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BUSINESS
ADMINISTRATION
No:
1
REMAINS
OF A DREAM
This is a tragic story,
narrated in first person, of an entrepreneur who became bankrupt for no fault
of him, without producing anything, mostly because of the irresponsible
political and government environment. This case study, documented by Bibek
Debroy and P.D. Kaushik and published in Business Today is reproduced here with
permission.
In the 1980s, I worked
as a chemical analyst for a transnational in Germany, but kept thinking about
shifting to India.
Opportunity knocked
when I saw an advertisement by the Uttar Pradesh government inviting NRI
professionals to start a chemical unit in the newly identified Basti Chemical Industrial
Complex. I hail from Lucknow. Hence, this was attractive. I inquired from the
Indian High Commission and was told that there is single window clearance for
NRI investors. The brochure said several things about the benefits – excise and
sales tax holiday for five years, uninterrupted power supply, low rate of
interest on loans, and clearance of application within 30 days.
I started the
application formalities for a chemical unit. Once the application was accepted,
I requested for long leave from my employers. I also inquired from my relatives
in Lucknow and was told that the Uttar Pradesh government’s intentions are
clear, and developmental work is progressing at fast speed.
Every now and then, I
received a letter from the ministry of industry in Uttar Pradesh to furnish
some paper or the other, as part of procedural formalities. After three months,
I received my provisional sanction letter for allotment of land, and term loan.
The letter also stated that within six months, I must take possession of the
land, and initiate construction. Otherwise, the deposited amount (Rs 1 lakh as
part of my contribution) will be forfeited. I resigned from the company, and
shifted permanently to India, since my employer turned down my request for long
leave.
On reaching the
complex, I was surprised to see that the Uttar Pradesh State Industrial Development
Corporation (UPSIDC) had actually developed the land in terms of markers, and signboards,
compared to what I had seen on my last visit.
Though roads were not
fully laid, it was evident that work was in progress. I took possession of my
land and started construction.
Meanwhile, I approached
the UPFC for granting me the term loan for ordering the plant and machinery.
The first obstacle came from the Uttar Pradesh State Electricity Board (now Uttar
Pradesh Power Corporation). The electricity supply to the complex was not yet
available. On inquiring, I was told that the plan had been sanctioned, but
required clearance from the power ministry, before undertaking further work.
The approximate time to get grid supply ranged between four and six months.
The next obstacle came
from the Uttar Pradesh Financial Corporation (UPFC). It could release the first
instalment after I completed construction till the plinth level. I continued
work with the help of a diesel generating set. It took another month to reach
the plinth level.
But before I could
request UPFC to release my first instalment, I received a letter from UPFC that
I had to deposit interest against the amount paid to the UPSIDC for land possession.
This was a shock, because interest had to be paid even before anything was produced.
But I had no
alternative, because the first insatlment was due. The UPFC promptly released
the first instalment after inspecting the construction. It helped me continue construction
work, and also book for plant and machinery.
Six months went by.
Construction was almost complete. I had received three instalments from the
Uttar Pradesh Financial Corporation (UPFC). Each time the payment of interest
was due, the required sum was adjusted from the instalment released. If there
was any shortfall in money required for construction, I paid from my own
pocket.
But after nine months,
my coffers went empty. Machinery suppliers were after me, for payment. UPFC
insisted on interest payments, because this was the last instalment of my term loan
and interest due couldn’t be deducted from future instalments. I borrowed from
family and friends and paid up. Then I received the final instalment from UPFC
for plant and machinery, with another notice that the yearly instalment for the
principal was due.
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Within two months,
machinery was commissioned at the site. But electricity was yet to reach the
complex. In the previous year, I had visited the Uttar Pradesh State
Electricity Board (UPSEB) office innumerable times. I also approached the
industry association to assist me. But all my efforts were in vain. This did
not help me, or others like me, to get the grid supply.
There were 14 other who
were in the same boat. The biggest company of them all – obviously with
contacts at higher levels – arranged for grid supply from the rural feeder. But
that plan also did not take off, because the rural feeder supplied poor quality
power for a mere six hours. A process industry requires 24 hours of
uninterrupted electricity supply without load fluctuations. It is precisely
because of this that all 15 of us, who were waiting for electricity, had insisted
on industrial power from UPSEB.
All plans failed.
Captive generation was not a viable alternative now. And we continued to wait
for the grid supply. We met the former minister for industry and pleaded our
case. He assured us that he would take up the case with the power ministry.
Meanwhile, I defaulted
on interest payment. So did the others. The final blow came in the Assembly
elections, when both the sitting : Member of Legislative Assembly, from Basti, and
the state industrial minister lost their seats. Suddenly, everything – from
road construction work, to the laying of sewer and phone lines – came to a
standstill.
Only the police post
and the UPSKB rural feeder office remained. The new incumbent in the industrial
ministry hailed from Saharanpur, so the thrust of the ministry changed. Basti was
not on their priority list anymore. After waiting for tow years, UPSEB was not
able to connect the complex with grid supply.
In the end, UPFC
initiated recovery action and sealed my unit. Besides, they claimed that I
could not get NRI treatment, with preferential interest rates, because I had
permanently moved to India. Thus, there were also plans to file a case against
me on account of misinforming the corporation. Experts suggested I should file
for insolvency if I wanted to avoid going to prison. This I did in 1994. I
spent Rs. 15 lakh from my own pocket.
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Now, all that remains
of an entrepreneurial dream is a sealed chemical unit in Basti and a complex
legal tangle.
I was better off
working for the transnational in Germany. Power does not come out of the barrel
of a gun. A gun’s barrel comes of power, especially when the latter does not
exist.
QUESTIONS
1. Identify and analyse
the environmental factors in this case.
2. Who were all
responsible for this tragic end?
3. It is right on the
part of the government and promotional agencies to woo entrepreneurs by
promising facilities and incentives which they are not sure of being able to
provide?
4. Should there be
legislation to compensate entrepreneurs for the loss suffered due to the irresponsibility
of public agencies? What problems are likely to be solved and created by such
legislation?
5. What are the lessons
of this case for an entrepreneur and government and promotional agencies
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2
THE
COSTS OF DELAY
The public sector
Indian Oil Corporation (IOC), the major oil refining and marketing company
which was also the canalizing agency for oil imports and the only Indian
company I the Fortune 500, in terms of sales, planned to make a foray in to the
foreign market by acquiring a substantial stake in the Balal Oil field in Iran
of the Premier Oil. The project was estimated to have recoverable oil reserves
of about 11 million tonnes and IOC was supposed to get nearly four million
tonnes.
When IOC started
talking to the Iranian company for the acquisition in October 1998, oil prices
were at rock bottom ($ 11 per barrel) and most refining companies were closing
shop due to falling margins. Indeed, a number of good oil properties in the
Middle East were up for sale. Using this opportunity, several developing
countries ``made a killing by acquiring oil equities abroad.’’
IOC needed Government’s
permission to invest abroad. Application by Indian company for investing abroad
is to be scrutinized by a special committee represented by the Reserve Bank of
India and the finance and commerce ministries. By the time the government gave
the clearance for the acquisition in December 1999 (i.e., more than a year
after the application was made), the prices had bounced back to $24 per barrel.
And the Elf of France had virtually took away the deal from under IOC’s nose by
acquiring the Premier Oil.
The RBI, which gave IOC
the approval for $15 million investment, took more than a year for clearing the
deal because the structure for such investments were not in place, it was reported.
QUESTIONS
1. Discuss internal,
domestic and global environments of business revealed by this case.
2. Discuss whether it
is the domestic or global environment that hinders the globalization of Indian
business.
3. Even if Elf had not
acquired Premier Oil, what would have been the impact of the delay in the
clearance on IOC?
4. What would have been
the significance of the foreign acquisition to IOC?
5. What are the lessons
of this case?
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No:
3
NATURAL
THRUST
Balsara Hygiene
Products Ltd., which had some fairly successful household hygiene products
introduced in 1978 a toothpaste, Promise, with clove oil (which has been
traditionally regarded in India as an effective deterrent to tooth decay and
tooth ache) as a unique selling proposition. By 1986 Promise captured a market
share of 16 per cent and became the second largest selling toothpaste brand in
India. There was, however, an erosion of its market share later because of the
fighting back of the multinationals. Hindustan Lever’s Close-up gel appealed to
the consumers, particularly to the teens and young, very well and toppled
Promise form the second position.
Supported by the Export
Import Bank of India’s Export Marketing Finance (EMF) programme and development
assistance, Balsara entered the Malaysian market with Promise and another brand
of tooth paste, Miswak.
The emphasis on the
clove oil ingredient of the Promise evoked good response in Malaysia too. There
was good response to Miswak also in the Muslim dominated Malaysia. Its promotion
highlighted the fact that miswak (Latin Name : Salvadora Persica) was a plant
that had been used for centuries by as a tooth cleaning twig. It had reference
in Koran. Quoting from Faizal-E-Miswak, it was pointed out that prophet Mohammed
used ``miswak before sleeping at night and after awakening.’’ The religious
appeal in the promotion was reinforced by the findings of scientists all over
the world, including Arabic ones, of the antibacterial property of clove and
its ability to prevent tooth decay and gums.
Market intelligence
revealed that there was a growing preference in the advanced counties for
nature based products. Balsara tied up with Auromere Imports Inc. (AAII), Los Angeles.
An agency established by American followers of Aurobindo, an Indian philosopher
saint. Eight months of intensive R & D enabled Balsara to develop a tooth
paste containing 24 herbal ingredients that would satisfy the required
parameter. Auromere was voted as the No. 1 toothpaste in North Eastern USA in a
US Health magazine survey in 1991.
The product line was
extended by introducing several variants of Auromere. A saccharine free
toothpaste was introduced. It was found that mint and menthol were taboo for users
of homoeopathic medicines. So a product free of such mints was developed.
Auromere Fresh Mint for the young and Auromere Cina Mint containing a
combination of cinnamon and peppermint were also introduced. When the company
relaised that Auromere was not doing well in Germany because of the forming agent
used in the product, it introduced a chemical free variant of the products.
QUESTIONS
1. Explain the
environmental factors which Balsara used to its advantage.
2. What is the strength
of AAII to market ayurvedic toothpaste in USA?
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No:
4
THE
SWAP
The Economic Times, 20
October 2000, reported that Reliance Industries entered into a swap deal for
the export and import of 36 cargoes of naphtha over the next six months. Accordingly,
three cargoes of 50,000 tonnes each were to be exported every month from
Reliance Petroleum’s Jamnagar refinery and three cargoes of the same amount
were to be imported to the Reliance Industries’ Hazira facility. The deal was
done through Japanese traders Mitsubishi, Marubeni, ltochu, IdCmitsu and Shell.
The export was done at around Arabian Gulf prices plus $22.
Reliance, needs
petrochemical grade naphtha for its Hazira facility which is not being produced
at Jamnagar. Therefore, its cracker at Hazira gets petrochemical grade naphtha
from the international markets in return for Reliance Petroleum selling another
grade of naphtha from its Jamnagar refinery to the international oil trade.
If RIL imports naphtha
for Hazira petrochemical plant, the company does not have to pay the 24 per
cent sales tax, which it will have to pay on a local purchase, even if it is
from Reliance Petro. Besides Reliance Petro will also get a 10 per cent duty
drawback on its crude imports if it exports naphtha from the refinery at
Jamnagar.
The export of naphtha
with Japanese traders is being looked as a coup of Reliance as it gives the
company an entry into the large Japanese market.
Indian refineries have
a freight advantage over the Singapore market and can quote better prices.
QUESTIONS
1. Examine the internal
and external factors behind Reliance’s decision for the swap deal.
2. What environmental
changes could make swap deal unattractive in future?
3. Could there be any
strategic reason behind the decision to import and export naphtha?
4. Should Reliance
import and export naphtha even if it does not provide any profit advantage?
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No:
5
A
QUESTION OF ETHICS
TELCO opened bookings
for different models of its proud small car Indica in late 1998. The consumer
response was overwhelming. Most of the bookings were for the AC models, DLE and
DLX. The DLE model accounted for more than 70 per cent of the bookings.
Telco has planned to
commence delivery of the vehicles by early 1999. However, delivery schedules
for the AC models were upset because of some problems on the roll out front. According
to a report in The Economic Times dated 13 March 1999, Telco officials
attributed the delay to non-availability of air conditioning kits.
Subros Ltd. supplies AC
kits for the DLE version and Voltes is the vendor for the DLX version.
Incidentally, Subros is also the AC supplier to Maruti Udyog Ltd.
Telco officials alleged
that Subros was being pressured by the competitor to delay the supply of kits.
``If this continues, we will be forced to ask Voltas to supply kits for the DLE
version too,’’ a company official said.
QUESTIONS
1. Why did Telco land
itself in the problem (supply problem in respect of AC kits)?
2. If the allegation
about the supplier is right, discuss its implications for the supplier.
3. Evaluate the ethical
issues involved in the case. (Also consider the fact Maruti was 50 per cent
Government owned.)
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No:
6
DIFFERENT
FOR GAMBLE
Product and Gamble (P
& G), a global consumer products giant, ``stormed the Japanese market with
American products, American managers, American sales methods and strategies. The
result was disastrous until the company learnt how to adapt products and
marketing style to Japanese culture. P & G which entered the Japanese
market in 1973 lost money until 1987, but by 1991 it became its second largest
foreign market.’’
P & G acclaimed as
``the world’s most admired marketing machine’’, entered India, which has been
considered as one of the largest emerging markets, in 1985. It entered the Indian
detergent marketing the early nineties with the Ariel brand through P & G
India (in which it had a 51 percent holding which was raised 65 per cent in
January 1993, the remaining 35 per cent being hold by the public). P & G
established P & G Home products, a 100 per cent subsidiary later (1993) and
the Ariel was transferred to it. Besides soaps and detergents, P & G had or
introduced later product portfolios like shampoos (Pantene) medical products
(Viks range, Clearasil and Mediker) and personal products (Whisper feminine
hygiene products, pampers diapers and old spice range of men’s toiletries).
The Indian detergent
and personal care products market was dominated by Hindustan Lever Ltd. (HLL).
In some segments of the personal care products market the multinational Johnson
& Johnson has had a strong presence. Tata group’s Tomco, which had been in
the red for some time, was sold to Hindustan Lever Ltd. (HLL). HLL, a
subsidiary of P & G’s global competitor, has been in India for about a century.
The take over of Tomco by HLL further increased its market dominance. In the
low priced detergents segment Nirma has established a very strong presence.
Over the period of
about one and a half decades since its entry in India, P & G invested several
thousand crores. However, dissatisfied with its performance in India, it
decided to restructure its operations, which in several respects meant a
shrinking of activities – the manpower was drastically cut, and thousands of
stockists were terminated. P & G, however holds that, it will continue to
invest in India. According to Gary Cofer, the country manager, ``it takes time
to build a business category or brand in India. It is possibly an even more
demanding geography than others.’’
China, on the other hand,
with business worth several times than in India in less than 12 years, has
emerged as a highly promising market for P & G. when the Chinese market was
opened up, P & G was one of the first MNCS to enter. Prior to the
liberalisation, Chinese consumers had to content with shoddy products
manufactured by government companies. Per capita income of China is
substantially higher than India’s and the Chinese economy was growing faster
than the Indian. Further, the success of the single child concept in China means
higher disposable income.
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Further it is also
pointed out that for a global company like P & G, understanding Chinese
culture was far easier since the expat Chinese in the US was not very different
from those back home where as most Indian expats tended to adapt far more to
the cultural nuances of the immigrant country.
One of P & G’s big
in India was the compact technology premium detergent brand Ariel. After an
initial show, Ariel, however, failed to generate enough sales – consumers seem
to have gone by the per kilo cost than the cost per wash propagated by the
promotion. To start with, P & G had to import the expensive state-of-the-art
ingredients, which attracted heavy customs duties. The company estimated that
it would cost Rs. 60 per kilo for Ariel compared to Rs. 27 for Surf and Rs. 8
for Nirma. Because of the Rupee devaluation of the early 1990s, the test market
price of Rs. 35 for 500 gms was soon Rs. 41 by the time the product was
launched. HLL fought Ariel back with premium variants of Surf like Surf Excel.
It is pointed out that,
``in hindsight, even P & G managers privately admit that bringing in the
latest compact technology was a big blunder. In the eighties, P & G had
taken a huge beating in one of its most profitable markets, Japan, at the hands
of local company Kao. Knowing the Japanese consumer’s fondness for small
things, Kao weaved magic with its newfound compact technology. For a company
that prided itself on technology, the drubbing in Japan was particularly
painful. It was, therefore, decided that compacts would now be the lead brand
for the entire Asia-Pacific region. When P & G launched Ariel in India, it
hoped that the Indian consumer would devise the appropriate benchmarks to
evaluate Ariel. As compacts promised economy of sue, P & G hoped that
consumers would buy into the low-cost-per-wash story. But selling that story
through advertising was particularly difficult, especially sine Indian
consumers believed that the washing wasn’t over unless the bar had been used
for scrubbing. Even though Ariel was targeted at consumer with high disposable
income, who represented half the urban population, consumers simply baulked at
the outlay.
Thereafter, one thing
led to another. Ariel’s strategy of introducing variants was a smart move to
flank Lever at every price point by cleverly using the brand’s halo effect. And
by supporting the brand in mass media and retaining the share of voice. By
1996, it had become clear that Ariel’s equity as a high-performance detergent
had begun to take a beating. Its equity as a top-of-the-line detergent was
getting eroded….Nowhere in P & G’s history had a concept like Super Soaker been
used to gain volumes…. It was decided that Super Soaker would no longer be
supported, nor would Ariel bar be supported in media.
QUESTIONS
1. Discuss the reasons
for the initial failure of P & G in Japan.
2. Where did P & G
go wrong (if it did) in the evaluation of the Indian market and its strategy?
3. Discuss the reasons
for the difference in the performance of P & G in India and China.
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