30
SAUDI ARAMCO Strategy Development

Pestal & porter

Embed Size (px)

Citation preview

Page 1: Pestal & porter

Saudi Aramco

Strategy Development

Page 2: Pestal & porter

1

Table of Contents

1.0 Background 4

2.0 Strategy Development 42.1 Corporate Strategy 42.2 Business Strategy 52.3 Emergent Strategy 72.4 Dynamics Strategy 8

3.0 External environment analysis 93.1 PESTEL 9

3.1.1 Political 93.1.2 Economic 93.1.3 Social 93.1.4 Technological 103.1.5 Environmental 103.1.6 Legal 10

3.2 Porter’s five forces 113.2.1 Competition 113.2.2 New entrants 113.2.3 Substitutes 113.2.4 Supplier power 113.2.5 Buyer power 11

4.0 Strategic group analysis 12

5.0 Internal environment analysis 145.1 Organizational Resources 145.2 Systematic Support 145.3 Diversification145.4 Synergies 145.5 Organizational environment 155.6 Global Efforts 155.7 Organizational Policies 155.8 Culture155.9 Organizational Structure 165.10 Human Resources 16

6.0 SWOT Matrix 17

MKT3002 Business Strategy In Global Environment

Page 3: Pestal & porter

2

7.0 Conclusion 18

References 19

MKT3002 Business Strategy In Global Environment

Page 4: Pestal & porter

3

List of Figures

Figure Title Page #

1 The Prescriptive Strategic Process 5

2 The Emergent Strategy Process 7

3 Porters Five Forces: Saudi Aramco 12

4 Strategic Group Analysis 13

MKT3002 Business Strategy In Global Environment

Page 5: Pestal & porter

4

1.0 Background

Saudi Aramco (SA) is considered to be one of the most valuable companies in the

world with an estimated valuation of between $2.2 trillion to $7 trillion in 2010

(Titman, 2010). It owns most of the crude oil reserves in Saudi Arabia and some other

Middle Eastern site and runs the largest hydrocarbon distribution network in the

world. It came into existence in 1933 when the Saudi government formed a

partnership with the American giant Standard Oil. Having gone through various

periods of change influenced by external political environment, the Saudi government

finally acquired controlling stakes of the company. The company is involved in oil

exploration, drilling, refining, petrochemicals, distribution as well as some assorted

businesses such as shipping.

2.0 Strategy Development

This report will focus on the SBUs of Aramco handling exploration and production

while ignoring the assorted businesses like shipping as well as auxiliary developments

like R&D.

The company is involved in joint refining ventures with the various companies at

home and abroad. SA conceived and executed various mega projects with the help of

government backup. The strategic process at Saudi Aramco revolves around the major

strengths possesses such as, the wealth of crude oil reserves which is the largest in the

world along with the preferential treatment it enjoys being a state owned company in

a geography endowed with the richest oilfields of the world. Since the 1990s Saudi

Aramco has adopted several corporate level strategies to improve its operations and

build a more professional corporation that can take other oil giants.

2.1 Corporate Strategy

The broader vision of Saudi Aramco is to ensure energy safety and supremacy

of Saudi Arabia in the world petroleum market. Its vision and mission are as

follows,

MKT3002 Business Strategy In Global Environment

Page 6: Pestal & porter

5

Mission: To ensure energy security of Saudi Arabian domestic market and

maintain the country’s stronghold over international oil prices.

Vision: To remain the world leader in the production of petroleum-based

energy by investing in innovation and entrepreneurship, creating educational

opportunities, powering economic progress, increasing environmental

awareness, and working in partnership for energy sustainability.

2.2 Business Strategy

The main focus in this process has been in expanding its capacity as well as

global reach. Following this pattern, SA has arrived at certain strategies. The

company has complete control over its suppliers, so, it can focus completely

on downstream operations.

Figure 1: The Prescriptive Strategic Process

MKT3002 Business Strategy In Global Environment

Page 7: Pestal & porter

6

As known, there are different strategic processes that can be used by the

organizations. In this case, Saudi Aramco’s strategies can be seen from three distinct

perspectives,

Profit Maximization/Competition: It is a highly profit oriented company which

can be seen from its revenues and net profits. It has the resources as well as

authoritative backing that have made it possible to restrict international

competition in the domestic market and lead take the pole position. However,

in other markets the competition is far more severe.

Resource Based: Mainly the strategy of Saudi Aramco is resource based. It

holds the richest oil fields in the world and that is the reason for its success

over the years. It has been fortunate to be located in an oil rich region and its

strategy is predominantly based on maintaining hold over the resources,

maintaining excess production capacity and thus dictating the price levels in

the world market.

Socio-cultural: Being a state owned farm, Saudi Aramco is also socio

culturally oriented. It has a distinct Arab identity and hence it is a formidable

player in the Middle Eastern markets but the same can hurt it as it expands its

business in other markets. But it has to be noted that it is not merely a profit

seeking firm but an important strategic component of the Saudi government

and hence being socially and culturally differentiation is a part of its

positioning strategy.

Game Based: Game theory can provide interesting insights into strategic

choices, but Saudi Aramco so far has not made any effort in this regard.

MKT3002 Business Strategy In Global Environment

Page 8: Pestal & porter

7

2.3 Emergent Strategies

Figure 2: Emergent Strategic Process, Lynch 2003

The emergent strategies arefour basic types,

Survival: Saudi Aramco has a strict competitive strategy based on profit

maximization as well as keeping ahead of the competition and that is what is

necessary for the survival. It has been able to build efficient capabilities over

its supply chain to survive the competition.

Uncertainty: Uncertainty is a part of oil industry because of the political nature

of the business as well as its own political affiliations. The economic

conditions of the world have significant impact on the oil industry as well. In

this regard Saudi Aramco is not fully prepared to face and cope with the

MKT3002 Business Strategy In Global Environment

Page 9: Pestal & porter

8

uncertainties of environment and the factors causing it. The company if fully

owned by the state and its welfare is subject to the survival of the government.

Innovation: Saudi Aramco had traditional methods of doing things and it was

not open to innovation in its products and services. Innovation is the key to

success for any organization and it is essential for its future planning. Recently

the leaders employed R&D facilities to bring the change within the

organizational processes.

Human Resources: Saudi Aramco has not taken significant steps to facilitate

the HR to date. The company must understand that effective investment in

HRM is vital to sustain and innovate in the market and build successful

organizational culture.

2.4 Dynamics of Strategy

Strategy follows in circular path over time in the organizations. Saudi Aramco

has a larger goal to support the cause of the government. However, that has

not prevented it from achieving business success because it has constantly

sought to come up with a winning strategy. The initial focus of the business

was to get access to local markets the success of which resulted in the shift

towards the world markets.

MKT3002 Business Strategy In Global Environment

Page 10: Pestal & porter

9

3.0 External Environment Analysis:

3.1 PESTEL Analysis3.1.1 Political

Political environment of the country plays significant role for Saudi Aramco. The

company is backed by the state therefore the policies are often influenced by the

governmental rules, regulations and other socio-political needs. The policies of Saudi

Aramco are dependent on the governmental plans for the oil production in order to

maintain the prices. The dependence on government sometimes makes it difficult for

the company to devise independent strategies for its growth in the markets. But, the

global political dynamics has allowed the government to facilitate its expansion

policies thus benefiting it significantly.

Another important issue that can affect the company’s operations is the growing

political unrest in the world, Saudi Arabia in particular and the Middle East in

general. With recent anti-incumbency movements in African-Arab countries like

Egypt and Libya, demands for democratic and modern regimes are likely to grow in

Saudi Arabia too. Changes to the political and state controlled system will have

profound impact on the operations and functions of the company.

3.1.2 Economic

The economy of Saudi Arabia is dependent on the oil production and distribution. The

Saudi economy is petroleum centric. 75 per cent of its revenues come through petro

products and it constitutes 90 per cent of its imports. This makes large state owned oil

companies such as Saudi Aramco significant players in the market. It also plays its

part in controlling international oil prices as it owns significant proven oil reserves

with ability to control Global oil production.

3.1.3 Social

MKT3002 Business Strategy In Global Environment

Page 11: Pestal & porter

10

Saudi Arabia is an Islamic country where Islamic methods are followed in the society

and in various aspects of life. Being a state owned company, it is therefore, expected

from Saudi Aramco to provide the jobs to the nationals and generate considerable

amount of revenues for the betterment of the country. Saudi Aramco has fulfilled its

duty by creating jobs for the domestic market and by creating wealth. It will be

desirable for the company to build and implement active Corporate Social

Responsibility (CSR) strategy to take part in the overall improvement of the

community and people.

3.1.4 Technological

In recent years Saudi Aramco has shown significant technological advancement

which can be seen in successful implementation of large scale projects before

schedule. At the same time the global shift towards cleaner and greener technology as

well as alternative fuels can be one of the reasons to ponder upon for Saudi Aramco as

well as other oil companies. For example the introduction of ethanol based fuel

(UNEP, 2009) in many countries has already shown the feasibility of the same.

However, these methods are yet to be perfected but they will definitely be important

in the foreseeable future.

3.1.5 Environmental

Environmental issues are the most crucial ones for oil manufacturing companies like

Saudi Aramco. Because of the nature of Saudi Aramco’s business, emission and

pollution are inevitable and hence they are bound to get into controversies. But Saudi

Aramco has done well by taking steps in emission reduction and pollution control. It

has also taken initiatives to reduce harmful lead content in its products.

3.1.6 Legal

There has been lot of legal implications for the oil companies regarding

environmental allegations around the globe. This trend is getting high in the Saudi

Arabia as well. The first comprehensive environmental legislation came into existence

in 2001. Nevertheless it has taken a strong stance against pollution and industrial

wastes and all the companies must abide by it. Also, most major international oil

markets have different regulations of their own. For example in Japan all energy

MKT3002 Business Strategy In Global Environment

Page 12: Pestal & porter

11

related transactions happen through Japan Oil, Gas and Metals National Corporation.

It decides the mode and type of imports and hence any company willing to operate

this market should have a working relationship with them. On the other hand in the

US, laws differ from state to state.

3.2 Porter’s Five Forces3.2.1 Competition

Competition in the domestic market is minimal for Saudi Aramco as it is the state

owned player and hence will always get the preference during major deals in the field

of expansion and refining. But for finished goods like hydrocarbon products, it has

significant competition from other domestic players such as SABIC. Also, in the

overseas markets it must compete with global giants such as Shell, BP and Exxon etc.

but its holds large oil reserves in the home country offering it a competitive edge.

3.2.2 New Entrants

The oil industry is a very intensive industry. Exploring oilfields, setting up production

facilities and distribution networks is a cumbersome and time consuming task that

also requires huge investments and backing from government and regulatory bodies.

Saudi Aramco have no threat of new entrants in the domestic market due to these

above mentioned capital requirement and the governmental support needed to set up

the business.

3.2.3 Substitutes

Depleting oil reserves have accelerated the hunt for substitutes such as bio fuels, solar

power and nuclear power. But the technology is yet to develop to an extent where

these sources can be utilized to completely substitute petro products. In the long run,

this substitution will be inevitable.

3.2.4 Supplier Power

Saudi Aramco has no supplier related issues as it is its own supplier. The company

explores and drills its oil. Therefore, Saudi Aramco does not face any significant

problem in the form of supplier power.

MKT3002 Business Strategy In Global Environment

Page 13: Pestal & porter

12

3.2.5 Buyer Power

Due to its stirring reserves and monopoly in the domestic markets backed by the

government, it can control the market and has significant hold over the buyers. The

Organization of Petroleum Exporting Countries (OPEC), of which Saudi Arabia is a

member, controls the production and global prices of oil, thus the buyer power is not

significant here as the buyers have no impact on the pricing of this essential product

whose sources are limited to few countries only.

Figure 3: Porters Five Forces: Saudi Aramco

4.0 Strategic Group Analysis

Strategic group analysis is bit difficult to conduct because Saudi Aramco has a near

monopoly in the domestic markets. Therefore, the comparison of Strategies will be

MKT3002 Business Strategy In Global Environment

Competition: Strong: SABIC, Shell, BP, Exxon

New Entrants: Weak: High entry barrier

Buyer Power: Weak in domestic market, Strong

otehrwise

Supplier Power: Weak: Vertically integrated

supply chain

Substitutes: Strong: Biofuels, other

alternatives

Page 14: Pestal & porter

13

based on their global reach and diversification to figure out the growth of a company.

It should be noted that other large state owned companies such as Petro China

(China), PETRONAS (Malaysia), ONGC (India) are not being considered here simply

because they are mostly restricted to their home markets and rarely cross paths with

Saudi Aramco. The comparison is drawn between the domestic competitor SABIC

and global giants British Petroleum, Royal Dutch Shell and Exxon Mobil

respectively. The rough estimates about the operations and functions of these

companies’ assets that Saudi Aramco has mostly caught up on diversification but it

lags behind in geographic coverage to most of these players. But SABIC is behind it

in both counts.

HIGH

LOW

Figure 4: Strategic Group Analysis

MKT3002 Business Strategy In Global Environment

Exxon

Geographic Coverage

Shell

BP

Saudi Aramco

SABIC

Diversification

Page 15: Pestal & porter

14

5.0 Internal Environment Analysis

The internal environment of an organization consists of the elements important within

the organization. It includes current employees, management, and corporate culture

which is the main factor that derives the employee behaviours within the organization

(Morden, 2004). On the basis of this, the internal environment of Saudi Aramco can

be analysed from its resource based view, its policies, culture and organizational

structure.

5.1 Organizational Resources

As discussed earlier, Saudi Aramco is rich in terms of its access to raw materials. It

owns the world’s largest oil fields and has also built strong production capabilities to

cash in on that. It is cash rich and hence can afford to take up large projects to thrust

its growth.

5.2 Systematic Support

It is state owned and hence it has easy access to the resources. It is supported by the

regulators and hence it has significant negotiating power.

5.3 Diversification

It has been able to diversify its businesses over the years. From exploration and

drilling it has moved to petrochemical production. It has also moved to some other

areas such as shipping. But compared to other global players, it still needs to come up

with more innovative plans to diversify.

5.4 Synergies

It has been able to identify areas of diversification where it can have synergies with its

existing business. Its thrust into petrochemicals can easily be supported by its existing

crude oil production and refineries.

MKT3002 Business Strategy In Global Environment

Page 16: Pestal & porter

15

5.5 Organizational environment

Owing to its state owned and hierarchical nature, it may not possess a very vibrant

organizational culture. In recent times, much emphasis has been put on workforce

diversity to ensure flow of diverse ideas and thus fuel creativity. Saudi Aramco may

need to take some steps in this regard such as recruiting from other regions.

5.6 Global Efforts

Saudi Arabia got inducted into World Trade Organisation (WTO) a few years ago. It

is also trying to increase its geographical reach in other markets through various

efforts and this augurs well for companies like Saudi Aramco.

5.7 Organizational Policies

The policies are formed and implemented by the state in case of Saudi Aramco. The

company has no liberty to formulate and implement new policies and strategies

without the consent of the government.

5.8 Culture

Organizational culture is considered as an important factor that significantly

influences the adoption and implementation of organizational processes and changes

in the business (Laudon and Laudon, 2006). The culture at Saudi Aramco is based on

the Saudi Culture. The culture of Saudi Arabia is collectivistic in nature where high

power distance lies and the decisions are said to be in the hands of elders and the role

of gender is given high importance (Hofstede, 2001).

The culture at Saudi Aramco is no different than the culture of Saudi Arabia. The

company is owned by the state so the local policies, rules, regulations and laws reflect

in the Saudi Culture. The culture tends to be in hierarchal where the decisions making

process is centralized and power lies in the hands of the senior management.

MKT3002 Business Strategy In Global Environment

Page 17: Pestal & porter

16

5.9 Organizational Structure

The organizational structure at Saudi Aramco is based on Hierarchy. Overall, it can be

said that Saudi Aramco is a company that exists for its main stake holder, the Saudi

government. Its significant business success can be attributed to favourable dynamics

in the global economy and the synergy between its business goals with political

ambitions of the home country rather than a single minded attempt at business

success. Through Saudi Aramco, the Saudi government maintains its hold over global

oil prices. That is why it has developed access production capacity over the years that

can be used well to control the oil prices.

In addition, it has taken up expansionary measures to help the government face

unemployment issues in the home market. This has fuelled its growth but the original

beneficiary has been the government.

5.10 Human Resources

Saudi Aramco lags behind in this important division of its business which can have

profound impact on all its operations and profitability. The company announced that it

will try to enhance the human resource development in 2010 by increasing

employement opportunities and training programs for their people. At the end of

2010, there were 54,798 employees in the company, including 47,741 Saudis, or 87

percent, and 7,057 expatriates (SA: Annual Review, 2010)

MKT3002 Business Strategy In Global Environment

Page 18: Pestal & porter

17

6.0 SWOT MatrixIn order to summarize the discussion key SWOTs for Saudi Aramco, can be listed

below:

STRENGTHS

Easy access to huge natural gas and crude oil base with excess production facilities Advanced project management capabilities and technology Strong backing from the local government Monopoly in the domestic markets

WEAKNESSES

Over dependence on a single commodity (crude oil) Comparatively smaller downstream capacity Comparatively small geographical reach Cannot devise its strategies independently.

OPPORTUNITES

Rising oil prices

Access to emerging markets, especially after Saudi Arabia’s induction in WTO Increasing growths in oil demand due to the growth in new markets. Market development and penetration opportunities available in the domestic and international markets.

THREATS

Economic recession and its impact on demand Increasing domestic demand that can snatch a share from the exports Environmental legislations, public activism against pollution and emission. Possible inventions leading to viable substitute fuels The political downfall can have significant impact on the operations of the Company’s operations

MKT3002 Business Strategy In Global Environment

Page 19: Pestal & porter

18

7.0 Conclusion

The study was conducted to analyze the business practices of Saudi Aramco and the

strategies devised by the company. The study findings suggested that the company

has three strategic approaches for its business practices which includes profit

maximization strategy, resource mobilization strategy and cultural diversification

strategy. The company has complete political backup from the government and it is

fully monitored by the state. The company enjoys unique position in the market due to

near monopoly in the Saudi domestic markets.

To summarize, it can be said that Saudi Aramco is an interesting case study that

shows that business profits can co-exist with larger socio-political goals in a state

owned corporation if they are aided by the external conditions. Saudi Aramco mainly

serves the policies of its government but at the same time it has successfully exploited

the conditions and used the privileges it has obtained from the government to the

fullest.

It has also successfully diversified into multiple fields. However, in order to be

globally competitive this company must try to diversify further and also explore

different geographical markets. It must also invest more in research and development

and put more effort towards innovating cleaner fuels and greener technologies

keeping the changing times in mind.

MKT3002 Business Strategy In Global Environment

Page 20: Pestal & porter

19

References

Gerry, J, Kevan, S. & Richard W., 2008. Exploring corporate strategy, 8thed, Harlow, England: Pearson Education.

Hofstede, H, G., 2001. Culture's consequences: comparing values, behaviors, institutions, and organizations across nations. 2nd Ed. California, UK, India: Sage Publishers

Kobayashi, Y 2007, Corporate Strategies of Saudi Aramco, Rice University, Houston, USA.

Laudon, K. and Laudon, J., 2006. Management information systems: Managing the digital firm 9th Ed., Prentice Hall, Upper Saddle River, NJ.

Lynch, R. 2003. Corporate Strategy. 4th Edition. Harlow: Financial Times Prentice Hall.

Morden, T., 2004. Principles of Management. 2nd Ed. England: Ashgate Publishers

Porter, M., 1979, How competitive forces shape strategy, Harvard Business Review, Vol 57, No. 3.

Saudi Aramco, 2011. Annual Review [online] available at http://www.saudiaramco.com/content/dam/Publications/Annual%20Review/SA%20Annual%20Review%202010_modified_060811-2.pdf [June 8, 2011]

Saudi Aramco, 2011. Company Information [online] available at http://www.saudiaramco.com [June 8, 2011]

Titman, S., 2010, More Thoughts on the Value of Saudi Aramco [online] available at http://blogs.mccombs.utexas.edu/mccombs-today/2010/03/sheridan-titman-on-fts-saudi-aramco-valuation [March 23, 2011]

MKT3002 Business Strategy In Global Environment

Page 21: Pestal & porter

20

United Nations Environment Programme 2009, Towards Sustainable Production and Use of Resources: Assessing Biofuels, vol. 12, no. 3, pp. 50-2.

MKT3002 Business Strategy In Global Environment