executive d — horace (65-68 bc) -...

Adversity has the effect of eliciting talents which in prosperouscircumstances would have lain dormant.

— Horace (65-68 BC)

Difficult times have their own merits. This is as much true for an individualas it is for an organization. These are the times when the entire organizationgets an opportunity to display its resilience through its innovative skills

and creative abilities. Naveen K Kshatriya, Chief Executive and Managing Directorof Castrol India Limited (CIL), echoed similar thoughts while reflecting on hiscompany in October 2002.

After the liberalization of the Indian economy in 1991 and the opening up ofthe oil sector, CIL focused on volume growth and achieved a market share of 20per cent. In the growth phase, cost efficiency and cost effectiveness of the operationalaspects were ignored. In the late 1990s, due to increased competition and acquisitionof CIL by British Petroleum, the focus shifted from high growth to efficient supplychain management. This brought about a sea change in the cost and performancemanagement systems at CIL. It required a cultural change — from chasing productionvolume targets to developing competitiveness through total quality management,business process reengineering, activity-based cost management system, and changein mindset. The focus of performance contract changed from a few financial measuresto a broad set of perspectives to achieve the company’s corporate mission. Kshatriyawondered which path the company should traverse that would take it to a sustainable,prosperous future.

INDIAN LUBE INDUSTRY

The lubricant industry in general has three broad segments, namely, automobile,industrial, and marine. As per the global trends, the automobile segment dominatesthe industry, and, within the automobile industry, the diesel engine lubricants formthe major part of the market.

Lubricants function as friction inhibitors by forming a viscous layer betweenmechanical links of machines. This viscous layer reduces friction by ensuring thatthe mechanical links do not come in direct contact with each other. Thus, in the currentera of mechanized economy, lubricants find extensive usage not only in terms of

Castrol India Limited:Managing in Challenging Times

Manoj Anand

ExecutiveSummary

describes a real-life situationfaced, a decision or action

taken by an individualmanager or by an

organization at the strategic,functional or operational

levels

KEY WORDS

Corporate Strategy

Liberalization

PerformanceManagement

Castrol India

Indian Lube Industry

M A N A G E M E N TC A S E

VIKALPA • VOLUME 30 • NO 1 • JANUARY - MARCH 2005 103

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reducing friction but also in providing extra durabilityto the machine.

Lubricants are obtained as lower order distillatesfrom the fractional distillation of crude petroleum. Theyare characterized by high wax content which providesthe necessary viscosity. Since they are expected to func-tion at extreme and varied conditions of temperature,they are provided with the required properties by addingvarious additives.

Before the liberalization of the Indian economy, thepublic sector oil companies dominated the Indian lub-ricant industry with a market share of 90 per cent. Thelubricants produced were simple blends based on lowand medium level technologies. More sophisticatedlubricants were imported and these accounted for arelatively small market share.

The liberalization of the Indian economy in generaland the oil sector in particular led to decanalization ofbase oil imports which used to be canalized through

Indian Oil Corporation earlier. There has been substan-tial reduction in the level of import duties. Free pricinghas been permitted and administered pricing regime hasbeen abolished. Deregulation has encouraged all themajor MNCs which include Shell, Mobil, Gulf Oil, BP,Exxon, and Caltex to set up their plants in India. Theentry of MNCs has led to increased competition andsubstantial reduction in the market share of public sectoroil companies.

The total market size and production of the lubricantindustry in India in the year 2000-01 were Rs 101.034billion (Table 1) and 13,898 thousand tonnes (Table 2)respectively. The lubricant industry witnessed a cumu-lative annual growth rate of 15 per cent during the period1995-96 to 2000-01. The major players are Indian Oil Cor-poration, CIL, Hindustan Petroleum Corporation, BharatPetroleum, Bharat Shell, and IBP Co. CIL has grown by12 per cent on a cumulative annual basis.

Indian Oil Corporation is the market leader with

Table 1: Key Statistics: 1995-96 to 2000-01

Particulars Unit 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Import quantity 000 tonne 58 44 650 396 407 1602Import value Rs billion 1.30 1.19 3.00 1.48 2.95 2.957Sales value Rs billion 48.717 52.933 57.448 64.908 70.231 71.464Market size (value) Rs billion 50.017 54.123 60.448 66.388 73.181 101.034Domestic consumption (value) Rs billion 50.017 54.123 60.448 66.388 73.181 101.034

Source: Centre for Monitoring Indian Economy, August 2002.

Table 2: Company-wise Trend in Production: 1995-96 to 2000-01

Name of the Company Unit 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Indian Oil Corporation 000 tonne 114 122 110 112 121 112Castrol India 000 litre 156,270 173,002 192,019 208,690 218,541 218,972Hindustan Petroleum Corporation 000 tonne 437 443 494.4 465.6 537.2 494.4Bharat Petroleum Corporation 000 tonne 86 84 86.9 102.7 100.4 96.6Gulf Oil 000 litre 27,540 48,630 51,383 60,273 57,266Bharat Shell 000 litre 39.3 41.9 41.4Savita Chemicals 000 litre 34,370 37,760 40,220 39,290 50,287 59,508IBP Co. 000 litre 21,272 21,423 15,764 11,266Tide Water Oil Corporation 000 litre 41,110 42,020 41,820 42,409.7 38,760.2 29,457.6Apar Industries 000 litre 62,100 69,671 78,304 41,911Indo Mobil 000 litre 16,229 16,508Indian Additives 000 tonne 11 11 12.6 14.3 15.5 11.3ELF Lubricants 000 litre 14,430 15,360 18,360Tata BP Lubricants(erstwhile) 000 litre 18,829 17,021Valvoline Commins 000 litre 3,815.6 7,250.8 12,126 14,156..6Pennzoil-Quaker State India 000 litre 13,163 13,155 14,923 12,786Chemoleums 000 litre 13,643 14,633.2Universal Petrochemicals 000 litre 5,037.8 9,905.9 12,638.9 11,480.9Raj Lubricants 000 litre 10,394.3 10,633.9 13,318.6Sah Petroleum 000 litre 8,370.8 19,893 10,892.9 11,421

Total for the sample 73 companies000 litre 684,388 640,556.7 784,823.2 990,456.3 1,021,071 800,215.7000 tonne 715.3 729.1 760.9 11,436 11,679.2 13,898

Source: As cited in Table 1.

104 CASTROL INDIA LIMITED: MANAGING IN CHALLENGING TIMES

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18.53 per cent (Table 3) and 24.49 per cent share in theyears 2000-01and 2001-02 respectively. CIL enjoyed amarket share of 12.03 per cent and 17.48 per cent duringthese two years.

The lubes of the public sector oil companies are soldthrough their own well-established petrol pumps net-work. These petrol pumps are not allowed to market thelubes of the MNCs which are marketed through auto-repair shops, garages, and service stations. CIL has clear-ing and forwarding agents, distributors, and dealers intheir distribution chain in case of retail lubricant marketpopularly known as ‘bazaar trade’ and clearing andforwarding agents only for institutional sales. CILdominates the retail lubricant market and has access toover 70,000 retail outlets.

However, the last two years have been difficult notjust for CIL but for the lubricant industry as a whole.To quote from the ‘Analysis Report’ of CIL’s AnnualReport (2001):

The automotive lubricant industry is a deriveddemand industry primarily driven by the con-ditions in the automotive transportation andgeneral industrial sectors. Both these sectors haveexperienced slowdown in the recent past. Duringthe year 2001-02, the commercial vehicle salesdeclined by 4.4 per cent, tractor sales declined by10 per cent, and the passenger car segment grewonly by 3.6 per cent, well below the expectations.The decline in the new vehicle sales in the year2001-02 indicates the difficulties confronting theautomotive sector. The two-wheeler segment isthe only segment that performed well with salesgrowth of 15 per cent. The other influences on thelube demand, namely, the overall GDP growthand industrial growth (2.7%), have been lower

than expected.The vehicular population structure in India

is changing rapidly. The commercial vehicle parcconsumes over 70 per cent of automotive lubri-cants popularly known as Diesel Engine Oils(DEOs). In recent years, there has been a shift tofuel-efficient, emission compliant engines withlower sump sizes. The new technology has led tolower top-up requirements. The two-wheelersegment is also shifting gears from two-strokescooters to four-stroke motorcycles. The new four-stroke two-wheeler engine technology has alsoresulted in lower lubricant consumption.

The impact of the above developments com-pounded by recent sluggish trends in the roadtransport industry resulted in the year 2001 beingan extremely difficult one for the lubricantindustry. The automotive lubricant market dec-lined by about six per cent. The main impact wasfelt in the Diesel Engine Oil category, the majorvolume contributor, where per capita vehicularconsumption decline has more than offset parcexpansion. Although two-wheeler and car lubri-cants have grown, their current share of overalldemand is modest. The ancillaries segmentcomprising gear oils, greases, brake fluids, andcoolants contribute around 13 per cent to thelubricant industry volumes; their demand has beenunfavourably impacted by similar factors.

The industrial lubricant demand is reflectiveof the industrial production and the growth trendin the economy which has been going throughsuccessive decline in the last two years from aprevious low of 5 per cent in 2000-01 to 2.7 percent in 2001-02.

Table 3: Company-wise Trend in Market Share: 1995-96 to 2000-01(Per cent)

Name of the Company 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Indian Oil Corporation 33.04 32.46 29.44 28.75 26.21 18.53Castrol India 13.82 15.89 15.9 15.92 15.96 12.03Hindustan Petroleum Corporation 16.27 15.94 14.83 12.69 10.58 9.23Bharat Petroleum Corporation 7.35 7.59 7 7.06 6.83 5.56Gulf Oil 2.76 4.15 3.92 3.78 2.54Bharat Shell 2.92 2.7 2.21Savita Chemicals 1.95 2.24 2.12 1.84 2.04 1.83IBP Co. 1.96 1.93 2.17 2.2 1.69Tide Water Oil Corporation 3.32 2.98 3.05 3.05 2.81 2.4Apar Industries 1.91 1.9 1.76 1.34Total for the above companies 75.75 81.81 80.33 79.96 74.46 56.47Total for the sample 73 companies 97.40 97.80 95.04 97.77 95.97 70.73

Source: As cited in Table 1.


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CASTROL INDIA LIMITED: A BRIEF HISTORY

In the year 1899, Sir Charles Cheers Wakefield establi-shed an oil company. In 1909, he produced a new lubricantand branded it as Castrol which revolutionized the trans-port industry in the first half of the 20th century. Formore than a century, his company’s philosophy has beenthat progress could best be achieved in partnership withthe customers.

Wakefield established the foundations of a specialistlubricant company committed to premium quality, highperformance, and leading edge technology. Throughthis company, he played a key role in developing trans-port industries and the pioneering days of record achie-vements.1

The Indian branch of Castrol was set up in 1919 andthe name was subsequently changed to Castrol Limitedin 1944. It became a part of Burmah Castrol Plc. groupin 1966. During the year 1981, it was amalgamated withIndrol Lubricants and Specialties Limited with equitystake of 40 per cent. The name of the company waschanged to Castrol India Limited with effect from No-vember 1990.2

CIL had a presence in the premium automotivesegment, whether it was a commercial vehicle, a motor-cycle or a car. The automotive segment of the lubricantindustry was not only big but also growing in value3 andCIL had a respectable presence in them. BP,4 one of theworld’s largest petroleum and petrochemical companies,acquired Burmah Castrol Plc and as a result of the globalmerger, Tata BP Lubricants India Ltd. was merged withCIL with effect from January 1, 2001 and, accordingly,CIL became a part of BP. BP acquired 70.92 per centequity stake in CIL in March 2000 (for shareholdingpattern, refer to Table 4).

With the amalgamation of Tata BP Lubricants IndiaLtd. with CIL and the discontinuation of the Tata BPbrand, CIL had the opportunity of launching a newdiesel engine oil offering a novel proposition. Under theBP master brand, CIL targeted a new consumer segmenthitherto untapped by the Castrol range of lubricants. Itoffered a unique benefit of 5.1 per cent diesel consumptionwhich had been widely accepted by the consumers.

Other products launched under the BP brand includedgear oils and greases for the trucking segment (AnnualReport, 2001).

At the macro level, CIL had the ambition of becominga market leader in the lubricant industry and, therefore,it was able to identify the role it must play. Accordingto CRISIL’s report on CIL in 2002:

CIL has a strong brand equity, wide distributionnetwork, and demonstrated product innovationability which will enable it to maintain its marketposition in the medium term. Besides, thecompany’s merger with Tata BP in the calendaryear 2001 is expected to result in an enhanceddistribution network. This will also enable thecompany to enter the lower segment of theindustry through the BP brand in addition tothe dominant presence in the premium segmentthrough its Castrol brand of lubricants.Accordingly, in India, the company chose to focus

on select strategic market spaces where they believedthat value creation was a must. Castrol incidentallyfound that the select spaces that have been identifiedhad a lot of commonalties with India and the Indianopportunities.

If the market was segmented on the price band, CILhad almost a dominant position in the premium segment.What was missing was the popular mass of the market.The acquisition of CIL by BP had brought together twogreat brands — BP and Castrol — and a variety of skills,particularly, marketing skills from Castrol and per-formance management skills from BP. The new team hadcreated an ideal platform for growth with the combinedbrand and marketing expertise, global reach, and scaleand cost synergies (Annual Report, 2001). CIL had a state-

1www.castrol.com/castrol/history_flash.html2www.indiainfoline.com3The share of automotive segments in the lubricants industry is 60 per centas reported by www.karvey.com.4BP operates in more than 100 countries and employs more than 100,000people whilst serving 10 million customers a day across six continents andis a leading player in the global lubricants market.

Table 4: Shareholding Pattern as on 13th June 2002

Particulars No. of No. of Paid-upShare- Shares Capital

holders Held (%)

Foreign collaborators 1 87,687,455 70.92Foreign companies 1 135,474 0.11Foreign institutional investors 20 1,355,424 1.1Overseas corporate bodies 11 23,927 0.02Non-resident individuals 286 137,141 0.11Financial institutions 14 7,516,646 6.08Indian mutual funds 31 460,352 0.37Banks 164 195,790 0.16Domestic companies 1,854 1,276,122 1.03Resident individuals 84,157 24,831,037 20.08Directors and relatives 4 20,930 0.08Total 86,543 123,640,298 100


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of-the-art technology that was backed up by the communi-cation and distribution system. It now acquired the BPbrand that was in the area of efficiency-based cost whichwas also important to the consumer. This was how CILwanted to position different brands in different segments.

CIL faced a challenge: How to cohere the value crea-tion in the premium segment by offering consumer rele-vant and technology-based proposition as distinct fromoffering generic specifications within the space?

Kshatriya disclosed that the company had chosenthe brand route to move to the market. Hence, it wasnecessary to establish a relationship with the endconsumer by communicating the tangible benefits of itsproducts to which he/she can relate. For example, thiswas reflected in its products like CRB Plus for reliabilityand longer engine life and Super TT proposition forfaster pick-up and power for motorcycles.

The channel, workshops, and mechanics influencethe demand for the lubricants. So, one of the greatmarketing challenges for CIL was how to manage all theconstituencies. Thus, adopting strategies such as marketsegmentation and managing the constituencies wouldenable it to get double-digit, top-line growth.

The focus of CIL was on the value of the marketrather than on the volumes of the markets. It had astrategy of bottom-slicing the product portfolio. Forexample, in the industrial segment, it focused more onnational account on specific segments which was largeand willing to pay a premium.

CIL had gone through three phases during the lastone and a half decade. The period prior to 1991 was moreof a survival phase. It witnessed dramatic growth duringthe period 1991 to 1996. From 1997, the focus shifted tosupply chain and cost management due to oil shock andintense competition.

Phase I: Survival Phase

Before 1991, CIL was constrained in its growth due toenvironmental factors. The base oil controls and itscanalization through the Indian Oil Corporation Ltd.were in place. The Indian economy was characterizedby moderate gross domestic product growth rate anddominance of nationalized oil companies. CIL did nothave access to enough raw material, i.e., base oil.

During the 1980s, the focus of the company was onmanaging within the limited availability of base oil. Thecompany could not grow in terms of volume becausethe base oil quota was fixed in terms of the then existing

market share of six per cent. It focused on margins, madeentry into the top end and value-added products, andcontrolled cost dramatically. There was no strategic thruston supply chain management. The issue was one ofsurvival and how to get the next base oil consignment.There were inadequate profits and a lot of under-investment in plants.

The company was not able to invest or earn moneyand not even allowed to set up factories to manufacturecable jellies for telephone cables. Effectively, it was asmall company struggling for survival. Though it set upa few plants, there was under-investment and under-utilization of plant capacity.

Phase II: Growth Phase

The first phase of liberalization in the government startedin 1991 and the plan was to deregulate the oil sector inthe next ten years. In the first phase, private sectorlubricant companies were allowed to import base oil.MNCs ventured into this sector with the entry of Shelland Exxon Mobil. CIL made a dramatic choice at thisjuncture. It changed the focus from ‘survival’ to ‘growthin market share and 30 per cent growth in volume terms.’At the marketing end, it focused on creating newopportunities and new brands, segmenting the market,and packaging of the products. At the back-end of thebusiness, the strategy in the supply chain was to keeppace with the explosive growth.

Thus, CIL is a typical case of a company that under-invested during the 1980s, had inadequate infrastructure,and was suddenly allowed to import base oil whichhelped its growth. The business and operations had onetheme— to ensure that the market is supplied with theproduct and to keep pace with the growth. The strategicthrust was on creating capacity, modernizing infras-tructure, improving quality, and hiring people in orderto manage change.

The supply chain function in CIL was geared tomake this whole change happen. The company that usedto manufacture 60 million litres per annum had set atarget to grow to a level of 200 million litres in the nextthree years. The challenge was to get people for managingthe transition from a Rs 1.50 billion business to Rs 10billion business in the next six years.

During the early 1990s, the Indian economic environ-ment was characterized by decontrol, MNC competition,and higher GDP growth. The Indian nationalized oilcompanies lost their market share from 90 per cent to


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less than two-thirds of the market. CIL had witnessedan explosive growth phase.

Ushwin D’Souza, Director–Operations, saw threethemes for the supply chain during this phase:• upgrade quality and service to compete with Shell

and other major players• revamp the packaging completely• modernize all filling lines in the plant.

Phase III: Cost-effective Phase

In 1997, CIL took a hard look at the economic scenarioand its competitive position. By this time, it had reacheda market share of 20 per cent. It had a double-digitgrowth rate in the past and now found it difficult tosustain that level. It could probably grow at five to sixper cent in the future. The scenario had changed fromvolume growth and efficient infrastructure to low growthand more emphasis on infrastructure and consolidation.

In 1999, the economy faced a huge oil shock andthere was a dramatic increase in oil prices which hada major impact on CIL. Looking at the cost structure ofCIL, 90 per cent of the costs were raw materials, five percent were manufacturing costs, and five per cent wereothers. Fifty per cent of the raw material cost in valueterms and 85 per cent in volume terms could be attributedto the base oil. The base oil prices are impacted by thechange in demand and supply conditions in the marketas well as the change in crude oil prices. The base oilprices had dramatically increased from the year 2000onwards. Other raw materials were performance en-hancer additives which would improve the performanceof the product under different conditions.

The oil price increase also had an impact on front-end of the CIL’s business. The lubricant demand fromthe trucking industry went down either because theyswitched to lower grade lubricants or had changed thelubricant oil after a long time. The oil shock had affectedCIL much more than anybody else.

The structural changes in the industry had alsoaffected demand for lubricant oil. The Supreme Courthad mandated the change in engine technology to Euro II.The Euro II engines consume 70 per cent less oil vis-à-vis old engines. The competition from the PSUs had alsoincreased as they started preparing themselves fordismantling the administered pricing mechanism (APM)and realized that they were losing their market share.

For CIL, the major issue was difficulty in marketingof diesel engine lubricant oil. The company adopted a

strategy of consolidation and the challenge was how tomake supply chain more effective. It changed its focusfrom ‘chasing capacity/chasing growth’ to ‘cost effec-tiveness.’

The major change initiatives at CIL were started in1999. The company implemented two of the three modulesof the JD Edwards Enterprise Resource Planning (ERP)software package in the areas of procurement, inventorycontrol, warehousing, distribution, and sales orderprocessing (Annual Report, 1999). Presently, it is in theprocess of implementation of i2 software.

MARKETING SET-UP AT CIL

CIL is essentially a marketing company and its saleswere effected through two channels namely ‘bazaar trade’(retail segment) and ‘institutional sales.’ The institutionalsales accounted for 40 per cent of the lubricant market.The players in the retail channel were clearing andforwarding (C&F) agents, distributors, and dealers andonly C&F agents in the case of institutional sales.

The company prepared a purchase plan for eachdistributor SKU-wise and monitored the inventory normsfor the distributors. It captured secondary sales data(distributor sales) by having Turview software at thedistributors’ end. Its focus was on actual sales loss ratherthan sales loss in the pipeline. It also captured thedistributors’ penetration level data. The data flow to CILtook place on a monthly basis. The company had plansto integrate Turview and JD Edward’s software in theyear 2003.

STRATEGIC GROUP ANALYSIS

The lubricant industry is now becoming a global business.Major international firms such as Exxon Mobil, Shell, BP,and ChevronTexaco are getting even larger accountingfor an even more significant market share of the globallubricants business which is estimated at 37.1 milliontonne in 2003. Most of these major suppliers are nowalso managing their lubricants business on a global basis.Economies of scale are an advantage that these leadingplayers seek in this very competitive market. This hasled to erosion among the mid-size and ‘me-too’ playersand an increasing polarization, that is, a move towardlarge and very large manufacturers, on the one hand,and small niche suppliers, on the other. Competition is,therefore, no longer limited to local, regional or evennational markets but is increasingly becoming global innature. Altogether, more than half of the world lubricants


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market has been part of such a concentration. Industryconsolidation continues to have a major impact oncompany market share and ranking, on the manufacturingand business economics, on base oil supply positions,and on the competitive environment. Therefore, it hasbecome even more important to monitor the marketshares, strategies, positioning, advertising and promo-tion budgets, supply chain synergies, and the outlookof these players on a global basis.

The responses of senior management of HindustanPetroleum Corporation Ltd., Gulf Oil Corporation Ltd.,Indian Oil Corporation Ltd., and Bharat Petroleum Cor-poration Ltd., to the survey questionnaire exploring thereasons for difference in performance in the Indianlubricants industry and for developing a framework inthe choice of competitive strategy are given inAnnexure 1.

FUNCTIONAL STRATEGIES

Castrol has always believed that ‘when the going getstough, the tough gets going.’ In order to meet thechallenges involved in managing a company, CIL hasdeveloped the following six strategic themes:

Health, Safety, Security, and Environment (HSSE)

It is vital for a company to have concern for health,safety, security, and environment. As it becomes larger,there are pressures from different sections of the societyto make it accountable. In order to fulfil its agenda ofa safer factory, safer transport, and being environment-friendly, CIL has made all the factories ISO 14000compliant.

CIL has also undertaken social investment pro-grammes which are aimed at creating sustainable humanprogress. It has invested in community developmentwork at Silvassa where one of its plants is located. Themain focus is on the areas of health, hygiene, andeducation. It has a partnership with about 750 drought-affected villages in Rajasthan, Gujarat, Madhya Pradesh,and Maharashtra where it is working with the villagersto develop water management systems/water harvestingmechanisms.

Product Market and Positioning Strategy

With two great brands — BP and Castrol — in its portfolio,CIL is in a position to provide better choice to its customersand top line growth for the company. The two brandspresent different types of features which appeal to

different types of customers.The BP brand promises ‘guaranteed performance.’

The BP diesel engine oil brand called Vanellus waslaunched in India in July 2001 with a formulationpromising a 5.1 per cent increase in fuel efficiency. Theproduct brand proposition was developed after anextensive consumer research followed by the IndianR&D team developing the formulation locally. The BPbrand currently operates in the trucking segment andis targeted at consumers who are looking for ‘peace ofmind.’

The BP brand communication strategy is built aroundsavings on diesel which is one of the key needs of thetrucker. Besides communicating through mass media,brand communication is also done through directconsumer contact and BP Health Media and TruckersInsurance Scheme which is aimed at reaching 2,50,000owner-drivers/drivers.

The Castrol brand essence is ‘winning performance.’It believes in delivering premium quality and per-formance of the products and services they represent.Products like Castrol Activ 4T, Castrol GTX Magnatec,and Castrol CRB Plus are leaders in their market segments.Castrol GTX Magnatec offers a unique product promise— superior engine protection within the first ten minutesof a start-up when maximum engine damage occurs.Castrol CRB Plus offers a strong product promise of alonger engine life and is a market leader in the multi-grade diesel engine oil segment.

The distinctiveness of both BP and Castrol has beenenabled by Global Research Project Alchemy which hashelped build distinctive product brand architecture,identify significant value drivers, and prioritize resourceapplication for strategic opportunities (Annual Report,2001).

Procurement Policy

CIL has identified and developed ‘supply chain efficiencydrivers.’ It plans to have economies of scale throughstandardization of its requirements and use the samekind of technology in all its brands across the family.It also plans to achieve scale in procurements throughglobal operations. The levers of procurement policy aresimplicity, standardization, scale, and reengineering ofprocesses.

The company has worked with its suppliers, re-engineered its brands, and optimized in terms of itsformulations and packaging of the products. It analyses


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what goes into each pack and negotiates with thesuppliers. The procurement strategy is evaluated on twodimensions — criticality and the scale of spending —as shown in Figure 1.

If the item is less critical due to the structure of themarket or because the substitutes are available but thecompany has high spending on the same, then it prefersto do deals in this area either through tender processor through e-procurement or reverse auctions. In caseof base oil, the structure of the market is such that onlytwo to three suppliers are available in the global market.According to D’Souza, the increase in base oil cost ismitigated through an efficient supply chain.

The working capital management performance ofCIL during the period 1998 to 2001 is given in Table 5.The operating cycle has increased from 101 to 122 daysand then reduced to 85 days. The cash conversionefficiency ratio has improved from 10 per cent to 15 percent during 1999-2001. The company has taken tradedebtors off its balance sheets by discounting their tradebills with the bankers.

Despite an increased focus on efficient cost mana-gement and supply chain management during the period1998 to 2001, the bottom line of the company has sufferedby 8.5 per cent on an annual basis as against the annual

average of 7.99 per cent increase in sales (Annexure 2).Even though the company has been able to optimize itsbase oil cost by making the best deals globally, the staffand other operating expenses have ballooned by 8.25 percent and 12.97 per cent respectively as evident from thevalue driver analysis in Figure 2. The operating andprofitability performances of CIL during the period ofstudy is cited in Tables 6 and 7. Overall, the company hascreated substantial shareholder value during these years(Figure 3).

Kshatriya sums up Phase III of CIL as follows:…The other focus is in the area of being more‘costefficient and cost-effective.’ One of thethings which has happened in this organizationis that in the era of growth which was till thelate 1990s, the focus was to get volumes growthand, therefore, cost efficiency and cost effec-tiveness were ignored. Possibly rightly so,because the organization thought it wouldaddress that later on. There are different schoolsof thought. My personal view is that one partis top line and the other part is cost line. Youhave to monitor both simultaneously in orderto have an optimum profit line. Else, you wouldland up in a painful situation. But, we arelearning from this organization…

Figure 1: CIL’s Procurement Strategy

Table 5: Management of Working Capital at CIL

Particulars 2001 2000 1999 1998

Inventory (as day’s consumption) 47 67 69 60Receivables(as days of gross sales) 38 47 53 41Receivables outstandingfor more than six months (%)

12.27 8.36 14.21 12.2

Operating cycle 85 114 122 101Creditors(as days of cost of sales)

111 71 169 72

Cash conversion cycle -25 43 -47 29Cash conversion efficiency(%) 15 10 10 14

Table 6: Operating Performance of CIL during 1998-2001

Particulars Cumulative AnnualGrowth Rate(CAGR) (%)

Sales 7.99Cost of raw materials 8.25Staff expenses 12.97Operating and other expenses 17.51Excise duty 15.85Operating profit before depreciation,interest, and tax (OPBDIT)

-6.5

Operating profit before interest and tax (OPBIT) -7.7Profit before interest and tax (PBIT) -7.7Profits after tax (PAT) -8.5

Table 7: Profitability Performance of CIL during1998-2001

Particulars 2001 2000 1999 1998

ROA(%) 44.82 30.37 67.13 44.29NOPAT/Sales(%) 6.96 8 12.81 12.31Sales/Productive capitalemployed(times)

6.44x 3.79x 5.24x 3.65x

PBIT/Net capital employed(%) 38.77 41.94 68.78 49.91PAT/Net worth(%) 27.72 34.12 54.79 40.28Tax/PBT(%) 28.32 18.00 20.19 18.60


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Rationalization of Distribution Systems

CIL dominates the retail lubricant market with a marketshare of 26 per cent and has access to over 70,000 retailoutlets. With workshops gaining a substantial share ofdistribution channels, CIL is developing a series ofinnovative workshops. These Castrol-branded work-shops will offer assurance and satisfaction to the involvedautomotive customers. In its bid to translate its brandpower into ‘bazaar power,’ the company has undertakena programme to make customer management processescomparable to the best in the world. The world-classcustomer management programme includes a distributorpartnership programme and a structured world-classsales cell.

Responsive Cost Management System

Roger Elston-Green, Director, Finance, feels that costmanagement systems at CIL have responded to thechanging dynamic environment. CIL monitors unitproduct costs but the focus has shifted to overheads cost

as a percentage of gross margin, freight and logisticscost, plant efficiency, cash profits, and returning cashto the shareholders in a tax-efficient manner. Dr A LRavimohan, Vice-President, Technology, shares thisfeeling and is satisfied with the gross margin figureswhich they get in the management team reports.

According to D’Souza, CIL has a better cost mana-gement system now than in the past. The underpinningsource of cost reduction is through cultural change fromchasing production volume targets to developingcompetitiveness through total quality movement,business process reengineering, and a change in mindset.

CIL has framed a policy of cost analysis and controlfor its global operations in July 2002 with an underlyingphilosophy of extending activity-based cost managementto customer-and facility-sustaining activities. It ispresently evaluating the feasibility of its introduction.The proposed cost system is expected to facilitate themanagement decision-making process in the areas ofproduct formulations, production scheduling, supply

Figure 2: Value Driver Analysis of CIL for 2001 (2000)


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chain costing, and customer/channel profitability ana-lysis besides product costing.

Performance Management System

The performance management system at CIL is linkedto volumes, profits, and working capital. The variablepay is based on achieving or exceeding the financialmeasures. The objective of variable pay plan at CIL isto influence the behaviour of individuals and/or teamsby providing appropriate financial rewards wherechallenging business results are achieved. It has enabledall eligible employees to share the success of their businessunit in a tangible way and encouraged ‘one team’approach within the business unit.

After acquisition by BP in July 2000, the performancemanagement system underwent a sea change. The focusshifted from a few financial measures to a broad set ofperspectives with the objective of achieving the corporatemission. Following BP’s tradition, performance contractsystem was introduced at all organizational levels atCIL. This set the key achievable objectives for the yearin the areas of finance, strategy development, HSSE,people issues, brand and customer, ethics, and effi-ciencies. The robustness of the performance contractsystem at BP can be gauged from the fact that India,Middle East, South Asia, and Africa (AMESA)-businessunit (BU) has signed a performance contract with BP(Annexure 3). The Castrol India performance unit’s (PU)performance contract is derived from the AMESA-BUperformance contract. The performance contracts forother functional areas, of CIL-PU are derived from theCIL-PU performance contract. Elston-Green aptly des-cribed it as follows:

BP has a philosophy of stretch targets. It willstart by multiplying your targets by two andmay be you do not achieve. But, you achieve50 per cent more than what you could have setup on your own. So, we have a concept ofstretch and high reward for achieving the stretchwhich creates a tension. Performance scorecardis instrumental in that. It is a vehicle for change.

BP is lot more about understanding whatis going on in each country’s performance unit,understanding what your long-term objectivesare, then tracking the delivery of those long-term objectives through short-term goals andperformance—tracking where you are at anymoment of time. It is not just on bottom linebut on all aspects of performance, be it volume,margins, cost, profits or KPIs.The AMESA-BU of BP forms a strategic part of

Lubes and Services Strategic Resource Unit (SRU). ThePUs of Africa, Middle East, and South Asia, and Indiaare part of AMESA-BU. As of 2002, AMESA-BU accountsfor 30 per cent of the global population and 14 per centof the global lube demand. India is among the top 20global lubricant markets (Newsletter of AMESA-BU, Sep-tember, 2002).

The AMESA-BU aspires to be number one regionallubricant marketer in terms of profitability and volumewith a market share greater than 15 per cent. It plansto build strong brands with a leading share-of-attitudein its chosen markets. It plans to reach USD 115 millionnet income mark by 2010, contributing around 15 percent of BP’s lubricants business (Newsletter of AMESA-BU, September, 2002).

Figure 3: Shareholder Value Analysis of CIL

Return on assetsEVA/capital employed


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CIL follows a two-tier process in the formulationof key achievable objectives: the top-down process, whichis the expectation of the shareholders and the bottom-up process. An effort is made to get the bottom-uptargets as close to top-down process targets as possible.The issue is how to bridge the gap, if any. There is aleadership team which decides on how to achieve abalance between the shareholders’ expectations and thecompetency available in the organization and to deter-mine the optimal blend of the hard and soft performancemeasures.

CHOICE OF KEY PERFORMANCEINDICATORS

Key performance indicators (KPIs) are still in the processof being developed. It is done through continuous thoughtprocess. The peculiarity of the process is that the moreit is changed, the more difficult it becomes to track over

time. The present KPIs in the performance contract ofdifferent functional areas of CIL are in Figure 4 (seeAnnexure 4 for detailed definitions of the KPIs). TheKPIs being monitored at Silvassa plant of CIL are in thenature of plant performance indicators and have a focuson continuous reduction in the plant cost per litre (Anne-xure 4).

The performance contract system is BP’s way ofdoing business. BP has demonstrated across the worldthat it is a performance-driven organization. Hence, theperformance contract system has been implemented atCIL-PU not only for improving sustainable real per-formance but also for dovetailing CIL into the BP’s sys-tems. This system has made the employees at CIL realizethat profitability is not going to come from volumegrowth but from efficient value growth.

Unlike in manufacturing where the measurementis precise, in areas such as marketing, human resource,

Figure 4: Performance Scorecard of CIL-PU

Increased CustomerEmphasis KPIs

• Serve customer better• Brand health index• Consumer’s share of mind• Consumer’s share of

attitude• Growth in market share

Financial KPIs• Replacement Cost

Operating Profit (RCOP)• Overheads cost as a

percentage of grossmargins

• Net cash flow• Total cost per litre

People KPIs• Achieve compliance on all

HR basics• Target improvement in ESI

score• Value added per

employee

HSSE KPIs• Zero fatalities• Road safety• ESI compensation• HSSE awareness through

appropriate communicationand training

• Limiting the days away fromworkplace

Ethics KPIs• Raise awareness on ethics

and ensure effective imple-mentation

• Continue to challenge cur-rent ways of working

Supply Chain KPIs• Fill rate• Logistics cost• Supplier performance in

terms of time and quality• Average payment period to

suppliers• Innovation ratio

MaximizeShareholders’

Value


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ethics, HSSE, etc., it is difficult to develop hard quan-titative measures. CIL-PU is presently undergoing atransition to a phase where the soft measures haveassumed greater significance. Hence, there is little choicebut to make an attempt to measure and monitor it.

Subjective as these soft measures are, it calls forgreater care to ensure that this quantification processdoes not restrict the creativity and innovative abilitiesof the individuals. Kshatriya aptly describes this dilemmaas follows:

The system is now broad-based. The good thingis that it is beyond the financials. The performancecontract at the salesman level is simple. As yougo up the level, wide areas are covered which youare expected to see, understand, and implement.Performance contract is what BP has adopted. We,in Castrol, followed a different system — MBO.It did not quantify. It did not have granularity.Perhaps it had lot more of subjectivity. The newsystem is broad; it has a lot more objectivity. Aslong as this objectivity does not restrict the spaceor freedom of individuals to operate on their owninitiative, I think it is all right. As long as it is notseen as the end of life, there should not be anyproblem.

CONCLUSIONCIL has maintained growth in the strategically importantand growing segments, namely, engine oil for cars, two-

wheelers, and new trucks. The overall sales volumecontinued to decline due to shortfall in commercial vehiclesegment which accounts for a significant part of theirportfolio. The market volumes of the commercial vehiclesegment have declined because of increase in theproportion of new technology trucks which consumeless oil; old technology trucks extending oil changeperiods because of cost pressures; and lower tractorutilization because of difficult conditions in the agri-culture sector. This market trend will continue untilthere is a revival in freight market and agriculturalactivity. CIL has been able to maintain its strong financialperformance by unit price improvement, lower materialcosts, efficiencies in supply chain, and cost reductioninitiatives.

The vision of CIL is to be an undisputed leader inthe premium automotive lubricant market. The companyplans to focus on consumer, channel-partner, and OEMrelationships using brands as the primary driver of theirbusiness with technology-based brand innovations; withnovel consumer communications and interactions; andinnovations in ‘route to market’ and customer mana-gement; and world-class supply chain and businessprocesses. The challenge before Kshatriya is to effectivelyleverage the power of their two brands — Castrol andBP—and to facilitate the implementation of the company’sstrategic initiatives.

Annexure 1: Responses of Senior Managers on Different Strategic Dimensions

Strategic Dimensions Hindustan Gulf Oil Indian Oil BharatPetroleum Corporation Corporation Petroleum

Corporation Ltd. Ltd. Ltd. Corporation Ltd.

The degree to Width of your product line Medium to high High High Medium to highwhich you focus Target customer segments Medium to high High High Medium to highyour efforts in terms of: Geographical spread of

markets served High Medium to high High Medium to high

The degree to which Price Medium to high Low Medium to high Medium to highyou seek brandidentification rather Other variables Medium Medium to high Medium Low to mediumthan competitionbased on:

The degree to which Directly on your own Medium to high Medium to high High Mediumyou seek to developbrand identification Support ofwith the ultimate distribution channels Medium Low High Highconsumer:

The choice of Company-owned channels Medium Medium Medium Medium to highdistribution channel Speciality outletsranging from: (Petrol pumps) Medium to high Low High High

Broad-line outlets Low Medium to high High Medium

Contd.


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The level of your Raw materials (base oil, additives) Low High High Highproduct quality in Adherence to tolerance Medium High High Highterms of: Features Medium to high High Medium to high High

The degree to which Medium Medium to high High Mediumyou seek technologicalleadership as an innovator

The degree to which Medium Medium to high High Mediumyou provide ancillaryservices with yourproduct line suchas engineeringassistance, training

The extent of vertical Forward vertical integration Medium Medium to high Medium Mediumintegration adoptedand value created Backward vertical integration Low Medium High Low to mediumin the process of:

The extent to which Manufacturing Medium to high Medium Medium Mediumyou seek low-costposition through Distribution Medium to high Medium to high Medium Medium to highinvestment incost-minimizingfacilities andequipment in:

The price position Cost position Medium to high Medium to high Medium Mediumof your product in Product quality Low Medium to high High Medium to highthe market relative to:

The relationship of Home government Medium to high Medium to high NA NAthe MNC to have accessto resources/regulations Govt. of India wherewith: it is operating Low Medium to high NA NA

The size of fixed Medium Low Medium Medium to highcosts which have beencommitted in themanufacturing facilities

The requirements on Medium Medium to high NA Medium to highfirm behaviour basedon the relationshipbetween the firm andthe parent company

Annexure 2: Financial Highlights of CIL (Rs in million)

Year 2001 1999 1998 1997 1996 1995 1994 1993 1992 1991

Sales and Other Income 13,729.4 12,565.1 12,186.4 10,994.1 10,107.8 9,055.7 7,515.1 5,685.2 4,141.4 2,915.4Raw materials consumed 6,579.3 6,048.0 5,300.1 5,203.9 4,893.3 5,079.2 4,158.3 3,161.3 2,816.1 1,979.1

Excise duty 2,327.8 2,177.5 1,681.0 1,512.9 1,318.6 979.5 680.4 461.2 51.9 26.0

Expenses 3,081.1 2,514.3 2,517.5 1,976.6 1,710.4 1,306.0 1,027.2 761.8 475.2 293.5

Interest 74.6 72.1 26.2 25.3 60.9 169.8 113.7 89.3 106.1 74.5

Gross Profit (BeforeInvestment/Interest Income) 1,629.9 1,642.7 2,548.2 2,161.7 2,028.6 1,438.1 1,236.7 1,046.2 601.6 470.3Depreciation 132.4 114.4 100.8 84.3 68.0 44.9 25.8 25.8 20.1 13.7

Profits before extraordinaryitems and taxation 1,534.2 1,638.8 2,560.8 2,191.1 2,056.6 1,476.3 1,509.7 1,185.8 672.0 528.6

Depreciation forearlier year (written back) -60.8 6.1

Contd.

Strategic Dimensions Hindustan Gulf Oil Indian Oil BharatPetroleum Corporation Corporation Petroleum

Corporation Ltd. Ltd. Ltd. Corporation Ltd.


115

Profits before Taxation 1,534.2 1,638.8 2,560.8 2,191.1 2,056.6 1,476.3 1,570.5 1,185.8 665.9 528.6Taxation 434.5 295.0 517.0 407.5 475.0 531.0 540.0 456.0 261.5 204.0

Deferred taxation 15.7

Profits after taxation 10,84.0 1,343.8 2,043.8 1,783.6 1,581.6 945.3 1,030.5 729.8 404.4 324.6

Debenture redemption reserve 4.5 3.2

Dividends* 927.3 926.3 2,470.1 926.3 741.0 524.9 524.9 289.5 1,23.2 78.8

Gross fixed assets** 2,439.5 2,234.9 2,118.2 1,881.8 1,733.1 1,449.9 854.1 517.5 3,84.8 290.0

Net fixed assets** 18,06.3 1,726.6 1,709.8 1,567.9 1,502.1 1,284.9 732.1 346.9 2,38.0 158.4

Investments 1,199.0 3.7 829.8 1,055.4 805.1 625.0 1,174.3 1,493.4 990.1 400.7

Net current assets 1,359.2 2,379.5 1,252.5 1,867.6 1,430.7 1,527.3 1,074.1 656.8 800.2 772.5

Less deferred tax liability 171.9

Miscellaneous expenses 1.1

Net assets 4,192.6 4,109.8 3,792.1 4490.9 3,737.9 3,437.2 2,980.5 2,497.1 2,028.3 1,332.7

Share capital 1,236.4 1,235.0 1,235.0 617.5 617.5 617.5 617.5 385.9 193.0 157.6

Reserves and surplus** 2,730.3 2,703.8 2,495.1 3,810.7 3,045.8 2,313.2 1,892.8 1,612.0 1,359.1 735.0

Net worth 3,966.7 3,938.8 3,730.1 4,428.2 3,663.3 2,930.7 2,510.3 1,997.9 1,552.1 892.6

Borrowings 225.9 171.0 61.9 62.7 74.7 506.5 470.3 499.2 476.3 440.1

Earnings per share*** 8.77 10.88 16.55 28.88 25.61 15.31 16.69 18.91 20.96 20.6

Dividends per share*** 7.5 7.5 20 15 12 8.5 8.5 7.5 7.5 5

Book value per share 32.08 31.89 30.2 71.71 59.32 47.48 40.65 51.77 80.43 56.64

Debt-equity ratio 0.18:1 0.14:1 0.05:1 0.1:1 0.1:1 0.2:1 0.2:1 0.3:1 0.3:1 0.5:1

Duty and tax payments 5,277.7 5,074.3 5,101.4 4,408.2 4,082.9 3,531.1 2,752.8 2,200.0 1,590.2 811.2

* Includes Rs.2.50 special for 75th year in 1993, Re 1.00 special in 1995, and Rs. 10.00 special in 1999.** Figures for the year 1992 for gross fixed assets and net fixed assets and reserves and surplus are after considering the effects of revaluation

of certain fixed assets.

*** Arrived at after considering a number of shares at the end of the period including right shares/bonus shares issued in the relevant period.

Annexure 3: AMESA (India, Middle East, South Asia and Africa)-BU 2002 Performance Scorecard

Performance Measures Performance AvailableMin. Goal Stretch Min. Points Stretch

Strategy• Complete the BU strategy by the end of Q2

HSSE• Focus on road safety as a key area for improvement with a 44 per cent

target reduction in RAR vs. 2001 (RAR-2971661.49)• Target zero fatalities for the BU• Contribute to limiting the number of DAFW cases in the SRU to the 18

cases• Continue to raise HSSE awareness through appropriate communication,

training, and process changes• Spills (medium and large)• ASA audits (competed in traction)• Standard Near Miss Reporting System in place in countries

People

• Achieve compliance on all HR basics (appraisals, upward feedback, careerdevelopment discussions, training days, etc.)

• Target 1 per cent improvement in ESI score

Increased Customer Emphasis• Serve our customers better across target markets, driving volume growth

2 per cent above the markets in core markets• Re-engage with the customers and consumers through targeted revenue

investments to strengthen the Brand Health - Measure Brand Health Indexin four key countries (India, South Africa, UAE and Iran) and target an 8per cent improvement vs. previous year

• Fully implement the Alchemy framework to ensure delivery of highlightedtop-line benefits

Year 2001 1999 1998 1997 1996 1995 1994 1993 1992 1991

Contd.


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• Achieve top-line growth targets for target new markets / segments — Iranand BP brand and institutional business in India. Develop options for twonew market developments in Africa

Ethics• Continue to raise awareness on ethics and ensure effective implementation

of the new Facilitation Payment Policy• Focus on risk assessments, continue to challenge current ‘ways of working’

and implement necessary remedial actions

Financial Performance• Replacement Cost Operating Profits (RCOP) $ million• Total cost/Gross margins (%)• Net cash flows $ million

Annexure 4: CIL’s Silvassa Plant KPIs

Key Performance Indicators Definition of KPIs

Yield = Output/InputOutput = Closing stock (all) + Dispatches (all)Input = Opening stock (all) + Receipts (external)It is being monitored on a monthly basis and the target is 99.5 per cent

Line fill (for stock transfers) = Number of line (SKUs) hits/Number of line (SKUs) indentedThe benchmark line fill is 97 per cent

Volume fill (for stock transfers) = Volume of hits/Volume indentedThe benchmark is 99 per cent

In-full on time(for direct sales) = Number of orders serviced/Number of orders placedLine fill

Manufacturing overheads per litre = Conversion cost/Production in litres= Plant overheads/Production in litres

First time pass rate(%) = Total number of blends without any amendments/Total number of blends taken

First time pass rate (oil)(%) = Total number of blends without any amendments + Blends with base oil amendments/Total number of blends taken

Packaging yield(%) = Number of packages lost/Number of packs filledThe packages lost include number of caps, labels, foils, cartons, and containersThe benchmark packaging yield is less than 0.5 per cent.

Filling line productivity (KL/man hour) = Actual KL produced/Total man hoursIt is worked out for each family and each line

Operational equipment efficiency(%) = Actual KL per hour/Rated capacity in KL per hour

Manpower efficiency(%) = Total man hours required/Man hours availableTotal man hours required = (Total production for the month/Capacity in KL perhour ) X Manpower used on the lineMan hours available = (Number of workers X Number of days available duringthe month X Shift time) + Overtime hours

Performance Measures Performance AvailableMin. Goal Stretch Min. Points Stretch

Acknowledgment • The author acknowledges the financialsupport received from the All India Council for TechnicalEducation (AICTE), New Delhi, under the R&D scheme. Theauthor also acknowledges the support provided by MrSubhashish Saha, Research Associate.

Manoj Anand is Professor in Finance and Accounting Areaat Indian Institute of Management, Indore. A Ph.D. from theUBS, Panjab University, Chandigarh, he is a Fellow of theInstitute of Cost and Works Accountants of India, Kolkata. He

has worked with Customs and Central Excise Commissionerateas an ICAS Officer. He has vast teaching, research, andconsulting experience with different business schools such asS P Jain Institute of Management Research, Mumbai;Management Development Institute (MDI), Gurgaon; NationalInstitute of Financial Management, Faridabad; and UBS,Panjab University, Chandigarh. His areas of interest includestrategic cost management, corporate finance, and projectfinance and control.e-mail: [email protected]


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