Innovative Marketing Strategies Panacea For Economic Downturn Commerce Essay

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The Indian economy has grown at a phenomenal 8%+ per annum for the last 3 years. But over the past 3-4 months the growth seems to have slowed down. Questions are being raised about this economic downturn of the economy. Reasons most widely stated have been the rise in crude oil prices. The prices of crude oil have shot up discounting demand and supply logic. India as we all know imports about 70% of its crude oil. So every time crude prices go up the import bill also goes up with it. So it is obvious that the Indian economic downturn is largely because of the crude shock. The situation also warrants the other factors associated with it like the government did away with the administered price mechanism but the prices are still being controlled largely to shield the common man from these speculative prices. The brunt of all this is taken by the oil companies. The under recoveries on petrol, diesel, kerosene and LPG have been bleeding the oil companies which are then bailed out by the government. So the money that could have been spent on welfare projects is then spent on bailing out the oil companies.

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Our paper here elaborates a marketing strategy of a fictitious petrol company that is omnipresent in the petroleum sector and what the solutions to the current problems are. It also provides an insight into how innovative marketing strategies in upstream, midstream, and downstream segments can help in increasing sales and reduce risk factors of the company. These strategies are targeted not only to the individual customers but also to the fleet companies. Loyalty of the fleet companies can help us increase the market share as they can provide us with volumes. Fleet companies face a huge problem of pilferage. Thus our strategy could help them avoid this as our concept says that the driver can get the petrol filled without any cash or paper payment. It will also ensure that the driver gets the petrol filled in the companies' vehicle only. This would be a huge saving for the fleet owners. Other strategies would include drive- in restaurant and a loyalty card for the customers. Mostly the commuters are tired of waiting in the line. The loyalty card would give them privilege over other customers. Drive in restaurants would also be attractive to the commuters since people generally do not wish to stop their cars at various locations to grab a bite. They could get the desired product while waiting in the queue. The paper also describes strategies for Indian PSU's that can help not only get these out of their losses but also how revival of the petrol companies can act as a panacea for the economic downturn of the complete Indian economy.

PETROLEUM SECTOR- INDIAN SCENARIO

Historically the India has relied on the foreign market for its crude oil needs. The industry policy resolution of 1948 and 1956 has clearly documented the government's aspiration and future plans for core industries like petroleum. All future development of petroleum industry was reserved for public sector undertakings. But foreign assistance was a necessity at least in the early stage. As collaboration with Anglo- American oil majors were ruled out, other alternatives were explored.

At that time the government considered four options as under for the development of its petroleum industry.

seek assistance of a great power like Soviet Union,

collaborate with a small country like Rumania

explore the possibility of a government to government co-operation with other small but neutral countries like Austria which had developed sufficient technical expertise in petroleum industry by that time;

Try and develop the industry through self-help by employing technicians and bringing necessary machinery from which ever source available.

In the eighties, the government allowed Indian private companies to enter into refining sector initially as a joint venture partner with a public sector refining company. Later, Reliance Industries Ltd. (RIL) was allowed to build the largest refinery in the country. For refining technology, the public sector refineries, during 1980s, were almost completely dependant on one American company M/s Universal Oil Products (UOP).UOP did not transfer their technology to the refineries. They 'leased' it simultaneously to more than one Indian refinery at a time. Thus, the technology could not be absorbed. The marketing policy followed by the public sector companies has made the economy and the society completely dependent on petroleum products.

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To begin with, the government in early nineties has changed the much awaited legal status of the Oil and Natural Gas Commission (ONGC) by converting it into a Corporation there by giving it more autonomy. Oil and Natural Gas Corporation Ltd (ONGCL) - a limited company governed by the Indian Company Acts was formed. Earlier, ONGC was governed by the Acts of the Parliament. As the government decided in favour of more involvement of private sector in exploration and production, there was a need to establish an independent regulatory body that could effectively supervise the activities of all the companies - private and public. Thus the Directorate General of Hydrocarbon (DGH) was set up in April 1993.Since then, the privatisation process of the exploration and production activities have been accelerated. The most noteworthy policy shift was the decision of the government to involve private and foreign companies in the development of already discovered fields. This though yielded very little results.

To counter this some of the incentives announced by the government were:

No custom duty on imports required for petroleum operations.

No minimum expenditure commitment during the exploration period.

No mandatory state participation.

No carried interest by National Oil Companies

Freedom to sell crude oil and natural gas in domestic market at market related prices.

Biddable cost recovery limit upto 100%

No cess on crude oil production

Royalty payment: 12.5% for inland areas, 10% for offshore and 5% for deep water areas.

Liberal depreciation provisions

Seven years tax holidays from the commencement of production.

The liberalisation policies followed so far has not shown any positive result in exploration and production sector. In a desperate bid, the government has accelerated the space of reform. How the national oil companies adjust to this rapid changing situation is to be watched closely.

To attract private investment in exploration, the government has announced that any company investing nearly US$400 million (Rs20 billion) in exploration and production or other specified avenue, would be eligible for marketing rights for petroleum products in India. This will allow the international oil majors to enter into the lucrative marketing sector.

Cross subsidised petroleum products competed with other energy sources like coal, and penetrated into their domain. Thus low priced kerosene has replaced vegetable oil for illuminating lamps and coal for cooking, subsidised LPG has become an essential household fuel, long distance trucks fed with cheap diesel easily competed with the railways in freight movement and subsidised naphtha made the coal technology unviable for fertiliser production. This pricing policy backed with elaborate distribution system has made the entire economy almost completely dependent on petroleum products.

The 'retention concept' on the other hand did not allow the PSUs become sick. Thus investors' (mainly multilateral funding agencies like World Bank, ADB etc) fund was safe.

Now that APM has lost its relevance. The economy has become dependent on petroleum and private parties are not happy with 12-15% assured return. They want more. Hence APM is dismantled in a phased manner.

The Indian midstream sector though is very active and the privatisation has yielded some very amazing results.

In this changed situation, the refining and marketing PSUs with old refineries and decades of 'retention' culture might find it difficult to face competition in the post APM phase ONGCL and OIL will also become uncompetitive unless they adjust themselves quickly with the changing situation.

Research shows that in the past four decades, ONGCL and OIL have increasingly become dependent on foreign companies in all major operational activities. Moreover, there was no major breakthrough in any oil or gas fields in the last thirty years though till last 3 year, most prolific fields were kept reserved for national oil companies. With the introduction of NELP, those privileges have been withdrawn and chances of success by national oil companies have also decreased. Thus operational expenses will rise with stagnant/falling production. Added to this, private sector refineries will not be bound to purchase crude oil from national oil companies. They will search for better quality crude at cheaper rates from alternative sources. In such a situation, ONGCL and OIL will find it difficult to survive in the competitive market. However, if the government compels the public sector oil refineries to purchase ONGCL/OIL crude at a higher rate, those refineries will be uncompetitive vis-à-vis private sector refineries. Existing public sector refineries will also face many more hurdles in the de-regulated economy. The disadvantages of the economy of scale and finding matching crude at competitive price for old refineries will be the major challenges before the refinery sector.

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Economy of Scale: Except one in Koyali (Gujarat) all other fourteen public sector refineries are small in size (less than 8MMTPA capacity).Their capacities ranges between 0.65 MMTPA at Digboi (Assam) and 12.50MMTPA at Koyali (Gujarat).And most of these refineries were built before 1980s.Compared to this, the Reliance refinery built in 1999 with state of the art technology has a capacity of 27MMTPA. It is estimated that a new complex of 6.0 MMTPA refinery with Hydro cracker and delayed Coker as the major secondary processing units and in-house power/hydrogen production will have a net margin of about US$5.8/bbl.If the capacity is increased to 9.0MMTPA, the net margin will improve to around US$6.3/bbl.However, this estimate varies depending on the price of crude and petroleum products.

In September 2006, the refining margins of IOCL refineries were only 30 cents per barrel compared to RPL's margin of US$1 per barrel. In 2005-06, IOCL had to forgo over US$700 million on account of lower refining margins compared to the earlier years. The effect of de-regulation is clearly visible now.

Matching of crude oil: Under the deregulated market, the refineries will have to pay import parity prices for the crude's and any fluctuations in the actual crude price will not be absorbed as before by the 'oil pool account' (a part of APM).Hence selection of proper crude oil for a particular refinery will of vital importance. In the emerging scenario of lower availability of sweet crude, dependence on heavy and sour crude oil is bound to increase. Selecting and sourcing matching crude for fifteen different refineries for optimum production to meet stringent environmental regulations and international quality standards, will be a major challenge to public sector refineries.

COMPANY BACKGROUND

We have considered this company to be Indian based integrated energy and energy related company. Petroleum can be divided in 3 sections that is Upstream - exploration, Midstream- refineries and Downstream- retail. The companies in the petroleum sector have very low margins if they are only in the downstream or the retailing sector. Thus it is beneficial for the companies to be vertically integrated that is to have operations in upstream, midstream and downstream.

Upstream

The upstream segment, sometimes referred to as Exploration & Production (E&P), generally includes searching for and extracting natural gas or petroleum at the "wellhead" (the source of the commodity). This also entails building, operating, and maintaining wells which bring the commodity to the surface so it can be transported and further refined. While most MLPs operate in the midstream space, some also exist in the E&P space.

Midstream

The midstream sector processes and stores, markets and transports crude oil, natural gas and the various natural gas liquids like ethane, butane and propane. It mainly includes refining.

The companies' midstream operations are vital to stabilizing the volatility associated with commodity price change. Our business strength would be an integrated infrastructure supported by commodity marketing. The company's midstream assets include:

Heavy oil up grader: located near heavy oil producing region and capable of expansion.

Pipeline infrastructure: reliable heavy oil pipeline system that is well integrated and have expansion opportunities.

Crude oil and natural gas storage

Commodity marketing: they markets its own and third party production of crude oil, natural gas.

Downstream

Downstream generally refers to retail or wholesale end users and, in the scope of oil, refineries where crude oil is delivered.

The downstream sector includes all oils refineries and petrochemical plants, petroleum product distribution via the affiliated retail outlets and natural gas distribution companies, within the operations. The downstream industry markets products such as gasoline and diesel and jet fuel. It also makes available asphalt, lubricants, plastics fertilizers and antifreeze and even pharmaceuticals. This is also the sector responsible for the availability of natural gas and propane.

Supply chain

The supply chain of the company can have divided in two sections - primary and secondary distribution.

Primary distribution is from the fields where the extraction of oil, gas or both to the refinery. The extracted material then goes to gathering unit for the mixture of hydrocarbons. Later it goes to terminal and then refinery. This entire procedure is captured under the primary distribution.

Secondary distribution- This is the movement of the refined product from the refinery to terminal/ depots and then to the retail outlets. There are various petroleum products like Liquefied Petroleum Gas (LPG) which are sent from the refineries to Liquefied Petroleum Gas (LPG) to LPG Bottling Terminal and then to the dealers which are to be sold to the final customer. Products like Naphtha are sent to the power plant. More popular products like Motor Spirit, Diesel, Kerosene, ATF are sent to the terminal and then to gas stations, industrial consumers. The end user for products like Naphtha, LSHS, HSD, and LABFS are the industrial consumers.

Modes of Transportation and Operations in Oil & Gas Industry

The vehicles that can be used in the supply chain are

Marine Vessels - these ensure that large quantities can be transported to the desired locations. It might result in the delay of the delivery of the oil since it takes time.

Types of marine vessels

Crude Carrier

Black Oil

Heavy products

Clean Product Carrier

Petrol

Gasoline

Kerosene

LNG Carrier

Pipelines- This is an innovative technique which just involves pumping in cash once. Pipelines can be useful as they transfer large quantities at a low cast. It is one of the most economical for bulk movement.

The pipes vary from product to product (i.e. different pipelines for crude, gas and other products) Transportation through pipelines can be categorized as onshore and offshore.

Railways - It is faster than the marine vessels. The rail tankers are called wagons. Several tankers hauled in tandem are called rakes. There can be 4 wheel and 8 wheel tank wagons.

They have air tight containers to prevent leakage.

Road Tankers - This kind of transportation is used for inland movement. It varies from product to product i.e. different for gas and liquid products. There are air tight containers to prevent pilferage.

CHALLENGES FACED BY COMPANY

The kind of problems our company is going to face are generalised to reflect the problem faced by most petroleum companies.

The major problems that any petroleum company faces today is that of :

How to build a unique and sustainable competitive advantage?

While this problem is very relative the only solution to this problem is to develop deeper consumer insight. By researching consumer habits the company can then plan its strategies to improve its customer base. And then based on the consumer demands try and solve the problems that these consumers face giving them the advantage.

Another issue that is faced by the companies is how to attract new customers?

There are various ways to solve this, the best solution is to build offering around the target consumer. For this it is imperative that the company clearly define its target customers. Building a strong Brand is of paramount importance here. A strong brand always helps in garnering better market share as well as building a base of loyal customers which is extremely important in the basic commodity context.

Looking at the holistic picture the challenges faced by the petroleum industry are not just in the downstream sector only. But most problems for Indian companies begin upstream. The problems begin with economies of scale. Most companies are government regulated and hence the issue of red tape and corpus for investment is an issue. So whenever these companies go in for bidding, smaller corpus always comes into the way. Also if we look at the potential investment destination today it can be divided into 4 major areas:-

Gulf Countries

Caspian Sea

Central Africa

South America

But the problems here are also different for all of them. Consider the Caspian Sea region which is dominated by Chinese, Russian and American companies. China uses the leverage of having one of the most extensive pipeline networks to their advantage. Central African regions are small and are extremely trade sensitive with little or no industry so their dependence on imports is enormous. But then Chinese again offer trade sops in return for oil drilling and marketing opportunities. India again lacks on this front. South America and gulf have similar kind of problems where domination of the bigger companies like Exxon Mobil and shell is evident.

But the way to counter this problem is only one; slowly build up a portfolio which will help us in getting a better footprint in the area.

MARKETING STRATEGIES

Upstream Marketing

Upstream petroleum sector consist of oil exploration for companies. The companies generally bid for these blocks. When any company looks at these auctions the only point of differentiation a company can create is by either building a portfolio of oil blocks in the area. Leverage of governments also can be used here but it's important to have a strategic investment plan to have interests in that region.

Upstream marketing also involves the usage of risk management of all assets and to spread them out over different region and also using them as a point of marketing suggesting our portfolio is global giving us wider capability to diversify risk leading to better access to funds and cheaper loans.

Using the latest of technology can also help us reduce our carbon footprints giving the company a green image. Petroleum companies generally come with a negative image so it's important that this be countered with a green image. Also this can help us improve revenues by giving us the access to global carbon credit markets.

Mid stream Marketing

Midstream petroleum includes petrol refineries. The Indian Companies generally tend to differentiate themselves around 2 points in this sector

Capacity

Margins

Quite a few time locations also matters. So any refinery with good connectivity by road and sea and is very accessible will score highly. So it is necessary to have a strategic location for any refinery which can then be effectively marketed.

Refineries can also market their capacity to good effect take for example the scenario in India refining capacity here is being used to fullest so its imperative that any new capacity be marketed well. But this can only work if the company takes the bigger picture into context so refining of petroleum becomes a way of integrating your own business vertically creating a complete package for marketing and branding of your products leading to dive down in costs.

Down stream Marketing

The main focus for a Petroleum retail store is to increase a higher market share and to ensure customer loyalty. Market share can be increased when we can attract a lot of customers. Thus we would be targeting the fleet companies along with the regular customers. One of the problems faced by these companies is that of pilferage. Our strategy is designed to consider this problem. The company can attract the fleet companies by using the following strategies:-

Fleet solutions

This is an innovative system, which enables refuelling in a petrol station without cash, credit card or voucher. A Vehicle Identification Unit (VIU) is installed in the vehicle and is used as the authorization and payment device. Advanced reports are generated for fleet managers.

This solution for fleets is a cost effective and durable system requiring minimal maintenance.  Data is collected automatically, wirelessly and effortlessly. Packaged in a waterproof enclosure, the Vehicle Tag is mounted in the vehicle, with an antenna mounted around the fuel inlet to allow a remote antenna in the building to access information stored on the vehicle tag. 

When the fleet vehicle enters onto the gas station property, the vehicle tag is detected by the system.  The driver selects a fuel nozzle and places it into the fuel tank. The system checks if the vehicle tag is correct, comparing it to the negative or "hot" list. If the tag is valid, the fuel type selected is compared to the fuel type stored on the vehicle tag, account authorization is obtained, and other controls in place are checked, like time between last fuelling, etc. If all is well, the site controller tells the POS to authorize the dispenser and fuelling can begin. As long as the nozzle stays inside the fuel tank inlet, fuelling can continue.

This would be a savings of 10%-25% for the fleet owners as the driver would not be able to get petrol dispensed in another vehicle.

The benefits oil companies, fuel station operators and fleet owners.

Benefits for oil companies:

• Increase loyalty level of individual and fleet customers

•Increase market share

• Increase dealer's loyalty

• Long-term fuel contract with fleets

• Provide secured fuelling to customers

• Innovative high tech image

Benefits for the fleet owners:

• Fuel consumption control

• Offer new services to fleets

• Fuelling of authorized fleet vehicles only

• Prevention of fuel fraud

• Efficient use of time and manpower in fleet management and accurate accounting

• Reporting on vehicle usage and consumption

• Odometer and engine hour readings for effective maintenance scheduling

Benefits for fuel station operators:

• Increase fuel sales

• Competitive customer attraction

• Operates local loyalty programs

• Faster and improved service; self service

• requires less service attendants

• Eliminates need for credit cards, vouchers   or checks

• Optimal management and control including

  shifts and inventory

Drive in restaurant

Petroleum retailing today is generally done through vendor pumps in India. The pumps are owned by either company or are franchised out to vendors. The marketing for petrol is targeted towards solving two problems.

customer loyalty

increasing sales

The first problem is faced because lack of differentiation based only on product as all the products available at all pumps are going to be very similar to one another. This is a problem all the basic commodities face since there is no point of differentiation. So companies are left with only two options poaching of customers and retaining existing customers.

Let's look at increasing sales. The point here is when a customer generally tends to come to a petrol pump. Market research has shown that pumps have maximum sales during morning hours and evenings. That's the time when everyone goes to either office or home. So if we are able to ensure regular visits from these people then our sales figures would in turn jump. So looking at another aspect of same market research we come to know that the other point all of these people are attracted to is food. So our company is going to target these factors of customers and put a strategy in place that solves both the needs of food as well as petrol for these customers. This leads to the concept of drive in restaurant come petrol pump. This can be achieved in the following manner

We open a window at the entrance of the pump this window takes the persons order. Then the customer moves to the petrol filling station and by the time he has filled up his petrol and is ready to leave his order is ready and he can leave with his food. This way we would be ensuring customers coming to our petrol pump driving up sales as well as non core business revenue.

Loyalty card:

To ensure customers are loyal, we need to provide certain incentives to them:-

The company could come up with a loyalty card wherein the card holders would get certain points every time they fill in petrol from our gas stations. They could later redeem these points in exchange for certain gifts according to the points in their card.

The card holders would also get privilege during a queue in the petrol station. This means that there would be a separate pump for these holders in almost every petrol station. During rush hours the company could divide the line in the pump which is empty. But the card holders would be preferred during a queue. This would ensure them quick service and more and more customers would want to avail the loyalty card since waiting in the queue is one of the major problems faced by the customers.

Parking is a major issue in most of the crowded areas. The canopy above the petrol stations could also be used as a parking area. The card holders would get a privilege to park their cars. This would be on the basis of first come first serve basis since the space is limited. Parking is a major issue in most of the crowded areas and this would also encourage customers to get this card. This would also encourage customers to get this card.

Quality:

Trust of people can be capture by giving them Quality and Quantity of petrol, that will be a key driver of choice. Quality impacts fuel efficiency and engine performance. Quantity is a parameter for consideration in India for getting the right amount of fuel at right price. Thus we could also market our petrol station which focuses on quality.

CONCLUSION

The Petroleum sector in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. India remains one of the least-explored countries in the world, with a well density among the lowest in the world.  With demand for 100 million tonne, India is the fourth largest oil consumption zone in Asia. This makes the prospects of the Indian Oil industry even more exciting.

After independence, there seen, the rapid growth of the upstream and downstream oil sectors. There has been optimal use of resources for exploration activities and increasing refining capacity as well as the creation of a vast marketing infrastructure and technology and a pool of highly trained and skilled manpower. However India attracts funds and technology from abroad into our petroleum sector.

There is vast competition in the petroleum sector as there has been entry of new players. This would mean reduction in the market share of the existing players. The company can use our strategies to attract the customers. Our strategies are mainly focused on the fleet owners and the daily customers. The fleet owners can bring in the volumes as they have many vehicles and need to get the tank refuelled frequently. Strategies like loyalty program and the drive in restaurant would also be attractive for the customers. Mostly the working people come to the petrol station during the morning hours or the evening while returning from the office. Thus strategies like priority during a queue would always be very attractive for the customers. Even a drive in restaurant is very attractive as the commuters and pick up their desired things quickly. These strategies can attract the customers which would lead to a larger market share and act as a panacea for the economic downturn.

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