A Case on Downsizing in Phil Corporation Ltd.


By
Shubhasheesh Bhattacharya
Faculty Member
ICFAI Business School
Plot No 5, Equity Tower, Sanghvi Nagar Road, Aundh, Pune-411 007
E-mail:
subasishb@rediffmail.com / sbhattacharya@ibsindia.org

Guided by:
Prof. Subasish Bhattacharya

Submitted by:
Shaikh A. Faisal

Goa Institute of Management, Ribandar
Phil Corporation Ltd.
 


Naryan Sopte is finally relieved as he resumes his job responsibility of managing sales of Konica products. He has been undergoing a lot of tension and insecurity over the last six months with regard to his job and now, having survived the downsizing process has been finally assigned back his job responsibility. Although he looks relieved, deep inside he would know that his job worries may be far from over, as the company's business doesn't seem to be doing any better over the years. The company had undergone a huge downsizing process wherein it had taken major steps to trim its excess work force and thereby re-organize the company.

Background

The company ' Phil Corporation Ltd. ' (Phil), incorporated in the year 1983 was formerly known as Photophone Industries Ltd. and had been a major player in the field of photography business. It had started initially under the leadership of its present chairman A. Y. Fazalboy in the manufacture of audiovisual equipments like slide projectors and overhead projectors at its plant in Tivim, Goa. It also ventured into the business of manufacturing and marketing of photography products. In July 1990, it entered into a license agreement with Konica Corporation, Japan to slit Konica jumbo rolls into film rolls and photography colour paper. As a result of this, its business expanded vastly and to cope with the increase in demand it set up another plant in Bicholim, Goa in the year 1994, in addition to its earlier plant in Tivim. It also had to recruit extra workers for these plants and also additional officers in functions of Sales, Marketing, Finance & Administration, and Human Resources. It had now strengthened its presence throughout the country by increasing the number of offices in all parts of India. It was operating through 14 area offices scattered in all parts of India with its head office and one of the area offices based in Goa. Each of its plants in Tivim and Bicholim were involved in the manufacture of Photographic chemical formulations required for the manufacture of photographic products, photographic cameras & accessories, colour paper film rolls, and projectors. By the year 1993 it also tied up with Polaroid Corporation, U.S.A. to manufacture and market its range of instant cameras and film rolls under its subsidiary called ' Phil Systems Ltd.' It kept on growing from strength to strength as its presence in the photography business was establishing. In the year 1996, it ventured into another business of food products such as cashew nuts, peanuts under its subsidiary ' Phil Foods Ltd.' and set up a plant in Valpoi, Goa for the same. However, right from the beginning this venture din't seem to be profitable and faced problems as this branded product faced stiff price competition from the local unbranded products.

As its turnover kept on increasing, the company had by now increased its employee strength to over 2000 employees. It was argued that the company's' success was more driven by it being the monopoly in the photography sector and that the company needed to be more focused in the business as more competitors were expected to enter into the business seeing its tremendous growth. Table 1 shows the net sales and net profits of the company over the last ten years.

As time progressed it was not getting as easy as it earlier was for the company. It was now facing competition in the form of Kodak , a major international player in the photography sector. It entered the Indian market in the early 90s and had started marketing its products aggressively throughout the country. It started gaining market share through its superior quality products and was of course, backed by an international brand image well acclaimed by the professionals in photography. Table 2 shows the net sales and the net profits of the Kodak India Ltd.  over the last ten years.

That was not all for Phil. Further the matters became worse for the company as Konica Corporation, Japan started selling its products in the country through another channel. Computer Graphics Ltd. (CGL) was a small Chennai based company, which started its operations in the year 1998.  It focused its operations in the South and West of the country where Phil was strong as there was a ready market available and all it had to do to capture the market was to offer better prices then Phil to the dealers which formed a crucial link.  These products were not directly sold to the end customers but went through the dealers who would push the product on bases of higher margins. Table 3 shows the sales and profit margins of the company while Table 4 shows the price difference in the Konica range of products between Phil and CGL.

On the other hand, Phil also started facing problems in its Polaroid range of products as well, as China entered the market of instant photography and started manufacturing instant cameras at the cost of U.S. $ 1.5, much lower than that manufactured by Phil at the cost of U.S.$ 3.These products started infiltering in the Indian market at reduced prices through unauthorized (grey) channels thus cutting into Phil's profits.

The company was now facing problems from all ends. Its sales had decreased and its profits were badly affected. Soon, the demand for its products reduced drastically and the work force was left without work.

The downsizing option

The company made attempts with Konica Corporation, Japan to negotiate on its terms of promoting Konica through other channels in the country explaining that its business was getting largely affected but it din't materialize. There was a need for quick action to be taken to arrest further losses. It had only one option: to reduce the excess amount of labour and then plan strategies to regain its lost ground.  Although reducing the excess work force could face lot of resistance, it had to be implemented.

The company first shelved its subsidiary Phil Foods Ltd. and then transferred the business of Phil Systems Ltd. of Polaroid products into its parent company, i.e. Phil Corporation Ltd. Phil Systems was the involved in the business of software services.

By the end of the year 1997, it started the downsizing process by identifying departments with excess number of workforce. It first identified 159 excess workers from the three factories of the total 450.  When the news started making rounds of the company it created a great deal of unrest amongst the employees and affected their moral. More of work hours started being spent by the workers in discussing their future prospects in the company. This was the time when the labour union started strengthening to resist the injustice, if any, rendered by the management towards them. The management too was aware that it would face stiff resistance and hence had to take further steps very cautiously.

After lot of thought, the management floated the VRS option to the factory workers. According to this option workers with over and above ten years of service with the company would be offered compensation of 45 days of their gross salary multiplied by the total number of years worked. The workers union did not accept this offer and demanded for 90 days instead of the offered 45 days. Since the management was reluctant to accept this demand the workers observed a 'slow down' strike wherein they further reduced their production capacity. This was not agreeable to the management. This issue remained pending for a while until after long negotiations a total of 65 days of gross salary was agreed upon mutually.

A total of 121 workers availed VRS Scheme while 38 of the excess workers did not accept the VRS option. These excess workers were subjected to harassment by transferring them between factories in Tivim and Bicholim and assigning them jobs below their level of experience gained in handling superior job functions, e.g. a senior Technician from the Inspection Department in Tivim was transferred to Bicholim in the dispatch section to look after loading of jumbo Rolls, a job usually handled by a much junior worker.  The remaining workers were re-organized: some interchanged departments, e.g. some employees from quality checking were shifted to servicing department, etc.  some were reduced of extra responsibilities, while others were given additional responsibilities.

The officers in the various other departments like the accounts, administration, human resources, sales & marketing knew that it would be their turn now. Unlike the workers in the factories, the officers did not have a union amongst them. Various department heads were asked to identify the excess employees that surfaced as a result of merger of the various divisions into one company and the jobs being re-assigned.

The management did not consider the VRS option to the officers like it extended to the workers. However, it considered reducing the workforce through asking these officers to resign and if they did not agree to do so then they were transferred to any locations within the country. Legally the management did not have the right to terminate any employee without assigning any specific reason proving their unsatisfactory performance. And in this case, the problem was not of the unsatisfactory performance of the employees and hence the employees held the right to challenge their termination in the court of law.

The employees could not digest this way of harassment by the management and had lost complete faith in them. Every fortnight, the management would release a certain selected list of employees who would be called upon by their respective superiors and explained the precarious state the company faced and would then be asked to tender their resignation. The employees had been completely gripped with fear as to whether their name would figure in the list of employees that would be asked to leave. Also, the management did not seem to have a well-defined process in listing employees to be retrenched. It was observed that those employees who held good relations with the top executives in the company survived while the others were held to retrenched.

Contrary to all this that was happening, in the year 1998, the company ventured into the marketing of X-ray products under the name Indu Phil, manufactured at the Hindustan photo films plant in Mumbai. It also recruited employees for this task all over India but even this venture proved highly unsuccessful since Hindustan photo films had a tarnished image in the industry and the factory had been closed due to its own labour problems. Also, the quality of products manufactured was seen to be far inferior than those which were available in the market and the concerned customer technicians rejected these products. Thus this decision had completely backfired to the company. Many had questioned the decision of the company to venture into this field and recruiting additional employees considering its present position and the tarnished brand of Hindustan Photo films.

In the meantime the sales of the company continued to be sliding down. And not many of the employees were able to concentrate on their work. Amongst them were also some senior management people who were also asked to resign. This process continued for over a year. Then came the turn of the officer in the sales department, Naryan Sopte who, like many other employees who were compelled to leave the organization, was briefed on the sorry state of the organization and was then asked to tender his resignation. But he did not agree to tender his resignation. Consequently the management offered him a transfer letter to go to Orissa. He bluntly refused this offer as well. The management repeatedly asked him on this but he was not to agree on this. Now the management held the full right of terminating Naryan from his services for not agreeing to accept the transfer letter to Orissa. But it did not take such a step since all along the retrenchment process, it had not terminated any employee and termination could further aggravate matters in the organization.

After this development the management took back all his job responsibilities and cancelled all his field allowances that he was entitled to as he handled sales. No solution seemed nearer. Naryan Sopte would come to the office and have no work to do while all his other colleagues would be busy with their work. It indeed appeared a disheartening state for all employees around.

This carried for over six months. Even as this continued, employees would resign as, either they were asked by the organization or voluntarily, finding better prospects elsewhere. As employees kept on leaving it had by now reduced the excess workforce and this problem appeared to be solved. Finally, the management decided on assigning back job responsibilities to Narayan Sopte, which were earlier taken away from him bringing an end to an unforgettable episode for him. But one could always wonder as to with what level of commitment would he work for the company, which had made him go through such tension and embarrassment or was it correct of a company to take back an employee once considered not required and whether it was a right strategy altogether adopted by the company to get rid of its excess workforce.

Table 1
Phil Corporation Ltd.

 

        Net Sales (crores)

       Net Profits (crores)

               1993

           61.2

           1.23

               1994

           87.75

           3.19

               1995

          130.7

           5.89

               1996

          203.7

           8.94

               1997

          228.0

           9.60

               1998

          239.3

           10.4

               1999

          237.2

           1.98

               2000

          268.7

           3.02

               2001

          244.5

           2.61

               2002

          175.7

           -8.6


Table 2
Kodak India Ltd.

 

         Net Sales (crores)

          Net profits (crores)

           1994

           141.5

              3.79

           1995

           184.2

              2.17

           1996

           232.4

              2.35

           1997

           231.3

              4.70

           1998

           429.5

              10.1

           1999

           477.2

              5.18

           2000

           555.9

              24.9

           2001

           628.4

              34.1

           2002

           695.3

              20.9

           2003

           765.9

              26.0


Table 3
Computer Graphics Ltd.

 

          Sales (crores)

    Profit Margins (crores)

          1999

           15.84

              1.55

          2000

           17.66

              3.69

          2001

           20.23

              2.19

          2002

           25.33

              3.56


Table 4
Phil Corporation Ltd.

 

Dealer (Rs.)

M.R.P. (Rs.)

VX 100

       72

    100

VX 200

       85

    130

Photographic Paper (sq.m)

     135

    145


Computer Graphics Ltd.

 

Dealer (Rs.)

M.R.P. (Rs.)

VX 100

      65

   100

VX 200

      72

   130

Photographic Paper (sq.m)

    122

   145


Factors that compelled the company to downsize its staff:

As we analyze the case, it can be studied that the company achieved stupendous growth in few years since the time of its incorporation. This was largely believed due to its monopoly position in the photography sector. But later, it had started facing stiff competition, which compelled the company to opt for the decision of downsizing its excess staff. It faced competition from the following:

  • Kodak, an international brand in the field of photography entered into India and started promoting its products aggressively. The brand was well accepted by the professionals in photography, which helped it gain mileage over Konica.  
  • The parent company Konica Corporation, Japan started selling its products in India through another channel ' Computer Graphics Ltd.' which offered better margins to dealers who in turn pushed the products more as compared to that of Phil.
  • In Instant Photography, goods manufactured at lesser rates in China started infiltering into the Indian Market through unauthorized channels, which also affected its business drastically.   

Teaching notes from the case

Retrenchment under the ID Act

Retrenchment means the termination of service of a workman by the employer, for any reason other than a punishment inflicted by way of disciplinary action.  Retrenchment, however, does not include the following:

  • Voluntary retirement of the workman;
  • Retirement of the workman on reaching the age of superannuation;
  • Termination of service of the workman as a result of non-renewal of the employment contract on its expiry or the termination of such contract under a stipulation to that effect contained in the contract;
  • Termination due to continued ill health. (Section 2(oo) of the ID Act)
  • When a workman is retrenched, and the employer proposes to take on another employee, an opportunity must be given to the retrenched workman to offer himself/herself for re-employment.  Such retrenched workman will have preference over other persons. (Section 25H of the ID Act)

Conditions for retrenching a workman

The following conditions have to be fulfilled by an industrial establishment having less than one hundred workmen, for the retrenchment of a workman who has been in continuous service for not less than one year:

  • The workman must be given a one-month's notice in writing, indicating the reasons for retrenchment. 
  • The workman must be paid, at the time of retrenchment (expiry of notice period), compensation, which is equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months.
  • A notice must be served in the prescribed manner, on the appropriate Government.  (Section 25F of the ID Act)

The following are conditions precedent to the retrenchment of a workman, who has been in continuous service for not less than one year by an industrial establishment with one hundred or more workmen.

  • The workman has to be given three month's notice in writing indicating the reasons for retrenchment or the workman has to be paid in lieu of such notice, wages for the period of the notice.
  • The workman has to be paid, at the time of retrenchment, compensation which is equivalent to fifteen days' average pay (for every completed year of continuous service) or any part thereof in excess of six months; and
  • Notice in the prescribed manner is to be served on the appropriate Government (or such authority as may be specified by the appropriate Government by notification in the Official Gazette).

Did the company abide by the rules of the ID Act?

  • As we study the case it is evident that the company tried to downsize its excess staff by instigating the employees to tender their resignation from the services. It did not retrench or terminate any employee since by the rules of the Industrial Disputes Act, the company would have to pay the due compensation to the retrenched employees and provide an explanation of its actions on retrenchment to the concerned government authorities.
     
  • In case of the employee, Mr. Naryan Sopte, the management could have taken the action of terminating him since he did not abide by the management orders and accept the transfer to Orissa. But, even in this case, the management did not taken such an action as it had not taken such an action all along the downsizing process and thought it would be inappropriate to do so now as it would aggravate matters for them.
     
  • It was however incorrect of the management to offer VRS option only to the workers and not to the officers. According to the pensions benefits ordinance scheme, VRS should be introduced to all grades at ranks and above where there is surplus staff or anticipated surplus staff problem. Thus the officers could have challenged the decision of the management in the court of law.
     


Shubhasheesh Bhattacharya
Faculty Member
ICFAI Business School
Plot No 5, Equity Tower, Sanghvi Nagar Road, Aundh, Pune-411 007
E-mail:
subasishb@rediffmail.com / sbhattacharya@ibsindia.org
 

Source: E-mail November 21, 2005

   

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