Group 6 Section A

Summary of Session 4
The session began with a brief summary of the nine preliminary questions related to data
comprehension that we covered in the last session. This reinforced our understanding of the case
data and helped us recall key elements with regards to the timeline, formation of new divisions and
type of customer segment that Texana chose in the period from 1949 to 1966.

To better summarise the session, we have deviated from the chronology followed in the session to
first understand two major concepts that helped us answer the latter preliminary questions. These
are as follows:

1. The Impact of ‘Big Oil’ Corporations on Texana

2. Return on Investment

These two concepts are explained as below:

1. The Impact of ‘Big Oil’ Corporations on Texana

Today ‘Big Oil’ refers to the top seven oil and gas companies, which are - BP, Chevron,
ConocoPhillips, Eni, ExxonMobil, Royal Dutch Shell and TotalEnergies. The history of ‘Big Oil’ started
with Standard Oil Co., which by the year 1904 controlled 91 percent of production and 85 percent of
final sales in the US. The US Justice Department sued them in 1909 for a number of ‘unfair
competitive practices’ like rebates, preferences and discriminatory practices, monopolisation of
pipelines, price-cutting and even espionage against competitors. Under the Sherman Act, Standard
was forced to break up into 34 independent companies. However, through overt mergers and
acquisitions, these companies managed to form an integral part of the cartel of seven companies
that took over the petroleum industry from the mid-1940s to the 1970s.

Even before the formation of a cartel Standard Oil Co. operated on an extremely large scale. The first
activity was that they were producing (mining) crude oil. The second was, refining crude oil, which is
another extensive process using fractional distribution. Finally, transporting petroleum products
requires an extensive pipeline, rail and road network. The final product is volatile and needs to be
constantly replenished as well. All these activities mean that Standard Oil Co was operating on a very
large scale even before the cartel formations and could easily control the market and push out the
competition. The cartel formed during the time of Texana operated on a similar if not larger scale
and at a global level.

This cartel of ‘Big Oil’ is significant to the case because it completely changed the strategy that was
adopted by Texana and pushed the company to divest from its lucrative fuel business into the line of
chemicals. A cartel uses covert measures to control the prices in a market and can thus push out the
competition using means which can be not only unfair but also illegal.

A few modern examples of cartels/monopolies discussed in the session were:

 Huawei became a direct competitor of a powerful US company like Apple when it came to
handsets. It also had a significant first-mover advantage when it came to 5G telecom
equipment. When Huawei became a threat, it faced unfair restrictions by other companies
and even governments like the US, Canada and UK. This curtailed the growth of the firm and
forced it to retreat from certain markets and change its strategy.
 In India, the telecom industry is a sector where a monopoly has formed. Over the years, due
to various reasons, both fair and unfair, a number of companies, including Tata Teleservices,
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RComm, Aircel and Videocon, have exited the sector. Idea-Vodafone and public sector
companies like MTNL and BSNL are barely surviving with bleak prospects and no
profitability.

2. Return on Investment (ROI)

The best way to under the meaning of return on investment is to contrast it with the evaluation
criteria followed by different types of business units. A quick look at this evaluation is as per the
table below:
Autonomy with respect to
Business Evaluation
Operating Capital
Unit Revenue Criteria
Expenses Expenditure

Budgeted
Cost Centre a r r Expenses
Projected
Profit Centre a a r Profits
Strategic Projected
Business Unit a a a ROI

In the case of Texana, the new departments were evaluated on the basis of ROI as per the policies
enforced by Irwin and Dutton. ROI allows the business unit to have complete control and cuts across
functional areas.

Now, getting back to the answers to the remaining preliminary data related questions which were as
follows:

Q 10) So, what might be the actual reason(s) for the genre change?

Ans: The major reason for the change in genre from fuel to chemicals was that the Texana
management realised that they were facing unfair competition in the fuels segment. This meant that
even though fuel was the primary revenue of the company, it would not be sustainable to continue
with the same business strategy. We have extensively covered the threat that ‘Big Oil’ posed to
Texana earlier in this summary. From our analysis, it can be concluded that even though the PCD
department was set up in 1949, the planning for this diversification started much earlier. To set up a
department would require capital in the form of debt, equity or internally generated funds. It would
need extensive planning and logistical execution to set up a new plant. Even the top managers would
need to be recruited from competing firms and this process usually takes the human resource
department a minimum of a few months for higher-level positions. Hence, it is fair to assume that
planning for the genre change probably began around the year 1945.

Q 11a) What might be the actual reason(s) for the drastic dip in sales in the early 1950s?

Ans: The reason for the dip in sales can be attributed to the dismal performance of the three new
departments that were set up during this period.

Q 11b) Why did the three new divisions do so poorly.

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Ans: Actual data related to the poor performance is not explicitly stated in the case but we can infer
the reasons by analysing why the company succeeded in the subsequent period. Three major
reasons for the poor performance may be as follows:

1. Robert Holmes envisioned the departments and ran them as integrated divisions with the
hope of generating synergy. This, although well-intentioned, proved to be an unsuccessful
strategy.
2. Evaluation of these departments was not done on the basis of ROI, which gives a more
complete performance measurement.
3. There was central control and major decisions especially related to capex, would be taken at
the head office level.

Q 12) Hence what might be the reason(s) for the healthy turnaround by 1966?

Ans: The reasons for a healthy turn around are given on P-2, c-2, p-1. The relevant text reads as
follows “…Irwin and Dutton selected aggressive general managers for each division and gave them a
large degree of freedom in decision making. Top management’s major requirement was that each
general manager create a growing division with a satisfactory return on investment capital.”

Thus, we can see that the major reasons attributed for a healthy turnaround after Irwin and Dutton
took over from Robert Holmes were:

 The degree of freedom that the new managers were given

 The abandoning of the integrated approach adopted till 1955
 The evaluation criteria of ROI which served as motivation to succeed

The table below better illustrates the strategy and performance during the two periods and
summarises Q 11b and Q 12.
CEO/ Impact On Company Revenue
Period HQ Strategy for New Divisions
President Absolute % Change
1950-55 Robert Holmes Close integration and synergy -200 million$ -40%
1955-66 Irwin & Dutton Extreme autonomy to the divisions +450 million$ +250%

This session brought a close to the preliminary analysis of case data that is a pre-requisite before
making any diagnosis as required in the assignment.