SUSTAINING COMPETITIVE ADVANTAGE IN THE GLOBAL PETROCHEMICAL INDUSTRY: A SAUDI

ARABIAN PERSPECTIVE

NAME: Ria Agustriana

NIM : 29111321

CLASS: R 46 - A

MASTER OF BUSINESS ADMINISTRATION

INSTITUT TEKNOLOGI BANDUNG

2013

The External Environment: Opportunities, Threats, Competition, and Competitor

Analysis

The external environments influences firms as they seek strategic competitiveness and above

average return. A firm’s external environment creates both opportunities and threats. The

understanding of condition in its external environment that the firms gain by analyzing the

environment then matched with knowledge about its internal organization as the foundation

for forming the firm’s vision, mision, and implementing the strategic actions. The strategic

actions are inffluenced by the condition of three parts: the general, industry, and competitor

of its external environment.

a. The General Environment: elements in the broader society that affect industries and their

firms. It consists of seven environmental segments: demographic, economic,

political/legal, sociocultural, technological, global, and physical. Identifying opportunities

and threats is an important objective of studying the general environment. To increase

understanding of the general environment, firms engage in external environmental

analysis. This analysis has four parts:

1) Scanning: Through scanning firms can identify early signals of potential changes in

the general environment and detect changes that are already under way.

2) Monitoring: To observe environmental changes to see if an important trend is

emerging from among those spotted through scanning.

3) Forecasting: To develop feasible projections of what might happen, and how quickly,

as a result of the changes and trends detected through scanning and monitoring.

4) Assessing: To determine the timing and significance of the effects of environmental

changes and trends that have been identified.

b. Industry Environmetn Analysis: Has a more direct effect on the firm’s strategies

competitiveness and ability to earn above average returns. The Porter’s five forces model

competition has been developed as one of the most often used business strategy tools to

analyse the competetive game in industries.

1) Threat of new entrants: How easy or difficult is it for new entrants to start compete and

what barriers exist?

2) Bargaining power of buyers: How strong is the

position of buyers, can they work together to order large

volumes?

3) Bargaining power of suppliers: How strong is the

position of sellers, are there many or only few potential

suppliers, is there a monopoly?

4) Threat of substitute products: How easily can our

product or service be substituted, especially more

cheaply?

5) Intensity of rivalry among competitors: Is there a strong competition between the

existing players, is one player very dominant or all equal in strenght/size?

c. Competitor Analysis: Focuses on each company against which a firm directly competes.

The analysis informs the firm about competitor’s future objectives, competitor’s current

srategies, competitor’s assumption, and competitor’s strengths and weaknesses. The result

of an effective competitor analysis help the company to understand, interpret, and predict

its competitors’ action and responses.

Case Summary: Sustaining Competitive Advantage in The Global Petrochemical

Industry: A Saudi Arabian Perspective

Saudi Arabia has been on the path of economic growth, even in the middle of

widespread decline globally. Saudi Arabia use its competative advantage to remain

competitive. Oil and gas reserves remaining Saudi Arabia’s greatest natural asset and largest

single source of revenue and well known as a leading producer and exporter of oil. Saudi

Arabia account for more than 5% of the world’s petrochemichals production and also the

largest producer of MTBE (Methyl Tertiary Buth Ether) with a global share of around 15%.

Saudi Basic Industries Corporation (SABIC) established as a result of govenrment’s plan and

became the third largest producer of petrochemical with 16 manufacturing subsidiaries that

are growing.

The Petrochemical Industry in Saudi Arabia

Domestic Consumption in Saudi Arabia is low, due the small size of market. Therefore

the industry in general pursued an ‘export-oriented’ strategy, as a result of more than 76% of

its petrochemicals production is being exported. Two major markets for saudi exports are the

Middle Eastern and East Asian region. From the analysis we can define the key strenghts of

Saudi Arabia petrochemical industry located in: the low costs of feed stocks, low costs of

utilities, large scale of production that cause the average fixed costs and average variable

costs lower than competitor, lower capital cost due to lower initial costs and last the presence

of an efficient infrastructure. There were also some weaknesses in petrochemical industry:

lack of technological and skills of personnel, lack of management expertise, and lack of the

ability on marketing approach, product development and providing technical support.

Industry Analysis: Porter’s Five Forces Model

To maximising SABIC corporate value creation, we use Porter’s five forces model to

analysis the petrochemical industries to creating competitive strategy and analysis the

attractiveness of an industry structure. The model also determine the long run profitability of

the petrochemical industry in Saudi Arabia.

Threat of new entrants

Big firms dominated market

Cooperation with existing firms for a

new firm to enter market.

Complexity and size plants will be

expensive to build.

High Technology needed.

Access to market is limited.

Rivalry between firms

Merger and Acquisitions between major

players.

Exxon, Shell, BASF chemical company, Dow

Chemical, Mitsubishi. Equal in size and

market power.

Price war due the sluggish growth rate.

No quality differences.

Customer easily switch from one supplier to

another.

Costs of leaving market is high.

Buyer’s power of bargaining

Numerous customers from around

the world (Gulf Nations, Indian

sub-continent, Far East, Middle

East, Africa, Europe, Japan)

Some product dependence on a

single country like China gives

bargaining power to buyer.

Focusing on a single nation will

pose threats and find alternative

markets.

Supplier’s power of bargaining

Suppliers scattered around the

globe.

Low on switching costs to

another supplier

Reasonable price and greater

credit facilities.

Critical raw material have a high

bargaining power. Shirtage in

supply may jeopardise

production

Threat of substitutes

Concerns about the environment, it will

lead to biochemical substitution.

From the analysis above, we can generates some strategy and practical implication to

improve Sabic competitiveness among competitiors on the industry.

1. The company should trained the human resources well the local employees has same

managerial and technical skills with the expatriate that has been hired in company. The

vision and mission of company must be reflecting with the performance of all employee,

department, manager, and firms of SABIC.

2. Aggressive marketing and distribution channel needed to sustain the profitability in

global market so they can penetrate a new and untapped markets like Far East and South

East Asian region.

3. Empowering the Research and Development (R&D) division so they can creates some

extension product lines, a world-class quality product that differs SABIC firms from other

competitors. It’s better to create a uniqueness of the product that will give the firm an

advantage point.

4. Improving high technology to support the operational of firms.

5. Offering the long-term contract to customer (one year or more) with one or combination

price so the existing customer will prefer to choose SABIC among other competitor.

6. Smaller and medium firms should merge in order to strenghten their capital base, increase

productivity and cut costs.

Lesson learned from the case

Saudi Arabia petrochemical industry has strong attractiveness and long-run industry

profitability and competitions. The petrochemical industry has helped Saudi Arabia to gain

and maintain its competitiveness. However, the presence of competitors which are regional

and international reduces the effectiveness of Sabic in the international markets. By analyzing

the external environment of the industry with Porter’s five forces model, Sabic can select

several strategies that can be applied immediately to the company. Sabic has to pay attention

more to the human resources, marketing and distribution channel, research and development

division, high technology that needed to strenghten their position even they are already one of

the biggest player in the industry. The product substitution will be one of the threats for the

firms, as many customer aware about the important to keep the environment clean. New

comer and new competitor will always come, the strategy needed to anticipated competition

from foreign companies that will enter Saudi Arabia.