DETAILED NOTES ON EXTERNAL ENVIRONMENT

 

 

BOCP’s performance is especially sensitive to growth and investment in the Engineering and Fabrication, Chemical and Pharmaceutical, Petrochemical and Glass industries.

 

Engineering and Fabrication

Steel production and processing, a subset of ‘Engineering and Fabrication’ sector, has historically accounted for 60% to 70% of total sales of BOCP. Trends in production of domestic steel mills are summarized in the table below:

	Steel Products    (000 tonnes)
Year	Coke	Pig Iron	Billets
1994-1995	701.5	1044.7	343.6
1995-1996	685.6	1002.2	332.7
1996-1997	663.0	1068.6	378.5
1997-1998	667.7	1015.8	350.1
1998-1999	588.7	989.3	276.1

 

As the table shows steel production in domestic steel mills has actually declined from 1994 to 1999. The largest steel manufacturer is the public sector Pakistan Steel Mills that has its own oxygen production facility. BOCP caters to the smaller private-sector steel rolling mills such as Mughal Steel, Crescent Steel and Malik Steel. The steel mills require oxy-fuel to generate the high temperatures needed in the steel manufacturing process. Smuggling of steel products from Afghanistan and Iran has hurt domestic steel mills. Till a few months back 30 to 35 trucks, each loaded with thirty to forty tonnes of steel, were illegally bringing steel into the country. As a result annual steel smuggling had touched 0.4 million tonnes or more than a fifth of total steel manufactured in the country. However, now the government has intervened by sealing the borders across which smuggling was taking place. As a result there is a 90% reduction in the volume of products being smuggled into the country.

Another major use of oxygen in the Steel Industry is in ship breaking. Oxy-fuel is used for the high temperature flame that cuts through the scrap vessel. The ship breaking industry at Gadani has been a major customer of BOCP, accounting for approximately 45% of the company’s sales in the Southern Region. Throughout the 80’s and well into the 1990’s the ship breaking industry at Gadani flourished, becoming the second largest ship breaking site in the world. However, lately the industry has run into dire straits. Due to 45% duty on import of ships as well steadily depreciating rupee, the ship breakers are increasingly finding themselves unable to import scrap vessels. Ship breaking industries in India and Bangladesh have developed at the expense of Pakistan since these countries have low duties on ship imports. At its peak nearly hundred domestic and foreign companies, employing more than 20,000 workers operated at Gadani. At present though the number of companies stands reduced to 10 and employment is less than 2000 workers. The rapidly declining operations at Gadani can potentially harm BOCP’s future sales and profitability.

 

 

Chemical and Pharmaceutical

This sector makes intensive use of nitrogen. Nitrogen has two main uses in the Pharmaceutical Sector; it is a part of the chemical composition of many products that the industry produces and, it is also used as a ‘blanketing’ agent in the packaging phase. Blanketing involves replacing oxygen with nitrogen because nitrogen, due to its relative inertness, does not chemically react under ordinary conditions of temperature and pressure. Through blanketing nitrogen preserves and enhances the shelf life of pharmaceuticals.

Annual sales of pharmaceuticals in Pakistan presently stand at Rs. 50 billion. The domestic industry, consisting of more than 450 licensed manufacturing units including 23 multinationals, accounts for Rs. 40 billion of these sales whereas the remaining Rs. 10 billion worth of pharmaceuticals are imported in the country in finished form. The pharmaceutical market has been growing at a scintillating pace, averaging 20% to 25% from 1990 onwards.

Nitrogen is part of the chemical composition of all fertilizers such as Urea and DAP. Some of the largest customers of BOCP in the chemical sector include fertilizer manufacturers like Engro, FFC, FFC-Fordan and Pak-Saudi Fertilizer Company. Growth trends in fertilizer production are depicted in the table below:

	Fertilizers
Year	Urea	Super Phosphate	Ammonium Nitrate	Ammonium Sulphate	Nitro-Phosphate
1994-1995	3,000.2	147.0	313.9	79.6	285.0
1995-1996	3,260.1	103.7	383.6	83.7	336.5
1996-1997	3,258.7	0.1	330.2	80.9	350.3
1997-1998	3,284.2	0.0	316.3	–	293.2
1998-1999	3,521.7	21.6	338.8	–	285.0

 

The table shows that Urea is the most important fertilizer and its production in the country has been increasing at an ACGR of 4.1%. In the post 1998 period urea uptake has increased especially briskly due to greater credit availability to farmers. Growth in grain output to meet the needs of a growing population will continue to be an area of major focus for the government. As fertilizer output continues to expand, BOCP’s sales to this important customer segment will also receive a boost.

BOCP has been an indirect beneficiary of the development of the synthetic fiber industry in the country. ICI’s $ 450 million PTA plant, set up to indigenously meet PTA requirements of PSF manufacturers, was commissioned in FY ’98 and gave a massive boost to BOCP’s sales. In that year, largely due to liquid nitrogen and hydrogen sales to ICI, BOCP’s sales jumped by a whopping 23.5%.

 

Petrochemicals

Oxygen serves as an important heating fuel in crude oil refineries. It is also used heavily during maintenance shut downs of refineries when it acts as a cleaning agent. Pakistan Refinery Limited, National Refinery Limited and Attock Refinery Limited have long been large customers of BOCP in the Petrochemicals segment. However, the most significant development for BOCP in this industry has been the commissioning of PARCO at Mehmood Kot a few months ago. PARCO has an installed capacity equal to that of the other three refineries put together. PARCO has entered into a long-term gases purchase agreement with BOCP as its sole gases supplier. To meet the massive requirements of PARCO, BOCP has erected a dedicated Air Separation Unit at Mehmood Kot. PARCO’s gas purchases will have an effect on BOCP’s revenues similar to that which ICI had in FY ’98.

 

Glass Industry

Oxy-fuel combustion is used in all types of glassmaking, from float glass and container manufacturing, to lighting, fiberglass, TV, specialty glass and tableware. Oxygen is needed to create the high temperature environments where glass can be melted and then molded into various shapes. Important customers of BOCP in this segment include Philips Electrical Company and Khyber Lamps. A number of units in Pakistan are manufacturing glass ampules for pharmaceutical companies. They also form an important customer set in the glass market.

 

Food
This is an area that has not yet been tapped by BOCP but offers good promise for sales expansion. Of special significance is the beverage industry where carbon dioxide is in widespread use. Nitrogen can also have widespread applications in food preservation. Growth trends in the beverage industry are shown in the chart below.

As shown in the chart on the previous page beverage production has increased at an ACGR of 10.26% between 1994 and 1999. Growth has been especially rapid 1997 onwards with the industry averaging a growth rate of 26.4%.

 

Economic Situation

Macro economic variables such as GDP growth, inflation, interest rates, exchange rates, investment and per-capita disposable income, individually and in concert impact BOC Gases Pakistan.

 

GDP Growth: Historically, growth in gas industry has outstripped the GDP by a factor of two. The implication for BOCP of this is that in order to maintain its leadership position it must achieve a sales growth double that of the overall economy. The table below summarizes the growth performance of GDP and the manufacturing sector:

Year	GDP Growth %	Manufacturing Growth %
1993-1994	4.51	5.39
1994-1995	5.26	3.69
1995-1996	6.76	4.80
1996-1997	1.93	1.29
1997-1998	4.30	7.88
1998-1999	3.15	4.18

 

The marketing department at BOCP must develop accurate forecasts of the GDP and then prepare a detailed marketing plan that will enable the company to achieve its growth objectives.

 
Inflation. External purchases of materials and services amount to 40% of BOCP’s sales revenues. Inflation in the economy leads to an inevitable increase in the cost of these inputs to BOCP. Employee compensation, amounting to 13.5% of sales, is also closely linked to inflation. In recent past the general price level has been increasing moderately and as such does not pose an immediate serious threat to the company. Inflation in the economy, measured by the GDP deflator, is illustrated in the chart below:

 

Interest Rates: Interest constituted 15% of value added by BOCP in FY ’99. BOCP was able to take advantage of a falling interest rate environment by negotiating a decrease in the mark up it had been paying on borrowed funds. However, in the backdrop of SBP raising discount and repo rates, interest costs in the short-term future will register an increase. Consequently BOCP’s profits might get adversely affected. Interest rate changes can impact BOCP’s capital structure decisions.

 

Exchange Rates: At present BOCP makes 30% of its external purchases by value from offshore suppliers. The cost of such inputs is sensitive to adverse movement in the exchange rate of rupee. As the value of rupee continues to slide BOCP’s import bill will rise and assume a larger proportion of external purchases. The trend in the value of US dollar, Pakistan’s choice of currency for external payments, is depicted in the chart below:

Depreciating rupee can have a severe impact on certain important customer industries. The Ship-breaking industry at Gadani for instance, which accounts for 40% to 45% of BOCP’s sales in the Southern Region, has virtually reached a standstill in recent past. The reason has been more expensive foreign exchange that has rendered scrap vessels too costly for local ship-breakers to import.

Investment: Investors’ reluctance to undertake manufacturing and industrial projects is hampering the sales and earnings growth of BOCP. The low investor confidence is reflected in the critically low credit offtake ratio that is a dismal 15% at the moment. If the investor confidence is restored and industrial activity picks up BOCP can enjoy robust growth in revenues and income. The table below gives a snapshot of investment performance in Pakistan in recent years:

 

Period	Total Investment              As %age of GDP
1980s	18.6
1990-1995	22.2
1995-2000	17.1
1999-2000	15.0

 

Per-capita Real Income: Growth in real per-capita income is of considerable significance to BOCP. Since Pakistan is a low-income developing country any improvement in the real incomes of people will lead to increased spending on essential goods. These goods will include brick and concrete dwellings, healthcare services and pharmaceuticals, petrochemicals, fertilizers and consumer durables. Consequently industries catering to these diverse needs will expand. Since gases are used is almost all of these industries gas sales will also improve substantially. Steadily rising real income levels therefore represent an attractive business opportunity for BOCP.

 

 

Government, Political and Legal Forces

Large public-sector infrastructure projects such as Kalabagh and Bhasha Dams represent tremendous business opportunities for BOC Gases. If implemented these projects will require massive volumes of oxygen and welding equipment for metal welding and cutting. However political opposition to the Kalabagh Dam and delays in feasibility studies of Bhasha Dam have hitherto prevented these projects from getting off the ground.

From the point of view of BOCP there have been some positive developments in the regulatory and administrative environment in recent past. The Government’s recent drive to document the economy and bring in tax culture, if successful, will serve to neutralize some of the advantages that BOCP’s competitors have been enjoying. By underreporting sales and earnings these competitors have been evading taxes and have made inroads into the market for gases by competitively pricing their products. Once in the tax net they will have to charge GST to their customers and their present price advantage will be eroded.      The Government’s firm stance on ‘Bara Markets’ and its effectiveness in checking 90% of the inflow of smuggled steel products and other manufactured goods across the borders of Taftan, Iran and Afghanistan will also be beneficial to the gases industry. For the last several years the organized domestic steel industry was being affected by annual smuggling of 0.4 million tonnes of steel into Pakistan. As this quantity begins to be manufactured on the domestic capacity gas sales will improve. The importance of steel industry to BOCP can be gauged by the fact that from 60% to 70% of its sales are to steel manufacturers.

The government’s emphasis on replacing furnace oil with gas as the major industrial fuel in the country is also a significant development from BOCP perspective. As the new newly discovered gas fields at Bhit and Miano etc. are developed and the pipeline infrastructure expands many large welding projects will be undertaken.

Government’s role in improving the investment climate in the country remains critical. Industrial growth has been hampered due to frequent and inconsistent policy changes. Moreover, unethical practices by the tax collection machinery and other government departments have been a source of constant nuisance for the industry.

 

Technological Forces

Technological advances continue to present fresh opportunities for process optimization and organizational streamlining. In three critical areas technology is especially relevant to BOCP, Production Process, Logistics and Information Management. Cost of power is the single largest expense in the gas production process. Energy cost considerations led BOCP to shift production from the old plant at West Wharf to the technologically more advanced and efficient Air Separation Unit at Port Qasim. This switch has enabled BOCP to achieve a substantial decrease in its break-even point. In an industry where being the lowest cost producer is critical BOCP must always be willing to incorporate technological alternatives that will reduce its operating costs.

BOCP has benefited from implementing System Application Products (SAP) software packages. SAP has enabled BOCP to plan and manage its inbound and outbound logistics more efficiently. Through enhanced information management capabilities of SAP, relevant information is relayed to the concerned managers in a timely fashion. This has enabled BOCP to be more responsive to customers and to make more informed decisions.

 

Social, Cultural, Demographic and Environmental Forces

Other factors constant an increase in population indirectly increases the demand for BOCP’s products. As the 70 million strong Pakistanis who are below 18 years of age become independent, demand for housing and consequently steel will go up. A growing population will also demand more grain, more healthcare as well as consumer products. As a result BOCP’s sales to the diverse industries that manufacture these products will rise. The concentration of industries in and around cities in response to greater urbanization will mean that BOCP will increasingly have to target its marketing efforts to urban centers.

 

 

External Factor Evaluation

Key External Factors	Weight	Rating	Weighted Score
Opportunities
Rapid Growth in Food and Beverage Industry	0.20
Large Energy Sector Projects Such as the White Oil Pipeline for PARCO	0.25
Government’s Drive to Document the Economy	0.05
Large Public Sector Infrastructure Projects Such as Kalabagh Dam & Natural Gas Provision Drive	0.10
Threats
Low Investor Confidence Leading To Low Investment/GDP Ratio	0.15
Entrance of a Major International Competitor	0.05

 

Bibliography for ‘Notes on External Assessment’ and ‘Air Separation Process’

• “Engineering Industry in Pakistan”, December 10, 1998, Report No. 779, Industrial Research service.
• “Gadani Ship-breaking Industry in Straits” by Laila A. Ali, September 21^st 2000, Business Recorder (brecorder.com)
• “PS Sells Rs. 4.5 billion Products in July-September” by Sabihuddin Ghausi, October 19, 2000, DAWN.
• Table 3.8, Production of Selected Industrial Items, 1999-2000 Pakistan Economic Survey.
• Aamir Niazi, General Manager HR, BOC Gases Pakistan
• “Pharmaceutical Industry in Pakistan”, Advertising Supplement, Friday Dawn October 20, 2000.
• Zahid Farooqui, Regional Sales Manager, Industrial and Medical Gases Division, BOCP.
• Table 3.7, Production of Fertilizers, Vegetable Ghee, Sugar & Cement, 1999-2000 Pakistan Economic Survey.
• Asif Ali, Manager Planning & Special Gases, BOC Gases Pakistan
• Annual Report 1998, BOC Gases Pakistan
• Annual Report 1999, BOC Gases Pakistan
• Table 8.1, Annual Rate of Inflation, 1999-2000 Pakistan Economic Survey.
• Table 1.1, Growth Performance of Real Sector, 1999-2000 Pakistan Economic Survey
• Table 1.3, GDP/GNP Real Growth Rates, 1999-2000 Pakistan Economic Survey
• Table 1.2, Sectoral Shares in GDP, 1999-2000 Pakistan Economic Survey
• boc.com
• boc.com/gases/solution/metals/index.htm
• boc.com/gases/solution/medical
• boc.com/gases/solution/glass
• boc.com/gases/delivery/onsite/oxysup.htm
• boc.com/gases/delivery/onsite/nitrosup.htm
• boc.com/gases/solution/metals/iron/minimills/steelmaking.htm
• boc.com/gases/solution/metals/iron/minimills/pcombustion.htm
• boc.com/gases/air/cryo/ico.htm
• boc.com/gases/process/process.htm

 

 

 

INTERNAL ANALYSIS FOR GASES DIVISION

 

 

Strategic Management at BOC Pakistan

 

BOC Pakistan gets certain guidelines from the BOC group which help it in developing its mission and objectives. These guidelines are a result of consensus reached between various subsidiaries and the headquarters at a conference. The subsidiaries have considerable freedom in formulating their own objectives. Also the subsidiaries are well represented by their managers and corporate planning heads at the conference. The conference also serves as an information gathering stage whereby each subsidiary gets to know what the others in the Group are doing and how successfully they have implemented strategies. In several cases subsidiaries have drawn on the lessons learnt by others in the group and applied it successfully to their own areas.

The senior managers and the Managing Director formulate the mission at BOC Pakistan. The senior managers include all the business division heads as well as the General Managers of the different functional areas namely Finance, Engineering and Safety, Operations, Human Resources, Corporate Planning, Commercial affairs and Information Technology. The lower level workers are not involved in the formulation of the mission statement. Their participation is not sought, hence the sense of ownership that the mission formulation process is supposed to develop does not take place. Top management feels that the low-level worker is more preoccupied with day to day operations and therefore feels that the top management can adequately formulate the mission statement. The mission is communicated however through a printed booklet which is distributed among the workers. Therefore the process of communicating the mission is conducted by the organization but the process of worker participation at all levels is not carried out in the spirit that it should be carried out.

 

Strategy Formulation:

The Field Sales Assistant is continuously scanning the environment. He detects opportunities and passes on to the information to his immediate superior. By this process it reaches the CEO who is facilitated by the management team in carrying out his strategy.

The management team critiques, evaluates the strategy and enables the information to travel up and down so that all input from all levels can be incorporated. In this sense strategy formulation is participative.

The diagram below shows the factors by which strategy is determined:

 

 

The Performance on Key Performance indicators is evaluated on a quarterly basis. If there is a shortfall in the previous period, it must be incorporated in the next period’s forecast and the company must achieve it in the next year.. One important aspect of strategy evaluation is that with the implementation of SAP, systematic information is available which is used by both corporate planning and divisions to evaluate performance.

Objectives are financial in nature but the company also focuses on setting objectives, which are qualitative in nature such as objectives concerned with preserving the environment or with providing the workers with a good remuneration package. Long-term objectives are set Corporate Planning and other divisional heads and are for a period of 3 to 5 years.

 

Formulation of Annual Plans:

In the case of annual plans, all the business divisions keeping external factors in mind prepare the sales forecast. The most significant factors that are kept in mind are the overall GDP growth rate, manufacturing growth rate and the rate of inflation. Also an additional issue is new growth in sectors important to BOC Pakistan which has arisen due to new foreign investment.

One aspect of developing the annual plan is that the Finance department plays a very significant role in consolidating the forecasts.  According to the Finance department even if business divisions make forecasts they are subject to a thorough scrutiny by the Finance department and unless and until they do not provide justifications for their forecasts the forecasts are not consolidated and sent to the Board of Directors for approval. According to the divisional heads however they feel that Finance is just a consolidator and that making forecasts and achieving them is still solely the divisions responsibility. Therefore they feel that there is no need for the divisions to justify their forecasts since they are the ones most equipped to handle their market, not finance.

Also once the Board of Directors has approved the annual plan forecasts it is sent to the regional headoffice in Singapore, which then consolidates the plans of all subsidiaries and then sends it to the main headoffice for approval. It is a rather long-winded process and conditions can change drastically by the time approval is sought by the Headoffice.

 

Value Chain for the Division:

 

Inbound logistics: The main raw material air requires other enabling materials like chemicals, caustic soda, oils and lubricants. An extensive network of suppliers numbering 130 in number supplies these enabling materials.   There is a centralized purchasing department that purchases raw materials for all the divisions in the company. In order to maintain low costs there are storage facilities for the raw materials that are located near the plants at Port Qasim, Taxila and Mehmood Kot etc.  Storage facilities are strategically located and therefore the only transportation costs are those which involve carrying the raw materials from the suppliers to the factory storage facilities. Storage reports are sent to Manager Engineering and operations

 

Operations: Total production of gases in 1999 was 67.132 million cubic meters whereas Bawany Air Products produced 2.391 million cubic meters.[1]  The process of production is continuous and comprises of air separation units. The basic raw material is air to which other enabling materials are added. The enabling materials are chemicals, caustic soda, oil and lubricants. For the plants that are not automated quality checks are made once every two hours whereas at the Port Qasim plant quality control is computerized. The products are liquid nitrogen, oxygen, hydrogen and dissolved acetylene.

 

Outbound Logistics:

Gases are supplied by cylinders dispatched by vehicles, or by customers coming to purchase the cylinders from the factory outlet or through the Direct Pipeline System. The Direct Pipeline System(DPS) are only used for those customers which are located near the plants. Key companies utilizing this facility are Gadani Shipyard and ICI’s PTA plant at Port Qasim.

 

Marketing and Sales:

The marketing share of Gases for BOC Pakistan nationally is 65% with Bawany and Fine Gases constituting 35% of the market. The southern geographic region in Gases was initially not considered so profitable because of its size since it accounted for 40% of the market size and the North/West region accounts for 60% of the market size. However today it accounts for 80% of the market share of gases in the South with 15% coming from Bawany and 5% coming from other small plants. Despite its size it is contributing more in terms of market share reflecting more aggressive marketing practices in the South as compared to the North.

There is no advertising and sales promotions involved in the marketing of gases. Marketing is more direct in nature with the sales force calling directly on the customer or the customer calling on the company for cylinders. It is the field sales assistants who through their interaction with the market determine new firms being set up and which need supplies of gases.This information is then passed onto the Regional Sales Managers and the General Managers who then prepare presentations to introduce the company and its products. Every level of the sales force is evaluating opportunities in the market but in the gases business the Regional Sales Manager has responsibility for conducting research to determine opportunities. Once an opportunity has been determined then a representative from BOC Gases headquarters would come over and evaluate or work with the local subsidiaries. This is however not so frequent and every business division in a subsidiary has flexibility in operations.

As far as the customer base is concerned 95% of the customers contribute to the profitability of the company by remaining loyal to BOC Gases. These mostly include those customers who purchase gases in bulk. The 5% are the brand switching lot which include small level steel rolling firms.

 

Customer Service: There is a department of customer service and distribution that provides technical training to customers in setting up central depots on site. Training is provided continuously and is not provided by competitors. Initially the company undertook three independent three party surveys to gauge consumer evaluations of the company’s operations. The survey stated that the company especially the Gases Business division lacked customer focus. The nature of complaints has bordered on issues such as late delivery of gases, quality of gases causing problems in the production process of customers and lack of communication and responsiveness. The focus of the gas division now is handling customer complaints within 24 hours. This involves even the line mangers getting involved with the customer issues at hand and trying to resolve them. In several cases an ability to handle complaints has led to the development of long term relationships with customers with BOC becoming the preferred supplier.

 

Human Resource Management: A three-month orientation program offered to every new employee inducted aims to provide a broader perspective of the organization. This helps to eliminate to an extent the narrow functional view that employees may develop if oriented only about the department or division that they are hired into.  Another important function being offered by the Human Resources Department is that the head of Human resources is accompanying General Managers of Business Divisions on their business development meetings to get an overview of the business they are engaged in so as to hire people with the requisite skills. The Learning and Development program  is also being offered by HR in coordination with the divisional heads.  This program is only three months old and before this program there was virtually no training given to the people in Gases.

 

Procurement:

Raw materials are procured from an established network of suppliers numbering 130 in number. 70% of the suppliers are local in number whereas 30% are foreign in number. Even though the firm is not into just in time systems supplier relationships are strong and reliable. As far as major capital expenditures are concerned all such decisions are initiated and undertaken by the department of corporate planning which does strategic planning for the company as a whole. Even the decision to build the highly automated plant at Port Qasim was taken by Corporate Planning.

 

Finance:

The finance function is centralized and provides support to gases, healthcare and welding. It employs 30 people with Chartered Accountants and Management Accountants dominating the employee composition. As such there are no MBA’s in the Finance function making it more specialized than multi-dimensional in approach. The Finance function has three sections namely Financial Accounting, Management Accounting and Treasury operations. The people in the respective sections have the advantage of years of experience so the quality of employees in Finance is considerably good. As far as budgeting procedures are concerned the Finance department gets some guidelines from the corporate headquarters of the BOC group but within these parameters it has flexibility to set its own limits. The review of budgets for the divisions as well as support functions is done continuously. Actual reporting is done monthly. There is a quarterly reforecast whereby previous forecasts are adjusted for changed conditions both internally and externally. A number of executive meetings are also held whereby issues relating to target achievement and budgetary allocations are discussed.

 

Governmental and Legal relations: There is a department of Commercial Affairs, which deals with sales tax issues, and other regulation passed by the government. However the utility of this support function is low because it is mainly concerned with ensuring proper documentation and sales tax refunds. It does not play an active role in lobbying to the government and is often unable to anticipate in advance the impact government regulation can have on business affairs.

 

Information technology:

There is a centralized Information technology Department for the company as a whole, which has implemented three modules of SAP namely those dealing with Finance and Control, Materials Management and Sales and Distribution. SAP has been very beneficial in terms of the Gases business since all sorts of information is available to manage inventory, answer customer queries, generate reports, and find out how many complaints have been answered promptly. The SAP system has passwords for all the business divisions and is relatively user friendly. Most of the employees have been relieved since SAP was installed since they find they can operate with relative ease. Before SAP was installed the IT department conducted training workshops to tell the employees the need for change and also provide relevant skills for operating the system.  Although the system has built in check systems IT should change passwords frequently as they have not been changed since the system was installed in May 1998.  A very comprehensive system of archives is in place with historical information about the company well organized. The Gas Division contributes to providing information for the creation and maintenance of the database of information.

 

Technology Development:

Research and development is important for the Gases Division. The field sales force does market research and as far as introducing new technology is concerned it is a decision by corporate planning. For new technology BOC Gases Pakistan looks to its global competitors as well as other subsidiaries in the group to ascertain best operating practices as well as appropriate technology requirements. At a conference held whereby the heads of the different subsidiaries converge to discuss the mission and overall corporate objectives success stories are traded and this provides feedback to subsidiaries, which they can take home, and implement. As far as technology development is concerned the Gases business in Pakistan is not working on any project in collaboration with either customers or competitors.

 

Management:

The Gases Business Division does participate in the setting of the subsidiary’s mission statement but the functional areas within each business division do not have a mission statement of their own.  For example the marketing and sales arm of Gases does not have a mission statement of its own. The Regional Sales Managers and the General Manager for the division conduct the SWOT for the Gases division. The lowest level worker does not contribute to setting the mission, as he should according to the essence of strategic management. The mission is communicated through booklets to all workers. When setting objectives and goals for BOC Gases Pakistan as a whole all the General Managers of the support functions and the General managers of the Divisions participate in the process. The Gases Business Division has a well-organized hierarchy of command. The Gases business is divided into territories geographically for marketing purposes as well as production purposes so that each region can be managed to its maximum efficiency. Also the number of people employed for each activity are done keeping in mind the size of the market having 2 market development officers for the Northwest region and one for the Southern region since the South accounts for 40% of the market size. Every employee has just one supervisor to report to so there is no confusion as far as reporting is concerned. All sections within a business division are well informed of the overall strategy being followed.

 

Internal Factor Evaluation Matrix for the Gases Business Division of BOC Gases Pakistan

Critical success factors identified are:

• Purity of the Gases supplied is crucial to the customer’s process of production.
• Cost is an important factor in distribution of gases hence development of an effective logistics system can create a competitive advantage.
• Stockout of raw material enabling production of finished gases can paralyze the production process and entail penalties from customers if finished goods are not delivered on time.
• Market research is crucial for determining market development opportunities.
• Customer focus is important since majority of customers buy in bulk and the loss of anyone customer can have a drastic impact on profitability.
• The company must also be sensitive to the needs of the customers who buy less amounts of gases since these are most vulnerable to price undercutting by competitors.
• Financial profitability is the key to providing quality products and resisting advances from competitors.
• A well integrated computer network is required so that each manager is well aware of what is happening in different functions and can be more proactive to changing conditions.
• Research and Development is required to develop improved production systems for gas production.
• Automated production systems will enhance the quality of products and reduce labor costs. Productivity is the key to achieving cost leadership.
• Need for people who understand all aspects of the Gases business from production to marketing to finance to corporate planning i.e. more multi-functional people required.

Key Internal Factors

Strengths:	Weights	Ratings	WS
Purity of gases	0.1	4	0.4
Good storage facilities	0.1	4	0.4
Distribution network	0.1	4	0.4
Implementation of SAP	0.06	3	0.18
Customer complaints handled promptly	0.1	3	0.3
Credit collection policies	0.08	4	0.32
Strong loyal customer base	0.11	4	0.44
Weaknesses:
No separate R& D Department	0.05	1	0.05
Problems in the strategic management process	0.13	1	0.13
No continuous training program to enhance ITcapability	0.055	1	0.055
All plants except Port Qasim are not highly automated	0.06	1	0.06
Need to develop people with cross-functional skills	0.055	2	0.11
Total	1.00		2.845

 

 

The Gases Business division is strong internally as indicated by the IFE score of 2.845

Justification for Ratings assigned:

 

For Strengths:

• Due to a highly automated plant the firm has managed to achieve purity levels of 99.99% hence the rating of 4 has been assigned.
• The firm has storage facilities all over the country hence it can meet queries within 24 hours, also it is the sole provider of the Direct Pipeline system of Gases in Pakistan hence storage and distribution both get a rating of 4.
• The implementation of SAP had increased productivity tremendously but the full potential of the benefit has yet to be realized hence a rating of 3.
• Customer focus has now become a priority with BOC Gases. Initially it was not so, infact responsiveness to customers was very low. After 3 surveys that the division conducted it was able to improve customer responsiveness. As far as customer queries are concerned they are now handled within 24 hours. There are other areas of customer concern that the division is working on so for now the rating of 3 should suffice.
• Credit collection policies gets a rating of 4 because the division was able to reduce Day Sales Outstanding to 13 days as compared to the Group’s average of 23 days. This achievement initself enabled BOC Pakistan to qualify as #1 in financial terms in the BOC group.
• 95% of the customers are loyal hence the rating Gases gets on this dimension is 4.

 

Weaknesses:

• The company has no research and development department and is not inclined towards technology development which it should be if it wants to maintain market share hence a rating of 1.
• Problems in the strategic management process crop up since not all levels of the division are involved in the formulating the vision. Also gases does not have a separate mission statement, since there is just one mission statement that all divisions conform to, hence the rating 1.
• There is a need to develop a variety of skills in the people employed so that all aspects of the business can be understood. However the Learning and Development program implemented three months ago will help to achieve this hence for now it’s a minor weakness and the rating 2.
• There is a serious need to develop IT capabilities so as to foster innovation hence the rating 1
• Port Qasim plant is the only automated plant, all other plants do not have state of the art technology, hence the company could face production problems in the future. Also inefficient and old equipment add to costs hence the rating 1.

 

External Factor Evaluation Matrix:

Key Opportunities	Weights	Rating	WS
Several upcoming projects in market sectors	0.15	3	0.45
Documentation of the economy	0.05	3	0.15
Growth of the petrochemicals sector	0.15	4	0.60
Key Threats
Gadani Shipyard facing difficulties	0.4	2	0.8
Price undercutting by competitors	0.09	2	0.18
Decline in Manufacturing sector	0.16	2	0.32
Total	1.00		2.50

 

The Gases Division is above average on its performance on the external dimension.

Justifications for ratings:

 

Opportunities:

• Upcoming projects that require liquid nitrogen and liquid oxygen were anticipated by the gases division and it is already contracted to provide supply schemes to such projects thereby justifying a rating of 3.These also include projects in the food sector whereby very recently the company has contracted to supply a substantial amount of gases to a food manufacturer.
• The documentation drive in the country will place pressure on some of BOC’s unscrupulous competitors who operate small plants and have managed to undercut BOC by providing products at lower prices. With the entire economy being documented they too will be forced to document themselves and hence their prices will be fully reflective of costs. BOC already has a well-documented system whose effectiveness has been enhanced with the implementation of SAP hence the rating of 4.
• The petrochemicals sector has been growing at an unprecedented rate. Anticipating this demand the Gases division has ensured that it has large supplies of nitrogen available and has also managed to tap this lucrative sector by making sure that the top players in this industry see BOC Gases as the preferred vendor. Hence a rating of 4 would suffice

 

Threats:

• Gadani Shipyard contributes 40-45% of revenues. Due to the depreciating value of the rupee and a 40% duty structure the ship breaking industry is in dire straits hence this line of business is bound to affect profitability in a negative manner.
• BOC has decided that 35% of the losses resulting from the loss in revenues from this sector will be met through capitalising on other sectors like process industries and the merchant market. Hence this suffices a rating of 2 since they are responding but did not anticipate the development in advance.
• A decline in manufacturing would be met by increasing marketing efforts on other market sectors hence a rating of 2.
• Once again they plan to counter competitor moves by more aggressive direct marketing, hence a score of 2. In the case of all three threats they have developed contingency plans.

 

TOWS

 

 

	Strengths – S Quality Products Good Storage Facilities Unique distribution network Customer responsiveness Good credit collection policies Loyal customer base	Weaknesses – W No separate R&D dept. Problems in strategic management Lack of continuous training for IT Only one automated plant Lack of variety of skills in personnel
Opportunities – O Several upcoming industrial projects Documentation of the economy Growth prospects in the petrochemical sector	SO Strategies Use customer responsiveness to offer customized solutions for the upcoming industrial projects. (S4, O1) Use the unique distribution network to capture more players in the petrochemical sector i.e. install more DPS for the clients. (S3, O3)	WO Strategies Enhance R & D capabilities by working as partners with customers on several projects thereby gaining more insight in product development opportunities. (W1, O1) Enhance quality of HR by encouraging BOC employees to work with customers. (W5, O1)
Threats – T Gadani shipyard faces possibility of shut down Price undercutting by the competitors Decline in growth of large scale manufacturing	ST Strategies Collaborate with the association of shipbuilders to counter the crisis being faced by the shipbreaking industry. (S6, T1) Work with quality conscious customers to lobby for industry wide quality standards to counter price undercutting by low quality competitors (S6, T2)	WT Strategies

 

Liquid oxygen and liquid nitrogen are stars and compressed oxygen is a question mark. Liquid oxygen has a market share of 80% and the share of liquid nitrogen is 100%. The share of compressed oxygen is 15%. However the industry sales growth for liquid oxygen is 7.5%, for nitrogen it is 3 to 4% and for compressed oxygen it is very erratic.

 

 

Financial Analysis:

 

Comparison with competitors

Sales Growth	BOC Gases	Bawany Air Products
1996-97	2.13%	4%
1997-98	32.21%	-11%
1998-99	16.08%	12%

 

BOC Gases is clearly leading as far as sales growth is concerned

 

Cost of Sales growth	BOC Gases	Bawany Air Products
1996-97	3.31%	6%
1997-98	36.02%	-11%
1998-99	8.04%	12%

 

BOC has managed to keep its cost of sales low despite turning over high volumes as indicated by the relatively low growth in cost of sales except for the year 1997-98.

Operating  Profit Growth	BOC Gases	Bawany Air products
1996-97	-3.19%	-4%
1997-98	29.6%	-65%
1998-99	28.64%	35%

 

Except for the year 1996-97 BOC Gases has performed better than Bawany

 

 

Net Profit Margin	BOC Gases	Bawany Air Products
1996	28.85%	22%
1997	34.34%	24%
1998	30.87%	15%
1999	25.09%	6%

 

Boc Gases is doing better than its competitors even as far as the net profit margin is concerned.

INTERNAL ANALYSIS FOR HEALTH CARE DIVISION

 

The BOC Health Care operates in three regions namely:

North _ This division includes the areas of Multan, Faisalabad, Lahore and Gujranwala

West  _ This includes Peshawar, Rawalpindi, Naushera , Jhelum and Taxilla.

South _ This includes Karachi, Hyderabad, Sukkur and Quetta.

 

In all the regions there are a sales staff, installation team and a support staff.

 

Generic Strategy

 

The BOC Health Care follows a differentiation strategy for all the product categories. This division of the company is mainly involved in the marketing and selling of different products. The superior quality products and the longstanding reputation in the industry enable the company to charge a premium price for all its products. On an average, the prices are about 8-10% higher in all the product categories.

 

Products

 

The different product categories of Health Care Division are:

 

• Medical Gases
• Medical Equipments
• Medical Pipeline System

 

The medical gases generate about 65% of the revenues for the division and the rest 35% are contributed by medial equipments and pipeline system.

 

• Medical Gases

 

The medical gases include three products:

• Medical oxygen
• Nitrous oxide
• Entonox

 

Medical oxygen The medical oxygen is sold in compressed form and in liquefied form. In compressed form it is sold through the cylinders and in liquefied form it is sold through the tankers and vacuum insulated pipes which are installed at the customers’ premises. BOC has a market share of about 80% for the medical oxygen nationally.

 

 

Nitrous oxide It serves as an analgesic and is sold in cylinders. BOC has a market share of about 82% nationally for nitrous oxide.

 

Entonox It also serves as an analgesic. Entonox is prepared by mixing 50% oxygen and 50% nitrous oxide. This gas is also sold only in cylinders. At present Entonox has a negligible share.

 

 

• Medical Equipments

 

BOC represents different companies in Pakistan. It imports medical equipments from these companies and sell them in the local market. The different companies and their products represented by BOC in Pakistan are:

 

Hewlett Packard

Monitors (for ICU, Operation Theatres & Transport)

ECG/Defibs/Fetal Monitors

Ultrasound Machine (Cardiac only)

 

Mallinckrodt

ICU ventilators and some sleep therapy equipments

 

Datex Ohmeda

Anaesthetic Machines/System and Infant care Systems

 

Other Companies

Suction machines, NIBP machines, Entonox cylinders, regulators and other spare parts.

 

• Medical Pipeline System

 

BOC in Pakistan represent the global giant Hill Rom. It imports the gas delivery system and OT lights from the company and sells in the market.

 

All the above mentioned products of the company can together provide a ‘Total Solution” for the medical units. When a new project starts the installation team of the company assists the medical unit in the installation of the pipeline systems throughout the hospital. Then all the medical equipments can be provided by the company. And once the medical unit starts its operations the medical gases are provided to the medical unit. Thus the company has a product for its customers for every stage. At present BOC is the only company, which can offer such a wide range of products for the hospitals and medical centers.

 

 

 

VALUE CHAIN ANALYSIS

 

 

PRIMARY ACTIVITIES

 

Inbound Logistics

 

The inventory control and ordering is the responsibility of the Inventory Staff Comptroller. All the inventory is ordered after 3-4 months.  The inventory mainly consists of:

 

• Cylinders for medical gases
• Medical equipments, machines and spare parts for medical pipeline system.

 

The gas cylinders and machines and equipments for medical pipeline system are stored in the warehouse at West Wharf. BOC has two separate warehouses for storing the medical equipments.  One in Karachi, where most of the saleable items and all the spare parts are stored and the other in Lahore, where only the required quantities are stored.

 

All the cylinders are obtained from a supplier in Sweden. The cylinders are prepared according to certain specification and are approved by the standards of the United States Pharmacopoeia. The medical equipments and gas delivery systems are imported from their respective companies, thus ensuring superior quality.

 

The only raw material required is ammonium nitrate for the preparation of nitrous oxide. It is purchased locally from a Multan-based company Pak Arab Filters. In case of unavailability from the local source, ammonium nitrate is then imported from Sweden. The recent practice is to maintain inventory level for Ammonium Nitrate for 3 months.

 

Operations

 

The operation of Health Care Division includes :

 

• Preparation of Nitrous oxide
• Marketing and selling the products of all the three categories and providing all the related services and assistance in installation of the equipments.

 

Nitrous oxide is prepared in the factory and filled in the containers demanded by the customer.  Besides this the division markets medical oxygen, and medical equipments and pipeline systems. For that purpose the Sales staff and the Installation team work together to determine the needs of the customers, provide them information about the

 

 

different products and help them in installation and then regular maintenance and repairs of equipment.

 

Outbound Logistics

 

The commercial department receives order from the customers. Before processing the order the company ensures that the customer has a good reputation and image in the market and shall be able to fulfill all the legal obligations.

 

The new customers who want to buy the cylinders (along with gases) can purchase them from the company. These empty cylinders are then transported from West Wharf to the Port Qasim plant where they are filled with gases and sent to the customers. The customers buy this equipment once and then send it to the company for refills. Most of the existing customers have their own cylinders, tankers and vacuum insulated equipment.

 

The medical equipment and gas delivery systems are delivered to the customers through different modes of transportation, depending on the size and nature of equipment.

 

The company has 14 offices throughout Pakistan to ensure quick and fast delivery of products to the customers.

 

Marketing & Sales

 

The division has a single sales staff for marketing and selling the products of all the three categories. The sales staff of the Health Care Division ensures that each product is defined and the right product is delivered to the customer. The superior quality of the products has enabled the company to maintain a considerable market share in all the three categories. The market share of Health Care in different product categories at present is:

 

• Gases sector 80%,
• Medical equipment sector 35-40%
• Medical delivery systems sector 65%

 

Besides superior quality another reason for a large market share in the medical gases is the absence of competition in that category. There is only one major competitor (Bawany Air Product) in Karachi and one major competitor (Fine Gases) in Lahore in this category. Bawany Air Product, however has a very low market share and Fine Gases although has comparable products is in Lahore only at present. There are about 350 active customers for gases. Out of these 350 customers, there are 4 major dealers and the rest are direct customers. The dealers have their own large networks of sub-dealers. The reasons customers purchase from these dealers and sub-dealers are:

 

 

• Firstly the quantity required by the customers is small.
• Secondly, BOC Health Care Division deals on cash basis only. Therefore the customers who want to buy on credit can purchase from these dealers.

 

The direct customers include government and private hospitals, clinics, medical centers and institutions like Edhi, Ansar Burney Welfare Trust etc.

 

The medical equipment and gas delivery systems are mainly marketed through personal selling by the sales force. Besides this the division participates in the seminars and exhibitions held in different cities. The parent companies also assist the division in marketing the products by setting up their stalls in these exhibitions and their technical and sales teams marketing their respective products. These global companies also advertise their products in specialized medical journals so that customer is well acquainted with their products. This is a kind of promotion for BOC as they are the sole company representing these large giants in Pakistan.

 

All the sales are made on cash basis except for a few big customers who are allowed secured credit subject to a credit ceiling and a specified number of days.

 

In order to maintain the market share the division gets the information from its sales force. Also the company gets the research conducted by the professional firm once a year to remain updated on the information about the new developments taking place, the customers’ choice and preference and to remain aware of the actions of the competitors in every category.

 

Customer Service

 

The technical staff of the Health Care Division provides all the installation and other related services to their customers. The after sales services provided by the technical staff is better than many of its competitors and has enabled the company to substantially increase the number of its customers. The division handles all the customer complaints related to repair and maintenance.

 

In order to get the valuable feedback from the customers, a proper research is conducted through the professional agency once a year.

 

 

SUPPORT ACTIVITIES

 

Human Resource Management

There are about 19 people working under the Regional Sales Manager (South)[2]. This includes:

• Sales staff
• Installation team
• Support staff

 

The hiring, recruitment and selection functions for the division are performed by the Human Resource department. However, the division may sometimes recommend certain candidates especially incase of hiring the technical staff for the division. Whenever an employee is hired, he is made to go through an intensive training program. The purpose is to familiarize him with all the aspects of different product categories and different products, as there is only a single sales staff and installation staff responsible for marketing and installing all the products. The training program for the existing employees is designed by the HR department on the basis of as and when required. In BOC every employee is required to design his performance contract at the beginning of each year. In this contract the employee sets the targets that he wants to achieve. This is then approved by the Regional Sales Manager. At the end of the year his performance is evaluated by a standard called Key Performance Indicator, designed by the company. On the basis of this evaluation, the employee is rewarded through the performance bonuses. Thus the employees only get their salaries and the performance bonuses (depending on the extent of targets they have achieved). Besides this no other incentive or motivation is given to the employees.

 

 

Technology Development

 

The division depends upon the companies whose product it represents to initiate a change. Although the BOC Health Care division itself does not perform any kind of research for technological development, but due to rapid technological advancements the sales staff and the installation team remain updated on the latest developments.

 

Procurement

 

The function of procurement is performed jointly by the commercial department and the division. BOC imports  cylinders from Sweden. The company ensures that these cylinders are prepared according to the specifications of United States Pharmacopoeia and a certain quality and standard is maintained.

 

 

 

Medical oxygen is manufactured by separating oxygen from the air through various machines and equipment and no other raw material is required. The raw material required for nitrous oxide is ammonium nitrate. Ammonium Nitrate is purchased locally from a Multan-based company named Pak-Arab Filters. In case if the demand is not met by the local company, then it is imported from Sweden. The inventory level maintained for ammonium nitrate is for about 3 months. The reason is that it takes about three months to receive the imported ammonium nitrate . Therefore in case the local source dries up, it will take three months to receive this chemical from Sweden. Entonox is a mixture a mixture of oxygen and nitrous oxide and therefore the raw material required is obtained from the company itself.

 

In case of medical equipment and pipeline delivery system, they are imported from the parent company or their authorized vendors and stored in the warehouses.

 

 

Firm Infrastructure

 

Finance: The first budget for the company is forecasted 15 months earlier. The budget is prepared by the joint efforts of the support and sales staff of the division and the finance department. Then after every quarter the budgets are revised and readjusted according to the changes in the environment and keeping in view the performance of their own company. Besides forecasting of budget, the finance and accounting helps the division in dealing with banks and opening LCs.

 

Governmental Relations: This department handles the governmental and legal issues for the division. These issues mainly include issues of sales tax, tariff structures and duties.

 

Information Systems: BOC has recently installed the SAP system which is an integrated software. At present the division is using its three modules namely:

 

• Sales & Distribution
• Materials Management
• Finance & Accounting

 

This system is very useful for the department. It is an online system and therefore the data gets updated as soon as it is fed into the computer, is accessible to everyone and generates reports automatically. The system is user friendly and can be easily operated by everyone. Most of the work can be done through this system in less time. Thus SAP has increased the efficiency of the division by reducing the duplication of work and easy accessibility of data. However, there is no Chief Information Officer or director of information in the company .The IT department is responsible for the proper functioning

 

 

 

of the SAP system only. The function of information gathering is not done by the information systems department at all.

 

Management: The division has its own mission statement, which is prepared by the senior level management only. The lower level employees do not have much say and they do not contribute much in the development of the mission. Once the mission is finalized and approved, it is communicated to the lower levels of employees in the written form.

 

The employees also do not contribute at all in preparing the long-term objectives and strategies for the company.

 

 

INPUT STAGE

 

 

INTERNAL FACTOR EVALUATION MATRIX

CSFs	Weight	Rating	Weighted Score
Strengths
Product Quality	0.13	4	0.52
Range of  Products	0.13	4	0.52
Market Share	0.04	4	0.16
Strong Support from Global Giants(Hill Rom, HP, Mallinckrodt etc.)	0.05	3	0.15
Effective Distribution Network	0.06	3	0.18
New SAP system provides timely and relevant information	0.06	3	0.18
Certification by International Agencies	0.02	3	0.06
Weaknesses
Price competitiveness	0.21	1	0.21
Lack of motivation for sales force	0.08	2	0.16
Lower level involvement in strategic planning process	0.07	2	0.14
Low role of marketing	0.15	1	0.15
	1		2.43

Ratings:   1=Major Weakness, 2=Minor Weakness, 3=Minor Strength, 4=Major Strength

Weights:  0.0 = not very important, 1.0 = very important

 

Product Quality:

The high quality products are an important factor in the Health Care industry and since the company offers premium quality product in every category, it is a major strength for the company

 

Range of Products:

BOC offers more products than any other company in the industry and the customer prefers to buy the products from a single company. Therefore this factor is weighed high

 

Market Share:

The division has a relatively high market share in all the categories, especially in the medical gases sector. The greater share, however is not considered to be a major strength and is therefore weighed low.

 

 

 

Support from Global Giants (Hill Rom, HP, Mallinckrodt etc.)

The companies, which BOC represent in Pakistan, provide some marketing and technical assistance. As their support is limited in certain areas it is considered to be a minor strength

 

Effective Distribution Network

The division has a fairly good distribution network throughout Pakistan and is therefore considered to be a minor strength.

 

New SAP system provides timely and relevant information

It is a minor strength because it helps the company respond quickly to variances in performance.

 

Certification by International Agencies

The company is ISO 9002 certified which is an added advantage to the company, thus is considered a minor strength.

 

Price competitiveness

The company charges premium price in all the categories Also, the taxes and duties increase their cost. This is a major threat as price is an important consideration when purchasing especially machines and equipment

 

Low employee morale

The employees are not provided enough incentives, which can lead to lower productivity.

 

Lower level involvement in strategic planning process

This means that employee may not be motivated enough to achieve the target of the division

 

Lower role of marketing

The senior management underestimates the importance of vigorous marketing efforts. Marketing is an important factor and is also weighed heavily by the industry. Lower marketing means less awareness which can ultimately result in declining profits for the division.

 

 

Result: The IFE Matrix shows that the performance of the Health Care Division is average in the industry.

 

 

EXTERNAL FACTOR EVALUATION MATRIX

CSFs	Weight	Rating	Weighted Score
Opportunities
Significant Increase in Demand of Health Care Products	0.2	4	0.8
Increasing trend towards sole suppliers	0.15	4	0.6
Government is on a documentation drive	0.06	4	0.24
Threats
Threat of New Entrant	0.17	2	0.34
Depreciation of Currency	0.17	1	0.17
Presence of undocumented sector	0..20	1	0.20
Unreliable Government Policies	0.05	2	0.10
	1		2.45

Ratings of Response:              1=Poor, 2=Average, 3=Above Average, 4=Superior

Weights:                     0.0 = not very important, 1.0 = very important

Government is on a documentation drive

It is important because most of the competitors are able to sell at lower price, as they are not under the tax net. Since BOC is documented and certified, it will benefit from the documentation of the economy.

 

Significant increase in Demand of Health Care Products

The demand for health care products is increasing tremendously with the increase in the number of hospitals and medical units. The wide range of BOC products will enable the division to benefit from this opportunity.

 

 Trend Towards reducing suppliers

The customers nowadays prefer to keep fewer suppliers and build long term relationship with them. Since the company offers a wide range of products, it can become a major supplier of these organizations.

 

Threat of New Entrant

The new competitor like Fine gas is expected to enter the market. The company is therefore making efforts to keep sustain its market share, however the efforts are not very aggressive and hence a weightage of 2 is assigned.

 

 

 

Depreciation of Currency

Since all the products are imported from abroad, depreciation of the currency is a major threat for the company.

 

Presence of undocumented sector

There is a large undocumented sector, which can sell its products at a lower price than BOC, but the company cannot do anything about the fact. Thus it is one of the major threats for the company.

 

Unreliable Government Policies

The changes in government policies like tariff structures etc. puts the company at a loss.

 

 

Result: The EFE Matrix score of 2.45 shows that the division needs to be slightly more sensitive to its external environment to perform better.

 

 

 

SWOT ANALYSIS

 

STRENGHTS

 

Product Quality

 

All the products of the Health Care Division are of superior quality. The division ensures that the product specifications and quality are superior.

 

Range of Products

 

At present, BOC is the only company in Pakistan offering such a wide range of products for the hospitals and medical centres. Different companies are competing with BOC in different categories but none of the competitor is competing in all the product categories.

 

Market Share

 

BOC has a very high market share in all the product categories. Its products are well entrenched in the market and enjoy a very high market share. The large customer base provides evidence that its products are in high demand.

 

Effective Distribution Network

 

The division has a very effective system of distribution for its products.

 

Strong Support from Global Giants

 

The division has a strong backing of the companies it represents in Pakistan. These companies provide technical assistance to the division for their respective products. Also, the Health Care division can benefit from their reputation in the industry and their marketing efforts.

 

Post Sale Customer Services

 

The division provides excellent after sales service to its customers. This customer service has enabled the company to increase its number of customers. All the repair and maintenance related complaints are handled by the division.

 

 

Installation of integrated software system

 

New SAP system provides timely and relevant information, which will help the company respond quickly to variances in performance.

 

Certification by International Agencies

The company is ISO 9002 certified which is an added advantage to the company

 

WEAKNESSES

 

Price Competitiveness

 

The major weakness is the high prices of all the products of the Health Care division. The margins on all the products are approximately 8-10% higher. This makes the products less attractive to the customer, especially in the medical equipment category where competitors offer almost similar products.

 

Low employee morale

 

The employees are not motivated enough to work. The only incentives offered to the employees are the performance bonuses. These bonuses too are not high enough to motivate the employees. Besides these, there in no concept of empowerment of employees and neither are the employees provided with any career counseling. Thus the employees should be provided with a better work environment and more opportunities of personal growth and development.

 

Lack of aggressive marketing

 

The senior management underestimates the importance of vigorous marketing efforts and in fact is not too keen on making any drastic changes in its current marketing policies. It relies on its personnel to capitalize on good relations developed overtime and on its products, which are accepted in the market due to their long clinical experience and therefore does not make aggressive marketing efforts.

 

Weak Planning of Training and Development

 

The HR Department does not undertake any scheduled training program for the employees. Training is provided only when there is a gap between desired and actual performance or whenever the need for training is felt.

 

 

 

 

 

Less involvement of lower level management in Strategic Planning process

 

The lower level staff normally does not make any contribution in setting goals and objectives of the division or in designing strategies for the division. The senior level management mainly performs this function.

 

The mission statement of the department is also prepared by the senior management of the division only and is later communicated in the written form to the lower level employees.

 

Absence of Bench Marking

 

There is no concept of  bench marking for any of the functional areas

 

 

OPPORTUNITIES

 

Significant Increase in Demand of Health Care Products

 

The tremendous increase in the number of hospitals, medical centres and clinics is creating a need for all the product categories of the division. The BOC healthcare can benefit from this opportunity, as it is the only company offering a wide range of products to fulfill all the needs of the customers.

 

Trend Towards reducing suppliers

 

The customers nowadays prefer to keep fewer suppliers and build long term relationship with them. Since the company offers a wide range of products, it can become a major supplier of these organizations.

 

Documentation of the Economy

 

The documentation of the economy will result in making the undocumented sector pay their taxes. This sector at present does not pay any taxes and is thus able to offer its products at a lower price

 

THREATS

 

Depreciation of the Local Currency

The depreciation of the currency will be a major threat for the company as it imports all the machinery and equipments from abroad. The depreciation will result in increasing the cost significantly for the division.

 

Threat of New Entrant

 

Due to the high growth rate of the industry, it is attractive for the customers to enter this market . One of the major competitors of the company in Lahore (in medical gases category) called Fine Gas is planning to expand its operations in Karachi. This competitor can be a major threat for the company.

 

Unorganized Sector

 

There exists a large unorganized sector, especially in the medical equipments category. These companies are able to offer their products at a lower price as they do not follow the legal procedure of paying duties and taxes. Since BOC has to pay all the duties and taxes, its prices are higher.

 

 

The TOWS Matrix

 

	STRENGHTS –S ·       Product Quality ·       Range of Products ·       Market Share ·       Effective Distribution Network ·       Strong Support from Global Giants ·       Post Sale Customer Services ·       Installation of integrated software system ·       Certification by International Agencies	WEAKNESSES – W ·       Price competitiveness: ·       Low employee morale ·       Lower level involvement in strategic planning process ·       Lower  role of marketing
OPPORTUNITIES –O   ·       Documentation of economy   ·       Significant Increase in Demand of Health Care Products   ·       Trend Towards reducing suppliers	SO STRATEGIES ·       Superior quality products, efficient distribution networks and after sales service can enable BOC benefit from meeting the increasing demand. ·       Also wider range of product help in benefiting from trend towards sole suppliers. ·       Documentation of the economy will be favorable as the company is documented and this fact can be promoted.	WO STRATEGIES ·       Problem of price competitiveness can be reduced to a certain extent because of documentation. ·       Also, if the company motivates its sales force by providing more benefits & involving lower level management in planning process, it can further benefit from increasing demand and by more efficiently selling its products.
THREATS -T ·       Depreciation of the Local Currency ·       Threat of New Entrant ·       Presence of undocumented sector ·       Unreliable Government Policies	ST STRATEGIES   ·       The greater market share, better after sales service and distribution network can enable BOC to erect barriers for new entrants. ·       The certification of BOC can help to make customers aware about quality and also counter competition from undocumented sector	WT STRATEGIES   ·       BOC should try to improve its workforce by providing better training, more incentives and their greater involvement in strategic planning. This will enable the company to be more competent and less vulnerable to competition.

 

 

 

 

 

INTERNAL ANALYSIS OF WELDING DIVISION

 

The Welding Division is the smallest division of BOC Gases in terms of both product line and sales contribution.  There are two set-ups, one in the South, which comprises Karachi, Hyderabad, Sukkur and Quetta, and another in Northwest, which comprises of Lahore and adjacent areas.  60% of the market for Welding Division exists in N. west and 40% exists in South.  The products manufactured and/or marketed by the Division are as follows:

 

1. Consumables, which consist of 16 different types of electrodes, like Zodium, PL113, Specials, etc., which are both manufactured and marketed. Consumables also include Metal Inert Gas Welding wires and Tungsten Inert Gas Welding wires.

 

2. Machinery and equipment, which is imported from other BOC subsidiaries and marketed by BOC Pakistan’s Welding Division. Machines are automatic, semi-automatic and manual.

 

Consumables, that is, electrodes give 70% of the revenue of Welding.  They are made under the license of Murex in UK.  Murex was a BOC subsidiary in the early eighties but a decision to spin off the Welding Division internationally made Murex a separate entity dealing exclusively in welding.  BOC still has strong relationship with its former subsidiary, and all electrodes in South Asia are manufactured under Murex’s license.  In fact, Welding exists only in South Asia and South Africa now.

 

Manufacturing requires three main raw materials: flux, wire rod and silicate.  Wire rod is procured locally while flux and silicate have to be imported from various sources depending on the type of electrode. Further discussion will be presented under Inbound Logistics.

 

Total demand for electrodes is around 17000 tons per annum.  However, 60% of the total market goes to low-priced unlisted competitors.  BOC Welding competes in the 20% premium-quality market with its high-priced electrodes.  Main local competitors include Raziq Engineering, Shanghai Industries and Pakistan Welding Electrodes, which are all unlisted and cater mostly to the low-end market.

 

Machinery and equipment are generally imported as completely built-up units. If for some reason they import completely knocked-down units then they have to be assembled locally.  All machinery is imported from Murex or Afrox (BOC subsidiary in South Africa).  There are very few local competitors in Machine and equipment.  Competition is from distributors like M. Sharif (BOC’s distributor as well) and Northern Traders, who directly import machinery from other sources and market them.

 

Generic Strategy

 

The generic strategy being followed by BOC Welding Products is differentiation on the basis of product quality.  BOC’s raw material sourcing, product specifications, operations and product quality are all certified and periodically tested by well-known international agencies like Lloyds and American Bureau of Shipping.  It also has ISO-9000 certification.  On that basis, it caters only to higher-end market for Welding products, which basically consists of institutional customers in the manufacturing and construction sector and government projects.  It therefore has fewer customers than competitors but higher prices.  Average price of BOC electrodes is around Rs. 54 per kg as compared to Rs. 30 per kg for a comparable competitor.  Project customers are usually bulk buyers and very profitable for BOC as well.  For example for a particular project of $600 million, only the consumables required from BOC are worth $20 million.

 

Value Chain Analysis

 

 

PRIMARY ACTIVITIES

Inbound Logistics

 

Inventory control and ordering responsibility lies with the Field Sales Manager of the Division.  Inventory requisitions are controlled through requisition slips, which are totaled at the end of each month to see which materials are needed.  In the recent year the practice has been to keep an inventory of around 45 days for both raw materials and finished goods on average, which is very high as compared to total company practice.

 

There is a storage facility for raw material in Karachi adjacent to the manufacturing facility so that raw materials remain in the custody of manufacturing.  This is convenient and cost-effective, however, it may also result in problems in accountability of the manufacturing department.

 

Operations

 

BOC has one Electrode factory at West Wharf, Karachi, which caters to the entire demand of high-quality electrodes in Pakistan.  Operations are quite modest due to the small size of the market with a capacity of 3500 tons.  Capacity utilization has gone down from 100% three years ago to around 70% recently.

 

Operations are based on international standards.  Product quality is standardized and tested through random tests periodically by two global agencies, American Bureau of Shipping and Lloyds.  The certificate from Lloyds has to be renewed every year.  Most customers do not want to deal with the company unless it shows a renewed ISO 9000 certification.  Conformance to international standards and product specifications improve product quality.

 

The equipment is old and there has been no improvement in the process or modernization of technology and equipment in the past five years.

 

Outbound Logistics

 

The Field Sales Representatives receive orders from customers.  They process the order, make a production schedule at the beginning of the month and pass it own to the Stock Controller and Manufacturing for a check on availability of inputs and capacity.  It has to be made sure that the company requesting an order is itself an ISO 9000 certified company and one with a good reputation for adhering to the legal obligations of documentation of transactions and payment of sales tax, etc.  When market is depressed, inventory for certain finished products has increased up to 100 days at times in the past two years.  Before that, when the going was good, inventory for consumables used to be 7-8 days on average.

 

The company has a central depot in Karachi for stocking Finished Goods.  There are sales depots in Lahore, Rawalpindi, Multan, Faisalabad, Sukkur, Quetta and Hyderabad which stock Welding Products.  From there goods are transported according to customer specification through people hired on contract basis and paid per delivery according to the distance covered.  This is one good example of outsourcing.   For customers located in remote areas such as most sugar mills, raw materials are transported to the customers’ transporters in the city.

 

 

Marketing & Sales

 

The Marketing function is decentralized in BOC. Every division has its own marketing and sales. Products are sold through a distribution network, some retail outlets as well as company’s own sales force.  Welding does not have any exclusive distributors.  The four main distributors, two of whom are M. Sharif & Co. and M. Zahoor & Co. also stock imported products.  Distributors get volume discounts on the basis of three levels of bulk buying; otherwise there are no other incentives to distributors.  About 65% of the products are sold through distributors and retailers and the rest through sales force.

 

Marketing efforts for Welding are limited in scope as over their 50 years of operation they have never come down to any promotional campaigns or changes in the product mix or distribution.  Main emphasis is on personal selling.  The sales force is responsible for picking out project and institutional customers, finding out from contractors about which new project is in the line, basically collecting market information and then making selling presentations to the targeted customer.   One important success factor is that with every new customer, they sign a contract that in their tenders they will specify that they use only BOC products.  That is an effective way to counter the presence of a large number of low-priced competitors.  Sales representatives are also supposed to receive and respond to customer complaints.

 

Prices are set using the cost plus method, specifically with a view to end up with a 22% GPAD (Gross Profit After Distribution to Stockholders) on every transaction.  Price reductions are against the Group’s Policy and Welding faithfully adheres to that policy despite cutthroat competition from lower-priced, lower quality products.  All direct sales are made on cash basis with the exception of a few big customers who are allowed secured credit subject to a credit ceiling as well as a specified number of days.

 

Services

 

Welding has its own technicians responsible for installation of machinery and equipment and training customers about usage of Welding Products.

 

 

SUPPORT ACTIVITIES

Human Resource Management

 

The division is responsible for evaluating candidates and hiring people.  The role of the actual functional department of Human Resources is to solicit candidates based on the requirements sent by the Division and then to finalize the procedures of hiring and fitting the new hire within the fixed salary structure.   Information on training programmes being conducted by PIMS or any other body is provided by HR but the decision to send an employee from the Division on a certain training programme lies with the senior management.  Performance standards are set and evaluations are carried out quarterly in terms of the extent to which milestones were reached.  This is done by senior management in the Division, signed by GM of Welding and passed on to HR for record keeping purposes.  The major function of “HR department” is therefore salary administration.   All other aspects are handled by divisional heads themselves and reported to HR dept.

 

Technology Development

 

The Division, like its other sisters depends on other Group members or overseas subsidiaries to initiate a change in technology.  In Welding, technology development has not been very pronounced because all over the world BOC has spun off its Welding operations.  Welding exists only in countries like Sri Lanka and Bangladesh and there are hardly any developments in technology since the time the plant is commissioned in Karachi  (1955).

 

Procurement

 

Procurement is a joint function of Operations, commercial department and Safety  & Engineering department.  The operations department gives out figures for material requirement, the Commercial department looks for the available source at the best price and acceptable quality and the Engineering and Safety department scrutinizes all buying and selling of the commercial department for conformance with the BOC Group’s specification.  That close scrutiny makes sure that inputs of the required quality are being bought.  Orders to buy are placed by Commercial department for both local supplies and imports.

Import component supplies are laid down by contract approved by Lloyds and so they are seldom changed.  Since most of them are BOC subsidiaries except Murex, they have good long-term relationship with these suppliers. .Incoming raw materials are of superior quality, designed to give the most effective part for one particular type of manufactured product.  The raw material, more specifically flux, for Zodium (a type of electrode) comes from BOC UK, flux for PL113 comes from China, and flux for Specials come from Australia and South Africa.  The reason is emphasis on product specification and quality.

 

Wire rod, another major component is bought locally from Hashu and Abbas Wire Steel due to government policy.  They do not have good relationship Hashu steel.  Being a monopoly, it can dictate terms to BOC.  There have been no successful negotiations with Hashu over the years; it requires BOC to pay for purchases in advance and at times, also causes delays in arrival of raw material.  That is one reason why a high raw material inventory has to be kept. In addition it also owns Raziq Engineering, a formidable competitor to BOC Welding with a much lower priced product.

 

 

Firm Infrastructure

 

General Management: The Division has 4 levels of hierarchy within itself. (Refer to Organogram). The management within the Division is quite supportive of the overall divisional goals – they all are focused towards proving that the Welding Division should remain a part of BOC and generate profits for the company so that a spin off does not become likely.

 

Management does quarterly reviews of competitors’ performance versus own performance while setting the budgets for the next quarter.  There is also quarterly evaluation of performance of employees.

 

Finance, Accounting & Information Systems: A separate functional department handles Finance and Accounting.  The role of Finance is very much integrated with the role of the IT department since the commissioning of the SAP System.  The SAP System had been introduced in BOC Pakistan in 1998 on the Group’s advice.  It now helps all the various functions by providing timely information to very low levels of aggregation.  For example, the Field Sales Assistants have access to the quantity sold to a small customer in a remote area like Bannu Aqil which helps them compare actuals versus budgets on a month-by-month basis; and the Field Manager receives an Aging Accounts Receivable document at the end of every month which helps in proper credit/receivables management.

 

Budgets are made by the consensus of the management team i.e. the GM and RSMs in Welding; it is then passed on to the MD for approval, from where it goes into corporate planning and finally to Finance for consolidation with the budgets of other Divisions to arrive at a total company forecast.  Finance provides a liaison between Production and Sales.  While Sales provides inputs on the expected demand for a product, Production provides insight into capacity constraints or other such issues.  Finance works out the balance and provides the price and cost estimates of raw materials and labour.

 

Legal Issues and Governmental Relations: Government is one big hurdle for BOC’s Welding Division.  A substantial portion of the Division’s purchases is imports, on which the government raises a lot of issues.  All imports have to be justified to the Customs and Sales Tax department as to why the alternate locally available material cannot be used.  Some raw materials imported by BOC for Welding are also used in the atomic industry due to which, the Ministry of Explosives keeps track of the quantity of material purchased, wasted and actually used for production.  Most of the checks on the materials or factory are unnecessary and cumbersome.  Such scrutiny can cause delay in the availability of raw material. The most recent govt. policy, which raises tariffs on import of machinery and equipment not manufactured locally and taxes the raw material imports which include BOC Welding’s raw materials, at a higher rate is another example of an unfavourable policy because it raises costs for Welding.

 

INPUT STAGE

 

INTERNAL FACTOR EVALUATION MATRIX

CSFs	Weight	Rating	Weighted Score
Strengths
Product Quality	0.03	4	0.12
Product Variety	0.03	4	0.12
Certification by International Agencies	0.11	4	0.44
Market share of premium quality market	0.01	3	0.03
Loyal customer base due to contracts	0.09	3	0.27
New SAP system provides timely and relevant information	0.1	3	0.3
Weaknesses
Price competitiveness is low	0.14	1	0.14
Engineering advances or technology development has been non-existent	0.01	2	0.02
Capacity utilization has decreased from 100% to around 70% in past 2-3 years	0.1	2	0.2
Inventory days have increased from 7-8 days to 45 days for consumables	0.1	2	0.2
Local supplier is not co-operative	0.13	1	0.13
Relationship with government is hostile because no bribes are given	0.15	1	0.15
	1		2.12

Ratings:   1=Major Weakness, 2=Minor Weakness, 3=Minor Strength, 4=Major Strength

Weights:  0.0 = not very important, 1.0 = very important

 

Product Quality: It has a weight of 0.1 because product quality matters to only 20% of the market.  Since BOC Welding is a market leader in that segment, it is rated 4.

 

Product Variety: Only big industrial projects need specific kinds of electrodes suited to their equipment.  Therefore, the importance to the industry as a whole is low, however, since BOC is the only company that produces 16 different types of electrodes in 4 different sizes, it is a major strength.

 

Certification by International Agencies: It is an added advantage to hold ISO 9000 certification.  BOC holds certification from Lloyds as well.

 

Market Share of Premium Quality Market: It is a minor strength because the company has a low share of the overall market but premium quality products allow it to charge higher price.

 

Loyal customer base due to contracts: As described in the Value Chain analysis, BOC Welding requires customers to specify in their tenders that they will use only BOC products.  That way, they command a loyal set of customers where the rest of the market thrives on price competition.

 

New SAP system provides timely and relevant information: It is a minor strength because it helps the company respond quickly to variances in performance.

 

Price competitiveness is low: It is weighted high because Welding industry is characterized by price competition.  BOC Welding has the highest priced products due to the fact that it is the only properly documented company and so it’s a major weakness.

 

Engineering advances or technology development has been non-existent: The industry is not characterized by frequent technology advances so the weight is low.  BOC has not has any modernization of the process or product in the past 12 years and so it’s a minor weakness.

 

Capacity utilization has decreased from 100% to around 70% in past 2-3 years and Inventory days have increased from 7-8 days to 45 days for consumables: Both are minor weaknesses and indicative of low demand for products.

 

Local supplier is not co-operative: It is important to have good relationship with suppliers, for BOC it is a major weakness because it has resulted in cost problems in terms of payment f or raw materials and availability on time.

 

Relationship with government is hostile because no bribes are given: In the Welding industry this is a crucial factor and one most responsible for poor performance in the past two years.  It is a major weakness because there are no attempts on part of the company to lobby to the government for favourable policies.

 

Result:  The Division has a weighted score of 2.12 on its internal factors, which means it is internally weak.

 

EXTERNAL FACTOR EVALUATION MATRIX

CSFs	Weight	Rating	Weighted Score
Opportunities
PARCO’s Pipeline from Port Qasim to Multan is expected to come on-stream	0.2	4	0.8
Government is on a documentation drive	0.01	4	0.04
Threats
Large scale manufacturing growth slowed down to 0.04%; Main customers, automobile (-19%) and sugar (-24%) industries in bad situation	0.29	1	0.29
Tariff increased on import of locally available machinery and raw materials for welding	0.16	1	0.16
Devaluation of rupee will affect cost of imports	0.14	1	0.14
Threat of divestment from BOC Group	0.2	3	0.6
	1		2.03

Ratings of Response:         1=Poor, 2=Average, 3=Above Average, 4=Superior

Weights:                            0.0 = not very important, 1.0 = very important

 

PARCO’s Pipeline from Port Qasim to Multan is expected to come on-stream: BOC earns a lot in terms of consumables on big industrial projects.  Its response is superior in the sense that it has already invested in the nitrogen plant that PARCO has built.

 

Government is on a documentation drive: It is important because most competitors can afford to be lower-priced because they are not under the tax net.  Documentation will reduce their price advantage.  Company’s response is superior because it has all the required certificates and documents for all transactions that prove its legitimacy.

 

Large scale manufacturing growth slowed down to 0.04%: Main customers are industrial projects so slow growth means a big hurt for the Division.  Response is poor because the Division has not been able to counter the effect of depressed sales.

 

Main customers, automobile (-19%) and sugar (-24%) industries in bad situation: Apart from the general industry, the main customers have done exceptionally bad  in the recent past and the company has not been able to do anything about it.

 

Tariff increased on import of locally available machinery and raw materials for welding: This has increased costs and the company does not plan to do lobby against any tariff changes.

 

Devaluation of rupee will affect cost of imports: Recent devaluation will make imports costlier and since Welding depends mainly on imports for raw materials as well as machine and equipment, costs will go up.

 

Threat of divestment from BOC Group: The Division is struggling to prove profitable since the past 5-6 years so that it is not divested.  The response is excellent because the whole team in Welding is geared to achieve this objective.  They did well for three years.  Only in the past two years, situation has deteriorated.

 

 Result:  The Division has a weighted score of 2.03 on its external factors, which means it is responding poorly to opportunities and threats in the industry and environment.

 

 

CPM Matrix

CPM		BOC Welding		Raziq Engineering
Success Factors	Weight	Rating	Weighted Score	Rating	Weighted Score
Market share	0.1	2	0.2	4	0.4
Price competitiveness	0.2	1	0.2	4	0.8
Product Quality	0.25	4	1	2	0.5
Product Variety	0.05	4	0.2	1	0.05
Government Relations	0.3	1	0.3	3	0.9
Customer Loyalty	0.1	4	0.4	2	0.2
	1		2.3		2.85

Ratings of Response:          1=Poor, 2=Average, 3=Above Average, 4=Superior

Weights:                            0.0 = not very important, 1.0 = very important

 

Bases for giving weights are the same as under the IFE and EFE Matrices: The numbers have changed because of a different mix of factors.  The ratings are justified as follows:

Market share: Raziq Engineering caters to the low-end of the market and the overall market share is around 28% as compared to BOC Welding’s 14%.

 

Price competitiveness: Average price of Raziq’s electrode is Rs.30 per kg, one of the lowest, against BOC’s Rs.54 per kg. Therefore, Raziq is rated superior.

 

Product Quality: BOC’s electrodes are superior in quality whereas those of Raziq’s are average.

Product Variety: Raziq produces general-purpose electrodes as against BOC’s 16 types with 4 sizes each.

 

Govt. Relations: Raziq is owned by Hashu and Abbas Wire & Steel, which is a company favoured by the government.  Therefore, Raziq also derives benefits whereas for BOC Welding, government departments are usually hostile.

Customer Loyalty: BOC Welding is superior in the sense that it enters into contracts with its very reliable industrial customers to buy only BOC products.

 

Result: BOC has a below average rating whereas Raziq has an above average rating showing that it is in a much better competitive position than BOC Welding.

 

TOWS MATRIX

	Strengths – S Product Quality   Product Variety   Certification by International Agencies   Market share of premium quality market   Loyal customer base due to contracts   New SAP system provides timely and relevant information	Weaknesses – W Price competitiveness is low   Engineering advances or technology development has been non-existent   Capacity utilization has decreased from 100% to around 70% in past 2-3     years   Inventory days have increased from 7-8 days to 45 days for consumables   Local supplier is not co-operative   Relationship with government is hostile because no bribes are given
Opportunities – O PARCO’s Pipeline from Port Qasim to   Multan is expected to come on-stream   Government is on a documentation drive	SO Strategies   1.      It can use its product quality, product variety and certification by international agencies to fit the specifications required by PARCO.(S1, S2, S3, O1)	WO Strategies   Government’s documentation drive can be used to improve price competitiveness.(W1, O2)   Help PARCO arrange Finance for its pipeline so that as the project starts and Welding’s capacity utilization of plant can be increased and inventory days can be reduced.(W3, W4, O1)
Threats – T Large scale manufacturing growth  slowed down to 0.04%; Main  customers, automobile (-19%) and sugar (24%) industries in bad situation   Tariff increased on import of locally available machinery and raw materials for welding   Devaluation of rupee will affect cost of imports   Threat of divestment from BOC Group	ST Strategies It can increase its share of premium quality market through aggressive promotions to get rid of the threat of divestment. (S4, T4)   It can use its loyal customer base to recommend other industrial customers so that the slow growth in the existing market can be compensated. (S5, T1)   It should use certification by international agencies as a ground for negotiating better trade-tariff terms with the government. (S3, T2)	WT Strategies   Use process reengineering to reduce costs so that the cost hike due to high tariff and devaluation can be offset. (W2, T2, T3)   Have the commercial department make representations to the government to have good relationship with the government and try to rationalize the tariff on BOC’s imports.(W6, T2).

SO Strategies:

 

It can use its product quality, product variety and certification by international agencies to fit the specifications required by PARCO.(S1, S2, S3, O1)

 

ST Strategies:

 

1. It can increase its share of premium quality market through aggressive promotions to get rid of the threat of divestment. (S4, T4)

 

1. It can use its loyal customer base to recommend other industrial customers so that the slow growth in the existing market can be compensated. (S5, T1)

 

1. It should use certification by international agencies as a ground for negotiating better trade-tariff terms with the government. (S3, T2)

 

WO Strategies:

 

1. Government’s documentation drive can be used to improve price competitiveness.(W1, O2)

 

1. Help PARCO arrange Finance for its pipeline so that as the project starts and Welding’s capacity utilization of plant can be increased and inventory days can be reduced.(W3, W4, O1)

 

WT Strategies:

 

1. Use process reengineering to reduce costs so that the cost hike due to high tariff and devaluation can be offset. (W2, T2, T3)

 

1. Have the commercial department make representations to the government to have good relationship with the government and try to rationalize the tariff on BOC’s imports.(W6, T2).

 

Financial Recasting

 

The following changes have been made in the income statement for the purpose of recasting:

 

1. Exchange Risk Fee and others have been excluded from “Mark-up and Interest Expense” and added to “Other charges” because it is not purely interest in nature.
2. Income from Savings Accounts/portfolio management schemes which was netted against Mark-up and interest expense has been taken out of it and added to “Other Income” to make the interest expense figure more representative.
3. Compensation from associated undertaking & sales tax provision written back has been deducted from Other Income in 1999 because it is non-recurring.
4. Federal Education Fee-written back has been deducted from Other Income in 1995 because it is a non-recurring item.
5. Items after Operating Profit have been allocated on the basis of sales of “Gases” and “Others” for comparison purposes for all the years.
6. Earnings per share have been restated for all the years taking into account bonus issue in 1999.
7. An amount of Rs.51.7 million has been deducted from the taxation figure in 1999 because it is due to a change in government policy regarding taxation. The amount is a tax write back from previous years and so does not have a bearing on operating performance of 1999.

 

The following changes have been made in the balance sheet for the purpose of recasting:

 

1. Cylinder deposits have been reclassified from long term liabilities to current liabilities because they are non-interest bearing and refundable on demand.

Organizational Culture & Leadership

 

The culture was described to us as ACTS – Accountability, Collaboration, Transparency and Stretch.  The organization does have a performance driven culture which is shown by every division’s struggle to prove itself as an integral, profit-contributing part of the total organization.  There is a healthy competition for resources.  The top management is quite enthusiastic about being the best of the Group, which also gets communicated to a certain extent to people down the line through frequent results reviews, individual performance evaluation and quarterly forecasts of businesses.

 

In order to make our assessment objective, we have rated the following factors:

 

Factors	Rating
The sense of identity and affiliation the firm provides to organizational members	Excellent
Consistency of the cultures of sub-units with each other and with the overall corporate culture	Average
Ability of the culture to foster innovation, creativity, openness and new ideas	Poor
Capacity to adapt and evolve, consistent with the demands of changes in the environment and strategy.	Poor
Executive, managerial and employee motivation based on both monetary and non-monetary rewards	Average

 

 

The sense of identity and affiliation has been rated excellent because the company has a low turnover.  The people we interviewed were enthusiastic about achieving the Division’s goals and they also seemed proud of the Group’s achievement as a whole.

 

Consistency of cultures of sub-units has been rated Average because there are different sentiments in different Divisions.  For instance, while people in Gases are very optimistic about the future and concentrate on above average growth, the people in Welding seem pessimistic about their future and strive for survival.  That leads to different viewpoints in the sub-units.

 

Ability of the culture to foster innovation, creativity, openness and new ideas has been rated Poor because BOC Pakistan does not encourage low level workers to give inputs into the processes of the company.  Recently they have started Learning and Development program to increase interaction with workers but the effect has yet to be seen.

 

Capacity to adapt and evolve, consistent with the demands of changes in the environment and strategy is rated Poor because although the company responds quickly to changes in Group’s strategy, it does not respond at all to changes in governmental regulations, etc. locally.

 

Executive, managerial and employee motivation based on both monetary and non-monetary rewards has been rated Average because the company has a fixed salary structure which is not tied to performance.

 

So overall, the organizational culture can be rated Average.

 

Legitimacy and Reputation

 

Legitimacy and reputation in strategic management are concerned with the ability of companies to produce favourable legislation and public opinion.  BOC has had 12 KSE’s Top Companies Awards.  It has also secured the Corporate Excellence Award from MAP for its 1997 performance during recession.  In those terms the reputation of the company is good, however, an objective assessment of its legitimacy and reputation with a view to affecting legislation and public opinion reveals the following:

 

 

Factors	Rating
Effectiveness in coping with restrictive regulations	Poor
Relationship with customer activist groups	NA
Relationship with media	Average
Relationship with policymakers and government officials	Poor
Ability to obtain government grants and funding	Poor
Extent of trade-tariff protection	Poor

 

 

Effectiveness in coping with restrictive regulations and Relationship with policymakers and government officials are rated Poor because the company has no representation to the government in setting of policies or about factors that may favourably or unfavourably affect a Division of the company.

 

Relationship with media has been rated Average because BOC has no media exposure, neither favourable nor unfavourable.

 

Ability to obtain government grants and funding is rated Poor because the government does not favour the company as it markets imported products to a large extent and purchases a number of raw materials as well from its foreign subsidiaries.

 

Extent of trade-tariff protection is poor because recently tariffs on machinery and raw material for Welding Division have been raised although the government is on a tariff-reduction drive.

 

The assessment shows Poor overall rating on Legitimacy and Reputation.

BCG MATRIX-CORPORATE LEVEL

Gases:

 

This division has a relatively high market share of 65% making it one of the main players in the industry. Also, it has a relatively higher than industry average. This places the division in the Star quadrant. With a high market share and a high growth rate, it should receive a greater amount of investment to maintain and strengthen its dominant position. The Gases division should follow the following strategies: Forward, backward and horizontal integration; market penetration, market development and product development and joint ventures.

 

 

Health Care:

 

With a 60% market share and 1% growth rate, this divison falls in the Cash Cow quadrant. It should be managed to maintain a strong competitive position for a long time period so as to generate continuous funds for the company. Stragetigies that it can follow are: product development and concentric diversification.

 

Welding:

 

With a market share of 35% and a negative growth rate of –16%, this would place the Welding division in the least attractive quadrant, Dogs. It should either be completely liquidated, divested or trimmed down through the process of retrenchment so that further losses are reduced and the funds from the sale can be used in the other two divisions or to pay off debt.

 

 

QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM)

 

			Strategic Alternatives
			Divesting Welding Division		CO2 For Beverages
CSF’s	Weights	Ratings	AS	TAS	AS	TAS
OPPORTUNITIES
High Growth in the Food and Beverage Sector Sector	0.2	3	–	–	4	2.4
Large Projects in the Petrochemical Sector	0.25	4	–	–	–	–
Documentation Drive in the Economy	0.07	3	–	–	4	.84
Large Public Sector Infrastructure Projects like the Kalabagh Dam and Sui Northern Pipelines	0.08	4	2	0.64	–	–
THREATS
Gadani Ship breaking Industry in Doldrums	0.2	2	2	0.8	–	–
Threat of a Large Multinational Entrant	0.05	2	–	–	4	0.4
Low Investment in Manufacturing Industry	0.15	3	3	1.35	3	1.35
STRENGHTS
Implementation of SAP	0.07	3	–	–	3	0.63
Distribution network	0.09	4	2	0.72	4	1.44
Product Quality High	0.20	4	2	1.6	3	2.4
Operating Profit Margin Increased	0.03	3	4	0.36	3
Days of inventory	0.11	3	4	1.32	–
Product Variety	0.08	4	2	0.64	2	0.64
Market share high	0.14	4	2	1.12	–
Certification by International Agencies	0.08	4	1	0.32	3	0.96
WEAKNESSES
No separate R& D Department	0.05	1	–	–	–	–
Non-existent Technology development	0.01	1	–	–	–	–
Problems in the strategic management process	0.08	2	4	0.64	1	0.16
Low emphasis on marketing and promotional activities	0.06	2	4	0.48	1	0.12
TOTAL				9.99		11.36

Result: The company should pursue a concentric diversification strategy whereby it would be selling new, but related to products to the same market.  The second strategy of going into the food business by manufacturing and selling carbon dioxide to the beverages industry has a higher score of 11.36 and hence should be selected.

STRATEGY ALTERNATIVES AND CHOICE

 

FORWARD INTEGRATION

Gases

The division can buyout their distributors so as to gain complete ownership of a part of their distribution network. It would also strengthen the company’s position in the market. Currently there is no threat of foreign competition, but if there is a revival of the economy it may encourage foreign companies to invest in this industry and hence bring in competition. Before this happens, BOC Gases would have already fortified its stance in the market by having its own primary distributors who distribute the company’s gases exclusively. It would also enable the division to build and maintain better relationships with its customers.

 

Welding Division

The welding division could take over two of its four distributors, M. Sharif & Co. and M. Zahoor & Co. to gain exclusive ownership, since these two distributors also stock imported products of other companies. This way only BOC Welding products would be sold into the market, strengthening the division in the market. Furthermore, it would help the company in building and maintaining long-term relationships with their end customers since they would know them better through direct business. Also, they have an advantage of having the SAP computer system through which they will be able to do smooth business with their newly acquired distributors.

 

Health Care Division

This division should purchase its distributors. In this way, it will be able to reinforce its selling efforts by having its own sales staff selling and distributing the company’s products. Also, if the Hub plant is closed down, then more jobs will be created if the company acquires the distributors.

 

BACKWARD INTEGRATION

 

Gases

BOC Gases imports some of its raw materials from its subsidiaries abroad. For the other raw materials, the division acquires them from a large number of suppliers. These suppliers also charge a commission, which is added to the total transportation cost of the division. It should hence acquire some of its main suppliers, which supply a majority of the materials. In this way, the only transportation costs for BOC Gases would be the overhead costs like fuel, depreciation of the vehicles and payments to the drivers. Also, if the Hub plant was to be closed, it would leave some employees jobless and it is company policy to not lay off workers. Hence, these employees could be placed in jobs formed around this new area.

 

Welding

The local supplier, Hashu and Abbas Wire Steel is the division’s only supplier of wire rod. This supplier is not.   very cooperative and has a monopoly in the market. BOC Welding division could purchase its supplier or negotiate with it, as it would enable both companies to work more cooperatively with each other. Raw materials, like wire rod, could be purchased at cost price without the additional mark-up profit margins

 

HORIZONTAL INTEGRATION

 

Gases

BOC Gases should acquire some of its smaller competitors. It would help the company by gaining more customers and reducing the competition in the market. Also, it may create a few more jobs where current employees of the company could be placed.

 

Welding

Hashu and Abbas Wire Steel owns Raziq Engineering, the welding division’s main competitor. By purchasing this company, there will be a double benefit for the welding division as it would not only own its supplier but also its main competitor. The welding division can use the strength of Raziq Engineering’s earnings and market share to increase its own sales and bring its profits figure in the positive. Also, it would help both companies in utilizing their resources more efficiently and effectively, thereby strengthening their position in the market.

 

MARKET PENETRATION

 

Corporate strategy

BOC should increase the use of its sales force to enable it to work on greater personal selling efforts which should in effect lead to long-term relationships and a strongly loyal customer base. It should employ more advertising tactics to increase market share, particularly in the Welding division where there is negative growth and the Health Care division where there is fierce market competition. Campaigns can be run through print media regularly circulated within the appropriate markets as well as participating in Trade exhibitions organized by the government. To increase publicity efforts, BOC should advertise in Trade and Industrial Marketing journals and other publications where it could be better exposed to customers.

 

Gases

There is no threat of foreign competition yet, but there could be if and when the economy revives. For this, the Gases division should increase the awareness of its product range and quality.

 

Welding

60% of the Welding division exists is in the North West region, but is not generating likewise revenues and profits. So the division must try to revive declining sales here by using print and television media to advertise their products. Also, of the 40% which is in the South, 38% business is in Karachi. So the company should try to increase the market share and growth in the North West region and in the other South regions, i.e. Quetta, Hyderabad and Sukkur. The welding division should increase the use of its sales force to more than the current 35%. It has and advantage of having premium quality products which it should promote through greater advertising and increased promotional activities such as price discounts for valued distributors.

 

MARKET DEVELOPMENT

 

Welding

Since the Welding division is not performing well in the areas it is operating in, it should expand into other geographical markets in the North West and South areas. This means that this division will have to locate towns and cities where welding products have a potential of being sold. Creating awareness of the high quality and wide range of products manufactured and distributed by BOC Welding through advertising and personal selling presentations is the first step. This should then lead to interest in the company’s products by regularly pushing the products into the minds of the customers.

 

CONCENTRIC DIVERSIFICATION

 

BOCP can also get diversify into distribution services where not only do they distribute their products but also distribute imported products of other companies. Since BOCP itself is a foreign-based company with a good reputation, there may be foreign companies willing to acquire the distribution services of BOCP. They may be willing to do business with BOCP. The company would be able to charge a mark up price for storing and distributing these products and in this way they could earn extra revenues and try to revive their declining profits and growth in the Pakistan market.

 

CONGLOMERATE DIVERSIFICATION

 

The company should diversify into the food sector by manufacturing and selling refrigerant gases. These are very beneficial in the Pakistani food industry, considering the weather conditions here. Foreign as well as local hotels and restaurants would be highly potential customers and it would bring in much needed revenues for the company. The food industry could prove to be a big boost for BOCP since the company  would be providing their main product, gases.

 

JOINT VENTURE

 

Since Bawany Air Products is the only competitor in Industrial Gases and one of the main competitors in Health Care it will create synergies if they enter into a joint venture agreement if the Monopoly Control Authority does not object.

RETRENCHMENT

 

Corporate Strategy

BOCP should scrap of its Hub plant since it is completely out of use and has zero book value. The machinery and equipment can be sold off to steel companies for recycling or placed in one of the other plant facilities of the company, either at Port Qasim or at West Wharf. The land and building of the Hub plant can be sold off and the funds can be invested in the existing plants, or they can be renovated for future use. Perhaps in the future, the building may not be needed and so later it can be demolished to make way for a new building. Furthermore, expenses related to maintenance and labor are being paid unnecessarily when no the plant is not even in use. The employees at the Hub plant can be relocated to the other areas of the company.

 

DIVESTITURE

 

Welding

Since the Welding Division has proven to be unprofitable over the years, it is better to completely sell it off so that BOCP can then focus on its other two divisions, Gases and Health Care, and invest in them with the funds acquired from the Welding Division’s sale. It can sell the division to its major competitor such as Rafiq Engineering, who specialize in the welding business or to some new entrant which is trying to or has jus entered the welding market. Selling off this division will prove to be a good idea in the long run as it would not incur any more losses for the company. Also, other BOC subsidiaries have divested their welding divisions and it just operates in South Asia and South Africa. BOCP should take a similar decision.

MAJOR AND MINOR PROBLEMS

Major Problem:

The major problem with the company is a lack of application of strategic management principles.  Although at top management level people are well versed with all concepts of involvement and participation of employees in decision-making, we don’t find such practice in the company.   Result is that it has evolved into a more or less bureaucratic structure with large number of hierarchies and low level of interaction between the top and the bottom.  Therefore, the problems that can be resolved easily through initiating good relationship with stakeholders (local suppliers, government and customers) are being carried over since ages.

 

Minor Problems:

1. There is no centralized research and development department for the Gases business, which is very necessary since in order to compete as a market leader the division, must innovate to find out new uses and applications of gases.
2. More pressure on the Port Qasim plant as demand increases and the other non-automated plants are not able to meet increased demand. Since the Port Qasim plant is already operating at full capacity the division will soon face issues of generating additional capacity.
3. Since the market is not quality conscious, competitors continue to undercut BOC Gases by providing cheaper quality goods at lower prices. The business must do something to counteract these threats.
4. The Gadani Shipbreaking facility, which contributes, 40-45% of the revenues of Gases is facing the probability of being shut down. This will have a disastrous impact on bottom line profits.
5. One minor problem in Welding is dependence on one supplier for local raw materials, Hashu & Abbas, with whom the Division does not have a good relationship. There is no effort on part of either party to build up a mutually beneficial partnership because Hashu also owns the biggest competitor for BOC’s Welding.
6. Inventory days for Welding have gone up recently due to the uncertainty of local and imported supplies, local because of problems created by Hashu & Abbas, and imported because of hurdles created by the Customs and Sales Tax departments.
7. Capacity utilization has decreased to 70% now due to a lack of demand for BOC Welding in particular since it depends on industrial projects, which have seen no growth in the past two years.
8. Operations in Welding are based on old plant and equipment and there have been no improvements in the process or machinery for the past 12 years. There is therefore a lack of efficiency.  Presence of a wide range of variety also hinders efficiency.
9. Welding depends on Personal selling efforts solely to push its products. It does not use other channels of marketing, which are used to project industrial products, for example trade journals or exhibitions.

 

 

 

MEETINGS HELD

 

Information of Previous Meetings:

 

Name: Mr. Aamir Niazi

Designation: General Manager & Corporate Planning HR

Phone number: 2313691

Actual date of meeting: September 12, 2000

Time of meeting: 3.30pm

Duration of meeting: 3.30-5.00pm

Summary of major findings:

Mr. Niazi gave an overall picture of the three divisions of BOC, describing their products, suppliers, customers, number of competitors and the strength of each division in terms of market share. He further discussed how BOC strategizes and implements decisions at the corporate level and how corporate planning handles support activities. The key market sectors for BOC are industries of manufacturing, chemicals, petrochemicals, oil/gas, glass and food.

 

Name: Mr. Fareed Shaikh

Designation: Regional Sales Manager (South) Health Care Division

Phone number: 2313887

Actual date of meeting: September 18, 2000

Time of meeting: 3.30pm

Duration of meeting: 3.30-3.50pm

Summary of major findings:

Mr. Fareed Shaikh briefly discussed about the health care division of BOC. This division is segmented into medical gases, medical pipeline system and medical equipment. He gave a brief description of the products offered and how they are marketed and distributed. BOC spends less that 2% of its budget on this division.

 

Name: Mr. Nadeem Nasir

Designation: Field Manager Welding Product Division

Phone number: 2313693

Actual date of meeting: September 18, 2000

Time of meeting: 3.55pm

Duration of meeting: 3.55-4.30pm

Summary of major findings:

The welding division produces and markets prime quality products such as working electrodes, equipment for welding ships, submarines and aircrafts to institutional customers directly and also through distributors. It is a price sensitive market and BOC has 10-14% market share. Competition exists with local small outlets and foreign distributors. The only source of supplier is Hashoo Company which is also its major competitor.

 

Name: Mr. Zahid Farooq

Designation: Regional Sales Manager (South), Industrial Gases

Phone number: 201038,2313694

Actual date of meeting: September 18, 2000

Time of meeting: 4.30pm

Duration of meeting: 4.30-5.00pm

Summary of major findings:

The Gases division has five market segments: Engineering and fabrication, Chemical and pharmaceutical, Petrochemical, Glass and Food. There are two major product categories, which are Industrial Gases and Specialty Gases. Under the industrial gases category, BOC manufactures both Oxygen and Nitrogen gases in bulk and liquid form. Specialty gases include Argon and Calibration gases like Hydrogen and Helium. There are two main competitors: Bawani Air Products (Karachi) and Fine Gas (Lahore). Their market share in the South is 85% and in the North it is 50%.

 

Name: Mr. Mubashar Murtaza

Designation:

Phone number:

Actual date of meeting: September 21, 2000

Time of meeting: 3.00-5.00pm

Duration of meeting: 2 hours

Summary of major findings:

The discussion was mainly reared towards the Gases division. There are three production facilities in the South: Port Qasim, West Wharf and Hub(this was closed down in 1998 due to low demand). The industry is an oligopoly and for the time being there is no such threat from foreign competition. BOC has created a barrier to entry by having the largest market share and having the largest production plant at Port Qasim. It is the only company that produces liquid Nitrogen, giving it an edge over its competitors.

 

 

[1] Source-Financial Statements of BOC and Bawany Air products for FY99.

[2] The detailed organogram of the Health Care Division (south) is attached.