Running head: COURSEWORK ASSIGNMENT ECONOMICS OF STRATEGY Coursework Assignment – Economics of Strategy August 27, 2009 Competitive Environment Porters approach to the industrys structural analysis is aimed to assess each of the competitive forces that act within the industry, the collective strength of which will define the profit potential and attractiveness of the industry. These competitive forces are: the intensity of rivalry, the barriers to entry, bargaining power of suppliers, bargaining power of buyers and the power of substitutes. Industry concentration can be evaluated by calculating Herfindahl-Hirschman Index (HHI) or concentration ratio (CR).
In order to calculate Herfindahl-Hirschman Index (HHI), it is necessary to assess the market shares of at least fifty largest companies in the industry. The industry is non-concentrated if the sum of market share squares is less than 1,000. In this case, the environment is considered highly competitive.
As far as Herfindahl-Hirschman Index (HHI) will need statistical data on large number of the world oil companies operating in Oil and Gasoline/ Oil and Natural Gas industry, which is quite difficult to obtain, concentration ratio in this paper will be calculated using market shares of 4 largest companies in the industry. The four leading companies in Oil and Gasoline/ Oil and Natural gas industry industry are BP (8.5%), Chevron (5.8%), ExxonMobil (11.7%), and ConocoPhillips (12.8%).
The Essay on Shell Oil Company And Katrina
The true immediate costs for Shell Oil Company are untabulated. The company lost 60% of its production in the Gulf in the following weeks after hurricane Katrina. The Shell Company suffered intangible losses of employee moral and high turnover. Its tangible losses are not limited to losses in refining capacity, downed transporting pipelines, and downstream revenue from retail stores sales. However ...
BP plc, a multinational oil company, is the 3rd largest company, one of the 6 supermajors (vertically integrated private sector oil exploration, natural gas, and petroleum product marketing firms).
Chevron Corporation is the fourth largest energy company with its headquarters in San Ramon, California, USA. The Exxon Mobil Corporation, or ExxonMobil is the worlds second largest publicly traded company operating in Oil and Gas industry. Finally, ConocoPhillips Company (NYSE: COP) is the fifth largest private sector energy corporation in the world.
Their total market share is 38.8%. Relatively moderate concentration ratio indicates that the oil and gas industry is still controlled by the six supermajors. The rivalry in oil and gas industry is one of the Porters Five Forces. Oil companies operating in this industry are typically classified by size (supermajors – (BP, Chevron, ExxonMobil, ConocoPhillips, Shell, Eni and Total S.A.),majors and jobbers or independents.).
There are 268,456 oil companies in the world, however, most of them are small and have no significant influence on the oil industry. Small oil companies have to compete with the six supermajors. Therefore, the oil industry is closer to monopolistic market than perfect competition. The supermajors products and businesses include downstream activities of refining and marketing of petroleum products, upstream activities of oil and natural gas exploration, development and production, and chemical businesses related to downstream refining operations.
The supermajors produce energy, gasoline and raw materials for chemicals and plastics. To achieve profitability in the oil and natural gas industry, the companies have to focus on improving efficiency via cost control, technology improvements, productivity improvements, regular reappraisal of their asset portfolio and reducing unit cost. The industry supermajors participate in is more profitable than the S&P 500 median. The Mining/Crude-Oil industry (the supermajors upstream activities) is ranked 1st with approximately 26.6% return on revenues, ranked 10th with a 21.8 return on equity and 11th with 8.2% return on assets. The Chemicals industry is ranked 17th with a 6.6% return on assets, ranked 26th with a 6.6% return on revenues and ranked 12th with a 20.9% return on equity. The Petroleum Refining industry (the supermajors downstream activities) is ranked 2nd with a 13.2% return on assets, ranked 20th with a 7.3% return on revenues, and 3rd with a 30.7% return on equity.
The Term Paper on Oil Industry Company Simon Employees
When Robert Horton left his position as Chairman and CEO of BP, the company was in financial trouble and the employee morale was notably low. The company was experiencing losses, the debt-to-equity ratio was out of control, and the company had positioned itself in so many diverse markets that most of the employees had no idea what the company mission and goals were. When David Simon took over as ...
The threat of new entrants is relatively low because major barriers to entry include environmental regulation, economies of scale, proprietary technology, high capital cost, distribution channels, geopolitical factors, and high levels of industry required to be competitive in the areas of extraction and exploration. Moreover, fixed cost levels are also high for chemical products, upstream and downstream products. Competition or business rivalry is also high due to the commodity-based nature f the oil and natural gas industry. There is also a competition with other industries supplying energy, chemical and fuel for both individual and industrial consumers. The oil and natural gas industry growth rate makes up approximately 1.8% (based on global demand for petroleum), and poses no significant threat or an opportunity. Finally, as far as oil and natural gas industry is a commodities market, the competitive advantage is mostly relates to the ability to produce oil and gas products at a lower cost. The supplier power is high as far as OPEC controls approximately 40% of the worlds supply of oil and has great impact on the oil price.
The suppliers are oil mining and extraction companies. The influence of OPEC on the price of oil constitutes a threat, as most supermajors purchase oil on the open market. Also, unstable companies hosting oil companies reserves are also threat as they can seize supermajors assets at any time. Industrial buyer power is low as upstream suppliers tend to keep prices high and limit supply (as it can be evidenced by shrinking downstream margins).
The Research paper on Economic Analysis of Oil Palm Industry a Case Study of Malay Independent Smallholders in Kuala Langat
It is entirely my own work and has not been submitted to any other University or higher education institution, or for any other academic award in this University. Where use has been made of the work of other people it has been fully acknowledged and fully referenced. I hereby assign all and every rights in the copyright to this Work to the Universiti Teknologi MARA ("UiTM'), which henceforth shall ...
Individual buyer power is also low due to high volume of demand (the energy prices continue to increase despite economic downturn).
Vertical boundaries of the oil industry are those between successive stages of production. (Crandall and Flamm, 1989, p.115).
The threat of substitutes is low. It comes from hydroelectric, solar, photovoltaic, biomass, nuclear power, geothermal, and wind. Hydroelectric and nuclear energy sources can hardly be considered a threat due to environmental concerns, government regulation and high barriers to entry. Photovoltaic sources are limited due to technological issues; geothermal sources are limited due to geographic availability. Biomass is the only potential threat. Segmentation analysis implies constructing a segmentation matrix (Cohen, 2004) for the chosen product. The product is broken down into several types.
Table 1.1 Industrial consumers Individual consumers Petroleum and derived products 82% 18% Oil and derived products 76% 24% Natural Gas 81% 19% Fuel 62% 38% Lubricant 79% 21% Table 1.1 shows the breakdown of oil products by five types: petroleum and derived products, oil and derived products, natural gas, fuel and lubricant. Buyers can be classified by different factors e.g. age, sex, geography, lifestyle and others. Segmentation of the oil products in the oil and natural gas industry was constructed classifying customers by type (individual and industrial customers).
The data was obtained from Research and Markets (2008) and Research and Markets (2000).
The percents represent the estimated potential market for each type of the product.
Barriers to mobility indicate how easily the companies operating in the oil and natural gas industry can shift from one segment to another. The analysis of competitive environment showed that the oil and natural gas industry is concentrated. The industry is very attractive because buyer power is low, the threat of new entrants is low, supplier power is high (this is a positive indicator as most of the supermajors in the industry are both suppliers and buyers), and the threat of substitutes is low. Due to high business rivalry the attractiveness of the oil and natural gas industry is high. Oil companies are profitable due to their operational efficiencies, high inventory turnover, and operational and technological efficiencies in the areas of exploration, extraction, and refining..
The Essay on Economic Impact Of High Gas Prices
Gas prices are up over 40 cents a gallon from this time last year (Stefano va). What impacts will that have on the overall economy A recent USA Today poll showed that 55 percent of people who make under $20, 000 a year consider gas hikes a financial hardship. Only 30 percent of people who make $50, 000 a year called the increases a hardship (Regan). If the recent gas price increases reflect the ...
