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Ingersoll-Rand (India) Ltd.: The Air Compressors Business at the Crossroads (A)
Yes, Ive done it! cried out Sanjay Mehta jubilantly, breaking the silence in his office in Mumbai.
A senior sales executive at Ingersoll-Rand (India) Ltd. (IRL), Sanjay had just received a letter of
intent from Deccan Textiles Ltd., confirming their interest in purchasing a Centac Centrifugal Air
Compressor for their manufacturing facility at Mumbai. Over the last three hot summer months,
Sanjay had made several rounds to the corporate office and production plant of Deccan Textiles.
During these interminable months, he had a series of discussions with the companys purchase head,
maintenance manager, chief of the engineering department and finally the Joint President, trying to
convince them that their existing aging reciprocating compressors, which supplied all the
compressed air requirements to the company, and which the management proposed to replace, could
be substituted with Ingersoll Rands (IR) Centac Centrifugal compressor, as it was the best in its
class, delivering highest quality air at the lowest possible operating cost. This was a sales pitch he
used with all his clients, and wryly he noted that his competitors sales executives, who also beat at
the same customers door, often close on his heels, must have doubtlessly been mouthing the same
platitudes to the very company executives whom he had just met! Sanjays perseverance seemed to
finally have paid off, the proof of which was the letter of intent he just received, which he clutched
close to his chest. The victory was all the more sweet since Deccan Textiles at one stage strongly
considered a competitors Centrifugal compressor as a suitable replacement, and was in the process
of nearly finalizing the deal. It was at that late stage when Sanjay heard of the on-going deal and
jumped into the fray. Besides, it was the first breakthrough sales of IR to this important customer,
since a competitor was well entrenched in this very important account, and generations of IR sales
executives tried in vain to get a beachhead into this account.
Book me on the next Jet Airways flight to Ahmedabad! Sanjay requested Trish, the executive incharge of travel. A bit of a brag that Sanjay was, he desired immediately to meet Mr. Anand
Ranganathan, Executive Vice President-Air Compressors, to announce in person his first big victory
after having risen to the position of senior sales executive five months ago, and more importantly the
foot-in-the-door beachhead order that he had just established for IR with this potentially important
customer. Anand will be delighted at this Rs. 93 lacs order! The sale will help IRL to break the
competitions stronghold in this account, providing tremendous opportunity to us for future business
with Deccan Textiles, a leading textile manufacturer, thought Sanjay to himself.
Riding high on his achievement, Sanjay made it to Anands office in Naroda, Ahmedabad the very
next day, the 3rd of July. Holding Deccan Textiles confirmation letter in one hand, Sanjay barged into
Anands office saying, Boss! I have clinched this order of our dreams! Quite surprised at Sanjays
unscheduled visit, Anand asked Sanjay to make himself comfortable on the chair across his table,
while he carefully read through Deccans letter of intent. The grim expression on Anands face after
he had finished reading the letter got Sanjay worried. Whats wrong? asked Sanjay, Arent you
impressed? In fact, I was floored when I read the letter. Anand paused for a moment and then
replied in a calm voice, As impressive as this deal looks on the surface, I wish you had not taken the
order. I dont understand, Boss! I thought you would be very impressed with this. Do you mean to
say that you dont want this huge order? asked Sanjay with mixed feelings of anger and
disappointment.
_______________________________________________________________________________________________________________
This case has been prepared by Ms. Shobitha Hegde, Research Assistant and Prof. DVR Seshadri, IIM, Bangalore, as a basis for classroom
discussion rather than correct or incorrect handling of a managerial situation. The authors wish to thank Ingersoll-Rand (India) Ltd. for
permitting them to develop the case, sharing its perspectives and providing access to valuable information and insights during the process
of preparing this case. The authors also wish to thank Mr. T. A. Krishnamurthy, Research Assistant for his assistance. Some of the data
have been disguised in the interests of confidentiality.
2005 Indian Institute of Management, Bangalore.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means - electronic,
mechanical photocopying, recording or otherwise without the permission of the copyright holders.

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Looking at it realistically said Anand, At this price, this sale will earn us only a 2%-3% profit. I
see no sense in offering a world class, high value product at such a heavily discounted price! Well
then, if we cannot afford to offer our compressor for Rs. 93 lacs, our competitors will be more than
happy to offer theirs at a price 10% lower than our quote. And if it were not for my perseverance and
persistent meetings with the top executives at Deccan Textiles, we would have lost this deal to our
competitors long ago! Anyway I am too shaken up now, and need to compose myself first before
hearing from you on what you want me to do on this order, said Sanjay raising his voice. Without
wasting another minute, he walked out of Anands office in a huff.
Competition is driving down air compressor prices and we cannot afford to offer such price
concessions anymore. This needs to stop, else IRL will bleed to death! said Anand to himself.
Ingersoll-Rand (India) Ltd.
Ingersoll-Rand, Inc., USA, a global major in the manufacture of a wide range of equipment catering
to diverse industries, had established its Indian presence over eight decades ago. With a business
history dating back to 1871, equipment manufactured by the company such as jackhammers, stopper
drills, drifter-type drills, air compressors, power tools, hoists, etc., were put to use for many
prestigious projects like the construction of the Panama Canal in 1904, construction of the Hoover
Dam (built between Arizona and Nevada) during the Great Depression, excavation work in the
Niagara Falls, construction of the historic English Channel Tunnel and building of the Three Gorges
Dam in China.
With a turnover of over US $ 9 billion, Ingersoll-Rand worldwide has a truly diversified product
portfolio that includes construction equipment, mining machinery, compact equipment,

refrigeration equipment, transport temperature-control equipment, security and safety


equipment, and air and gas compressors. Its remarkably diverse range of products comprise
industrial and commercial equipment and components, most of which are positioned as number one
or two in their respective markets. The company serves four global growth market segments:
Security and Safety; Infrastructure; Industrial Productivity and Climate Control. With close to 46,000
employees spread across 80 manufacturing facilities in 42 countries, more than half of which are
located outside the United States, the company caters to industries as diverse as transportation,
manufacturing, construction and agriculture.
Ingersoll Rand made inroads into India in 1921 by incorporating a private limited company under the
name Ingersoll Rand (India) Pvt. Ltd. at Calcutta, West Bengal. Known to be one of the first IndoAmerican ventures in India, Ingersoll Rand (India) commenced business as a trading company. In
response to the upbeat demand for engineered products in India, Ingersoll Rand (India) Ltd. (IRL) set
up its first manufacturing plant in India in 1965 at Naroda, Gujarat to manufacture reciprocating
compressors. The company went public in 1977, thereby diluting the foreign equity holding to 74%.
In 1978 IRL commissioned its second production unit at Bangalore, Karnataka to manufacture downthe-hole hammer drills, water well drills, hand-held light drills and heavy duty blast-hole drills,
which find application in construction, mining and water well drilling activities.
The years 1993 to 1997 witnessed major capacity expansions at both plants of IRL. Soil and asphalt
compactors, gas compressors, and pneumatic tyre rollers were added to the companys product line.
In 1998 IRL became the market leader in vibratory compactors. In 1999, the company sold off its
Gas Compressor business to Dresser-Rand India Private Ltd. Additions were made to the product
portfolio in 2000 with the introduction of new high-pressure portable compressors for water-well
drilling, Blaw-Knox asphalt sensor pavers with combination screed, and the Cable Layair portable
compressors. The company also successfully launched indigenously built hydraulic drifter drills in

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the second quarter of 2001. Simultaneously, the range of stationary air compressors was also
expanded continuously, accompanied by a significant thrust on rotary screw compressors.
With an annual turnover of Rs. 406.2 crores (2001-2002) and employee strength of about 1000, IRL
delivered a compounded annual growth rate of 7.69% in revenues and 5.62% in profits after tax for
the year 2002 (Exhibit - 1 presents performance highlights of the company). It takes pride in being a
significant exporter of engineered goods from India, the annual exports for 2001-2002 being about
Rs. 80.0 crores. Of these, air compressors accounted for the bulk of the export earnings. With a
network of 22 company offices and more than 80 distributors offering Ingersoll Rand products and
services in the country, IRL serves its customers in two major markets, viz., Industrial Productivity
and Infrastructure Development.
IRLs Air Compressor Business
An air compressor is a machine, which is capable of compressing air thereby increasing its pressure
from a lower to a higher pressure. All compressors act as sources of energy wherein the compressed
air is used for control applications such as triggering, starting, stopping and modulating a motion or
process. Small manufacturing plants invariably use small compressors, which are installed close to
the point of use. Large manufacturing plants typically use large compressors that are installed in a
separate utility room along with the diesel power generation sets (DG sets). Air Compressors are
usually classified according to their capacities spanning the low (0.5 horsepower (HP) to 40 HP),
middle (40-100 HP) and high (100-2000 HP) ranges. While portable compressors are diesel-driven
and are used for construction and drilling, stationary ones are normally electric-driven and are used
in industrial applications.
Based on the method of compression, air compressors are classified into reciprocating, rotary screw
and centrifugal compressors. These compressors find applications in virtually all types of industries,
but are more intensively used in most process industries and large-scale manufacturing plants. Some
of the major industries that use compressed air are construction, cement, steel, refineries, glass,
plastic processing, chemicals and pharmaceuticals, foundries and forge shops, textiles, PET bottleblowing and automotive manufactures. Table 1 lists the typical applications of air compressors in a
few industries. Exhibit 2 provides the applications of compressed air in a Textile Industry.
Table-1
Typical applications of air compressors in different industries
Industry
PET Bottle-Blowing

Some typical applications of compressed air


Blowing the pre forms of bottles that are heated in dies using high pressure air

Steel

For Oxygen enrichment of molten steel

Automobile

To paint bare bodies of vehicles manufactured and to operate Pneumatic Tools

Cement

For transfer of cement through Pneumatic conveying pumps

Paper & Pulp

Instrumentation Controls

Foundry

For Pneumatic Moulding / Jolting of Mould Tables

Forging

To operate the Pneumatic Forging Hammer

Sugar

Combustion for Sulphur Burners

Dairy

Used for milk sachet packing. The Pneumatic Cylinders are actuated by
Solenoid Valves

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The Indian operations of Ingersoll Rand are organized into two major business groups: Air
Compressors and Infrastructure. The Air Compressors business of IRL manufactures compressors of
various types and sizes in the two IRL manufacturing units located respectively at Ahmedabad and
Bangalore. The Infrastructure group manufactures drilling equipment for the mining industry and a
variety of equipment for road building and construction industry at the companys manufacturing
facility at Bangalore. Table-2 below presents the growth of IRL in the Air Compressors business
during the period 1999-2002. Growth in this segment depends heavily on capacity expansions in the
manufacturing sector and recurring revenue from equipment already supplied to customers, such as
through supply of replacement compressors or spares.
Table-2
Revenue & growth rates of air compressors business, Ingersoll-Rand (India) Ltd. (Rs. crores)
Description

March 2002

March 2001

March 2000

March 1999

Air Compressors business

118.59

122.61

119.32

86.03

Total Sales of IRL

406.72

337.77

413.43

372.79

-3.28 %

2.76 %

38.70 %

---

% Growth in Air
Compressors Business

Source: Annual Reports of Ingersoll-Rand (India) Ltd.

Products and Applications

The Air Compressors business of IRL offers its customers a wide array of air compressors that have
high quality, high reliability, low maintenance cost, use advanced technology, and are energy
efficient. The company also offers its customers air compressor accessories and services. The
compressors manufactured by IRL are broadly classified into small compressors, medium
compressors and heavy industry compressors based on the capacity of the machines. The type of
compressor and size of compressor are strongly correlated as shown in the following:
Small compressors: both Small Reciprocating Compressors and Rotary Screw Compressors
Medium Compressors: predominantly Rotary Screw Compressors
Heavy Industry Compressors: Large Reciprocating Compressors and Centrifugal Compressors.
The type and size of compressors chosen for a particular application depends on the usage specified
by the customer.
While small Reciprocating Compressors are simple, rugged and very durable, they require regular
monitoring and frequent replacement of parts. The Rotating Screw Compressor has become the most
popular source of compressed air for industrial applications. It uses a more modern technology and is
designed to provide pulsation-free air 24 hours a day. Its operations are relatively quiet, It is energy
efficient at full load, has reliable long life and produces improved air quality. Large Reciprocating
Compressors and Centrifugal Compressors are very efficient, are suitable for large capacities, use
very critical technology in terms of design and components, and cannot be easily substituted by
alternate types of compressors. Table-3 lists the types of compressors used in different industries.

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Prices of a typical IRL compressor in the above three categories would typically fall in the following
ranges:
Centrifugal compressors: Rs. 50 lacs to Rs. 125 lacs
Large reciprocating compressors: Rs. 15 lacs to Rs. 20 lacs
Rotary screw compressors: Rs. 7 lacs to Rs. 8 lacs
Small reciprocating compressors: Rs. 60,000
Table 3
Air compressors: Technology, Horsepower (HP) and Market segments
Technology type
Small reciprocating

HP range
(approx.)
5-20

Small rotary

5-40

Large reciprocating

30-700

Medium rotary

50-300

Centrifugal

250-1000

Typical market segments


Automotive service, gas stations, construction,
small industries
Small industries, garment manufacturers, auto
components
Air separation, sugar, pharmaceuticals, PET
bottle-blowing
Auto components, textile, medium engineering,
cement
Vehicle manufacturers, metal (steel, aluminium),
petroleum refineries, textiles, auto components

Capabilities

The IRL factory at Naroda is the only IR unit worldwide that carries out manufacturing and assembly
of all the 4 types of compressors. Over the years, the Indian operations have built up a high level of
competence on product engineering capabilities. Until a few years ago, IRL was a faithful
implementer of product designs developed by the engineering teams of the parent company in USA.
In the recent years, IRLs proven engineering skills, manufacturing skills, localization skills, ability
to develop prototypes, approve vendors, etc., have improved greatly. The company has consequently
earned the consent of IR, USA to design and manufacture products tailored to the specific market
needs in India. The percentage of the bill of materials (in terms of value) that has been indigenized
has progressively increased over the years and stands at about 70 %. This figure however varies
depending on the type of compressor and customer application. The other strengths of the Naroda
unit include financial management, value engineering and corporate governance.

Markets

The Air Compressors business for IRL predominantly comes from industries such as automotive,
automotive components, textiles, metals (steel and aluminium), petroleum refineries and PET
bottling industry. IRL is well entrenched in these markets. Sales to these markets are handled directly
by IRL or through distributors depending on type of application, compressor and customer.
Compressors required for simple applications are handled by distributors. Medium range
compressors and Large Reciprocating compressors are sold by both IRL and distributors. Centrifugal
compressors are directly sold by IRL as these require considerable technological knowledge and
competencies that typically IRLs distributors do not possess.

Competition

Atlas Copco, Elgi Equipments Ltd., Kirloskar Pneumatics (KP) and IRL are the key players in the
organized sector for both medium (40-100 HP) and large (over 100 HP) compressors . Atlas Copco is
a major competitor of IRL in Rotary and Centrifugal compressors. Elgi Equipments is a major
competitor of IRL in Small Reciprocating and Small and Medium Rotary compressors, while KP is a
significant competitor of IRL in Large Reciprocating and Centrifugal air compressors.
Atlas Copco has been the market leader in small and medium Rotary compressors for the past
several years. In this segment, IRL products have not managed to create a strong impact. Cutthroat
competition in the small and medium Rotary compressors has stunted the growth of IRL in this
market segment. Ingersoll Rand is a leading manufacturer in the Centrifugal compressors and high
pressure reciprocating compressor segments, where technology sophistication levels are considerably
higher than for other ranges of compressors. IRL is the only company in India that offers a range of
compressors from 4 CFM (cubic feet per minute) to 10,000 CFM without any product gap. But
competitors have been trying to catch up with IRL in the centrifugal compressor segment through
ambitious growth programs including through foreign technical collaborations. Atlas Copco has
launched its programme Investing for the future, which lays stress on development of new models
in centrifugal compressors for the local market. The proposed merger of Atlas Copco with Chicago
Pneumatic, another large player, would result in broadening the product portfolio of Atlas Copco, by
adding Chicago Pneumatics reciprocating compressors to its stable of products. Elgi Equipments
tie-up with Samsung Techwin Co. Ltd., an affiliate of the South Korean Samsung group, is expected
to bring the centrifugal compressors range of the Korean behemoth to India. Exhibit-3 presents the
market perception of compressors manufactured by competitors of IRL.

Exports

The parent company Ingersoll-Rand follows a policy of global sourcing. Accordingly, it has
identified centers of excellence (CoEs) for manufacturing various products in its different factories
around the world. Its Indian plant has been nominated as the CoE for small air compressors up to
30HP. Other IR CoEs in manufacturing are located in the U.S.A, Europe and China. IRL
manufactures bare compressors for the U.S. market. The bare compressors are then packaged and
sold in the U.S. Consequently, exports of IRL entirely depend on the performance of the U.S.
economy. Further, the emergence of Ingersoll-Rand as a dominant player in the global small
compressors market has made ITL a very strong sourcing base for export of this range of products.
A meeting with the Ahmedabad sales team and financial controller
With Sanjay Mehta having left his office on a bitter note, Anand felt that it was urgently necessary to
get the views of his sales team and the financial controller, Mr. Suresh Prasad on the issue at hand
(Exhibit 4 presents the organization chart of IRL). Accordingly, a meeting was hastily convened in
the adjoining conference room. Anand also remembered to send out an e-mail to Sanjay requesting
for some fast facts on Deccan Textiles, so that this information could be factored into the on-going
discussions on the issue at hand, as if flowed in. In the meeting with his senior colleagues at
Ahmedabad, he laid out the purpose of the meeting in a terse manner, as was his style:
Sanjay Mehta, our star Business Leader from Mumbai, met me a couple of hours ago, began
Anand, and he has been successful in procuring a Rs. 93 lacs order from Deccan Textiles for a
Centac Centrifugal Compressor. There was a loud round of applause from the sales team. But I am
not too convinced that this is a good order as the profit margin is non-existent or wafer-thin, he
continued and such deals only end up putting pressure on our bottom-line, and in extreme cases,

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even eroding it. There was hushed silence, with everyone wanting to fathom what the boss was
trying to get to. This was surely different from the past when exuberance filled the room when the
company procured such orders, especially first-time beachhead orders from a customer firm, as was
the case with the Deccan Textiles order.
The capital goods industry is being affected by the economic slowdown. Growth in the industrial
sector has been sluggish over the last two years. This has had an adverse effect on the sales of our air
compressors, which depends heavily on the activities in the industrial sector. And as you already
know, this trend is likely to continue even this year. I feel the Rs. 93 lacs order that Sanjay got is
cause for us to celebrate in these trying times, said Naveen Parikh, one of the Sales Executives.
Even before he could finish, his colleague Vidya Sagar added, Thats true, the investment climate
doesnt seem to be improving in the industrial sector. In fact, many of my key customers are
postponing capacity expansion plans. I personally feel we should grab whatever orders we get, so
long as it is above our costs, even if it means offering heavy discounts, and selling well below the
guidance price. We should take on the order of Deccan Textiles because earning even a 1% profit is
better than making no sale at all! Even worse, it the competitor takes the order, he would surely go to
town with it and brag about it. That would only further weaken our market position! I agree with
Sagar on this point. Over the last several months, our competitors have been offering customers
extremely low prices, often below their costs. We at Ingersoll-Rand can never dream of dropping our
prices to such levels, as these prices violate the norms we have been given from the corporate. It was
but a week ago that I lost a big order from a leading Indian pharma company to our competitor, who
offered a whopping 14% discount on our last price of Rs. 18 lacs for a large reciprocating
compressor, said Debashish Chatterjee, the chain-smoking go-getter salesman of the Ahmedabad
team. With our competitors offering discounts at the drop of a hat, customers today are accustomed
to getting high quality equipment at ridiculously low prices, and therefore I am not surprised that
Sanjay has been forced to slash down the price for Deccan Textiles from our best price of Rs. 108
lacs, which itself is considerably below our list price of Rs. 115 lacs, to Rs. 93 lacs. If we are to
retain our market share in the compressed air business today, customers have to be wooed through
substantial discounts, and this has regrettably become the rule of the game, lamented Pramod
Mahajan, a veteran in the sales team.
Suresh Prasad, the Finance Controller lit his cigar in slow and measured movements, and then gave
his verdict: While it is true that you as salesmen are badgered by customers for steep price cuts, it
would be worthwhile to look at our costs of manufacturing a centrifugal compressor. The major raw
materials that go into its manufacture are castings, aluminium and steel. The finished and semifinished components used are bearings, coolers and filters, switches, gauges, rotors, skid, control
panels, starters, housings and piping. Although the entire manufacture/assembly of the machine is
done here at Naroda, we still take recourse to imports from the parent company for some of the
critical components by paying a customs duty as high as 25%. Thus, an overall estimate of our total
costs, which includes production costs, distribution costs and service costs, would be Rs. 91.3 lacs
for the Centac Centrifugal Air Compressor being considered for Deccan Textiles. The present
increase in raw material prices and the devaluation of the rupee will further impact our input costs.
Also, as you all are already aware, there is a lot of value packaged into the Centac Centrifugal
compressor. Its robust design enables customers get trouble-free operation for 10-15 years, without
any drop in operating efficiency. It delivers the highest quality of air at the lowest operating cost. I
understand from Anand that there is a lot of clever design and several proprietary features including
some very important patents that IR holds that have gone into all the software of building that
machine. Therefore, offering this product at a price as low as Rs. 93 lacs would mean undervaluing
the product. Besides, at the end of the day, we will end up losing money, should we sell it at such a
low price, since there are a lot of hidden costs involved in the implementation, over which we do not
have too much control. I am afraid that the same is true for our entire product range.

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We agree with what you say, Suresh. However customers are using the existing ruthless competition
to their advantage. Suppliers are asked to give their best quotes. The customer then pits one supplier
against the other, eventually forcing the suppliers to offer rock-bottom prices. In this sense, I fear
that as an industry we are all to blame for accelerating the downward plummeting prices for
compressors. However at the end of the day, we sales people have sales targets to chase and market
shares to defend. If we do not sell our products fearing that the profit being earned is not much, then
we would end up making no sales at all. If we extend this line of reasoning, soon, we will have no
jobs to keep! remarked Pramod sarcastically. In these difficult market conditions, sales realizations
are not going to come easily. When we salesmen have fought hard on a business deal to ultimately
clinch the order, we are now hearing that it is better off not making the sale, because profits are low!
I think this is being really unreasonable, grumbled Sagar.
I see no danger in the way we are doing business at present. We will win some orders and we will
lose some. Our air compressor business has managed to report relatively impressive performance
figures even amidst heightened competition and slowdown in the user sectors, commented Naveen.
Anand seemed to rebuff Naveen: Dont forget that our good performance has been on account of
sharp increase in exports of air compressors, coupled with improvement in sales of spares and
services. As it is, our export program is already under competitive pressure from our own China
plant, which is much more productive and cost-effective compared to our plant. (Exhibit 5
provides the sales distribution of air compressor business of IRL).
Cheaper imports and competition from the unorganized sector is also becoming a cause for worry.
These two sources account for about one-third of the sales in the reciprocating compressor segment,
which means lower margins for us in this segment, mused Sagar . We should also bear in mind that
competitive pressures on our customers are forcing them to look at reduction in their costs. This is
yet another reason for customers to squeeze out the best deal from their suppliers, and this is
happening across the board of suppliers, covering capital goods, raw materials and consumables,
added Debashish. Customers are showing reluctance to pay for features accompanying our
products, and price has become the principal purchasing criterion, mentioned Sagar. Customers
undoubtedly prefer to have a more durable and more reliable compressor over a less durable and
reliable one at the same price, added Naveen. If IRL has to maintain its position in the market, it
needs to fight competition on price. This makes it all the more important that we accept even the not
so profitable orders such as that of Deccan Textiles, Sagar emphatically concluded. Wanting to
swing the entire team to his reasoning, he continued, We at IRL manufacture a wide range of
compressors that are high on quality, suited to the needs of our customers. We have a commendable
after-sales service and a strong presence in the export market to the United States. I see that pricing
is and will be the only factor affecting our performance. We would be unnecessarily putting our
performance under pressure by not willing to offer prices that our customers want. I feel that we
should show more flexibility in our approach to pricing and not be too fixated in getting premium
pricing, as we appear to be doing. I firmly believe that the days of juicy prices are long gone and we
must now wake up to the realities of the market.
The meeting had gone on for two hours.
Although price is critical, a sale cannot be purely price-driven. If left to the customer, he will only
fight on prices and our profit line will get eroded even though topline growth may be maintained.
And this certainly doesnt ring well for the company. I cannot but help compare what is happening to
us with what happened in ancient Rome many thousands of years ago! IRL is today experiencing
what I call the gladiator syndrome. Competitors, like gladiators, are fiercely swinging their swords
fighting each other, while the customer sits in the stands cheering wildly. In the end, both gladiators
end up bleeding. One gets so badly hurt that he is as good as dead, while the other who is also
grievously injured, is proclaimed by the customer to be the winner. All this time, the customer is

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sitting in the stands, watching the battle with much delight, and happily applauding. The price war
going on in the air compressor market has IRL already bleeding! said Anand emphatically.
How then do you propose we do business, if not on price? To my knowledge, IRLs strengths lie in
manufacturing high quality air compressors. We have been doing feature-additions to existing
products fairly frequently. We have been introducing newer, more sophisticated machines regularly.
This is critical for both maintaining and expanding our market share. Apart from this, what else do
we have that we can leverage upon? questioned Pramod. No one present in the meeting had an
answer to this sage question. Anand decided it was time to conclude the meeting: Pramod has
summed up our predicament well. I suggest each of you think through the situation and come up
with what you think we ought to be doing going forward. We are in an emergency situation of sorts
as you all will recognize. Lets plan to meet in ten days time, to skin the cat. In the mean time I have
asked Sanjay in Mumbai to feed us with a lot more information on Deccan Textiles. On this note,
the meeting concluded. The team dispersed leaving Anand behind, engrossed in thought.
Details on Deccan Textiles sent by Sanjay
On reaching his office at Mumbai, Sanjay found an urgent email waiting for him from Anand. He
quickly assembled the following details pertaining to Deccan Textiles and dispatched them to him.
Manufacturers of one of the finest cotton fabrics for over a century in India, Deccan Textiles Ltd.,
Mumbai has carved a niche for itself in the domestic textiles industry. Incorporated in the year 1897,
the company today is a trendsetter in cotton textiles and has a strong presence in Yarn and Denim as
well. With an annual turnover of Rs. 975 crores (2001-2002) and exports of Rs. 350 crores (20012002), the companys fabrics have made their presence felt in highly competitive international
markets such as Austria, Australia, Bahrain, Bangladesh, Belgium, Canada, China, U.A.E., U.K.,
USA and Zimbabwe.
The companys production facility situated in Mumbai is spread over an area of 30 acres. It
manufactures world-class cotton fabric such as Grey, bleached, dyed, printed and yarn dyed woven
fabrics in various weaves and patterns. Deccan Textiles also imparts finishes such as Mercerised,
Pre-shrunk, Emerised, Wash-n-Wear, and Easy-care suited to the end customers needs and taste.
Other fabric varieties produced by the company include Sheetings, Poplins, Cambrics, Mulls, Lawns,
Full Voiles, Duck fabrics, Drills, Twills, Satins, Suitings, Shirtings and Furnishing Fabrics.
A balanced blend of modern, sophisticated machinery with a highly skilled and dedicated workforce
has seen the company through a very difficult period for the Textile industry over the last few years.
Increased input costs, depressed market conditions, demand recession, general economic slow down
in the country and a sluggish global demand have forced Deccan Textiles to regulate production of
fabrics in accordance with the falling demand in both domestic and export markets.
Rising input costs for electric power, water, labour, diesel oil, coupled with stiff competition in the
organized sector of the textile industry has made Deccan Textiles adopt a rigorous system of cost
deployment. Clearly, the thrust in the company is now on cost reduction and costs are being managed
systematically, covering both fixed and variable costs.
Deccan Textiles has a reputation among its suppliers as being an aggressive buyer, demanding the
highest product quality and the best service at low prices. The purchase function sends out the RFQ
(request for quotation) to suppliers and plays a key role in deciding the vendor along with the
President.

10
A research team created to gather further information on Deccan Textiles
With a desire to get a better understanding of the challenges being faced by Deccan Textiles, Anand
created a fact finding team that comprised of Sanjay, Pramod and Debashish. The idea was to have
the team spend time in the premises of Deccan Textiles talking to people and collating information
on problems being faced by the company. Sanjay had managed to establish a fairly good rapport with
the President of Deccan Textiles over the last few months, and this helped the IRL team get his
consent to interact with officials of the various departments in the company, supposedly for the
purpose of better understanding their needs.
Over the next one week the fact finding team held intense discussions with the heads of the sales &
marketing, purchase, maintenance, finance and manufacturing at Deccan Textiles. The findings of
the team were summarized. As Anand read through the report, he learnt the following:

Sales & Marketing function is under enormous pressure to increase the companys domestic and
international market shares. Although the company has so far been exporting about 40% of its
production, depressed export markets and increasing competition from domestic and global
players resulted in reduction of the percentage of exports of the companys products in all
product lines. Similar competitive pressures were at play in the domestic markets, where severe
price pressure from both domestic and foreign competition was the reality for the company at
every turn, leaving no scope for price increase on any of the products in its existing product
range.

The companys falling turnovers and profits over the last three years has had the Managing
Director (MD) worried. He is being pushed hard by the Chairman and Board of Directors to
increase the earnings per share of the company by 30%. The board directed the MD to embark
on consolidation with particular emphasis on improving operational efficiency through
implementing strict measures for cost control and financial restructuring of the company to the
extent possible.

In his drive to cut costs and minimize waste in the company, the MD has given the Vice
President (Manufacturing) a clear mandate to reduce cost of production in the three divisions,
viz., textiles, cotton yarn and denim. While the VP (Manufacturing) was working on developing
energy conservation measures and absorption of new technology to improve process efficiency
and product quality, he had also asked the heads of department of purchase, maintenance and
human resource to trim costs.

Known to be shrewd extractors of price concessions and service support from vendors, the
purchase department has over the years created a lot of negative feelings amongst its vendors.
Suppliers have had enough with Deccan Textiles purchase policy of pay the least and get the
most. Directives from the top management to control costs further had the VP Purchase at
Deccan Textiles in a tight spot. He strongly felt that pressurizing vendors further for price cuts
would only end in them discontinuing supplies to the company.

Over the last 3 years the utility manager had encountered numerous problems with many of the
equipment (such as exhaust fans, transformers, motors etc.) purchased by the company. He felt
that this was due to the mercenary policies adopted by the company in price negotiations with its
suppliers. Repeated breakdowns of equipment had affected plant operations resulting in the
manufacturing department scowling at the utility manager. The maintenance department has
often failed to come to the rescue of the utility department during such breakdowns due to
shortage in manpower.

11

The maintenance head, gave some first hand information regarding problems being faced by
Deccan Textiles on account of poor compressor performance over the last 3 years. Most of the
instrumentation of the manufacturing plant at Deccan Textiles is powered by high-pressure air.
Machine tripping occurred on a number of occasions on account of low air pressure in the
system, caused due to leakages. The low air pressure has been causing plant breakdowns and the
time being spent to revive plant operations has been on an average, 2 to 3 hours. Machine
tripping of this nature happens at least 15 times a year. Every time there has been a plant
breakdown, direct loss in revenue to Deccan Textiles has been approximately Rs.8 lacs. Thus,
every year, direct loss in revenue associated with low-air-pressure plant breakdowns has been
Rs.120 lacs. Apart from the direct revenue losses, there are additional costs Deccan Textiles had
to incur. For instance, some to he equipment would get damaged due to consequential thermal
stresses. Cost of overtime for employees, cost of work in process at various stages that had to be
dumped, and costs of repairs were realities that the company faced. The cost of low-pressure
air had thus been quite substantial. To counter this, the company increased the compressed air
capacity by adding a new large compressor to the system about two years ago. The enhanced
compressed air capacity led to underutilization of the additional compressor.

In following the instructions of the MD, the VP (Finance) was all set to ensure that the company
ramped up its profitability anyhow. His approach to containing costs and enhancing profits
would clearly be through time-tested methods: steep reduction in overheads, variable costs as
well as sales & marketing expenses, and controlling investments in R&D.

The team also sent Anand copies of the profit & loss statement, balance sheet, and income statement
of Deccan Textiles (as provided in Exhibits-6, 7 & 8) for his perusal.
The way forward?
It was a busy morning on the 10 th of July. Anand browsed through Sanjays email containing fast
facts on Deccan Textiles and mulled over the findings of the company as reported by his specially
appointed research team. He was still not convinced about the price decided on the centrifugal
compressor for Deccan Textiles. It is just not profitable! he said. Should IRL continue to bleed
doing business this way? he asked himself. If we carry on doing the business the way we have
been doing for the last few years, we will come under enormous bottom-line pressures. Also we will
end up growing the company at about the same rate as the growth of the economy.
Air compressors are a complex technology product, with a lot of value locked in it. Sadly, today
even these have been dragged down to commodity status! The combined pressure from the customer
and competition is forcing prices of compressors to hit all time lows. Our products have a lot of
value built into them. How can my salesmen convince customers that highly engineered products
like air compressors should not be purchased simply on the basis of price? Unless we get better
prices, we cannot continually improve the technology, and this will over a period of time also impact
the customer adversely.
Anand recollected some of the concerns expressed by Simon McDonald the President, Industrial
Technologies during a recently held meeting in the global headquarters in USA. There is much
more potential for air compressors in the Indian market, Simon had said confidently to Anand. He
based his judgment of the potential of the Indian market, which in turn was founded on the overall
excitement about India in the developed world, and the fact that this sleeping giant was beginning to
wake up. Its over a billion people were hungry for all types of goods and services, and all that meant
great times for companies in the western world. At least that is what the western business media
wanted company honchos like Simon to believe. You guys in IRL are not capitalizing on this

12
opportunity. Something is missing somewhere. You have the right kind of people, the required
technological skills, the market seems to be there, but your growth has not been anywhere near the
aha that I have been hoping for! Anand came away from this meeting with a clear directive that he
had to grow the domestic air compressor business at a faster clip. In parting, Simon advised Anand
that the way forward was for IRL to do something very different. Anand was too seasoned a
manager to ask Simon if he knew what that something very different should be!
As Anand pensively sipped his second cup of coffee, he felt it was imperative to slow down, if not
change, the commoditization of air compressors. If a leading player like IRL itself accelerated the
commoditization, there was not going to be too much hope in that business in the years to come! He
was to not only preserve the companys profit position, but also grow the air compressor business
profitably. IRL has to beat the commodity cycle. It has to come out of the gladiator syndrome and
move ahead aggressively to ramp up top- and bottom-line growth and market shares. We also need to
expand the pond, and enlarge the market in which we play, he told himself. But the question was
How?

13
Exhibit - 1
Financial Performance of IRL during the period 1998-2002 (Rs. crores)

Description

Year
2001-2002

2000-2001

1999-2000

1998-1999

Sales

406.72

337.77

413.43

372.79

Other Income

21.60

20.37

20.83

15.33

Exports in value

78.84

88.47

62.78

52.65

Profit After Tax

36.33

51.05

52.38

54.25

Profit After Tax as % of Sales

9.14%

15.21%

12.67%

14.55%

CAGR for Total Income (%)

7.69

7.33

12.60

---

CAGR for Profit after Tax (%)

5.62

10.86

13.50

---

*Source: Annual Reports of Ingersoll-Rand (India) Ltd.


*CAGR Compounded Annual Growth Rate

14
Exhibit 2
Applications of Compressed Air in a Textile Industry
In a Textile plant, raw material (cotton) undergoes many processes from the time of receipt into the
mill untill the final cloth is made. Broadly the operations can be classified as:
Spinning
Weaving
Processing
Texturizing

- Converting Cotton to Yarn (threads)


- Converting Yarn to Cloth
- Bleaching / Dying of Cloth / Printing
- Process where Partially Oriented Filament Yarn (POY) is stabilized through
heating and drawing.

Each of the above processes use machines that are powered by compressed air. The compressed air
requirement for some of the Textile machines is listed below.
Name of
Machine

Textile Function Description

Bale Opener, Bale


Breaker, Scutcher
Carding
Comber
Draw Frame
Speed Frame
Ring Frame
Lap Former
Cone Winding
Auto Coner
Air Jet Looms

Opening and cutting bales

Air
Pressure
Kgs/Cm2
10-15

Volume
of Air
CMF*
12

Removing waste fiber


Combs the cotton in carding drums
Draws the combed cotton to silvers
Twists the silvers
Several silvers are combined into thick Silver
Several thick silvers are twisted to yarn
Combing the yarn onto Bobbins or Cones
Joins yarns that break during winding on Cones
Carrying the yarn across

6-7
6-7
6-7
6-7
6-7
6-7
6-7
8.5
8

2-3
2-3
2-3
2-3
2-3
4
5-15
35
28-48

*CFM - Cubic Feet per Min

Apart from finding applications in the above processes, compressed air is used:

To hold empty Bobbins (Cones) between end plates


To pressurize drafting tubes by passing the compressed air through Pneumatic Cylinders
To squeeze rolls with Pneumatic Cylinders
To blow air on the yarn to keep it clean & free from dust and impurities
Used in Pneumatic Cylinders that are actuated through Electrical Solenoid Valves. Some
Pneumatic Cylinders are used for doing various operations such as opening / closing duct doors.

15
Exhibit-3
Market perception of compressors manufactured by
IRL and its competitors on a scale of 1 (poor) to 10 (excellent)
Product

Low HP Compressors
Price Perception
Quality Perception
Reliability
Technology leadership
Medium HP Compressors
Price Perception
Quality Perception
Reliability
Technology leadership
High HP Compressors
Price Perception
Quality Perception
Reliability
Technology leadership

Atlas
Copc
o

Manufacturer
Elgi
Kirloskar
Equipme
Pneuma
nts
tics

Ingersoll-Rand
India Ltd.

7
8
7
8

8
7
8
7

6
5
6

6#
8
8
7

8
8
8
8

7
7
6
7

7
7
7
7

7
7
7
7

8@
6@
6@
5@

6#
8
8
8

@ Large reciprocating compressors only


# Perceived as premium brand, not the cheapest in the market

16

Exhibit - 4

17

Air Compressor Group, India


(Year 2002)

Executive Vice President


Air Compressor Group

Associate
Vice President Systems

General
Manager Special Projects

Group Controller

General Manager
Operations &
SCM

SCM

Naroda
Operations

Bangalore
Operations
Group Human
Resources
Manager

General Manager
Marketing &
Sales-PBM

PBMMarketing
&Sales
(domestic)
PBM + Large
Recip.
Exports

Head Aftermarket

Parts

Service

COE
Warehouse &
Interco Parts

Air Centres,
Branches,
Distributors
Note: Shaded positions reflect sales and marketing functions

General Manager
Customer
Solutions

Business
Leader
LI Systems
Business Leader
MI+ Recip
&System
Components
Business
Leader
H I Systems

Engineering.
LIS

Engineering
MIS

Engineering
HIS

18

Exhibit 5

Sales Percentage

Sales Distribution of Air Compressors Business


Ingersoll-Rand (India) Ltd.

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Exports
Spares
Completes

1998 1999 2000 2001 2002


Year
*Source: Ingersoll-Rand (India) Ltd.

Total Business of Air Compressors of IRL (Rs. Crores)


Description

Air Compressors

Year ending
March 2002

March 2001

March 2000

March 1999

118.59

122.61

119.32

86.03

20
Exhibit 6
Yearly Financials of Deccan Textiles

Units: Rupees Crores

Description
March
2002
Sales

Year ending
March
March
2001
2000

March
1999

975.12

1,457.06

1,338.21

1,294.80

Other Income

56.96

15.73

18.38

12.55

Raw Material

228.96

357.49

0.00

0.00

77.92

150.73

0.00

0.00

Employee Expenses

166.67

160.26

0.00

0.00

Excise

106.68

170.23

0.00

0.00

Other Expenses
Operating Profit
Interest
Gross Profit
Depreciation
Taxation
Net Profit / Loss

296.84
131.12
25.22
162.86
52.61
26.97

440.06
169.61
79.91
105.43
81.38
31.00

1,098.69
239.52
94.58
163.32
99.70
4.25

1,010.25
284.55
114.02
183.08
92.14
10.17

81.13

332.22

31.71

80.77

61.38
13.44
15.77
7.86
13.22

61.38
11.64
7.15
22.55
54.13

75.09
17.89
12.03
2.33
4.22

75.09
21.97
14.00
6.17
10.76

Power and Fuel

Equity Capital
OPM (%)
GPM (%)
NPM (%)
EPS (in Rs.)
*Note: OPM - Operating Profit Margin
GPM - Gross Profit Margin
NPM - Net Profit Margin
EPS - Earnings per Share

21
Exhibit 7
Balance Sheet of Deccan Textiles
Units: Rupees Crores

Description
March
2002

Year ending
March
March
2001
2000

61.38
833.88

61.38
812.52

75.09
733.07

75.09
713.86

142.44
388.65
1,426.35

190.92
335.81
1,400.63

314.77
449.47
1,572.40

428.58
476.46
1,693.99

823.80
0.00
470.97
352.83
25.73
584.39

788.76
0.00
421.43
367.32
3.46
607.44

1,478.58
0.00
630.73
847.85
6.29
185.83

1,454.47
0.00
531.99
922.48
12.56
96.83

768.78
306.80

731.35
311.27

847.83
317.52

934.28
277.37

461.97
1.42
1,426.34

420.09
2.32
1,400.63

530.31
2.11
1,572.39

656.91
5.20
1,693.98

577.88

603.93

182.32

48.72

4.69

3.93

5.17

18.72

192.32
613.81

207.88
613.81

334.14
750.91

237.89
750.91

March
1999

SOURCES OF FUNDS

Owners Fund
Equity Share Capital
Reserves & Surplus
Loan Funds
Secured Loans
Unsecured Loans
Total
USES OF FUND

Fixed Assets
Gross Block
Less: Revaluation Reserve
Less: Accumulated Depreciation
Net Block
Capital work-in-progress
Investments
Net Current Assets
Current Assets, Loans & Advances
Less: Current Liabilities &
Provisions
Total Net Current Assets
Miscellaneous expenses not written
Total
Note:
Book Value of Unquoted
Investments
Market Value of Quoted
Investments
Contingent liabilities
Number of equity shares
outstanding (in Lacs)

22
Exhibit 8
Income Statement of Deccan Textiles
Units: Rupees Crores

Description
March
2002
Income:
Operating Income
Expenses:
Material Consumed
Manufacturing Expenses
Personnel Expenses
Selling Expenses
Administrative Expenses
Cost of Sales
Operating Profit
Other Recurring Income
Adjusted PBDIT
Financial Expenses
Depreciation
Other write offs
Adjusted PBT
Tax Charges
Adjusted PAT
Non Recurring Items
Reported Net Profit
Earnings before Appropriation
Equity Dividend
Dividend Tax
Retained Earnings

Year ending
March
March
2001
2000

March
1999

885.06

1,307.26

1,463.71

1,390.01

277.08
121.63
166.67
104.92
74.12
744.42
140.64
48.63
189.27
55.46
52.61
1.52
79.68
26.97
52.71
28.62
83.64
110.00
27.62
0.00
82.37

530.53
198.24
160.26
195.63
99.02
1,183.68
123.59
32.80
156.39
91.71
81.38
2.82
-19.52
31.00
-50.52
380.82
333.41
294.79
18.41
1.88
274.50

564.14
212.40
136.38
225.97
79.72
1,218.61
245.10
31.87
276.97
110.25
99.70
3.04
63.98
4.25
59.73
-31.29
32.62
81.83
11.26
1.24
69.33

520.43
200.48
137.03
175.29
78.87
1,097.02
292.98
30.93
323.92
116.87
92.14
2.73
112.17
10.17
102.00
-16.86
86.59
133.84
15.02
1.65
117.17