This study explores whether Saudi Aramco, a state-owned petroleum company, has developed new products or services that would be the company’s future business despite the company has monopoly operation of oil production in the Kingdom of Saudi Arabia. Given the presence of management of Saudi Aramco objectives on the company’s future, we believe that product road map and business strategy become the measure of the corporation’s sustainable development. The study further examines whether corporations with a strong positioning in a product or service would act on developing new products earlier long before the end of product life cycle or start exploring new businesses just before their main product ends.
In this case, we find that Saudi Aramco has started a business diversification by carrying out a joint venture with the Dow Chemical Company to build the world’s largest petrochemical complex. As the company heads for becoming the full provider of petrochemical producers, it requires Saudi Aramco to establish product road map and business strategy become the measure of the corporation’s sustainable development amidst their strong position as the world’s leader in oil production.
In addition, learning from several incidence of explosion or oil spill during the exploration, Saudi Aramco had better have the risk management plan to anticipate when any incidence occurs. Thus, it reduces the associated costs to clean up the spill or damage.
This study explores Saudi Aramco’s current and future strategic profile, which highlight whether newly developed products or services would be the company’s future business. In addition, the study further examines whether corporations with a strong positioning in a product or service would act on developing new products earlier long before the end of product life cycle or start exploring new businesses just before their main product ends.
Saudi Arabian Oil Company (Saudi Aramco) is the oil production in Saudi Arabia is produced by the stated-owned national oil company of Saudi Arabia that manages the full line of global petroleum enterprise ranging from exploration and refining to distribution and shipping. The company operates in more than 70 nations all over the world and employs over 54,000 staffs. They also hold the world’s largest reserves (260.1 billion barrels as of end of 2010) and also become the largest oil company by production at 7.9 million barrels per day in 2010 (Saudi Arabian Oil Co, 2012a). As the business grows, Saudi Aramco diversifies its production to explore its world’s extensive reserve of natural gas liquids (NGL) and starts the joint venture with The Dow Chemical Company to build and operate the integrated chemicals complex in the Kingdom of Saudi Arabia (Saudi Arabian Oil Co, 2012k).
This paper further will have following outline that describes the planned flow of discussion on the assigned topic.
Understanding the key internal strengths and weaknesses is important to evaluate corporate performance. Appendix 1 displays the result of Internal Factors Evaluation (IFE) on Saudi Aramco. There are many core competencies for Saudi Aramco which are:
The first internal factor is business development. The rate for Saudi Aramco in this internal factor is 4 out of 5 due to the fact that the company has prepared the future revenue generator although their oil reserve can hold for over 90 years. This factor is important for a world-class company just like Saudi Aramco as they get benefits of monopoly in the oil production and marketing in the Kingdom of Saudi Arabia.
Another factor that may prevent Saudi Aramco to diversify and expand their services is the fact that they hold the world’s largest oil reserves at over 260 billion barrels. This provides Saudi Aramco with the reserve for about 90 years at average production of 7.9 billion barrels per day.
In addition, the company also leverages their existence in the petrochemical industry by conducting partnership with the Dow Chemical Company. In July 2011, the two companies were agreed on the formation of joint venture that were planned to build a fully integrated chemicals complex in Jubail Industrial City, Kingdom of Saudi Arabia. The new joint venture, named “Sadara Chemical Company,” is established following the feasibility study and front-end engineering, which conducted in 2007.
The second internal factor is innovative culture. C.K. Prahalad and Gary Hamel reveal core competence refers to the collective learning and coordination expertise in a company’s product line. This competence further becomes the source of competitive advantage and let them to introduce the variety of products and services that are not easily copied by their competitors. Saudi Aramco has a strong point at nurturing new technologies that improve their oil production method and quality of service. To date, the company has been awarded for over 100 patents and it is going to spawn other tens to hundreds of patent as the company manages the extensive facilities for research and development through Research and Development Center (R&DC) and the Exploration and Petroleum Engineering Center Advanced Research Center (EXPEC ARC).
Sales and Marketing
The weakness of Saudi Aramco lies on their global reaches as the lucrative markets lie in developing economies such as India, China, and other Asian countries as industries move towards this region, with the rising needs for oil consumption. As the rising demands of oil continue rising and it will significantly raise the costs of production and lead to inflation, developed countries such as U.S., Japan, India, and China start developing alternative energy to bring the costs down. The increasing demands from the two countries (India and China) are due to they become the powerful economies in the future, according to many analysts and in larger scale the growing demands for oil will be from Asian countries about 40% (CBD, 2008).
Despite the weakness in developing markets, Khalid Al Falih, Saudi Aramco’s chief executive, asserts that they would serve global demand for oil much better. The CEO specially notes that Saudi Aramco would pay attention to the rising needs in Asia because of two factors: demographic growth and growing economics (Milhench, 2011).
Environmental Analysis: PESTEL Analysis
Concerning the environmental analysis on the external factor of Saudi Aramco, we employ the PESTEL analysis.
Despite the major influences resulted from oil price changes, analysts have also indicated that oil price changes should not be considered an independent factor that is free from the influence of other factors. Researchers have revealed that most of the changes in oil prices were preceded by political events in the Middle East. For example, the March 1999 OPEC meeting is deemed responsible for the March 2001 oil price increase.
The full operation of Saudi Aramco in oil industry suggests that they should manage better their products as each requires massive investment. In operation, the company has wide range of services from exploration, refining, international shipping, and distribution. The recent plan to build the world’s largest chemical complex also requires huge investment over $20 billion. In addition, globalisation kicks in on the company. Several researches indicate that the age of globalisation brings economies into a new trend, where services grew with a significantly faster rate than the manufacture business. Macro factors derived from globalisation effects reduces growth of the manufacturing industry (International Labor Organization, 2006).
The world is going to an economisation phase, where people are constantly looking for cheaper prices for the same quality of products. In oil and gas industry especially in refinery, distribution, and marketing aspects, the competition is tough as multinational oil companies target the same markets in Asia, Europe, and North America. Though, Saudi Aramco is positioned as the best petroleum company according to Petroleum Intelligence Weekly’s top 10 rankings that position Saudi Aramco in top ranking above the NIO (Iran), ExxonMobil (USA), PDV (Venezuela), and BP (United Kingdom).
The company’s excellence in nurturing growth through innovation can be evaluated through the awards that the company receives such as the world’s top 100 companies for operational excellence in manufacturing. In oil and gas industry, technology plays important role to produce in the most efficient and effective ways.
Another innovative culture in Saudi Aramco is to practice innovative way in everyday work, which already spawns several groundbreaking technologies. For example, the company has introduced the GigaPOWERSTM, which is the next generation reservoir simulator that is capable of providing the simulation on the largest oil fields at seismic resolution. The other breakthrough is the use of solar power for water desalination and power generation (Saudi Arabian Oil Co, 2012e).
Environmental issue in oil industry is unquestionable as it may cause a severe damage to environment when an incidence happens. Therefore, the challenge for Saudi Aramco is to be a company that shows its commitment toward the preservation of environment and contribution to the environmental improvement. Some example of large-scale environmental damage caused by the oil company is the Deepwater Horizon oil spill that occurred in April 20, 2010 because of the explosion in the deepwater of Gulf of Mexico and caused billions of dollars of damage. Another example is the oil spill from Exxon Valdez tanker on the sea of Alaska on March 24, 1989 (Alaska Department of Environmental Conservation, 1993).
SWOT Analysis exhibits the environmental analysis that derived from internal and external environment. Appendix 2 shows the further analysis of SWOT that suggests each four strategies according to the predefined strengths/weaknesses/opportunities/threats. The outcome of the SWOT analysis is the matrices indicating each strategy that would be taken following each strengths, weaknesses, opportunities, and threats.
In the S-O (strength – opportunities) matrix, we identify that Saudi Aramco could run CSR program that invests in the development of petroleum technology and utilize the strong brand of Saudi Aramco to win foreign markets especially in North America, Europe, and the fast-growing Asia. Meanwhile, considering the S-T (strengths – threats) initiative, Aramco may launch a new marketing campaign that focuses on innovation to position Saudi Aramco as the leader in innovative petroleum company and to expand the foreign markets to less dependent on particular markets.
In order to minimise the negative influence of their weaknesses, the recommended W-O strategies are to expand the business of Saudi Aramco to make the costs per employee lower and increase the revenue per employee and to introduce several derivative products that solve customers’ needs. Meanwhile, the W-T (weaknesses – threats) strategies are executed by producing oil in the most efficient cost structure and to increase the efficiency of production from an average 40%.
Strategic directions and strategic objectives
The current position of Saudi Aramco that produces 1 of every 10 barrels in the world greatly influences the way Saudi Aramco do the business because they have great influence on the supply and thus the competition. The situation suggests that the volatility on crude oil price may cause great losses for refiners and distributors. Therefore, to keep gain profit from selling gasoline to end customers, Saudi Aramco should continue developing technology that increases the efficiency of oil production. Currently, 47 barrels of gasoline are made from every 100 barrels of crude oil (Energy Information Administration, 2006).
Under such circumstances, Saudi Aramco faces challenge of efficiencies of production. In their vision statement, the company states that they are going to transform themselves from a leading oil and Gas Company into a fully integrated global energy and chemicals companies. There are several objectives that Saudi Aramco sets in order to reach their vision. First of all, they strive for being the most respected employers globally, which attracts talented employees that help Saudi Aramco reach their vision. Second is to be the finest oil and gas exploration and production business. Third is to be an integrated global-scale refining and chemicals business. Fourth is to maintain its leadership in innovation in energy industry. Fifth is to strengthen their mission to be the export-oriented business (Saudi Arabian Oil Co. 2012i).
As shown in the appendix 3, the major stakeholder of Saudi Aramco is the Kingdom of Saudi Arabia as they operate and explore the world’s largest oil reserves at over 260 billion barrels. This provides Saudi Aramco with the reserve for about 90 years at average production of 7.9 billion barrels per day. This situation may prevent Saudi Aramco from developing new business if they think the vast oil reserves are just enough. But, it turns out that Saudi Aramco continues diversifying their service not only manage more than 112 oil and gas fields in Saudi Arabia but also with provide refinery, petrochemicals, marketing, distribution and shipping. Although indispensable monopolistic operation in oil production and distribution, still Saudi Aramco has a strong point at nurturing new technologies that improve their oil production method and quality of service. To date, the company has been awarded for over 100 patents and it is going to spawn other tens to hundreds of patent as the company manages the extensive facilities for research and development through Research and Development Centre (R&DC) and the Exploration and Petroleum Engineering Centre Advanced Research Centre (EXPEC ARC).
Another stakeholder is Saudi Aramco’s subsidiaries or affiliates in refining and marketing companies in key markets such as China, Japan, United States, and the Republic of Korea. This global operation marks Saudi Aramco to be the only energy company that serves the three major markets: Asia, North America, and Europe. According to Lyon et.al (2010) that United States, China, and India are among countries that consume oil in large numbers over the next two decades. To anticipate this huge need for oil in the future, China already closed deals with suppliers to supply over 7.8 billion barrels of oil within several years.
The other stakeholder, OPEC, also presents an important role as researchers have revealed that most of the changes in oil prices were preceded by political events in the Middle East. For example, the March 1999 OPEC meeting is deemed responsible for the March 2001 oil price increase. Under any cases that cause the undulating oil price, OPEC may ask its member countries to increase or decrease the oil production in order to stabilize the market price.
It highlights that the undulating oil prices are influenced by many factors. War and political tension in the Middle East also influence the price. This idea suggests that the high price was not because there was a short supply or very little production capacity. Today’s oil price situation is not the same with that caused by interruptions by oil exporting countries in the Middle East. The Iranian revolution was also deemed responsible for increasing oil prices which lead to the January 1980 recession. The October war and the start of the oil embargo immediately lead to oil prices and the November 1973 recession. Numerous observers continue to include the role of political events in the Middle East while explaining the reasons of US recessions.
Meanwhile, the supported universities also receive benefits for enhancing the research and development on oil and gas production. Meanwhile the other important stakeholder, consumers, has great power as they represent the importance part of Aramco’s business.
Key broad business-level and international strategies
As a oil company that award a contract to manage the exploration of oil and gas in the Kingdom of Saudi Arabia, which provide a significant share of worldwide oil and gas production, Saudi Aramco is determined to provide better result as it is the prime driver of the Saudi economy. Their production contributes about 86% of government revenue. At business levels, Saudi Aramco holds significant role to support the economy of the Kingdom of Saudi Arabia, to generate job for Saudis and also to establish new business opportunities for Saudi nationals (Saudi Arabian Oil Co. 2012b).
Internationally, Saudi Aramco has grown to be the largest petroleum company in the world that provide various services including the exporting and marketing crude oil, petroleum products, natural gas liquids and sulphur, distribution services or shipping of crude oil through their affiliated company, refineries, petrochemicals production (Saudi Arabian Oil Co. 2012f).
Strategic implementation: General perspective
According to C.K. Prahalad and Gary Hamel, core competence refers to the collective learning and coordination expertise in a company’s product line. This competence further become the source of competitive advantage and let them to introduce the variety of products and services that are not easily copied by their competitors. In order to achieve their vision as the global petrochemical company, there are several initiatives that Saudi Aramco conducts in four areas. To pursue the competitive strategy, the company’s two competencies are in line with the chase of the competitive strategy. Firstly, is to ensure the reliable supply as Saudi Aramco not only fulfils the local demands but also the global customers worldwide. For this reason, all people at Saudi Aramco work towards the same objective, which is to be the most reliable supplier of energy. This is shown when global supply of oil drops due to Iraqi war, Saudi Aramco immediately raises the total output to offset the gap. This could be done as the company has the proven reserves with flexible production capacity. In addition, the company’s robust infrastructure also contributes to the reliable and sustainable supply of crude oil and refined products (Saudi Arabian Oil Co. 2012j). The reliability aspect also includes the competencies to provide safety-working environments to their employees. In addition, Saudi Aramco’s competency in producing environmentally clean products in clean facilities also supports the achievement of Saudi Aramco’s competitive strategy.
Lastly, aspect is to develop human potential. Saudi Aramco understands the need to develop human capital in order to transform into a knowledge economy. As the transformation needs the empowerment of innovation and development of the Kingdom’s human potential, Saudi Aramco needs to develop their human resources to take their parts.
Strategic implementation: Issues
The core of Saudi Aramco is a corporate culture of lifelong learning. Since its inception, Saudi Aramco has been developing the world-class learning programs to prepare their human resources with the necessary skills and knowledge to succeed. In addition, the company also supports the vocational institutes and universities to learn and contribute to the improvement of oil industry (Saudi Arabian Oil Co. 2012c). Moreover, Saudi Aramco’s competency in developing all employees’ skills also complies with this statement clearly become one of Saudi Aramco’s core competences. This is because a petroleum company needs to respond to the fast-changing oil industry needs by acquiring and training their employees to keep to with the challenges.
Balanced Score Card
Robert Kaplan and David Norton first introduced the Balanced Scorecard in the early 1990’s as a strategic management system that forces managers to focus on the important performance metrics that lead to success. There are four perspectives of BSC as following:
Firstly, Financial perspective
This is the standard perspective that everyone uses even before the BSC. Even a non-profit organisation uses this perspective in order to balance their books. It measures financial performances through financial ratios and other financial indicators. In the case of Saudi Aramco, the financial perspective includes strategic objectives in following areas:
- Revenues: $182 billion (est. 2010)
- Competitive position: strong as it represents significant portion of worldwide oil production.
Secondly, Customer Perspective
It is a measure of corporate value viewed from the value it delivers to customers. For instance, time taken to process a phone call, result of customers’ surveys, number of complaints, competitive rankings, etc. In Saudi Aramco, the Customer Value Perspective includes strategic objectives in following area:
- Customer retention or turnover: the number of clients continues growing as Saudi Aramco provides reliable supply to developing countries
Thirdly, Business Process Perspective
It measures corporate value from the enhancement of its business processes, like time spent prospecting, quality cost, product rework required, etc. In Saudi Aramco, Process or Internal Operations Perspective includes strategic objectives in following areas:
- Productivity or productivity improvement
- Operations metrics: Saudi Aramco is able to reduce the amount of lead in their gasoline and has already done so by about 50 percent
Lastly, Learning and Growth Perspective
This perspective measures corporate value from its learning abilities or the progress of its learning processes. Example of activities measures are staff training, employee suggestion and improvement of certain processes as an outcome of the learning process (‘Balanced Scorecard’, 2006). In the case of Saudi Aramco, the Learning and Growth (Employee) Perspective includes strategic objectives in following areas:
- Employee Growth: 4.5%
- Technological innovation: awarded more than 100 patents in technological innovation
Corporate Social Responsibilities (CSR)
In today business, corporate social responsibility is one important aspect that differentiates a company from the others. It also highlights a company’s commitments to contribute a positive impact in society by working in partnership with local communities and government agencies as stated in the company’s key objective to promote sustainable social and economic development in the following methods. There are four main CSR programs that the company carries out. First is to give something back by volunteering in recreation services and medical services. Second is to reaching out to those in need by supporting cultural activities, events and entertainment in the Kingdom, conducting the children’s art contest, and participating in programs of children with cancer and orphans. Third is to participate in safety program to make roads safer by launching our Traffic Safety Signature Program (TSSP) to create a safer driving environment. Fourth is to donate in three Areas: charities by contributing a fund to help small business projects for women, favour the medical treatment etc (Saudi Arabian Oil Co, 2011).
In addition to the strengths and core competence that Saudi Aramco has, they also have identified weaknesses in two issues: corporate size, and its marketing coverage.
Saudi Aramco is one important petroleum company in the world. As the main contractor for the oil exploration in the Kingdom of Saudi Arabia, they hold the largest oil reserves that could provide the exploration for the next 90 years at 7.9 million barrel per day. However, as the petroleum product is not renewable, Saudi Aramco needs to prepare the future revenue generator. In this case, Saudi Aramco has started it with the joint venture with the Dow Chemical Company. In addition, this situation also requires Saudi Aramco to establish product road map and business strategy become the measure of the corporation’s sustainable development amidst their strong position as the world’s leader in oil production. In this case study, we have explored Saudi Aramco’s ways in developing new products or services that would be the company’s future business. The study also examines whether corporations with a strong positioning in a product or service would act on developing new products earlier long before the end of product life cycle or start exploring new businesses just before their main product ends.
Another aspect that should be the concern of Saudi Aramco is the human capital management that should be equipped with the entrepreneurship culture in order to help the company develop new business. Zahra (1991) says that corporate entrepreneurship deals with improving organisational profitability. This objective can be achieved by having appropriate methods and strategy in enhancing the quality of human resources in a company so that they keep informed regarding the competition, how-to in selling particular products, comparison with competitors’ product, and future trends.
The basic objective of knowledge management is to encourage every member of an organisation (employees, management, and partners) to share information or knowledge regarding particular issues in order to enable other people experiencing and gaining knowledge on how to deal with the issues. The idea of KM is a system that is trying to capture that knowledge, share them with all staffs in a company to help them in improving qualities of work (Desouza, 2005).
In addition, learning from several incidence of explosion or oil spill during the exploration, Saudi Aramco had better have the risk management plan to anticipate when any incidence occurs. Thus, it reduces the associated costs to clean up the spill or damage. Some issues that should be taken into account are:
- History of accidents and cleanup efforts
It is necessary to include information on what types of problems are ‘common’ inside every method and how the company would responds to them. The elaboration would be evidence that the company had learned from experiences of all cleanup operations.
- Worst-case scenarios analysis for each choices if cleanup methods
It consists of analysis on potential problems in case the safety measurements within the methods failed. For instances, in the use of chemical solvents, what would happen if the chemical agents escape the booms into the ocean? Another example, in the use of dispersants, what would happen if different types of dispersants are used, would it be better or worse for the environment?
- Prevention programs for each case defined in the worst case scenarios
Afterwards, the plan should specify corporate efforts to prevent such a scenario from occurring. The plan should also discuss the method to reduce the involved risks. For example, in the use of dispersants, we must elaborate the specifications of conditions resulted by our dispersants and how we manage to reduce the environmental hazard of the chemical.
- Alternative strategies of responses to possible occurrences of incidents within the worst case scenario
In case the worst happens, the company must have prepared strategies in dealing with those cases. The strategy must include coordination with government bodies and other emergency response centres.
|Forward and Backward Integration||International Business|