Summary of the 8th session for Section D

The session started with a brief recap of the previous session as to why the company’s 5 divisions were
brought under the leadership of the Executive Vice President from CEO.

The fact that the 3rd End User division, i.e., Building Product Division, was acquired in the year 1963 (just
3 years prior to Irwin abdicating his responsibility of overseeing the five divisions), led to the
establishment of the fact that Irwin was planning for Texana Petroleum to go for a large number of
acquisitions. The pre-1966 structure and the post 1966 structure were compared to support this
inference.

1955-1966: The scaffolding structure existed and it was evident that there was almost no chance that
the scaffolding structure was going to be removed anytime soon, and thus the conflicts between the
divisions would also remain.

Now the question was, if Texana was to retain the ICAM structure, was there any way to improve the
situation?

To start with, a divisional analysis was done to see if ROI evaluation of the divisions was necessary.

The end user divisions catered to external B2B markets where the after sales issues were to be
addressed as priority. From the case facts, it is also known that the end user divisions procured raw
materials both from in-house (PCD) as well as external suppliers, with BPD procuring almost 80% of its
raw materials from external suppliers. Whereas PCD had a huge number of external buyers as well.

PtPD on the other hand catered to both internal and external buyers, with external buyers constituting
of both B2B and B2C market in the USA and Europe & Latin America respectively.

Then how did ROI evaluation affect each of these divisions?

To understand this better, each of the divisions were looked into separately.

End User Divisions (Molded Products Division, Packaging Products Division, Building Products Division)

The three end user divisions, i.e., MPD, PPD and BPD, all had different product lines of their own and
also did not have any product flow relationship among themselves, hence not being Laterally Related.
They were also not Vertically Related as none of their end products were used as raw materials for each
other. Thus, it was safe to say that ROI evaluation was not an issue for the end user divisions.
Petroleum Product Division

Petroleum Product Division was seen to have no complaints for the neither of the other divisions, nor
the headquarters. The other divisions and the headquarter too had no complaints for PtPD either.

Why was it so?

To understand this better, help of the BCG Matrix was sought after.

To understand the BCG Matrix, lets go through the following points:

 If Demand is in excess than Supply, and both the industry growth rate as well as the Business
Unit’s market share are high, then the company should further Invest in long term asset
building.
 If Demand is almost equal to or a bit less than Supply, and the industry growth rate is high while
the Business Unit’s market share is low, then the company should go for Harvest.
 If Demand is very less than Supply, and both industry growth rate and Business Unit’s market
share are low, then the company should Divest.
 If the industry growth rate is high, but the Business Unit’s market share is low, then there is a
need to think of what to do further, thus the “?” sign.

Now market share for PtPD was very high and the growth rate of oil industry (inspite of being high) was
growing as well. Thus, going by the BCG Matrix, they were supposed to Invest more. But from the year
1947 onwards, they refrained from investing any further, as they could see that their division would not
grow further inspite of the market having a huge growth rate. The reason behind their actions was that
they were being coerced out of the market by BIG OIL. Hence, they decided to Harvest whatever profit
they could from the market with their existing resources, as they were not expecting any further
investment, and maintaining status quo. Thus, for them ROI evaluation did no matter much, as even
after being in the Harvest phase of the BCG Matrix, they were still a highly profitable division for the
company.
Polymer and Chemical Division

Polymer and Chemical Division here, is guzzling investment. They require an enormous injection of
investment capital.

PtPD and PCD are vertically related (finished product of PtPD becomes raw material for PCD), and hence
transfer pricing is an issue as PtPD is an in-house supplier to PCD. Hence PCD was receiving the raw
materials from PtPD at cost price.

Now, one might ask, why were the raw materials supplied at cost price and not with slight profit or
slight subsidy?

The reason behind PtPD not supplying the raw materials at subsidy was the fact that they were in-house
suppliers to PCD and supplying at subsidy would have been wasteful, which did not make any sense.

If PtPD was to supply the raw materials to PCD at slight profit, then PCD’s pricing in the external market
would have been affected thus increasing competition, not only for PCD, but for the end user divisions
as well. Getting the raw materials at cost from PtPD was competitively advantageous for PCD and was
also helpful in increment of PCD’s market share.

Thus, it was concluded from the above facts that ROI evaluation was an issue with PCD and because they
were guzzling investment, PCD always had a problem with the other divisions as well as the headquarter
and vice versa.

The next question that arises is whether ROI evaluation is a tragedy for the Polymer and Chemical
Division? If so, why?

This is to be discussed in the next class.