Sustaining Competitive Advantage in the Global Petrochemical Industry
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Transcript of Sustaining Competitive Advantage in the Global Petrochemical Industry
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.