BASIC Refined Technology Ltd

INTRODUCTION
BASIC Refined Technology Ltd (BART) provides a number of products and services to
refineries for use in the oil refining process to extract useful products. BART held the patent
to some of its technologies, making it the market leader for some of the solutions offered.
Cracking Products & Services (CT) was one such area where BART had an edge over its
competitors and it earned a significant portion of its revenue.

With the expiration of the patent to CT and the oil prices rising, BART’s global sales
manager, Gautam Kumaravolu, was facing the issue of selling the technology without
discounts among heavily discounted competitors. Further, he had to consider and decide on
the suggestion by his Territory Managers on having differential pricing to capture the
market.

SITUATION ANALYSIS

MARKET CONDITION
 The prices of crude oil, used as a source for extracting fuel products, has drastically
fallen from $115 in 2015 to $40 in 2016
 Refineries are able to realize maximum margins through operational efficiency and
cost-effective sourcing
 Cost-effective sourcing can be achieved by only accepting oil from a wide variety of
sources with different levels of contamination
 Technologies capable of extracting various products from different sources of oil
produced maximum operational efficiency
 A consolidated market prevented solution providers from providing differential
pricing in different markets

BART’s POSITION
 Current market leader in providing products and services to refineries
 Spends significantly higher (9%) of its revenue compared to its competitors (6%) on
RD, hence it is able to develop superior technologies, patent it and stay ahead of its
competitors
 CT is its star product, bringing in 29% of the total revenue, while having a 41%
contribution in profits.
 CT’s patent is due for expiry and competitors have equivalent product at a
discounted price
 The falling prices in copper, an important metal in the manufacturing of CT, has
significantly fallen, resulting in pressure from the customer to reduce CT price
  Currently the price trend setter in the market and competitors followed suite with a
discount
 Salesforce comprised of some of the high-quality talent from around the world
 Develops deep relationships with the customer’s senior technical personnel, which
was a significant asset
 The combination of Products and Services enabled BART to establish edge over its
competitors with the customers

CRACKING PRODUCTS & SERVICES (CT)

 Significantly higher functionality product compared to other competitive products in
the market
 Capable of processing both easy and heavy components to product end products
 In an optimally operated condition, CT was able to save customer 4-5 times the cost
of CT
 Under sub-optimal conditions, customers found it difficult to quantify the benefit of
CT
 Patented product with the patent expired recently

COMPETITORS
C1
 Clients: Very profitable refineries in US
 Neat Customer segmentation
 Focused on development activities
 Products perceived as ‘futuristic’
 Customized and carefully designed products
 Launching comparable product as CT at 15% discount
 Acquired as customer some reputed brands as part of industry consolidation in US

C2
 Japanese competitor with significant process and cost advantage compared to
others.
 Competent and responsive customer care on sales
 Customer intimacy built over long period of association
 Advanced manufacturing practices
 Low price
 No differential pricing

Others
 20% of global market share
 Low cost coupled with import tariff
 Standard products
  Grow with local clients
 Price spoilers
 Ambitious to increase presence beyond local geographies

Financial Analysis
 BART currently earns 57 Million USD as its global revenue of which the share of CT is
29%. This accounts for a revenue generation of 16.6 Million USD from sale of CT
technology in 2016.
 As the profit margins of CT are in the range of 40-45% the expenditure share of BART
as a whole can be taken as 59% of the Revenue. As per case information 55% of this
cost is solely due to mined metals like Copper which form the base of the CT
technology.
 This highlights that BART as a whole sells 1200 MT of CT product every year and
purchases 1080 MT of copper every year to meet its requirement.

Given below is a cost benefit analysis of BART’s CT business if it plans to maintain its
sales figure of CT while maintaining the same purchases of mined metals to meet its
production demand.
Scenario 1 Scenario 2 Scenario 3
Year 2016, with Copper prices being 5000
Year 2017, with Copper prices being 15%
Year 2016, with Copper prices USD/Ton and Discount given to customers
higher @ 5750 and Discount given to
being 5000 USD/Ton for 6% (Maintaining Mkt Share by giving
customers for 6% (to maintain Mkt share)
discount)
Total Revenue, $ 57404000 53959760 53959760
Share of CT in Total
29% 29% 29%
Revenue, %
Revenue earned
16647160 15648330 15648330
through CT, $
Price of CT, $/MT 13862 13030 13030
MT of CT sold, MT 1201 1201 1201
Margin of BART, % 41% 37% 32%
Total expenditure
59% 63% 68%
Cost, %
Total Expenditure
9821824 9821824 10629821
Cost, $
Proportion of
Copper/ Mined
55% 55% 55%
metals out of total
cost, %
Cost of copper
5402003 5402003 6210000
consumed, $
Price of Copper, $/MT 5000 5000 5750
Tons of copper
1080 1080 1080
consumed, MT
Total Profit earned
6.83 5.83 5.02
from CT, Million $
Loss in Profit
compared to scenario 1.00 1.81
1, Million $
Based on the above calculation we can see that offering the customers a discount of 6% will
lead to a loss of 1 Million USD to BART which will increase to 1.81 Million USD in 2017 if the
Copper prices rise by 15% (to 5750 USD/MT).
 Total Profit earned from CT, Million $

6.83
7.00 5.83
5.02
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2016 2016 with 6% discount 2017 with 6% discount
and 15% rise in Copper
prices

Margin of BART, % Total expenditure Cost, %

68%
63%
70% 59%
60%
50% 41%
37%
32%
40%
30%
20%
10%
0%
2016 2016 with 6% discount 2017 with 6% discount
and 15% rise in Copper
prices

 If BART gives a price discount then its profit margins will reduce from 41% to 37% in
2016. If in the subsequent year (2017) the Copper prices rise then this profit margin
will decrease further to 32% making BART highly uncompetitive as compared to its
competitors.

This highlights the extent to which BART will suffer losses if it tries to maintain its sales
volumes by giving discounts especially in a scenario where the copper prices are expected to
rise. Another issue which is also of consideration is that the oil prices are expected to rise in
coming months which will ease the financial stress on refiners and a price cut may not be
required at all.

Once a price discount is given its very difficult to take it back in the future when markets
recover and will hamper the long term growth potential of the company. BART can however
undertake several actions in the short and long term to maintain its market share while
having similar levels of profits.
RECOMMENDATIONS
Short Term Recommendations:

 Since the Copper prices are expected to rise, BART can enter into long term supply
contracts with the suppliers to hedge the risk by fixing forward contracts at current
lower prices.
 Since the Oil Refiners are reeling under the impact of low crude oil prices BART can,
instead of giving price discounts, give long term credit period to the refiners to pay
back the money which will ease the financial stress on refiners.
 Instead of giving the usual 0-2% discount which BART gives to its customers
throughout the year the discount can be staggered over months. As the demand for
refined products varies with season and consumer habits discount should only be
given during the lean months to boost sales and not a constant amount throughout
year.
 Leverage its superior technical services and optimization capabilities to differentiate
its CT technology package from the competitor C1’s standalone CT Technology.
Special value added services can also be provided to the long term clients without
charge, during the period the clients are facing financial difficulties to keep the
competitors at bay.

Long Term Recommendations:

 Increase spending in Research, Technology Development and Technical Services

from 9.5% to 12% over a period of 5 years to further strengthen BART’s competitive
advantage over its competitors in the technology domain.
 Over the long term the amount that BART charges to its customers for providing its
services for optimization and operational efficiency improvement can be based on
production capacities. This will help the customers save some money when they are
not operating the plants at full capacity and still make CT a lucrative choice as during
such sub-optimal operating conditions benefits of CT is not that prominent and
obvious.