Ongc Growth Strategy

ONGC GROWTH STRATEGY

The case describes the growth strategy and diversification plans of the Government owned Oil and Natural Gas Corporation Limited (ONGC), the largest oil exploration and production (E&P) company in India. ONGC has near monopoly in India's oil E&P industry producing nearly 90 percent of the country's crude oil and natural gas. Till the late 1990s, the company was mainly confined to upstream activities of E&P. In order to reduce risks inherent in confining to one activity and to achieve financial stability and steady growth, ONGC acquired a major equity stake in Mangalore Refinery and Petrochemicals Limited so as to enter the down stream activities of refining. With this, ONGC became the first integrated oil company in India. The case examines the benefits and drawbacks of oil E&P Company entering into refining and retailing businesses. The case also discusses the possible benefits and disadvantages of ONGC's plans in 2004 to enter insurance, power generation and shipping businesses as part of its diversification program.

Issues: » Examine the growth strategy of a public sector oil exploration and production company » Study the internal and external factors that contributed to the growth of ONGC

» Critically analyze the vertical integration strategy of ONGC by entering into refining and retailing businesses » Examine the latest diversification plans of ONGC to enter insurance, power generation and shipping businesses and identify synergies, if any, with its core businesses » Chalk out a future growth strategy for ONGC » Gain insights into the oil and energy industry in India

Introduction The Oil and Natural Gas Corporation Limited (ONGC) was the largest oil exploration and production (E&P) company in India. The company enjoyed a dominant position in the country's hydrocarbon sector with 84 per cent market share of crude oil & gas production. Around 57 per cent petroleum exploration licenses in India for over 588 thousand sq. km belonged to ONGC. The company was the first to achieve Rs 100 bn net profits in the Indian corporate history. ONGC's major products included petroleum, crude natural gas, liquefied petroleum gas (LPG), kerosene and petrochemical feedstock. For the fiscal year ended 2002-03, the company reported gross revenues of Rs 353.872 bn and net profit of Rs 105.293 bn. With market capitalization of US$ 15 bn, ONGC was ranked 260 in BusinessWeek's Global 1000 list of the world's top companies by market value, for 2003-04. Since the mid 1990s, ONGC had faced the problem of declining crude

oil and gas production. The company made efforts to consolidate its position in the business by acquiring foreign oil equity through its wholly owned subsidiary, ONGC Videsh Limited (OVL). OVL was formed to help ONGC secure a strong foothold in the international oil market. With the acquisition of Mangalore Refinery and Petrochemicals Limited (MRPL), ONGC became the first integrated oil company in India. \

With ONGC's core business showing signs of stagnation, the company chalked out a massive diversification plan to go into downstream activities such as LNG marketing, diesel, naphtha and kerosene. ONGC was also contemplating forward integration opportunities in gas, petrochemicals and the power sector. The company also announced its intentions of entering the insurance and shipping business in the next couple of years. However, ONGC's diversification plans received a major setback when the Government of India (GoI) announced that the company should stick to its core business rather than venturing into 'unrelated' areas.

Prior to independence, there were two companies in India involved in the exploration of oil - the Assam Oil Company in the North-Eastern region and the Attock Oil Company in the North-Western region. Both companies had meagre oil exploration outputs as major parts of India were deemed unfit for exploration of oil and gas resources. After independence, the GoI realized the importance of developing the oil and gas sector to achieve rapid industrialization. In the 1950s, private oil companies carried out exploration of hydrocarbon

resources in the country. However, a large portion of offshore regions remained largely unexplored. In the mid 1950s, the GoI decided to explore oil and natural gas resources in various regions of the country. This resulted in the formation of the Oil and Natural Gas Directorate at the end of 1955, as a subordinate office under the then Ministry of Natural Resources and Scientific Research. The department was constituted with a team of geoscientists from the Geological Survey of India. However, soon after the Directorate's formation, it became evident that it would not be possible for the new body to function efficiently due to limited financial and administrative powers. In August 1956, the Directorate was raised to the status of a Commission with enhanced powers; but it continued to be under GoI control. In October 1959, the body received further elevation, both in status and powers, with the Commission being converted into a statutory body by an act of Parliament. This act came to be known as the ONGC Act in 1959. According to the act, Oil and Natural Gas Commission's main functions were, "to plan, promote, organize and implement programmes for the development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it..." Industry experts felt that ONGC new strategy was essential. They felt that there was a pricing cycle for crude, (Refer Exhibit. I for world oil prices for three

decades) gas, refinery margin, marketing margin, petrochemical margin and that international prices operated on different cycles in each case. This meant that confining to one sector, whether upstream or downstream or petrochemicals would make any organization vulnerable to the ups and downs of a particular cycle. The integration of these activities would ensure profitable operation across a number of cycles and financial stability. ONGC acquired 297 mn shares of MRPL from the AVB group for Rs 2 per share in March 2003. The company pumped in Rs 6 bn by issuing fresh equity of MRPL, increasing its equity stake to 51 per cent. Later on, ONGC purchased 356 mn shares from institutional investors and increased its stake in MRPL to 71.5 per cent. This deal was worth about Rs 3.9 bn. The total amount invested by ONGC in MRPL was about Rs 10.494 bn... The Growth Plan ONGC tried to overcome the declining production of oil and natural gas by focusing on new domestic production enhancement programs, offshore exploration and technology upgradation. To improve productivity and financial performance, ONGC concentrated on human resources development and financial restructuring. For the fiscal year 2004-05, ONGC planned to spend approximately Rs 100 bn on capital expenditure relating to exploration and development of domestic oil and gas properties. As part of production enhancement, redevelopment of Bombay High oil wells was given top priority. This involved two projects called Bombay High North Redevelopment and Bombay High South Redevelopment, which were expected to cost around Rs 82 bn. The program

aimed to achieve an additional 76 mn tonnes of producible reserves of oil and gas. ONGC expanded its global operations through its subsidiary OVL, by making sizeable capital investments in Vietnam, Sakhalin (Russia) and Sudan... The Deregulation The GoI deregulated the Indian oil industry with effect from April 01, 2002, by doing away with APM. This meant that domestic oil companies could take independent decisions based on import parity and market forces in pricing petroleum products. It also meant that oil PSUs would lose state protection and would have to face the global competitive business environment. Industry experts felt that deregulation would give an edge to domestic PSUs in marketing their products due to their strong investment base, superior infrastructure and extended distribution network. They felt that dismantling APM would also result in increased profitability for oil companies. As expected, the dismantling of APM benefited ONGC significantly. For the fiscal year 2002-03, ONGC reported a 70 per cent jump in net profits to Rs. 105.293 bn as opposed to Rs. 61.979 bn in the previous year. ONGC's revenues increased from Rs. 225.142 bn in 200102 to Rs. 342.773 bn in 2002-03, an increase of 53.4 per cent... Future Plans In mid- 2004, ONGC was contemplating forward integration opportunities in gas, petrochemicals and the power sector. It announced plans to set up major power plants using natural gas at Dahej in Gujarat and another plant at Mangalore in Karnataka. An agreement was entered into with Gujarat Government for setting up a

Special Economic Zone (SEZ) for this purpose, including a 2,000 MW power plant based on re-gasified natural gas. In addition, another SEZ was planned in Kakinada, Andhra Pradesh, to establish a power plant and an LNG import terminal. Another 2,000 MW plant was planned adjacent to the company's subsidiary, MRPL, in Karnataka. However, ONGC did not plan to venture into transmission and distribution of electricity or power trading. As gas transportation was uneconomical, power plants were planned at gas fields and the power generated was proposed to be sold to grids or captive users. ONGC also planned to foray into areas like LNG marketing, diesel, naphtha and kerosene, which promised higher realizations...

Louis V Gerstner - The Man Who Turned IBM Around Abstract: The case examines in detail the way in which Louis V. Gerstner transformed one of the most admired companies in the US - IBM, from a loss-making one to a market leader. The case further examines the leadership qualities of Gerstner which contributed to this transformation. It also gives an account of Gerstner's past experiences, and how he learned from those experiences. The case details several measures taken by Gerstner to turn IBM around including customer orientation, reducing work force, decentralizing decision making, developing ebusiness strategies etc.

Issues: » Understand and appreciate the role of a leader in reviving the fortunes of a loss making company. n 1993, IBM, a global leader in the IT industry was in deep financial trouble. The company had reported a record net loss of $8.1 billion. Many analysts wrote off IBM as dead. However, eight years down the line in 2001, the company reported a net income of $7.7 billion (Refer Exhibit I). During the period 1993-2001, the share price of IBM shot up by nearly 800%. This was the period in which Louis V. Gerstner Jr. (Gerstner) headed IBM. Under the leadership of Gerstner, IBM made a remarkable comeback and proved its critics wrong. In doing so, IBM seemed to have made significant changes which had an impact on the entire information technology (IT) industry. It strategically positioned its server family to suit the needs of the emerging Enterprise Resource Planning (ERP) and e-commerce applications. IBM also changed its emphasis from being product centric to being customercentric in order to provide complete solutions to its clients. Gerstner played a major role in reviving the fortunes of IBM. Under Gerstner, the image of IBM was transformed from a company which primarily manufactured mainframes to a company which offered complete solutions in hardware, software, and other technologies. Gerstner brought about a radical change in the work culture of IBM. The turnaround was achieved by a series of well calculated and unconventional moves, which appeared unreasonable to many employees of IBM as well as industry analysts. According to analysts, Gerstner's style of functioning was quite different from that of his predecessors. He was a man of conviction and always followed his own instincts. He was seldom disturbed by what his critics said. He believed that his deeds spoke for himself. He wanted results and expected his employees to give the results at

any cost. He did not mince words when it came to expressing his views on their performance...

Introduction Contd... Gerstner never believed in setting long-term plans. Instead, he focused on immediate problems, and evolved strategies to solve them. He identified the needs of customers, and developed solutions to satisfy their needs. Gerstner watched the IT industry closely and carefully and was quick to foresee the trends which were likely to emerge in the future. He was among the few people who visualized that networking could transform the way people worked. While visualizing these changes was not exceptional, converting these visions into the potential opportunities was indeed exceptional...

Background Note Gerstner was born on March 01, 1942 in Minolta, New York, US. His father was a traffic manager at F&M Schaefer Corporation Brewery. Right from his childhood, his parents stressed the importance of education and discipline. Thus, they helped to a great extent in shaping up his attitude towards life. Gerstner graduated in engineering at Dartmouth3 in 1963. Two years later, he earned a business management degree from Harvard Business School. Fresh out of college, Gerstner joined the reputed management consultancy firm, McKinsey & Company in 1965, earning the distinction of being the youngest manager to be hired by the firm at that time. He soon became noted as a hard task master. Within four years of joining, he was promoted as a partner. He was among the selected few, who were offered partnership, before six years, which was the general practice. In 1973, he was promoted as senior partner in the firm and was responsible for handling major clients. Two years later i.e. in 1975, he was appointed as a director of the firm. He was the youngest director of the firm. During his thirteen years tenure at McKinsey, Gerstner had many accomplishments to his credit, prominent among them being devising the financial strategy practice for McKinsey, helping the transportation firm, Penn Central Railway4 to turnaround from the verge of bankruptcy and helping American Express5 to expand its business. He was also a member of the leadership committee at the firm. An important leadership lesson which Gerstner learned at McKinsey was to thoroughly focus on the problem on hand and create an environment which encouraged people to come out with their ideas, irrespective of their designation in the firm...

he Tenure at IBM When Gerstner joined IBM, he was sarcastically referred to as 'the guy from a cookie company. During that time, IBM was passing through the worst phase ever in its nearly eight decade long history. IBM recorded an operating loss of $325 mn in the first half of 1993, and the stock price dipped by about 15 percent within few months of Gerstner becoming CEO.

The financial situation of the company was deteriorating. The company posted a net loss of $2.86 billion in 1991, followed by a net loss of $4.97 billion in the financial year 1992...

The Early Initiatives After joining IBM, Gerstner's immediate task was to make the company profitable. He spent the initial period at the firm learning about the prevalent situation. Gerstner visited different IBM facilities all over the world and met customers, competitors, senior executives, financial analysts, and consultants to get a first hand account of the actual state of affairs. During these interactions, he learned that customers still appreciated IBM since it offered solutions for a host of their computer related needs under one roof...

The Turnaround Strategy In 1994, Gerstner made efforts to improve the reporting procedures across different units of the firm. This helped him to closely monitor the production schedules, cost schedules and sale of different products. He also started focusing on specific problems related to individual units. He realized that the personal computers division, which had good potential, was performing very poorly. The division was facing tough competition from companies such as Dell, HP and Compaq...

Emphasis on e-Business In 1997, Gerstner's network centered computing strategy evolved into a full-fledged 'e-business' strategy for IBM. This strategy sought to leverage on IBM's strengths in big servers, huge storage capability, bullet-proof databases, massive processing power and expert systems integration. IBM provided the complete package for ebusiness i.e. hardware, software, training, security, networking and services. Lotus Notes Groupware added another powerful feature to IBM's e-business solutions...

The Criticism Though Gerstner has been credited for his remarkable efforts to turn around IBM, the manner in which he went about this task drew lot of criticism. His early moves to keep IBM intact and change the corporate culture of IBM were severely criticized by the employees..