respectively. The producefrom these factories went either to industry for various applications, or to middle men whobought in bulk and later sold to retail outlets. Harsh Mariwala tobk over this business inthe mid seventies. From a predominantly bulk sales business he pursued an aggressivestrategy of small packs, brand building and retail distribution. He successfully created theretail market for 'Parachute' coconut oil and 'Saffola' - a refined safflower oil.

HarshMariwala's Entry

Harsh joined the business in 1971, soon after he completed a Bachelors degree in Commercefrom Sydenham College, Bombay. In keeping with his family tradition, he married early,in his mid twenties. In 1992, his daughter and son were attending a prestigious school inBombay..Archana, his wife, was a voracious reader with an active interest in environmentalissues. Harsh lived with his parents on one of the spacious floors of a well-appointedbuilding in South Bombay. The other floors were occupied by his uncles.

In addition to his role as the chief executive of the consumer products business, Harshwas on the boards o( directors of Bombay Oil and its subsidiaries. He was also a memberof the managing committee of the Indian Merchants' Chamber and a member of the YoungPresidents' Organisation.

Harsh believed in keeping himself physically fit. He enjoyed long walks and swimmingand played golf over the week-ends. He vacationed with his family at least twice a year, andenjoyed listening to Indian classical music.

Though his formal academic education was modest, Harsh kept himself abreast throughintensive reading of management literature, persuading his managers to do likewise andeven discussing emerging trends and practices with them. He was open to new ideas,experimentation and learning. Perseverance and a strong belief in the power of peopleamplified his role performance.


Harsh had nurtured a desire to go to a business school overseas. His father felt that thebiggest learning was hands on rather than in some "fancy business school". As Harshstarted learning about the business, he got more and more involved in it. In fact, Harshlater said,

"In hindsight I think my father was right in not sending me to a business school. Had I goneto a business school. I may have corne back with theoretical notions about management andwould immeclliatelyhave run into conflict with the way things were being done then. Theoutcome could have been serious. That I had to learn the business virtually by the seat-of-my-pants gave me a first-hand knowledge of how traditional Indian businesses are run and thepsyche of people who were associated with such businesses. That learning could not havetaken place had I gone to a business school. Worse, the organisation of people that existed thenwould not have been able to adapt to what my ideas may have been. The change in thinkingand approach, as it evolved, carne in small incremental steps hardly perceivab 1eas it happened.But if! were to compare then and now, there has indeed been a dramatic change. Iquickly learntthat if I had to influence the change process, I had to, in a way, live with the two opposingrealities of tradition and contemporariness, until time would have helped to make theserealities converge."

Harsh started his career with Bombay Oil without a designated portfolio. He spent hisearly work days travelling to various businesses, factory locations and markets observing,asking questions, or sometimes doing tasks; but all the time absorbing information forfuture use. He took time. to travel into the interior markets, where he studied thedistribution and retailing operations of vegetable oils as it was being done then. This areaof business amongst all the others fascinated him. He observed, that there were very fewbrands of vegetable oils, and that, vegetable oil for edible ~nd other purposes were beingdispensed out 'in loose' from larger tins, by retailers to consumers. He saw the distinctpossibility of adulteration and spurious quality. He started thinking about how Bombay Oilcould make a dent and create a niche for itself in this rather disorganised kind of marketplace. Around him he saw giants like Hindustan Lever, Colgate, Nestle and many othersmarketing branded consumer products, which in itself gave these products a certain imageand consumer franchise. He wondered whether edible oils also could be marketed in asimilar fashion.

Creating a Consumer Market

Parachute Coconut Oil

Harsh visualised a national market for small consumer packs of Parachute brand coconutoil. He imagined it being retailed from any outlet that sold toilet soaps, for instance. He alsounderstood that to build such a distribution network, it would take years of effort. But heknew that at the end of this, he would have a network ready to launch a host of otherconsumer products. This vision made him advocate the thrust to small packs morevigorously, rather than chase the market for 15 kg tins and the sale of bulk oil.

By inclination and choice) Harsh decided in 1973 to focus on building the consumer

42 Cases in StrategicManagement

products businl!~;'.Harsh started work on developing the small packs business. He invitedan advertising agt..lcy to help him in the positioning and marketing of Parachute. Perhaps,this was the first time a coconut oil seller in India had tbought of advertising. Coconut oilhad varied uses. In South India, coconut oil was used primarily as a cooking medium.Elsewhere, it was used as a hair oii and as an oil for body massage. He decided to rendera distinct identity to the brand -'- of purity, clarity and aroma. An image of tradition andbeautiful hair was created to put Parachute across as a desirable product. At about this time,Harsh recruited his first sales professional, Basutkar, who was a seasoned front-line fieldsupervisor with Hindustan Lever. He joined Harsh as a sales officer at the head office, lateron to become the sales manager, from where he left the company in 1985. Together, theywent about building and expanding the distribution network of depots, qistributors,retailers and salesmen as the market for Parachute grew from region to region. Their initialfocus was on the West India through the years until 1980, followed by South and Norththrough the period 1980-85 and much later in the East which was the stronghold of anotherbrand - 'Shalimar'. Parachute entered the Eastern market with an aggressive strategy,priced 5% lower than Shalimar with near zero contribution levels. This strategy wascontinued through the late eighties. Since then, Parachute had even been able to price itselfat a premium of2% over Shalimar. By 1991, it had gained a market share of32% in the East.Competitive market share data are given as Exhibit 3.2.

In Harsh's scheme of things, he wanted Parachute to be the undisputed No.1 brand,nationally and in each state. If this meant that he had to wait long for it to begin contributingto the bottom-line, he was willing to wait. Not many agreed with this approach. It was acommonly-held view that if Shalimar, as the market leader in the East, was itself sellingat low prices and low contribution levels, Parachute would have to penetrate the marketat prices lower than Shalimar. To add to that, it would also have to incur higher distributionand advertising costs. Parachute being able to make a substantial presence even afterincurring higher costs was, to many minds, a doubtful strategy.

Saffola Edible Oil

As the national distribution network for Parachute was being created, he saw an opportu-nity to extend nationally the other brand 'Saffola'- a safflower-based edible oil which hada small market in Bombay. It had become known in scientific fora that safflower oil hadcholesterol-reducing properties. An advertising agency was invited to build a healtheducation campaign, in order to promote the sale of Saffola countrywide, as it wasnecessary to educate the public about high cholesterol and how Saffola helped to reducethe cholesterol levels. It was the first time that an edible oil had taken a health platform,and Saffolawas promoted aggressively through doctors. Literature on heart care, medicaland cardiac conferences and heart-care camps were used as fora to create awareness ofSaffola's cholesterol-reducing properties. Recipe books on cholesterol-reducing diets werefreely circulated and mailed to potential users. From a very small market demand forsafflower oil, this two-pronged strategy of mass education and doctor detailing, virtuallycreated a captive health oil segment for Saffola. It was, even in 1992, the only edible oilprescribed by doctors. While all other cooking oils were price elastic, Saffola couldcommand a premium and had built up a strong franchise of loyal consumers.

Brand

Shalimar

Parachute

CocorajTatasOthers

Eastern RegionParachuteShalimarTatasOthers

Source: ORG Data

Exhibit 3.2 Market Share: Branded Coconut Oil

Vision of a New Business

By about the late seventies, the consumer products business had outgrown the otherbusinesses within Bombay Oil. Harsh started thinking about the future. He had dreams ofthe consumer products business becoming a major force in the Indian Market; of beinga true consumer products company rather than a marketeer of vegetable and refined oils;of being a modern organisation reputed for its quality products and its managementprocesses.

In those days, Bombay Oil was a typical owner-run enterprise with no clear-cut roledefinitions and accountabilities drawn up amongst the various members of the family.Each of the family members had built up experience and expertise in one Orthe other areasof technology or commerce. Decision making, by and large, meant talking to the othermembers of the family and relying on the expertise that was available within the family.Harsh felt that he needed the freedom to build his part of the business the way he felt mosteffective. He believed that each family member should have the autonomy to run hisbusiness so long as there was accountability for results.

Quite to the contrary, there were no defined methods in which funds and other resourceswere allocated to various businesses. J..ittleindependence was available to any ofthe familymembers to take initiatives on their own in the areas of policy-making, organisation andculture building or corporate image building. These were areas of collective responsibility.For instance, Harsh believed that the key to development and growth was people. But inorder to attract professionals, he needed to build a corporate image and a culture wherepeople could stay and contribute. Simultaneously, he would need to pay salaries compa-rable with the leading companies in industry. Any such attempts on his part "lA/QuIdconflictwith the staffing policies that the other businesses within the group followen. This meantthat he had to hold himself back from doing what he felt was necessary to do.

~=-~ -- - - -- - - - - -

1990 1991

42% 50% Market Leader in north,south and w: t regions.

15% 14% Market Leader in

east region.4% 7%

13% 9%26% 20%

20% 32%41% 43%16% 14%23% 11%


Brand

Shalirnar

Parachute

CocorajTatasOthers

Eastern RegionParachuteShalirnarTatasOthers

Source: ORG Data

Exhibit 3.2 Market Share: Branded Coconut Oil

Vision of a New Business

By about the late seventies, the consumer products business had outgrown the otherbusinesses within Bombay Oil. Harsh started thinking about the fu.ture. He had dreams ofthe consumer products business becoming a major force in the Indian Market; of beinga true consumer products company rather than a marketeer of vegetable and refined oils;of being a modern organisation reputed for its quality products and its managementprocesses.

In those days, Bombay Oil was a typical owner-run enterprise with no clear-cut roledefinitions and accountabilities drawn up amongst the various members of the family.

. Each of the family members had built up experience and expertise in one or the other areasof technology or commerce. Decision making, by and large, meant talking to the othermembers of the family and relying on the expertise that was available within the family.Harsh felt that he needed the freedom to build his part of the business the way he felt mosteffective. He believed that each family member should have the autonomy to run hisbusiness so long as there was accountability for results.

Quite to the contrary, there were no defined methods in which funds and other resourceswere allocated to various businesses. J..ittleindependence was available to any of the familymembers to take initiatives on their own in the areas of policy-making, organisation andculture building or corporate image building. These were areas of collective responsibility.For instance, Harsh believed that the key to development and growth was people. But inorder to attract professionals, he needed to build a corporate image and a culture wherepeople could stay and contribute. Simultaneously, he would need to pay salaries compa- .rable with the leading companies in industry. Any such attempts on his part 1'\Touldconflictwith the staffing policies that the other businesses within the group followen. This meantthat he had to hold himself back from doing what he felt was necessary to do.

1990 1991

42% 50% Market Leader in north,south and 'Nt t regions.

15% 14% Market Leader in

east region.4% 7%

13% 9%26% 20%

20% 32%41% 43%16% 14%23% 11%


This dilemma led him to an exploration into the organisations and people. He readwidely, and attended seminars and training programmes both in India and abroad. Heinteracted with senior professionals in industry. He spoke to CEOs of other family-managed companies. He read case histories of family-owned companies and learnt thereasons why some of them failed and some of them succeeded during different generations.The media was agogwith family splits amongst the Shrirams, Dalmias, Kamanis and otherbusiness families and the acrimony associated with such splits. Thinking about theseexperiences convinced him that he should go through a process of creating autonomy andaccountability for himself, the other family members and the other businesses withoutdisturbing the relationships within the family. In fact he felt, that there were ways in whichthe entire family could be instrumental in participating as active partners in the changeprocess. But he knew, this would involve considerable time and effort.

DIVISIONALISA TION

The first initiative of change came with the divisionalisation in 1980-81, when threedistinct profit centres were created, i.e. consumer products division, fatty acids andchemicals division and spice extracts division. Harsh took over as the head of the consumerproducts division with the hope that this first step would in some way help realise someof his dreams.

Changing Product Mix

Through the eighties, Saffola and Parachute consolidated the position of the consumerproducts division. Also, during this period the bulk business in raw and refined oils thatBombay Oil was traditionally into was virtually withdrawn. For instance, in 1975 out of atotal volume of 2940 MT (Metric Tonne) of raw oils, Parachute coconut oil in small packsconstituted around 22% by volume. By 1980, out of a total volume of 3552 MT, Parachutecoconut oil in small packs constituted around 71 % by volume. By 1985, the bulk coconutoil business had been altogether replaced by the consumer packs business, to register avolume' of 5052 MT. The monthly sales mix of Parachute from 1975 to 1992 is shown inExhibit 3.3.

15 kg (Bulk packs)Retail pack (Tins)Retail packs (HDPE)

Total:

Annual sales

(in Metric Tonnes)

1975 1980 1985 1990 1991 1992

200 85 - - - -45 211 240 190 260 242- - 181 777 838 1030

245 296 421 967 1098 1272

2940 3552 5052 11,604 13,176 15,264

Exhibit 3.3 'Parachute' Coconut Oil: Sales Per Munth

Bombay Oil Industries Lid : Consumer Products Division 45

This happened in the refined oil market as well. In 1975, refined oils, which wereprimarily sold in bulk, constituted a volume of 2556 MT. By 1980, bulk refined oils andSaffola sold a volume of 5040 MT. By 1985, the consumer pack business which' was farmore profitable had established ap.preCiable volumes and contributed 68% of the totalrefined oil business. The greater accent on consumer packs also meant a phased withdrawalfrom the bulk oil business, resulting in a temporary drop in volumes from 5040 MT in1980 to 3408 MT in 1985 (Exhibit 3.4). During the fifteen year period between 1975 - 90,in spite of the change in product mix, value turnover of the raw oil/consumer businesshad more than doubled every five years from Rs 6.28 crore in 1975 to Rs 14.03 crore in 1980to Rs 32,93 crore in 1985 and to Rs 80.73 crore in 1990 (Exhibit 3.5).

(in Metric Tonnes)

1985 1990 1991 1992

Other refined oils (Bulk packs)Saffola15 kg (Bulk packs)Retail packs (Tin)

Retail packs (HDPE)

106

30120

28

Total 213 420 284

Annual sales

Sweekar

Retail packs (HDPE)PMPA

2556 5040 3408

465*2212652

1802169

* Launched late in 1989Exhibit 3.4 Refined Oil Sales Per Month

Total sales

Profits

Consumer productsdivision

Fatty acids andchemicals division

Spice extractsdivisionOthers

1975 1980

134 312

13 2566 83

24 25 20- - -

334 367 403

358 392 423

4296 4704 5076

(Rs in crore)

1975 1980 1985 1990

6.28 14.03 32.93 80.73

2.69 4.95 6.81 13.41

0.15 0.99 2.61 6.13

0.76 1.16 1.41 2.93

9.88 21.130 43.76 103.20

0.03 0.02 0.70 10.75

Exhibit 3.5 Sales and Profits

46 Cases in Sllategic Management

By 1990, Parachute had registered a volume turnover of about 11604 MT and Saffolaabout 4296lvff to account for a combined turnover ofRs 80.73 crore. In retrospect, perhapsthe decision to change the product mix was most significant in improving the overallbusiness performance of Bombay Oil. This would appear to be more true if the fin.ancialfigures pertaining to the period between 1985 - 90 were to be analysed. From a profit of 70lakh on a turnover of Rs 43.76 crore, Le. a margin of 1.6% in 1984-85, the margin hadimproved to 8% on an average over the three year period 1987-90. In 1989-90, Bombay Oilachieved a Rs 10.75 crore profit on a turnover ofRs 103.20 crore. The consumer productsbusiness was contributing substantially both to turnover and profits.

Plastic Packaging

The marketing of vegetable oils in consumer packs was traditionally in tins. But with theincreasing cost of tin sheets it appeared that tins would no more be the most economicmedium for packing. Plastics seemed to be the answer. Harsh virtually pioneered themovement from tin packs to HDPE packs in the vegetable oil segment. In the early eighties,Harsh recruited Mr Bindumadhavan as a purchase manager. Bindumadhavan already hada background in plastics packaging. Together, they spearheaded the changeover in adeliberate and planned manner. The change to plastics meant a reduced cost structure andalso gave the consumer an aesthetically designed and user-friendly product. Changing theprofile of a product in those days was not exactly an easy proposition. The trade, mainlyretailers, resisted the idea of plastic packs. They were quite content with the traditionalpacks and believed that consumers had a strong preference for tin packs. Alongside, wereproblems of the plastic packs being bitten into by rats. Experimentation with the packdesign eliminated this problem. The reduced cost structure on plastic packs helped pushthe product through trade incentive schemes. It also helped the company to go in for aheavy burst of sustained advertising to create the consumer pull. Consumers had to beeducated on the benefits of plastics packaging at a time when plastics were just beingintroduced as a medium of packaging. TV commercials, press advertisements and otherconsumer promotion schemes were used quite aggressively. Conversion from tin to plasticpacks was followed through as a vigorous strategy by tracking the tin to plastic conversionrate and building employee reward schemes around the conversion targets. By 1990, over85 % of the packs for Parachute were plastics, with tin packs doing business in some partsof North India through the winter months. Close on the successful conversion of Parachuteto plastic packs, Saffola too followed suit. .

Product Failures

Everything appeared to be going well for the consumer products division on the surface.However, the decade of the eighties also saw some failures of products in the market place.Harsh wanted to diversify and widen his portfolio of consumer products. He did not wantto be over-reliant on Parachute and Saffola in the long run. In 1981, a tooth powder by thebrand name 'Whistle' was launched, in select markets. The tooth powder market wasdominated by Colgate, with a host of small regional brands coming way behind. Inlaunching Whistle it was hoped that shares could be grabbed both from Colgate and the


local brands. Pricing was competitive, but Bombay Oil had not quite reckoned withColgate's intrinsic strength in the market. A distinct image was not built for W"istle. Therewere also frequent changes in quality based on inadequate market feedback. The feedbackthat came from the field seemed to be different from market to market. Changes in theproduct were not well researched. The volumes never really grew. The tooth powder waswithdrawn from the market in 1983.

A groundnut oil under the brand name of 'Parachute Filtered Groundnut Oil' waslaunched in select markets in 1984. Though the product created a small market for itself,it could not become a truly national brand. Significant investments in terms of advertisingand promotion were not available for this brand and the margins were always underpressure. Since the volumes were not substantial and the markets were very localised, thisbrand was also withdrawn in 1986.

Packaged pulses under the brand name of 'Parachute' were also launched in Bombay in1984. This product did not last very long in the market, as the retailers resisted the entryof this brand. Selling loose pulses was far more profitable to them than selling packagedpulses.

Why did all these new products fail? Was umbrella branding the right strategy? Did allthe new products receive the necessary resource backup? While some of these questionswere being echoed, Harsh summed up these failures. He said:

"We can always attribute these product failures to some phenomena outside of ourselves. ButI think the truth is the poor quality of thinking we managers then did. There was inadequateresearch, processes and systems, and little attention was given to_product development andquality. We were not willing to commit big resources behind any of these products because,I suspect, we were not sure of our thinking. Just as in the past when we.moved over from thebulk business to the consumer business, what we needed was a major transformation in theorganisation's thinking, to begin looking at products even outside the oil trade. We werecaught napping."

These product failures, each close on the heels of the other, led the consumer productsdivision into a three year hibernation, at least as far as new products were concerned.

Skill Gaps

The organisation seemed to lack in very many critical skills which acted as obstacles forgrowth. For instance, all the new products wer.e unleashed into the market withoutsufficient product development work going in. In fact, there were no departments or setsof people devoted to the task of product development, understanding the technologies andtranslating them into manufacturing skills. Quality was not perceived as an end in itselfbut was left more to chance. It also reflected the mood that generally prevailed in thecountry where pricing was more important than quality or value for money. Here again,there did not exist a department to inspect or assure quality of either the inputs or thefinished products.

Except for the few top management personnel heading manufacturing, firunce, market-ing and raw material buying, who were either inducted or promoted from within, through

48 Cases in S""::f:giCManagement

the mid 80's, the rest of the organisation was devoid of specialist skills in various functionalstreams ofm;"~":.igement. The structure of the organisation was built around the skills of thefew top managers without regard to any structuring logic. A middle management levelseemed altogether absent. Compounded with this thin executive staffing was the inabilityof the compa'lY to retain its few top management personnel. As a result, long periods ofimproper and inadequate staffing at the top management also prevailed. While the fieldsales organisation was operationally strong, the rest of the organisation seemed to belimping along from one crisis to another.

Supply Problems

With the growth in volumes, manufacturing capacities began to come under severe stress,often resulting in loss of sale. Around 1986-87 the volumes of Parachute coconut oil beingsold crossed the 500 MT per month mark, which was the capacity of the factory at Sewree.The strategy then was to rely on out sourcing to bridge the gap. The bottlenecks were notonly in terms of the extraction capacities, but were also in terms of filling and packingwhere the number of pack units had grown to about 2.5 million p.m. Here again, outsourcing for filling and pack~ng operations was adopted. Out sourcing as an approach wasnot so much a consequence of deliberate thought, but emerged more as a measure to hedgethe paucity of funds for investments in plant and machinery.

In the meanwhile, Saffola seemed to have a problem of a different nature - one ofinadequate availability of raw materials. Safflower was a crop grown mainly in theMarathwada region in Maharashtra. Most of the produce was milled locally in small unitsfor local consumption. What was available for sale changed hands through many interme-diaries, who also indulged in hoarding and speculating. The vagaries of supply meant thatit was not always possible to meet consumer demand. This was not only true for saffloweroil but was also true for all other oil seeds and oils. Oil seed production had barely goneup from about 5.4 in 1955 to 13.9 million tonnes in 1990, with the area under cultivationjust about doubling from 10.9 to 20.5 million hectares. Meanwhile, the population hadgrown fI:om around 400 million to over 900 million by 1990, leaving a large unsatisfieddemand for vegetable oils for both industrial and human consumption.

CHANGING COMPETITION

The Government of India attempted to bridge the demand-supply gap through imports,whenever foreign exchange reserves permitted. As a long term measure, the Governmentof India set up a Technology Mission for Oil, in 1986, which encouraged corporations tomove into the arena of agro development. The National Dairy Development Board and ITCLtd., Calcutta bogan extensive work in the agricultural development of oil seed crops.

NDDBwas a corporation, set upby the Government ofIndia in 1967 to develop milk co-operatives in and around the Mehsana district in Gujarat. With funding from the UnitedNations and the Government ofIndia, NDDBhad done pioneering work in making availablewholesome, pastuerised milk and other milk products all round the year. NDDB wasentrusted with duplicating this model in many other states of the Indian Union which later


on began to be called 'Operation Flood'. From a situation of shortages through the perioduntil the seventies, hygienic milk in consumer packs had become freely available, atreasonable prices, almost all over India. Middlemen who earlier controlled milk prices anddistribution had virtually been el~minated. In 1986, NDDB was asked by the governmentto repeat the co-operatives' model of development, in increasing cultivation and supply ofhigh quality oil seeds,

On the other hand, lTC, - the Indian offspring of the British American TobaccoCompany, U.K. - diversified rapidly into areas other than cigarettes, like hotels, paper,packaging and agro-technology. It floated a new company called ITC Agro Tech, in the lateeighties, concentrating on biotechnology, agriculture extension work in oil seeds, tradingand marketing of branded edible oils. In a fairly short time, ITC Agro Tech had built anextensive farm network for the cultivation of sunflower crop and simultaneously launchedits brand of sunflower refined oil called 'Sundrop'. Bombay Oil like mar.y others in thistraditional business had done very littie work in building assured sources of supply.

NDDB launched under the umbrella brand name - 'Dhara' a range of refined and filteredvegetable oils in tetrapacks. Dhara was priced lower than all the competing brands in a bidto peg down the price-escalations that were taking place in the market both for branded andloose oils. For instance in 1992, when Saffola sold at around Rs 73/-'per kg, sunflower oilbrands sold at Rs 50/- and groundnut oil brands sold at around Rs 65/-. Dhara groundnutrefined oil sold at Rs 50/- and Dhara groundnut filtered oil sold at Rs 39/- for comparablepack sizes. NDDB was also simultaneously involved in test-marketing a range of other oilssuch as mustard, sunflower and palm oil under the Dhara brand name, in tetra-packs,through 1992. NDDB was also reportedly setting up a network of oil refineries and fillingstations with the objective of making good quality cooking oils available at prices lowerthan other equivalent brands. NDDB through its bulk buying interventions both globallyand nationally hoped to control market prices of oil-seeds and oil.

The conventional technology used in the refining of edible oils had batch-modeprocessing. Improved efficiency and quality of refining had become available with the newtechnology of continuous refining, and ITC Agro Tech had launched their brands ofrefinedoils using this technology. A new standard of quality had consequently emerged - a nearcolourless, odourless oil. Bombay Oil found itself unprepared to meet these new chal-lenges. lTC's Sundrop became a market leader in a period of two years, Le. 1~89-91 byexpanding the market for consumer packs and also by taking away shares from other refinedoil brands, significantly from the packed refined groundnut oil segment (Exhibit 3.6).

Meanwhile, the consumer products division of Bombay Oil launched its own sunflowerrefined oil under the brand name of 'Sweekar' late in 1989, at about the same time whenSundrop was launched. Tamil Nadu Agro was already a significant marketer of sunflowerrefined oil under the brand name 'Sunola' in Tamil Nadu. Sunola went national. Liptonalso started aggressively marketing 'Flora' - a sunflower oil brand that was marketed byits sister company Hindustan Lever earlier. Many other big names had also begun to showinterest in sunflower oil. The refined sunflower oil segment and more particularly therefined oils market, which was lying dormant, had suddenly become highly competitivewith many big names in it. 'Postman', the refined groundnut oil marketed by Ahmed OilMills was the market leader in the mid-eighties in the consumer packs segment. It had givenway to ITC Agro Tech's 'Sundrop' by 1991.


Brands

Groundnut

Sunflower

SafflowerDharaAll Other Brands:

Exhibit 3.6 Market Share: Refined Edible Oil Brands

CONCERNS AT BOMBAY OIL: EARLY 90s

Refining Capacities

'Sweekar' built up volumes from an average of around 39 Metric Tonnes per month in theyear ofits launch to about ~21 Metric Tonnes per month, in 1991. With Bombay Oil havingtwo edible oil brands by 1990, Le. Saffola and Sweekar, there were major constraints inrefining capacity. Saffola was refined at Bombay Oil's Mazgaon Plant at Bombay. This planthad a manufacturing capacity of 500 MT per montl:1. The combined requirements of Saffolaand Sweekar involved a refining capacity of around 700 MT per month in 1990-:-91 withprojected growth rates of 25 % annually. A part of the refining requirement was being metby a sub-contractor. This approach of out sourcing could not be continued indefinitely. Theproblems of quality, capacities and refining efficiencies needed urgent attention with littleinvestments having gone into upgrading the plant, machinery and capacities in the pastdecades. It seemed as if Bombay Oil was waking up rather late to this reality (Exhibit 3.7).

Corporate Image

One other problem that seemed to be bothering Bombay Oil, and more particularlyimpacting the consumer products division, was the issue of corporate image and itsinability to attract talent. The company's products seemed to be fairly well known to theconsumers, but their association with Bombay Oil was very weak. A survey conductedamongst working executives in Bombay in March 1990, revealed that managementprofessionals would not consid~r Bombay Oil an attractive place to work in. Most of thecommonly held perceptions and stereotypes of family-owned companies seemed to beassociated with Bombay Oil.

1989-90 1990-91

Dalda Refined 6% 5%(Liptons)Crystal (ITC) 5% 2%Postman (Ahmed Oil) 10% 8%

Sunola (Tamil Nadu Agro) 2% 2%Sun drop (ITC) 7% 10%Sweekar (Bombay Oil) 3% 5%Flora (Liptons) 4% 4%

Saffola (Bombay Oil) 9% 9%Range of edible oils 15% 20%

(Over 25 local brands) 39% 35%


(Rs in lakh)

\

Sales Advertisingand SalesPromotion*

Plant andMachineryGross Bloc**

1974 - 751975 - 761976 - 771977 - 781978 - 791979 - 801980 - 811981 - 821982 - 831983 - 841984 - 851985 - 861986 - 871987 - 88Ju!' 88 - Mar '891989 -1990

8389

111125145183230241245252283323337406434526

733869

1255159518092113207821112823396443764104561875718613

10,320

3.04.07.06.0

11.025.034.025.016.038.0

110.0110.0113.0156.0

3,41.00

* Almost the entire ASP spending was incurred by the Consumer Products Dividon.** Out of a total investment of Rs 443 lakhs to plant and machinery over a 15 year period between

1975-90, the consumer products business spent around Rs 40 lakh on installing automatic fillinglines.

Exhibit 3.7 Sales, Gross Block, ASP

The location of Bombay Oil's headquarters, placed as it was in a crowded, commoditymarket place, seemed to be an eye-sore and contributed to the low imago. The fact thatBombay Oil had no track record as an employer of professionals was another contributingfactor. It was a 'Catch 22' situation.

Changing AsPirations of Mariwala Family

Meanwhile, Harsh's cousins who had by then been initiated into the group's activities, hadbegun to take over the various other .businesses within the Bombay Oil fold. They oftenexchanged and compared notes on the issues facing Bombay Oil.

Their experiences were somewhat similar to what Harsh had gone through, though invarying degrees. All of them shared the common perception that business as was done inthe past was no more relevant. They individually and collectively believed in the virtuesof professional management. They, each had dreams of becoming induft~ialists, andwanted to createinstitutions, using the businesses that they inherited or set u. as startingpoints.

52 Cases in S!. ;,;,,~gicManagement

Harsh was IJ..l.zled over several questions. Where should he begin? Where 'Yas he goingto find the r\~&,}J.J.i4esto begin the second stage of organisation transformation? How wouldhe go about i t'w'Iflcmenting the needed changes? He was restless. He once again had to bringinto sharp f8('1.:;,the issues of autonomy and accountability.

Questions for the case' Bombay Oil Industries Ltd: Consumer Products Division'Q1. Using value-chain analysis, describe the resources of Bombay Oil Mills.Q2. Discuss Strategic, functional and operational capabilities in the context of the caseQ3. 1nthe context of the case explain how competition and the changes in the linn'senvironment affect the value of resources.

Q4. Which activities of the organization are a result of deliberate strategies and which areemergent?

bombay oil industries ltd

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