Table of ContentsExecutive Summary....................................................................................................................................... v1. Business Balanced Scorecard................................................................................................................12. Company

Profle....................................................................................................................................2

2.1.

History...........................................................................................................................................22.2. Equity Shares................................................................................................................................

.22.3.

Products ........................................................................................................................................32.4. Market & Customers.....................................................................................................................3

3. Vision, Mission & Corporate Objectives...............................................................................................5

3.1.

Vision.............................................................................................................................................53.2. Mission Statement........................................................................................................................5

Analysis of Mission Statement..............................................................................................................5Improved Mission Statement...............................................................................................................6

3.3. Strategic Objectives......................................................................................................................6

4. Internal Assessment..............................................................................................................................7

4.1.

Management.................................................................................................................................7

Board Audit Committee ........................................................................................................................7Board Finance and Operation Committee............................................................................................7Board Human Resource Committee.....................................................................................................7Management Committee......................................................................................................................7Core Leadership Team..........................................................................................................................7Employee Leadership Team..................................................................................................................8Executive

Committee............................................................................................................................8

4.2.

Marketing......................................................................................................................................84.3.

Finances ........................................................................................................................................94.4.

Operations ..................................................................................................................................104.5. Management Information Systems............................................................................................114.6. Internal Factor Evaluation Matrix (IFEM)....................................................................................12

5. External Assessment ...........................................................................................................................13

5.1. Consumer Markets......................................................................................................................13

5.2. Competitors................................................................................................................................135.3.

Suppliers......................................................................................................................................155.4. Economic Condition....................................................................................................................155.5. Regulatory Environment.............................................................................................................165.6. External Factor Evaluation Matrix (EFEM) ..................................................................................16

5.7. Competitive Profle Matrix..........................................................................................................16

6. Strategy Formulation ..........................................................................................................................18

6.1. TOWS Analysis Matrix.................................................................................................................185.2. Basket of Available Strategies.....................................................................................................195.3. SPACE Matrix...............................................................................................................................215.4. Grand Strategy Matrix.................................................................................................................225.5. BCG Matrix ..................................................................................................................................235.6. Internal-External (IE) Matrix .......................................................................................................235.7. Decision Matrix ...........................................................................................................................245.8. Qualitative Strategic Planning Matrix .........................................................................................265.9. Strategy Selection .......................................................................................................................27

6. Strategy & Long Term Objectives........................................................................................................28

6.1.

Strategy.......................................................................................................................................286.2. Long Term Objectives.................................................................................................................286.3. Comparison of Long Term Objectives.........................................................................................28

7. Strategy Implementation....................................................................................................................29

7.1.

Recommendations ......................................................................................................................29

8. Specifc Objectives..............................................................................................................................30Appendix 1 -

Finances .................................................................................................................................31

Balance Sheet..........................................................................................................................................31Income Statement..................................................................................................................................32

Appendix 2 Organization Chart................................................................................................................33

Executive Summary

The purpose of this report is to develop strategic plan of Pakistans largest Oil Marketing Company,Pakistan State Oil (PSO) by applying basic principles of Strategic Management. This report coversInternal & External assessment of the company, Strategy Formulation, Selection, Evaluation and LongTerm Objectives for the period of 7 years (FY 2011 FY 2017) and its Implementation. A Balanced

Business Scorecard has also been developed for the company.

Findings in this report indicate that the huge circular debt in the economy, unreliable source of supplyfrom Oil Refning Companies and decreasing profit margins are the major challengesthat PSO iscurrently facing. Another challenge faced by the company is the forward integration by the various OilRefning Companies.

Pakistan State Oil has strong Research and Development department. Using theirinternal strength of research and development along with increasing energydemand and requirement of alternate energy fuel they can make use of theiravailable resources to improve their position in the market.

We have suggested following strategies to Pakistan State Oil:

Research and improve alternate energy products such as Bio-Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSOs debtors

to pay of their liabilities to PSO

v

1. Business Balanced Scorecard

VStrategy

Customer PerspectiveObjective

Customer Satisfaction and Retention

Market Share

Financial PerspectiveObjective Target

yr 1: 2% yr 2: 3% yr 3: 4%yr 4: 5% yr 5: 6%

Revenue GrowthDecrease in Trade Debts and Payables

7% per anum 40% Debts & Payables af

Innovation & Learning PerspectiveObjective Target

Increased EmployeeSatisfaction Turnover rate < 10%

2 trainings per yeemployee

1

Internal Business Objective

Target InitiativeUtilize Storage Capaci

90% capacity- Improveddistribution - Certified Equipments - Building Certified IT

Use of ITand E-Commerce

Order confirmation with in 24 hoursEnsure

Health and safety ofworkers

0% accidents

2. Company ProfilePakistan State Oil, the largest oil marketing company in the country iscurrently engaged in the marketing and distribution of various POL products,including Motor Gasoline, High Speed Diesel, Furnace Oil, Jet Fuel, Kerosene,LPG, CNG, Petrochemicals and Lubricants. In addition to this we also importdiferent products according to their demand pattern and possess the biggeststorage facilities representing 80% of the countrys total storage capacity.

2.1. HistoryThe creation of Pakistan State Oil (PSO) can be traced back to the year 1974, whenon January 1st; the government took over and merged Pakistan National Oil (PNO)and Dawood Petroleum Limited (DPL) as Premiere Oil Company Limited (POCL).

Soon after that, on 3rd June 1974, Petroleum Storage Development Corporation(PSDC) came into existence. PSDC was then renamed as State Oil CompanyLimited (SOCL) on August 23rd 1976. Following that, the ESSO undertakings were

purchased on 15th September 1976 and control was vested in SOCL. The end ofthat year (30th December 1976) saw the merger of the Premier Oil CompanyLimited and State Oil Company Limited, giving way to Pakistan State Oil (PSO).Itis considered as one of the most successful mergers in the history of Pakistan.

After PSOs inception, the corporate culture underwent a comprehensive renewalprogram which was fully implemented in 2004. This program over the yearsincluded the revamping of the organizational architecture, rationalization of staf,employee empowerment and transparency in decision making through crossfunctional teams. This new corporate renewal program has divided the companysmajor operations into independent activities supported by legal, fnancial,informative and other services. Inorder to reinforce and monitor this structuralchange, related check and balances have been established by incorporatingmonitoring and control systems.Human Resource Development became one of themain priorities on the companys agenda under this corporate reform.

2.2. Equity SharesPSO has 200 million shares authorized forpublic ofering and it has currently171,518,901 shares floating in Karachi Stock18Exchange. The stock price on August 02,2010 was Rs. 282.54 making the total 28market capitalization of the company at Rs.48.43 billion. Apart from the public ofering

GOP

54 Institutions

Individuals& Others

of the equity shares,Government of Pakistan holds

54% majority stakes in thecompany, including both direct holdings ofFigure 1 - Shareholding Structure of Pakistan State Oil the Federal Government and indirectholdings through GOP owned institutions.

2

According to the Privatization Commission of Pakistan, Government of Pakistan is in the advanced stages of divesting 51% of its stakes in PSO to a strategic investor.

2.3. ProductsPakistan State Oil deals in both White Oil and Black Oil markets. White Oil consistsof High Speed Diesel (HSD), Gasoline (which includes the Retail Fuel and GaseousFuels), JP-1 (Jet Fuel) and Superior Kerosene Oil (SKO). Black Oil consists of FurnaceOil and Light Diesel Oil (LDO).

Besides selling Gasoline, Furnace Oil, Jet Fuel and HSD, Pakistan State Oil alsocaters to the vast customer base of lubricants in the country. PSO sells twotypes of lubricants; Automotive Oils and Industrial Oils, catering both types ofcustomers in this area as well.

Pakistan State Oil also exports JP-8 Jet Fuel to Afghanistan. It is being used by the DESC and NATO forces.

2.4. Market & CustomersPSO caters to POL (Petroleum, Oil and Lubricants) requirements of a widespectrum of customers comprising the retail consumer, various industrial units,government, power projects, aviation and marine sectors of Pakistan.

PSO industrial consumer dominance in the government sector can be judged bythe fact that all the major government entities like OGDC, Pakistan Army, Pakistanrailways, Navy, NLC and PAF Wah have entrusted PSO to meet their POL needs.Besides supplying fuel to national power utilities like WAPDA and KESC, PSO is thesole furnace oil supplier to all Independent Power Projects (IPPs) in Pakistan.

PSO also supplies fuel to industrial units like textile, cement, agriculture,transport etc. Its industrial consumer base includes prestigious entities like thePresidency and the Prime Minister Secretariat, where PSO has developedconsumer outlets for timely refueling of their feets.

Furthermore, PSO also serves the fuel needs of both national & international aircarriers. It also provides jet fuel into-plane refueling facilities at 9 airports ofPakistan i.e. Karachi, Lahore, Islamabad, Peshawar, Multan, Faisalabad, Turbat,Pasni and Sialkot.

PSO also supplies fuel to ships at Karachi Port, Korangi Fish Harbor & Port Qasim.Moreover, we cater to the fuel requirements of Pakistan Navy, Maritime SecurityAgency, Karachi Port Trust, PNSC, Faisal Marine Oil Services (Pvt) Ltd.

Pakistan State Oil also has strategic investments in related projects such as:

Joint Installation of Marketing Companies (JIMCo) PSO holds 62% stakes of the facility which is operated by PSO itself. It has maximum daily throughput of 17,000 kilo tons.

Asia Petroleum Limited PSO holds 49% stakes in the company which operates 82 kilometer pipeline as well. It has a capacity of 3.6 million tons per annum.

3

Pak Grease Manufacturing Company PSO holds 22% stakes in themanufacturer of the specialized grease catering to the requirements ofmany the customers including Pakistan Steel and Armed Forces

Pakistan Refnery Limited PSO holds 18% stakes in Pakistans third largest oil refning company. The annual capacity of this refnery is 2.2 million tons per annum

White Oil Pipeline Project PSO holds 12% stakes in this project which is ajoint venture of PSO, Shell Pakistan (26%), Caltex Pakistan (11%) and

PARCO (51%). It is a 817 kilometer, 26 inch diameter pipeline dedicated totransfer refned products from PARCO to the other regions of the country.

4

3. Vision, Mission & Corporate Objectives

3.1. VisionThe V i sion of Pakistan State Oil is as follows:

To excel in delivering value to customers as an innovative and dynamic energycompany that gets to the future first.

3.2. Mission StatementThe existing M i s s i o n of the company is:

We are committed to leadership in the energy market through a competitive advantage in providing the highest quality petroleum products and services to our customers based on:

A professionally trained, high-quality, motivated workforce that worksas a team in an environment which recognizes and rewards performance,

Mission Statement Component

PSOCustomers our customers based on .... The

term is quite vague and it does notidentify the target customers of thecompany.Products or Services providing the high qualitypetroleum products and services to.... This component is correctlydefned in the mission statementMarkets The geographic market is not specified in the mission statement.

Technology This component is not specifed in themission statement of PSO.

Concern for Survival, growth and proftability

Sustained growth in earnings in real terms. This component is specifed in the mission statement.Philosophy This component is not specifed in themission statement.

Self-Concept We are committed to leadership inthe energy market through acompetitive advantage in providingThis component is defned in themission statement.Concern for Employees A professionally trained, highly

qualified. For personal growthand development. This

innovation and creativity, and provides for personal growth and development. The lowest-cost operations and assured access to long-term and cost-effective supply sources. Sustained growth in earnings in real terms. Highly ethical, safe, environment-friendly and socially responsible business practices.

Analysis of Mission StatementThere are nine essential components of Mission Statement of any organization. We will be analyzing the mission statement of the Pakistan State Oil to see if it has these components.

5

Mission Statement Component PSOcomponent is specifed in the mission statement.Concern for Public Image Highly ethical, safe, environment-friendly and socially responsible

business practices..Thiscomponent is specifed in the mission

Improved Mission StatementWe are committed to leadership in the energy market of Pakistan through a

competitive advantage in providing the highest quality petroleum products andservices to our retail and industrial customers based on:

A professionally trained, high-quality, motivated workforce that worksas a team in an environment which recognizes and rewards performance,innovation and creativity, and provides for personal growth and development.

Excellence in our core activities and a passion for satisfying our customersneeds in terms of total quality management.

Innovative and technologically advanced systems and procedures.

The lowest-cost operations and assured access to long-term and cost-effective supply sources. Sustained growth in earnings in real terms. Achieving higher collective and individual goals through teamwork Highly ethical, safe, environment-friendly and socially responsible business practices.

3.3. Strategic ObjectivesThe existing strategic objectives of Pakistan State Oil are as follows:

Maximize proftability in the Lubricants business through segmented marketing and brand promotion.

Explore potential markets for the export of fuels and lubricants. Expand the PSO Cards Business by enhancing the customer base, efficient

distribution and brand partnership. Enhance our reach and add to our network of New Vision Retail Outlets (NVROs). Develop bio-fuels and expand the gaseous fuels business. Revamp the C-store network; introduce Quick Service Restaurants and

develop strategic alliances with local and international franchises. Revamp organizational structure and various functions in line with the best corporate practices. Streamline systems and procedures in accordance with thechanging business environment. Ensure full HSE compliance in all our operations and try to meet a zero

accident objective through efective system development, training, inspections and audit.

Reinforce quality assurance by acquiring the ISO 9000 quality management certifcation of various departments, and expansion of MQTU network.

6

4. Internal AssessmentInternal environment is essential for any organization as it helps the company toformulate and adapt to the new strategies. Pakistan State Oil also needs toassess its internal environment before the formulation and implementation ofany strategy. The internal environment consists of the way of management atthe organization, marketing and advertising, fnancial situation, operationalprocesses and the information management. In this section, we will frst discuss

the internal factors affecting Pakistan State Oil. Later, we will present anevaluation of PSOs response to the key internal factors using the strategicmanagement tool called Internal Factor Evaluation Matrix (IFEM).

4.1. ManagementPakistan State Oil is managed by a Board of Directors called Board ofManagement in PSO, headed by Mr. Syed Naveed Qamar, Minister for Petroleum.Mr. Irfan K. Qureshi is the Managing Director of the organization and the Boardof Management also have 8 directors. Apart from the Board of Management,

there are seven other committees headed by diferent directors.

Board Audit CommitteeBoard Audit Committee is responsible for recommending to the Board ofManagement the appointment of external auditors by the companys shareholdersand it considers any questions of resignation or removal of external auditors,audit fees and provision by external auditors of any service to the companyinaddition to the audit of its fnancial statements. The Board of Management isbound to act according to the recommendations of this committee unless there arestrong reasons to do otherwise.

Board Finance and Operation CommitteeThe Board Finance and Operation Committee primarily review the fnancial andoperating plans of the company and all matters relating to them. It reviews theexisting and proposed annual business plans, analyzes the profit margins andapproves major operating expenses and suggests appropriate measures andremedies to improve company's performance by analyzing the economic conditionsof the country.

Board Human Resource CommitteeThe Board Human Resource Committee is responsible for makingrecommendations to the Board of Management to maintain a sound plan oforganization of the company, efective employees development program andsound compensation and benefts plans.

Management CommitteeThe Management Committee, or Man-Com, is a business strategy committee thatmeets on a weekly basis primarily to steer and review all key projects fromconceptualization to implementation. Man-Com also reviews budgetary proposalsand weeds out non-essential ones. Upon its approval, a fnal business plan isprepared and sent for Board approval. It also reviews major business issues andtakes decisions accordingly.

Core Leadership TeamThe Core Leadership Team comprises of the Executive Directors and GeneralManagers of the company. It is chaired by the Managing Director. In this meetingvarious company initiatives and progress on different assignments are discussed.

7

Employee Leadership TeamThe employee leadership team meets on a regular basis and reviews all matterspertaining to human resources including recruitment, transfers, disciplinaryactions, promotions and employee benefts. The committee also reviews successionplans and organizational developments.

Executive CommitteeThe Executive Committee is another high level committee which meets once in a

month to review day-to-day company afairs. The committee members share theirproblems as well as key accomplishments with other committee members. It ischaired by the Managing Director and it comprises of EDs / GMs / DGMs /Departmental Heads of the company.

An important thing to note is that Pakistan State Oil is a semi-government institutewhile government is having the majority stake of 54% in the company, thereforeone of the directors is the Joint Secretary (EF&P) and fnancial advisor on

petroleum and natural resources to the Ministry of Finance. This is one of thereasons that the company has been under influence of various fnancial matterssuch as the issue of the circular debt.

4.2. MarketingPakistan State Oil has introduced various new ways to market the POL (Petroleum,Oil and Lubricants) products. They were the pioneers of introducing the cardsbusiness in the OMC industry. The customer loyalty cards product is a way to pre-pay for the future fuel consumption. This product proved benefcial also for theFleet and Corporate Card customers. The corporate customer base has increasedto more than 10,000 corporate accounts serving more than 100,000 customers.

Pakistan State Oil has also joined hands with United Bank Limited as a corporatepartner. UBL is the third largest bank in Pakistan having a good customer base incredit card business. UBL has issued Pakistans frst Auto Credit Card named; UBLPSO Auto Credit Card. UBL and PSO are ofering high value incentives and discountson fuel and other automobile related products on the usage of the Auto Credit Card.

PSO had also successfully introduced yet another technology-driven initiative forlarge corporate feet accounts, namely the Vehicle Identification System (VIS) thatconfnes the delivery of fuel to authorized vehicles only.

Pakistan State Oil also puts greater emphasis on the Non-Fuel Retail (NFR) Businessin order to diversify and strengthen the bond with its customers in a bid to provideconvenience and services that distinguish it from the competition.

Providing a diversified range of services at strategically selected locations, NFRaims to enhance PSOs brand image and generate supplementary revenue for theCompany by utilizing the capacity of PSOs valued retail space and by leveragingthe advantage of a captive target market.

Collaborating with renowned local and international banks, PSO has launchedfinancial facilities such as ATMs and Banking Centers that provide the ease of 24-

hour banking services in a secure environment.

8

Customers can also fnd Pizza Hut and Dunkin Donuts outlets available at selected PSO retail outlets in Lahore and Karachi.

As an additional revenue stream, NFR has also introduced advertising platforms at the retail forecourt and provides opportunities for distinguished brands to establish in-store alliances for PSOs Shop Stops.

PSO is lagging behind in marketing its Lubricants to the automobile and industrialcustomers which is proving to be a minor weakness. Despite being a market leader

in the fuel sector, PSO is lagging behind its competitors in the sales of lubricants.

4.3. FinancesPakistan State Oil has a very strong balance sheet if we only go by numbers as ithas Rs. 182.5 billion assets. In reality, the balance sheet has a huge amount ofreceivables and payables. Various government institutions and autonomous bodiesowe more than Rs. 41 billion to PSO. Power companies like HUBCO and KAPCO alsoowe about Rs. 60.4 billion to PSO.

On the other hand, Pakistan State Oil is under a heavy debt of Rs. 136 billion tovarious domestic and foreign suppliers. The weak economic condition of Pakistanis clearly shown on Pakistan State Oils balance sheet. The heavy debt incurredby PSO has made the company a very risky prospect for the investors and it hasto pay higher fnancial charges due to the increased risk of defaults despite ofstrong revenue stream.

The 3-years Balance Sheet and Income Statement of Pakistan State Oil can be found in Appendix 1.

Table 1 - Financial Ratio Analysis of Pakistan State Oil

Financial Ratios

Liquidity Ratios Current Ratio Quick Ratio

Activity Ratios Receivables TurnoverAverage Collection Period Inventory Turnover

Total AssetTurnover FixedAsset Turnover

Leverage RatiosDebt-to-Asset RatioLong Term Debt-to-Asset Ratio Debt-to-Equity RatioTimes Interest Earned

Profitability Ratios Gross Proft Margin Operating Proft Margin Net Proft Margin

2010

1.1183

0.8338

8.1011 45

20.3132

4.8068

67.8153

84.65%

1.61%5.516

42.765

5

3.33%3.11%1.03%

2009

1.0666

0.7536

8.9341 41

17.6736

4.6882

48.4168

86.40%

1.65%6.351

0 -

0.42%(0.77)%(0.93)%

2008

1.2362

0.5709

17.2016 219.352

34.588

351.92

74

75.64%

1.90%3.105

016.41

28

5.15%3.85%2.41%

9

Financial Ratios Return on Asset Return on Equity Earnings Per Share Price-Earnings Ratio

Growth Ratios SalesNet Income Earnings Per Share

20104.96%

31.20%

52.764.931

7

21.92%235.10%235.10%

2009 (4.36)%

(32.09)%

(39.05)-

23.33%(147.66)%(147.66)%

2008 11.06% 45.38%81.945.143

4

41.88%199.67%199.70%

The revenues of Pakistan State Oil increase to Rs. 877 billion. The chairman ofPakistan State Oil has set his sight on the sales target of Rs. 1 Trillion by the end of2012. The cost of goods sold is generally high and about 96% revenues earned goto the sales Tax, IFEM and the cost of goods sold. The net profit margin is merely1% in 2010 as the fnancial charges have increased due to the increase ofriskiness of Pakistan State Oil.

Pakistan State Oil incurred heavy inventory losses during 2008-09 due to the fuelprices crashed by 75% from US$ 141/barrel to US$ 33/barrel. We can alsoobserve that Pakistan State Oil have started to maintain lesser inventory as thefuel price fuctuation increased. The inventory levels have come down from Rs.62.36 billion in 2008 to Rs. 43.18 billion in 2010. The decreased inventory levelshave helped Pakistan State Oil to increase the inventory turnover ratio; but the everincreasing Accounts Receivables have not helped them and the Average CollectionPeriod has doubled to 45 days in 2010, which was 21 days in 2008. The liquidityratios for the company do not have any impact because the major portion ofcurrent assets and current liabilities consists of the receivables and payablesrespectively.

Pakistan State Oil has devised a strategy of matching the maturities of thecurrent assets and current liabilities in order to maintain the liquidity ratios. Thelittle mismatch is covered by short-term borrowing by the fnancial institutions.

An important point to note here is that Pakistan State Oil reported a growth in Sales Revenue over the past 3 years.

4.4. OperationsPakistan State Oil is currently engaged in the marketing and distribution ofvarious POL products. In addition to this, it also imports diferent productsaccording to their demand pattern and possess the biggest storage facilitiesrepresenting 80% of the countrys total storage capacity.

The company has the largest distribution network comprising of 3,620 outlets outof which 3,384 serve retail customers, 53 outlets cater to the agriculture sector and183 outlets serve the bulk customers. Out of a total number of 3620 outlets, 1,735have been upgraded as per the New Vision Retail Program with the most modernfacilities.

Moreover, there are 37 company owned and company operated (Co-Co) sites toserve PSOs retail customers. The idea of setting up Co-Co sites is to make

these stations fagships under maximum

10

supervision and intense scrutiny to maintain the highest level of efficiency, serviceand customer care. In addition to retail customers, more than 2,000 industrialunits & business houses, power plants and airlines are being catered to by PSO'sdifferent departments.

PSO possesses huge infrastructure facilities from Karachi to Gilgit. This entails 9installations and 12+1 depots with a storage capacity exceeding 1 million metrictons, representing over 80% of the total storage capacity owned by all oil

marketing companies. To optimize storage utilization, the company has recently alsoprovided hospitality to refneries and other oil marketing companies that includeChevron, Total PARCO and Hascombe.

The modes used for the product movement of POL products by PSO include tanklorries, tank wagons and pipeline. PSO has a fleet of around 6,000 tank lorries.Around 1,200 tank lorries, equipped with tracking and pilfer proof systems, havebeen upgraded as per international standards which are engaged in delivering

quality fuels across the country.

With the inception of the White Oil Pipeline Project (WOPP) from Karachi toMehmoodKot via Shikarpur& the MFM (MehmoodKot / Faisalabad / Machikey)pipeline, the pattern of supplies from Karachi has drastically changed as theentire white oil movement from Karachi has been switched over from tank lorries topipeline. PSO has an equity partnership in this project with a 12% shareholding.

PSO has set up a state-of-the-art Lubricants Manufacturing Terminal (LMT) at theKorangi Industrial Area in Karachi to cater to all kinds of lubricant customersincluding automotive, hi-street and industrial consumers by meeting the nationaldemand through products of international standards.

PSO is working at a fast pace for the commercial launch of Ethanol BlendedPetrol E10 Gasoline in major cities of the country. The new fuel E10 Gasolineformulated by blending ten percent ethanol with petrol has been introduced as partof the governments strategy to promote alternate energy resources. PSO initiatedresearch and development work on bio diesel in 2008. Tests have beenconducted on vehicles and generators. PSO is now in consultation with theGovernment of Sindh, the Government of Balochistan, the Ministry of Petroleum &Natural Resources, the Ministry of Food Agriculture & Live Stock, the AlternateEnergy Development Board, the Pakistan Agriculture Research Council, and theSmall and Medium Enterprise Development Authority to make further inroads inthis important area which has the potential to save precious foreign exchange forthe country

4.5. Management Information SystemsA state-of-the-art Computerized Maintenance Management System (CMMS) hasbeen deployed to integrate all maintenance activities for retail outlets. Thissystem has been implemented to ensure complete traceability of complaintsregarding all breakdown issues at retail outlets. It also provides real-time dataregarding all pending complaints along with any repetitive defects in anyequipment. The system also serves as an information hub and helps in quick andaccurate decision-making.

During 2009, PSO was also awarded the ISO/IEC 27001: 2005 InformationSecurity Management System certification in recognition of its secure multi-siteprovision of IT Services to PSO offices and Departments. PSO is the frst Companyin the Oil & Gas Industry in Pakistan that achieved this milestone.

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ISO 27001:2005 refects the quality certifcation as per the latest internationallyrecognized standards that should be implemented by the Information Systemsdepartments of any organization. The objective of ISO 27001 is to provideorganizations with a common basis for maintaining information security andassurance for the confdentiality, integrity and timely availability of informationassets. In Pakistan, only 11 organizations including IT companies/software housesmostly affiliates of foreign companies, are ISMS certifed.

4.6. Internal Factor Evaluation Matrix (IFEM)Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditingor evaluating major strengths and weaknesses in functional areas of abusiness. IFE matrix also provides a basis for identifying and evaluatingrelationships among those areas.

Table 2 - IFE Matrix for Pakistan State Oil

Key Internal Factor Strengths

Highly managed company with set strategicobjectives Highly trained and motivated workforceStorage capacity of 80% of the total country storage Largest retail outlets network in the countryMarket leader in all types of fuel products Increasing sales revenue over the past 3 years Sole provider of Furnace Oil to Power Companies ISO certifed Information Management System Strong Research and DevelopmentLargest market share in aviation business

WeaknessesLow proft marginsGovernment interventions due to semi-government structure Declining market share to small competitorsNot a market leader in Lubricants sectorHigh fnancial charges incurred due toriskiness Total

Weight Rating WS

0.05 40.20 0.0540.20 0.1040.40 0.0640.24 0.1040.40 0.0630.18 0.0530.15 0.0530.15 0.1040.40 0.0540.20

0.10 10.10 0.0520.10 0.1020.20 0.0320.06 0.0510.05 1.00

3.03

The Internal Factor Evaluation Matrix score for Pakistan State Oil is 3.03. It represents that PSOs response to the internal key factors is above average.

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5. External AssessmentThe external environment is always important for a companys performance; as italso helps in setting the tone for any organizations future strategies. PakistanState Oil is no diferent than other organizations. It has always been afectedand infuenced by the external environment that consists of Consumer Markets,Competitors, Technology, Suppliers, Labor Market, Economic condition andRegulatory Environment. In this section, we will frst discuss a few of the

external factors which are afecting Pakistan State Oil. Later, we will present anevaluation of PSOs response to the external environment using the strategicmanagement tool called External Factor Evaluation Matrix (EFEM).

5.1. Consumer MarketsPakistans retail consumer market is much diversifed. Customers are not loyal toany OMC product and they use any available fuel or lubricant. There is alsoperceived low product quality among the retail customers. Retail customers havestarted to prefer Gaseous fuel over White Fuel which has helped Pakistan in

becoming the largest Gaseous fuel market.

The power companies are the major consumers of the industrial fuel in Pakistan.Apart from these companies other industries like textile also use industrial fuelsuch as furnace oil and Light diesel oil. Aviation and Marine sector is also one ofthe major fuel consuming sectors of Pakistan.

5.2. CompetitorsPakistan State Oil is the largest Oil Marketing Company in Pakistan, currentlyengaged in storage, marketing and distribution of various POL (Petroleum, Oil andLubricants) products. It possesses market share of 50.5% in White Oil and 85.9% inBlack Oil markets. Pakistan State Oil has 68.6% of total market share of the country.

Pakistan State Oil is facing ferce challenges from its competitors in the White Oilmarket. The market share of PSO is declining constantly from 61% in 2008 toalmost 50% in 2010. PSO, however, is being able to maintain and increase itsmarket share in Black Oil market over the years. PSOs Industry market share haddecreased from 71% in 2008 to 68.6% in 2010.

The loss of market share in While Oil industry is sighted as the major cause ofdecline in the industry market share over the years. PSO lost its market share toAttockPatroleum, TOTAL/PEARL and Bosicor (Now Byco Petroleum).

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0.60% Industry Market Share 4.20%204.10%70%

0.50% 0.30% PSO

6.40% Shell

11.60%

68.60%

Attock Patroleum TOTALCaltex Bosicor HascombeOOT Company Ltd

3.

%

0.

Figure 2 - Industry Market Share of OMCs as of June 2010

Bosicor has rebranded itself as Byco Petroleum earlier in 2008. It was an oil refningcompany which has also started marketing the petroleum products. It has carriedout a major marketing campaign within the major cities. It is posing a major threatto PSOs White Oil retail customer business. Considering that PSO has been in themarket for more than 35 years and has the biggest storage, distribution and sellingnetwork in the country, Byco Petroleum will have to work hard for capturing theirshare of market from PSO.

100.00%90.00%80.00%70.00%60.00%50.00%40.00%30.00%20.00%10.00%0.00%

Motor HSD SKO JP1 LDOFO Gas

PSO Shell CaltexAttock Patroleum TOTALHascombe AskarOilOOT Company LtdBosicor

Figure 3 - Product-wise Market Share of OMCs

On the other hand, TOTAL/PEARL is an OMC of Pak-Arab Oil Refnery (PARCO), whichis a major supplier of the petroleum products to various OMCs in Pakistan. Asimilar trend of Forward Integration by the other oil refning companies might alsoemerge as a threat to Pakistan State Oil.

14

Chevron Pakistan has recently decided to divest its aviation business in Pakistanand they are seeking bids from the existing OMCs in Pakistan. It can become anopportunity for PSO to increase the market share of Jet Fuel supply to its aviationcustomers.

5.3. SuppliersPakistan State Oil gets the POL products from many of the major Oil Refningcompanies in Pakistan. The major suppliers are Pakistan Refnery Limited, National

Refnery Limited, Attock Refnery Limited, Pak-Arab Refnery and Byco Petroleum.PSO holds 18% stakes of the Pakistan Refnery Limited, so are the other OMCs.

The three suppliers, in Attock Refnery Limited, Byco Petroleum and Pak-ArabRefnery Limited, have their own OMCs as well. Therefore the reliability on thesesuppliers has been reduced and they pose a major threat to PSO.

5.4. Economic Condition

Pakistans macroeconomic environment faced massive challenges of the war onterror, the deepening of the fnancial crisis which pierced into the domesticeconomy through a substantial decline in the countrys exports, the return ofexpatriates due to layofs in international markets, a visible slowdown in foreigndirect infows and the devaluation of the Pakistani Rupee.

The oil prices remained stable between US$ 60 to 80 per barrel, but there was anincrease in domestic fuel prices. This increase leads to a decrease in theconsumption of the White Oil throughout the country and an upward trend ofusing CNG (Compressed Natural Gas) in the domestic vehicles. Pakistan hasbecome the worlds largest CNG consuming country with around 2.5 million CNGvehicles on the road.

The circular debt problem has assumed alarming proportions, threateningPakistan's future. The IMF and the US oficials in their recent meetings withPakistan government have described the circular debt as a signifcant threat to thecountrys economy. Former fnance minister Saukat Tarin quoted that in real termsthe circular debt has swelled to Rs. 108 billion which mainly includes non-paymentof Rs. 42 billion by KESC, Rs. 21 billion by the government of Sindh and Rs.15-16 billion from commercial consumers to the Pakistan Electric Power Company(Pepco).

Unless the government deals with the economics of power generation by boldlytackling the issue of growing circular debt quickly, it will be almost impossible toget the IPPs to fully utilize existing installed capacity, much less attract newinvestments in the power sector.

The economic condition of the country has also slowed down the automobileindustry in the country. There are still enough vehicles on the road because theeasier automobile fnancing facility before the global fnancial meltdown. Thetrend of purchasing old cars is increasing as well and the energy demands willincrease in Pakistan.

The industrial sector is worst afected by the existing economic condition, manyindustries have closed down which is a reason of decline to HSD sales in Metric

Tons terms. The demand of Fuel Oil, also

15

known as Furnace Oil, has increased due to its use in energy sector companies such as WAPDA, KESC and IPPs.

5.5. Regulatory EnvironmentThe fuel prices in Pakistan are regulated by the Oil and Gas Regulatory Authority(OGRA). It reviews the fuel price fortnightly and adjusts the domestic pricesaccording to the international prices. The Ministry of Petroleum has decided to

deregulate this mechanism earlier this year. Government is planning to transferthe rights of setting the fuel prices to the Oil Refning companies. It might becomea threat for PSO because many of its competitors are the forward integration ofsome of Oil Refning companies.

5.6. External Factor Evaluation Matrix (EFEM)External Factor Evaluation (EFE) matrix method is a strategic-managementtool often used for assessment of current business conditions. The EFE matrix isa good tool to visualize and prioritize the opportunities and threats that a business

is facing.

Table 3 - EFE Matrix for Pakistan State Oil

Key External Factor OpportunitiesOperating in largest CNG consuming country in the world Increase in the energy demands in the country Deregulation of Oil IndustryChevron is liquidating its aviation business Search for alternate energy sources ThreatsConstantly growing circular debt Unreliable sources of supply (Refneries) Devaluation of Pakistani RupeeDecline in consumption of White Oil Products Fluctuation of oil prices in international marketsNew alternatives to the industrial energy requirements such as solar energyDeregulation of the mechanism of setting fuel prices in Pakistan Scarcity of CNG in the countryForward integration of oil refining companies (suppliers) Total

Weight Rating WS

0.10 40.40 0.1030.30 0.0820.16 0.0220.04 0.0530.15

0.15 20.30 0.0520.10 0.0530.15 0.1030.30 0.0520.10 0.0530.15

0.05 30.15 0.0520.10 0.1020.20 1.00

2.60

The External Factor Evaluation Matrix score for Pakistan State Oil is 2.60. It represents that PSOs response to the external environment is above average.

5.7. Competitive Profile MatrixCompetitive profle matrix is an essential strategic management tool to compare afrm with the major players of the industry. Competitive profle matrix shows theclear picture about a frms strong and weak points relative to its competitors.The Competitive profle matrix for PSO will compare the frm with three importantcompetitors Shell Pakistan, Chevron (Caltex) Pakistan and BycoPetroleum.

16

Table 4 - Competitive Profile Matrix for OMC Industry

PSO Shell Chevron Byco

Total 1.00 3.21 2.98 2.48 1.65

Pakistan State Oil certainly has a competitive edge over its competitors. Shell isthe closest competitor of Pakistan State Oil. Byco Petroleum has recently startedits campaign to acquire the retail customers market share. It will take a lot of hard

Critical Success Factors W Rating WS Rating WS Rating WS Rating WSMarket Share

0.20 Product Quality

0.10 Customer Service

0.10 Customer Loyalty

0.10 Storage Capacity

0.10 Social Responsibility

4

0.80 3

0.30 3

0.30 2

0.20 4

0.40 3

3

0.60 4

0.40 4

0.40 3

0.30 2

0.20 3

2

0.40 4

0.40 3

0.30 3

0.30 2

0.20 3

1

0.20 3

0.30 2

0.20 1

0.10 3

0.30 1

work to Byco to beat the already established OMCs in the industry such as PSO andShell Pakistan. Chevron/Caltex Pakistan also poses minor competition to PakistanState Oil.

17

6. Strategy Formulation

6.1. TOWS Analysis Matrix

Opportunities1. Operating in largest

CNG consuming

country in the world2. Increase in the energy

demands in the country3. Deregulation of Oil Industry4. Chevron is liquidating

its aviation business

5. Search for alternate energysources

Threats1.

Constantly growing circular debt2.

Unreliable sources of supply (Refineries)

3. Devaluation of Pakistani Rupee4. Decline in consumption of

White Oil Products5. Fluctuation of oil prices in

international markets6. New alternatives to the

industrial energy needs such as solar energy

7. Deregulation of mechanism of setting fuel prices in Pakistan

8. Scarcity of CNG in Pakistan

9. Forward integration of oil refining companies (suppliers)

Strengths1. Highly managed company

with set strategic objectives2. Highly trained and

motivated workforce3. Storage capacity of 80%

of the total country storage4. Largest retail outlets

network in the country5. Market leader in all types

of fuel product6. Increasing sales revenue

over the past 3 years7. Sole provider of Furnace

Oil to Power Companies8. ISO certified

Information Management System

9. Strong Research andDevelopment 10. Largestmarket share inaviation

business SO Strategies

Increase CNG retailoutlets in major citiesand towns of the country(S4,S5,O1,O2)

Acquire majority share inone of the existing Oil

Refining Companiessuch as

Pakistan Refinery Limited(S1,S3,S5,O2,O3)

Build a new OilRefinery

(S1,S3,S5,O2,O3) Invest in Chevron

Pakistans liquidating business(S1,S5,S10,O4)

Research and improvealternate energy productssuch as Bio-Diesel and E10(S1,S5,S9,O2,O5)

Diversify in alternatesources of energy such asSolar and Wind Energy(S1,S9,O5)

ST Strategies Acquire majority share in

one of the existing OilRefining Companiessuch as

Pakistan RefineryLimited(S1,S3,S5,T1,T2,T3,T4,T7,T9)

Build a newOilRefinery

(S1,S3,S5,T1,T2,T3,T4,T7,T9)

Research and developnew products as

White Oil substitute (S5,S9,T4,T8) Diversify in alternate sources of

energy such as Solar and WindEnergy (S1,S9,T6)

Weaknesses 1.

Low profit margins2. Government

interventions due to semi-government structure

3. Declining market share to small competitors

4. Not a marketleader in

Lubricants sector5. High financial charges

incurred due to riskiness

WO Strategies Acquire majority

share in one of theexisting Oil RefiningCompanies such asPakistan RefineryLimited(W1,W2,W3,W5,O2,O3)

Build a new OilRefinery

(W1,W2,W3,W5,O2,O3)

Research and

improve alternate energyproducts such as Bio-Dieseland E10 (W3,O2,O5)

WT Strategies Work out a formula and

convince government tofacilitate PSOs debtors topayof their liabilities to PSO(W2,W5,T1)

Diversify in alternatesources of energy such asSolar and Wind Energy(W3,T6,T8)

18

5.2. Basket of Available StrategiesThe following strategies can be formulated form the TOWS Matrix. We will discuss each strategy and its rationale in this section.

Strategy 1: Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (Generic Strategy: BackwardIntegration)

This strategy will be useful for PSO in many ways. There is an increase in the

energy requirement in the country especially for the furnace oil. Pakistan StateOil imports the furnace oil at higher cost and supplies it to the various industrialconsumers such as Independent Power Projects (IPPs) and other industries. Thisstrategy will help in reducing this cost of goods sold since the refinery will beproducing the furnace oil and other petroleum products from the crude oil; andcrude oil prices are considerably low in the international market. The freightcharges on the imports will also be cut when furnace oil will be produced in thecountry. It will also help in increasing the proft margins of the company andimprove the credit risk profle of the company. It will also help in averting thecircular debt problem between the domestic oil refning companies and PakistanState Oil to some extent.

Government of Pakistan is also deregulating the oil industry and the rights tosetting the POL products are going to be set by the Oil Refning Companiesrather than the Oil and Gas Regulatory Authority (OGRA). It will prove beneficialto have majority share in an oil refning company as it will give Pakistan State Oil

some control in setting the POL products prices.

Pakistan State Oil is also facing unreliable supply of petroleum products from theirexisting oil refning companies. Most of Pakistan State Oils competitors areforward integration of these oil refning companies which prefer their owndistribution more than Pakistan State Oil. Pakistan State Oil has been surviving thechallenge because of the Government majority share in the company.

Strategy 2: Build a new Oil Refinery (Generic Strategy: Backward Integration)This strategy is an alternate to strategy 1. It has all the benefts similar to strategy1 but it is more of a longer term solution since developing an oil refnery takes 5to 7 years, depending on its size and capacity.

Strategy 3: Increase CNG retail outlets in major cities and towns of the country (Generic Strategy: Market Penetration)There is a huge potential of increasing Revenues by selling more CNG. Pakistanhas now become the largest consumer of CNG and it has more than 20 million CGNvehicles on the roads. This strategy might not be as efective as should be becauseof the scarcity of natural gas in the country and Governments inability to acquirenew sources of natural gas.

Strategy 4: Invest in Chevron Pakistans liquidating business (Generic Strategy: Horizontal Integration) Pakistan State Oil is the largest supplier to JP-1Jet fuel to the domestic and international airlines but the sales have decreased in Metric Tons terms during the FY 2009-10. Shell Pakistans market share had marginally increased with Chevrons market share decreased to 1.5% from 3.0% in previous year. Investing/acquiring this business will increase Pakistan StateOil Jet Fuel market share marginally.

19

Strategy 5: Research and improve alternate energy products such as Bio-Diesel and E10 (Generic Strategy: Product& Market Development)There is an increase in the energy requirement in Pakistan for both industrialand retail customers. Pakistan is the largest CNG consuming country but naturalgas is scarce. Alternate fuel solutions are extremely necessary. Pakistan State Oilcan bank upon its strong research and development facility to improve its twoalternate fuel products names Bio-Diesel and E10 retail fuel.

This strategy will help Pakistan State Oil in two ways. One, it will help them incatering to the increasing energy requirements and two, it will help them inconsolidating the White Oil market share which they have been losing to smallcompetitors. Pakistan State Oil can use their market leadership characteristic indeveloping new markets as well as in penetrating the existing markets for thesenew products.

Strategy 6: Diversify in alternate sources of energy such as Solar and

Wind Energy (Generic Strategy: Concentric Diversification)The strong research and development department can also help Pakistan StateOil to diversify the business to other related energy products such has Solar andWind energy. It will help in catering to the increasing energy requirements inPakistan.

Strategy 7: Research and develop new products as White Oil substitute (Generic Strategy: Product Development)The scarcity of natural gas in the country and declining trend of White Oilbrings out another opportunity to develop a new substitute for the white oil.Pakistan State Oil has the research and development team which have beendeveloping new fuel products.

Strategy 8: Work out a formula and convince government to facilitate PSOs debtors to pay of their liabilities to PSO (Generic Strategy: No Specific Strategy)The circular debt has caused the major problems for the whole Pakistan economy.Pakistan State Oil is worst afected by the circular debt as many debtors owearound Rs. 108 billion to PSO. On the other hand, PSO also owes around Rs. 136billion to various creditors such as domestic and international oil refneries andvarious fnancial institutions.

Pakistan State Oil needs to work out a formula so that they can convincegovernment to facilitate their debtors to pay off liabilities they owe to PSO. It willnot be an easy task but mid-term strategy of 3 to 4 years can be devised whereGovernment can pay of its on debt to PSO which is about Rs. 41 billion. They canalso facilitate the entities like KAPCO and PEPCO to pay of their bills of around Rs.60 billion over a certain period of time. Pakistan State Oil can use this cash streamto pay their debts to various other ORCs and fnancial institutions to bring debt-related ratios of their books down.

Other StrategiesThere are some other strategies which Pakistan State Oil can adopt, which were not present in TOWS analysis matrix.

Increase marketing of lubricant products to capture more market share in lubricants sector (Generic Strategy: Market Penetration)

20

5.3. SPACE MatrixThe SPACE matrix is a management tool used to analyze a company. It is used todetermine what type of a strategy a company should undertake. The StrategicPosition &ACtion Evaluation matrix or short a SPACE matrix is a strategicmanagement tool that focuses on strategy formulation especially as related to thecompetitive position of an organization.

Table 5 - SPACE Matrix Components Calculation

Financial Strength Return on AssetLeverage/Debt Management Net Income

Earnings PerShare Inventory

Turnover

Industry Strength GrowthPotential Financial Stability

Ease of Entry in the industry Resource Utilization Proftability

Environmental Stability Rate of Infation Technological Changes Competitive Pressure Barriers of Entry

Competitive Advantage Market Share

Quality Customer LoyaltyTechnological KnowledgeControl over suppliers and distributors

ConclusionIndustry Strength Average is: 16.0/5 = 3.10 Financial Strength Average is: 14.0/5 = 2.80 Directional Vector Coordinates:

x-axis = IS + CA = 3.10 2.60 = 0.50

Rating3.02.03.04.02.014.0

3.03.03.05.02.016.0

-4.0-3.0-4.0- 2 .0-13.

0

-1.0-2.0-4.0-2.0- 4 .0-13.

0

Competitive Advantage Average is:-13.0/5 = -2.60 Environmental Stability

Average is: -13.0/4 = -3.25

y-axis = FS + ES = 2.80 3.25 = -0.45

21

6 5 4 3 2 1 0

-6 -5 -4 -3 -2 -1-1 0 1 2 3 4 5 6-2-3-4

PSO

-5-6

Figure 4 - SPACE Matrix for Pakistan State Oil

The graph falls in 4th Quadrant of the SPACE Matrix which suggests that PakistanState Oil need to adopt competitive strategies. The competitive strategiesinclude all the integrative and the intensive strategies.

The SPACE Matrix also suggests that the company should bank upon the industry strength rather than on the environmental stability while making its strategies.

5.4. Grand Strategy MatrixGrand Strategy Matrix has become a popular tool for formulatingalternative strategies. Any organization can be positioned in one of the GrandStrategy Matrixs four strategy quadrants. The Grand Strategy Matrix is based ontwo evaluative dimensions: competitive position and market growth.

Pakistan State Oil operates in a rapid growth industry, since the annual salesrevenue grow by more than 5%. The company has a very strong competitiveposition as it is the market leader in almost all the areas of operation in theindustry.

Rapid Market Growth

WeakCompetiti

vePosition

StrongCompetiti

vePosition

Slow Market GrowthFigure 5 - Grand Strategy Matrix for Pakistan State Oil

22

Pakistan State Oil is located in the 1st Quadrant of the Grand Strategy Matrix. PSO isin the excellent position according to the GSM. Continued concentration of the markets as well as products (intensive strategies) is an appropriate strategy for Pakistan State Oil. Pakistan State Oil can also adopt integrative and related diversifcation strategies.

5.5. BCG Matrix

The BCG matrix is a chart that helps corporations with analyzing their businessunits or product lines. This helps the company allocate resources and is used as ananalytical tool in brand marketing, product management, strategic management,and portfolio analysis. While analyzing an industry, this Matrix can also be used toplace various companies according to their relative market share with respect tothe industry leader and the companys growth in the industry.

Pakistan State Oil is the overall industry leader among all Oil Marketing Companies.

PSO

STARS QUESTIONMARKS

CASH COWS DOGS

Its growth has also been good over the past 4 years.

1 0.5 020

0

-20 Relative Market Share

Figure 6 - BCG Matrix for Pakistan State Oil

According to the BCG Matrix, Pakistan State Oil is a Star company which highergrowth and highest market share. Considering the fact that it is a market leader,any slowness in growth may only push it down to become a Cash Cow.

Currently, BCG matrix suggests integrative and intensive strategies for Pakistan State Oil.

5.6. Internal-External (IE) MatrixThe Internal-External (IE) matrix is another strategic management tool usedto analyze working conditions and strategic position of a business. The InternalExternal Matrix is based on an analysis of internal and external business factorswhich are combined into one suggestive model.

23

Market Growth Rate

4.0 3.0 2.0 1 .0

3.0

2.0

1.0IFE Matrix Total Weighted Score

Figure 7 - IE Matrix for Pakistan State Oil

Pakistan State Oil is located in 4th Quadrant of IE Matrix. The company should adapt grow and build strategies which include integrative and intensive strategies.

EFE MatrixTotalWeighted Score

PSO

Generic Strategies

SPACE Matrix

Grand Strategy Matrix

BCG Matrix

IE Matrix

TotalForward Integration Y Y Y Y 4Backward Integration Y Y Y Y 4Horizontal Integration Y Y Y Y 4Market Penetration Y Y Y Y 4Market Development Y Y Y Y 4Product Development Y Y Y Y 4Concentric Diversifcation

N Y N N 1Conglomer

ateDiversifcati

N N N N 0Horizontal Diversification

N N N N 0Joint Venture N N N N 0Retrenchment N N N N 0Divestiture N N N N 0Liquidation N N N N 0

5.7. Decision MatrixThe decision matrix method is a quantitative technique used to rank the multi-dimensional options of an option set. It is frequently used in engineering for makingdesign decisions but can also be used to rank investments options, vendor options,product options or any other set of multidimensional entities such as strategicoptions from a basket of strategies.

Table 6 - Decision Matrix for Pakistan State Oil

According to the decision matrix, Pakistan State Oil must adopt integration andintensive strategies. Concentric diversifcation strategy is not recommended bythe decision matrix at the moment. The following sets of strategies may then beconsidered as the one strategic option for the company in next 5 years to 7 years.

24

Strategy AThis strategic option will consist of the backward integration strategies alongwith the strategy to overcome the debt problem of the company. The followingstrategies will be a part of this strategic option.

Acquire majority share in one of the existing Oil Refining Companies such asPakistan Refnery Limited

Build a new Oil Refnery for the long term competitive advantage Work out a formula and convince government to facilitate PSOs debtors

to pay of their liabilities to PSO

Strategy BThis strategic option will consist of the market penetration strategies alongwith the strategy to overcome the debt problem of the company. The followingstrategies will be a part of this strategic option.

Increase CNG retail outlets in major cities and towns of the country

Increase marketing of lubricant products to capture more market share in lubricants sector

Strategy CThis strategic option will consist of the productand market developmentstrategies along with the strategy to overcome the debt problem of the company.The following strategies will be a part of this strategic option.

Research and improve alternate energy products such as Bio-Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSOs debtors

to pay of their liabilities to PSO

Now we will evaluate these three strategic options using the Qualitative Strategic Planning Matrix (QSPM).

25

5.8. Qualitative Strategic Planning MatrixKey Factors Strategy A Strategy

BStrategy C

W AS TAS AS TAS AS TASOpportunitiesOperating in largest CNG consuming country in the world Increase in the energy demands in the country Deregulation of Oil IndustryChevron is liquidating its aviation business Search for alternate energy sources Threats

0.100.100.080.020.05

0.150.050.050.100.050.050.050.050.10

0.050.050.1

2

0.20 4

0.40 4

0.32 --1 0.05

3

0.45 4

0.20 3

0.15 2

0.20 2

0.10 --4

0.20 2

0.10 4

0.40

4

0.20 - -4

4

0.40 2

0.20 1

0.08 --2 0.10

1

0.15 1

0.05 1

0.05 3

0.30 1

0.05 --1

0.05 1

0.05 1

0.10

1

0.05 - -1

1

0.10 3

0.30 3

0.24 --4 0.20

2

0.30 3

0.15 2

0.10 4

0.40 3

0.15 --3

0.15 4

0.20 3

0.30

2

0.10 - -3

Constantly growing circular debt Unreliable sources of supply (Refneries) Devaluation of Pakistani RupeeDecline in consumption of White Oil Products Fluctuation of oil prices in international marketsNew alternatives to the industrial energy requirements such as solar energy Deregulation of the mechanism of setting fuelprices in PakistanScarcity of CNG in the countryHighly managed company with set strategicobjectives Highly trained and motivated workforceStorage capacity of 80% of the total country storage Largest retail outlets network in the countryMarket leader in all types of fuel products Increasing sales revenue over the past 3 years Sole provider of Furnace Oil to Power Companies ISO certifed Information Management System Strong Research and Low proft marginsGovernment interventions due to semi-government structure Declining market share to small competitorsNot a market leader in Lubricants sectorHigh fnancial charges incurred due to riskinessTotal 2.00 5.31 3.06 5.25

26

5.9. Strategy SelectionThe strategic option A turns out to be more favorable for Pakistan State Oil as ithas the highest QSPM score of 5.31, however, we recommend strategic option C toPakistan State Oil which stands second in QSPM with the score of 5.25.

Strategic option C consists of Market Development and Product Developmentstrategies of alternate fuel products of Pakistan State Oil. The company has

already been working on the two new products namely, E10 which is blended fueltargeting the efficient performance of the retail customers vehicles and Bio-Dieselwhich is produced using the natural seed oil. It will also enable PSO to pricethese products accordingly after the deregulation of oil industry since they will beproducing these products.

The company may still be facing the threat from its suppliers for unreliable supply ofPOL products and it may also not have an upper hand in setting the fuel pricedespite being an industry leader, but the strategic option C provides the

company a unique competitive advantage of introducing efficient andenvironmental-friendly fuel in the market.

Strategic option A gives a competitive advantage to the company and more control on setting the fuel prices, but it cannot be adopted for various reasons.

Pakistan State Oil has very high debt ratios and very low net income margins wedo not recommend strategic option A to the company because this option ismore capital intensive. PSO will already be working with the Government ofPakistan to convince them to facilitate its debtors to pay of their liabilities toPSO; therefore they cannot expect the Government to rise funding for any newacquisition or construction of the Oil Refning Company. The fnancial costs incurredby the company are also very high and more borrowing will be more costly and onlyadd to the risk of the company.

The company may, however, adopt this strategy after resolving the debt issuesand bringing down its fnancial costs; by that time the company must focus onacquire more market share in the alternate fuel business.

27

6. Strategy & Long Term Objectives

6.1. StrategyPakistan State Oil needs to adopt the combination of following Low-cost Leadership, Market and Product development strategies.

Research and improve alternate energy products such as Bio-

Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSOs debtors

to pay of their liabilities to PSO

6.2. Long Term ObjectivesHere are the long term objectives for Pakistan State Oil.

To work with Government of Pakistan to reduce companys portion of

circular debt by 60% by FY 2017. To increase proftability to at least 6% by end of FY 2015 To have at least 25% revenue in FY 2016 from the alternate fuel products To have revenue growth of at least 7% per annum till FY 2017

To enhance the E-10 blending facility at 60% storagefacilities by FY 2013. To improve and launch Bio-Diesel as

a substitute of White Oil by FY 2014. To train employees to adapt to technology advancements in alternate fuel by FY 2015.

6.3. Comparison of Long Term ObjectivesThe existing strategic objectives of the company, given in section 2.3, are alsorelated to the intensive strategies of Market Development, Market Penetration andProduct Development. The proposed Long Term objectives back the strategiesadopted by the company at the moment of increasing its market share by usingIntensive strategies.

28

7. Strategy Implementation

7.1. Recommendations Board of Management must purse with the Government of Pakistan on a

formula to reduce the companys portion in the circular debt of the country. The Ministry of Petroleum, Ministry of Finance, the Finance Department of Pakistan State Oil and the related fnance departments of the debtors and

creditors of the PSO need to sit together to reach on an agreement to discharge their liabilities to each other. A 5-year plan must be devised in this regard before the end of FY 2012 and the implementation of this plan need tostart from FY 2013 till FY 2017. The decreased debts and receivables will helpstabilize the company and the economy in general. This stability will translate into higher net proft margin.

Increase the supply of alternate fuel, especially E-10 blended fuel, to all the retail outlets of the country by FY 2014. It can be achieved by installing Fuel Blending facility at 20 out of 30 storage facility of the country by the end of

FY 2013. The E-10 fuel can be carried in the existing modes of transport of fuel such as tank lorries, therefore its availability at all the retail outlets is possible. The increased availability of alternate fuel at the retail outlets will in turn increase its portion in the total revenues. The lower production cost will help in increasing the gross profit margin.

Research, in collaboration with Singaporean and Malaysia OMCs, on Jatrophafruit (edible) oil to produce more cost-eficient, environment-friendly fuel asa substitute of White Oil and CNG. Pipri Marshall Yard is being used as theresearch facility at the moment. Plantation of Jatropha seed is recommendedon large scale in order to produce sufficient Bio-Diesel for launching theproduct and maintain uninterrupted supplies.

Arrange for trainings in Singapore and Malaysia for having the basicknowledge and innovative ways of extracting fuel-oil from the non-edibleseeds. It will help to produce alternate fuels more efficiently.

29

8. Specific ObjectivesTable 7 - Specific Objectives for Pakistan State Oil Departments

Operations2011-12

2012-13Logistics

2011-12

2012-13Supply 2011-12 2012-13 2013-

14 2014-15 2015-16Construction & Retail Facility 2011-122012-13 2013-14 Each Year Procurement 2011-12 2012-13 2013-14 Each Year Retail Fuel 2011-12 2012-13 2013-14 2014-15 2015-16 Legal2012-13 2014-15 Finance

2011-122012-2017 2012-2017

Install fuel blending facility at the 8 major storagefacilities in large cities of the country (4 in Punjab,2 in Sindh, 1 in Khayber Pukhtunkha and 1 in Balochistan).Install fuel blending facility at the 12 storage facilities in the country. (4in Punjab, 4 in Sindh, 2 in Khayber Pukhtunkha and 2 in Balochistan)

Arrange for stand-by tank lorries in the country, 70 in Punjab, 50 in Sindh, 15 in Khayber Pukhtunkha and 15 in Balochistan.Arrange for additional stand-by tank lorries in the country, 100 in Punjab, 75 in Sindh, 30 in Khayber Pukhtunkha and 20 in Balochistan

Ensure the import of 15,000 metric tons extra HSD for E-10 fuel Ensure the import of 40,000 metric tonsextra HSD for E-10 fuel Ensure the import of 70,000 metric tons extra HSD for E-10 fuel Ensure the import of 100,000 metric tons extra HSD for E-10 fuel Ensure the import of 140,000 metric tons extra HSD for E-10 fuel

Ensure the availability of storage tanks for E-10 at 800 retail outlets inthe country. Ensure the availability of storage tanks for E-10 at addition 1200 outlets (2000 in total) Ensure the availability of storage tanks for E-10 at addition 1600 outlets (3600 in total) Ensure that any new retail outlet has storage tank for E-10 fuel

Ensure the procurement for the dispensing units for E-10 fuel for 800 retail outletsEnsure the procurement for the dispensing units for E-10 fuel for additional 1200 retail outlets Ensure the procurement for the dispensing units for E-10 fuel for addition 1600 retail outlets Ensure that there are dispensing units available in inventory for new retail outlets

Achieve alternate fuel sales equal to 2% of total annual sales Achieve alternate fuel sales equal to 5% of total annual sales Achieve alternate fuel sales equal to 11% of total annual sales Achieve alternate fuel sales equal to 18% of total annual sales Achieve alternate fuel sales equal to 25% of total annual sales

Get the patent for E-10 fuel for the next 15 years Get the patent for Bio-Diesel for the next 15 years

Ensure to have an agreed plan for circular debt removal in collaboration withthe Government ministries and related parties such as debtors and creditorsEnsure that the agreed plan is being carried outEnsure that the Net Proft Margin is increased by 1% each year.

30

Appendix 1 - Finances

Balance Sheet

ASSETS

Non-Current Assets

as of March 2010 June 2009 June 2008 (Rupees in 000)

Property, Plant and Equipment IntangiblesLong Term InvestmentsLong Term Loans, Advances and Receivables Long Term Deposits and Prepayments Deferred Tax

Current Assets

Stores, Spar

e Parts and Loos

e Tools Stockin-tradeTrade DebtsLoans and AdvancesDeposits andShort Term Payments

Other ReceivablesTaxation NetCash and Bank Balance

Net Assets in Bangladesh

EQUITY AND LIABILITIES

Share Capital Reserves

Non-Current Liabilities

Long Term DepositsRetirement and Other Service Benefts

Current Liabilities

Trade and Other Payables ProvisionsAccrued Interest/Markup Short Term Borrowing Taxes Payable

6,312,778 40,3242,390,40

8289,979

90,7213,819,53

912,934,7

49

109,18243,182,36

6108,277,6

93756,822320,341

13,630,913 -

3,263,488169,540,8

05-182,484

,554

1,715,19026,288,79328,003,983

931,8372,002,3632,934,200

136,532,117

688,512391,404

12,918,724

1,015,614151,546,3

71

6,987,025 68,8722,153,51

4405,870

83,6555,033,27

314,732,1

19

112,14340,698,20

980,509,830 418,015

551,80312,806,779 709,6272,883,118138,689,5

24-153,421

,643

1,715,19019,155,59520,870,785

854,7181,673,0202,527,738

110,123,702

688,512556,380

18,654,526

-130,023,120

7,460,549

105,5022,701,09

7477,745

79,098407,33711,231,3

28

115,81462,360,0

6733,904,7

28396,220401,43315,681,7

90 -3,018,640115,878,6

92-127,110

,020

1,715,19029,249,86430,965,054

834,5981,574,1482,408,746

81,067,565

726,116217,92810,997,9

08726,70393,736,2

20

182,484,554 153,421,643 127,110,020

31

Income Statement

Gross SalesSales Tax and IFEM* Net SaleCost of Products Sold Gross ProfitOther Operating Income

Operating Expense WPPF & WWF

Other IncomeProft/(Loss) from Operations (EBIT) Financial Costs

Share of Proft of Associates Proft/(Loss)before Tax TaxationProft/(Loss) after Tax (Net Income

Jul09to Jun

10

877,173,254

(134,415,303)

742,757,951

(713,591,707)

29,199,244

1,479,05430,645,298(8,080,568

)(1,331,317

)(9,411,885

) 6,095,34827,328,761(9,882,010

)17,446,751

516,40117,963,152(8,913,556

) 9,049,596

Jul08to Jun

09

719,282,176

(106,586,587)

612,695,589

(609,685,478)

3,010,1111,451,6664,461,777

(10,815,121) -

(10,815,121)

776,686(5,576,65

8)(6,232,05

6)(11,808,7

14)451,850

(11,356,864)

4,658,329(6,698,53

5)

Jul 07to Jun

08(Rupees in 000) 583,213,959

87,935,426495,278,53

3(465,254,9

07)30,023,62

61,396,527

31,420,153(9,283,021

)-

(9,283,021)

313,86022,450,9

92(1,367,89

8)21,083,0

94294,31821,377,4

12(7,323,61

7)14,053,7

95

*IFEM = In-Land Freight Equalization Margin

32

Appendix 2 Organization Chart

Managing Director

ExecutiveDirector

(Finance & IT)ExecutiveDirectorSupply

GM Information System

GMFinanc

eGM

Operations

GMLogisti

cs

GMSuppl

y

GM Construction andRetail

ExecutiveDirector

MarketingGM

Procurement

GM Retail Fuel

GM Industrial Customers

GM Aviation, Marine &

Export

GMLubrican

ts

DGM CNG & LPG

DGMNon-Fuel Retail

DGMCard

s

GM Alternate Energy & New Business Dev.

GM Quality Assurance

DGM Health Safety &Environment

GM Human Resource

GMLegal

GM Security Services

and

33