OVERALL INDUSTRY RATING
From the above individual analysis on the five forces we can say that the industry is attractive and can be favorable for generating profits.
PEST ANALYSIS
GOVERNMENT & POLITICAL ISSUE
- It is the national obligation of PSO to maintain 28 days inventory and for that PSO incurs high cost because of the fluctuations in the international oil prices. Pakistan’s oil marketing industry offers lower risk in the regional context given the stability in government policy and outlook for marketing margins. Prices set by the government guarantee a 3.5% margin to OMCs (Oil Marketing Companies) on regulated products (65% of total volume) and all subsidies are borne by the government.
- During the FY 2006 even though the international prices were increasing, coupled with the Pakistan rupee’s depreciation against the US$ government didn’t increase the oil prices and bore the burden. The government did this by cutting back its own share of taxes and levies built into petroleum product prices called Petroleum Development Levy (PDL). In Pakistan, the petroleum product prices carry a volume-based development tax apart from the general sales tax and excise duty. The amount of PDL imposed on per liter of any product (generally, high speed diesel, motor gasoline and light aviation fuel) is a function of government revenue requirement and government policy of stabilizing domestic prices. As oil prices increase, the government progressively reduces the PDL on domestic products.
- Due to deregulation of the oil industry by the government we see improved operational and pricing freedom for OMCs.
This stability in policy comes against the backdrop of an oligopolistic structure in the downstream industry where over 65% of market share is in the hands of the state-owned Pakistan State Oil. The only direct impact of end-consumer subsidy on the OMCs has been the interest cost they have to bear to finance the receivables which are generally compensated
by stretching their tax payments (corporate and sales tax) to the maximum allowable time period. The indirect cost has been the potential loss of marketing margins (linked with end-product prices) which did not increase in proportion to oil price inflation. OMCs poised to benefit from strong growth potential in a deregulated environment over the years since 2000
II. ECONOMICAL
Pakistan being a developing country is exhibiting accelerated economic growth. The trend is more pronounced in GDP growth figures of recent past. To fuel the impetus growth any developing economy needs increasing quantum of energy supply. The crude oil runs like blood in the vein of developing economy.
The consumption of POL products has shown exponential growth over the years in general and during the recent past in particular.
III. SOCIAL
Standard of living in Pakistan has increased tremendously during the past 5 years; better economic conditions have resulted in high cost of living. There has been an increase demand of car purchases which stems from softer loan terms offered by banks, a persistent inflow of home remittances and the easy availability of car financing schemes, resulting in increase numbers of cars and usage of petrol and CNG.
IV. TECHNOLOGICAL
- The new technological advancement in the energy sector has created a lot of competition. Every firm is copying each other’s technology to become cost efficient and provide same value as others.
- The use of technology helps in improving the oil quality thus increasing its credibility and giving the producers a competitive edge
- The use of technology helps in tracking the logistics and in preventing oil theft during the transaction.
- Use of technology to increase Brand image example PSO plastic card
- The use of technology can be incorporated in the distribution channel to keep the delivery and reorder level updating.
EFFECT OF PEST ON PORTER’S FIVE FORCES
THREAT OF NEW ENTRANTS
Political Force
The deregulation over the years in the petroleum sector has encourages new entrants to enter thus lowering the barriers of entry and increasing the threat of new entrants.
Economical Force
The threat of new entrant is high because of the following economic drivers:
- GDP growth was 6.6% for FY06 thus making it favorable of the new entrants.
- Manufacturing grew at a rate of 8.6% with agriculture registering growth levels of 2.5% (as at FYE06)
- Cumulative growth for the commodity producing sector was 4.3% for FY06 does increasing the usage by industries and the services sector registered growth of 8.8%.
Social Forces
Threat of new entrant is low due to social forces because the market possesses well accepted brand identities and customers are loyal to them therefore it will be very difficult for a new comer to come into the industry and take away the share from existing giant of the industry. Hence huge brand image enhancement strategies are required by the new entrants to successfully make a place for themselves.
Technological Forces
In order to compete with the giants in the industry a new comer needs to have a good controlled distribution network, for that they will have to acquire new technology. But the technology can only be implemented once you have a sound infrastructure where the technology could be incorporated. These all factors can be taken as a de-motivating factor for the new firm to enter. Secondly technological implementation requires a huge backup from investors and also requires a long term ROI plan for which companies need to be strong in terms of financials and at Human Resources thus these factors reduce the threat of new entrants.
Analysis
The effect of pest forces has overall increased the threat of new entrants from low to moderately high.
BARGAINING POWER OF BUYER
Political Force
Bargaining power of buyers has been increased due to various subsidies that have been given by the Government in favor to the end –users which reduces the negotiation power of companies and increases the buyer’s power of bargaining between different companies from medium to high. Example GOP announced a change in the oil pricing formula resulting in a decline in OMC margins by around 20% on March 16th 2006
Economical Force
Economic forces cause the inflation level to rise thereby reducing the bargaining power of buyers and forcing them to pay the price as set by the Regulatory Authority example Oil prices set by Oil & Gas Regulatory Authority (“OGRA”) on a fortnightly basis
Social Forces
Social forces increase the bargaining power of buyers as the issues of environmentally friendly products are becoming important amongst consumer. Secondly consumers are becoming aware about different cause and effect of usage of oil and gas therefore companies practicing the “Going- Green” are beneficiary and liked by consumers.
Technological Forces
Bargaining power of buyer is increased through the impact of technological forces firstly due to the increased use of technology, the order delivery network becomes more efficient and faster like 24 hrs open petrol pumps and delivery services and they demand more and more services from the firm. Example the plastic PSO cards has made customers more loyal to PSO. Which means rapid adaptation of new technology is beneficial for company thus customer has a choice to negotiate between competitors, company with better technology know how will be better-off.
Analysis:
The effect of pest forces has overall increased the bargaining power of buyers from low to high.
BARGAINING POWER OF SUPPLIERS
Political Force
The political forces reduce the bargaining power of suppliers because the GOP has recommitted itself to privatize Pakistan State Oil Company Limited (“PSO”) therefore GOP Intends to divest a 51% shareholding in PSO with management control to a qualified investor. Example GOP announced a change in the oil pricing formula resulting in a decline in OMC margins by around 20% on March 16th 2006
Economical Force
Power of suppliers may increase as the GOP deregulates as there are few suppliers with long term joint ventures with most of the OMCs and as the demand is rising due to increase in agriculture, industrial and transportation sector, demand is increasing and therefore OMCs will readily have to abide by the suppliers.
Technological Forces
With better technology the cost of purchasing the raw material can be reduced. Since suppliers are relatively low in the market and a supplier with better technology can supply better quality raw material at low cost, therefore the bargaining power of supplier is high to those who have such technologies.
Analysis:
The effect of pest forces has overall increased the bargaining power of suppliers from moderately high to high
THREAT OF SUBSTITUTES
Political Force
Currently political forces do not affect the threat of substitutes but as the environmental concerns take a bigger step, government might standardize rules on usage of energy products which harm the environment and encourage using of alternate use of energies. Example it can levy taxes on industries using energy products over a certain limit.
Economical Force
Due to climate changes, Hydro power is on of the key substitutes due to excessive rain continuation there has been an excessive amount of water availability therefore Hydro Power sector has witnessed a significant growth. In light to this growth, the threat of substitutes has increased.
Social Forces
As the awareness increases and consumers have a choice to choose between alternate resource of energy over non-renewable source of energy, consumers concern with environment can divert them to using thermal and hydro power if available.
Technological Forces
As the technology advances and if huge investment in technology is done to produce alternative energy that is Hydel and thermal, threat of substitutes might occur.
Analysis:
The effect of pest forces has overall increased the threat of substitutes from low to moderately high but it is a threat to be considered in long term..
INDUSTRY RIVALRY
Political Force
New OMC licenses have been issued which has increased number of competitors in the industry. Currently 11 players are operating in the oil marketing space. These include PSO, Shell, Caltex, Attock Petroleum Limited (“APL”), Total-Parco Pakistan Limited (“TPPL”), Admore Gas Limited, Hascombe Storages Pvt. Ltd., Overseas Oil Trading Co., Askar, Bosicor and Pearl Parco.
Economical Force
Due to the positive increase in the GDP and development sectors like industrial, agriculture & transportation, competitors are thriving to capture the new markets or unmet needs or increasing distributors.
Technological Forces
With the use of better technology the competitors will have competitive edge over others. New technologies are coming in the market but rivals are copying it in no time. Currently PSO has better use of technology over other competitors. Therefore the regular advancement in technology is increasing the industry rivalry.
Analysis
The effect of pest forces has overall increased the industry rivalry which was already high in the industry.
EFE MATRIX & STRATEGIC EVALUATION
EFE STRATEGIC EVALUATION
Through the analysis of the porter’s five forces and the effect of PEST on the porter’s five forces we evolved the above opportunities and threats.
According to our interpretation there is an opportunity in the rural area where the agricultural sector is increasing as our economic factor shows as well as industrial development is taking place in my rural areas as well as other cities. And as the GDP is rising demand for industrial products and commodities also rises. Secondly there is an environmental concern which is being responded by many internal oil companies and OMCs in Pakistan are also investing in providing environmentally friendly products. There is an increase in consumption of lubricants, giving opportunity to increase the production and distribution of lubricants widely to capture the untapped markets.
Major threats are the possible delays in the pipelines projects which can result in depletion of fuels. There is a threat of smuggled oil from Iran which is small in number but threat exist as it can increase if proper action is not taken. Another threat of concern is the threat of new entrants as the industry is attractive and favorable due to the deregulation and the economic factors like growth in industrial and agricultural zones.
MICRO-ENVIRONMENTAL
ANALYSIS AND
INTERNAL COMPANY RESOURCES
INTERNAL RESOURCES
Skill or Important Expertise
- Lowest cost operations
- Strong e-commerce expertise
- Technological know how
- Expertise in providing consistently good customer service
Valuable Physical Assets
- State of the art refinery and down streaming plants and equipments
- Cutting edge computer networks that utilizes ProCurve networking (by HP) which helps in greatly expanded PSO’s capability to perform its operations cost effectively
- Efficient and technology enhanced ERP systems
Valuable Human Assets
- An experienced and capable workforce
- Talented and well trained employees in management and all the key areas
- Motivated employees
Valuable Organizational Assets
- Hold the rating of “AAA” (Triple A) company by Pakistan Credit Rating Agency (PACRA).
- Effective quality control system
- Strong balance sheet
- Recorded highest Mogas market share in last ten years, i.e. 45.3%.
- With an addition of 209 leased retail outlets, the New Vision network expanded to 1,459 across the country.
- Expanded PSO Cards infrastructure to 1,200 Point-of-Sale Terminals in over 170 cities.
- Assumed lead role at World Business Council for Sustainable Development as the first company in the Muslim world to have its CEO on WBCSD’s Business Role Focus Area Core Team (FACT).
- Awarded National Environmental Excellence Award 2005 and 2006.
- Best HSE Practices Award 2006.
- CSR Excellence Award for the last 5 years.
- Customer database
Valuable Intangible Assets
- Strong brand name image
- Good reputation in the market
- Being a local and quality player PSO holds buyer good will as well
Competitive Capabilities
- A strong dealer network
- Long term and cost effective supply chain management
- Strong partnerships with key suppliers like PRL, National Refinery etc.
Achievements or Attributes That Puts PSO in a Position of Market Advantage
- Low overall cost
- Market share leadership with a market share of 79%
- Strong name recognition in the region
PSO CORE COMPETENCIES
- Brand Enhancement Process through technology innovation
- Highest Storage Capacity in the industry i.e. 82%
- Long term and cost effective supply chain management
- Strong partnerships with key suppliers like PRL, National Refinery etc.
- A strong dealer network
STRATEGIC ANALYSIS OF CORE COMPETENCIES
PSO management strongly believes that all efforts should be directed towards customer delight. In order to improve the brand equity and to restore customer confidence, following actions have been taken by PSO:
- 24-Hour Customer Care department established with Toll Free number
- Aggressive advertising and sales promotion campaigns backed by strong media support
- Company-Owned & Company-Operated (CoCo) sites network expanded to 26 while another 30 being added by June ’03
- Introduced plastic card technology in oil marketing
The company has been striving to launch innovative products and services and is now recognized as the Leader with Innovativeness. Following are the few glimpses of innovative services launched by PSO during the last two years:
- First oil company to introduce plastic cards (Loyalty, Fleet, Corporate & Prepaid)
- 800 Internet Kiosks to increase Internet awareness throughout the nation
- 19 Mobile Quick Testing Units to ensure the best quality product
- Oil change facility at customer’s doorstep
- First-ever auto car wash plant at Karachi, Islamabad & Lahore
- Monolith price displays at retail outlets
- Pioneer in installing Tallest Signs / Largest Hoarding in Pakistan
- Business centers at retail outlets
- First OMC to install “Easy Payment Centers” at Retail Outlets in collaboration with
- Citibank; 19 payment centers have been installed
- Overall lowering their cost by managing effective cost supply chain management
The launch of plastic card technology by PSO has offered customers a wide array of convenience in terms of loyalty points, secured transactions free of hash handling and lucrative discounts. In order to reinforce the brand image and to further create brand awareness among customers, PSO has been making considerable efforts by using permanent tools like billboards and hoardings at strategic locations. The company has been utilizing the best available resources but in cost-effective manners. Hoardings, Tall Signs are being installed at retail outlets to further curtail the investment cost. The company is capitalizing on its delivery vans/ trucks by painting them beautifully and attractively in corporate colors and brand messages.
STRATEGIC ANALYSIS OF VALUE CHAIN
In order to make the organization more competitive and responsive, PSO management embarked on a series of initiatives and revamped the entire organizational architecture. PSO’s corporate structure has evolved into a matrix, which has divided the company’s major operations into independent activities supported by the financial, legal, information and other services. These activities are performed in an autonomous and collegial manner in the form of Strategic Business Units based on the clear and transparent allocation of responsibility and accountability. This structural change has been reinforced and related checks and balances have been established by putting in place several corporate monitoring and control systems. In the past, many support services were working under the umbrella of non-core businesses, which now have been de-linked and merged with marketing operations. For instance, Logistics, previously known as Distribution used to report to operations and has now been merged in Marketing to implement the modern and contemporary concept of value-chain as logistics has always been considered as an integral part of marketing. In addition, unnecessary layers in management have been reduced to make PSO more lean and flexible in line with best international practices.
It includes placing demands and arranging upliftment of Base Oil from NRL through Tank Lorries, making payments to NRL, maintaining a record of receipts and consumption of Lube Base Oil and maintaining an optimum inventory level of Lube Base Oil at Lubricants Manufacturing Plants A & B.
Activities, costs and assets associated with covering inputs into final product form. PSO core business is oil marketing, so it does not indulge in any manufacturing activities, except for the packaging of lubricant products which are purchased in bulk and then packaged into small units for distribution.
The basic notion of this service is to provide better, timely, efficient and effective services to its customers through dedicated trucks/Vans with corporate color scheme and PSO logo showing its product range to retail outlets, industrial consumers and distributors/lube shops.
The identification of customer needs and generation of sales. PSO pioneered the concept of loyalty cards, corporate cards, fleet cards and prepaid cards.
The support of customers after the products and services are sold to them.
These primary activities are supported by:
- The infrastructure of the firm
- Human resource management
- Technology development
- Procurement
In the pre-good governance period, PSO’s internal systems had been weakened owing to obsolescence, mismanagement and leakages and as a result the company’s financial systems and controls were badly affected and a negative public perception took roots – a fate majority of the state-owned companies suffer. In order to plug all leakages and to strengthen internal controls, implementation of an Enterprise Resource Planning (ERP) system is its final stages. The ERP would provide online and real-time information, eliminate financial misreporting, improve funds management and strengthen efficiencies further in all aspects of business. Prior to deciding to go for SAP, the company successfully conducted ‘Business Processes Reengineering’ so as to streamline business processes and procedures for improved efficiency.
To provide necessary infrastructure for successful implementation of SAP, a major WAN (Wide Area Network) project was completed for setting up an online integrated communication system connecting PSO headquarters in Karachi to all Installations, Depots, Plants and Divisional offices all over the country. The management also instituted Business Planning & Reporting system so as to monitor business performance against scientifically planned targets. A comprehensive Business Plan is developed in advance for every forthcoming year and is presented to the Board for approval. The plan covers Specific, Measurable, Attainable, Realistic and Time Bound (SMART) corporate objectives supported by investment opportunities and budgetary allocations.
Limits of Authority, Purchasing, and Human Resource Manuals were updated after 30 years so as to eliminate ad hoc management practices and empower the professional managers as well as to ensure accountability at all levels. To facilitate standardize and structured process flow, Operations and Logistics manuals have also been developed as part of Quality Management System. With proper systems in place, any deviation or discrepancy irrespective of nature, position or status is indicated promptly and handled swiftly according to the clearly spelt out procedures. Considerable man-hours have gone into making PSO a system-driven company. Various fully empowered Cross Functional Teams (CFTs) and committees have been formed to develop operational and tactical plans and chalk out prudent implementation strategies. The Managing Director has all along performed his cardinal role of providing leadership, guidance and long-term vision for the business while functional general managers are responsible for their activities.
STRATEGIC COST MANAGEMENT ANALYSIS
PSO is managing its Strategic cost in following ways.
- Long term agreement with Refineries to improve its business operations.
- It has biggest storage capacity 82%, and it has used it capacity by providing storage and handling facility to Attock Refinery and PARCO for their surplus Mogas Naphtha.
- PSO has added value to its value chain by efficient use of technology that is by employing online ordering & tracking system, online capital management system, ERP system, Pro-Curve Network.
- Transformation process across all the functions of PSO has been completed for SAP implementation. This will mark the successful implementation of SAP involving the setup of financial, human resource, inventory, and sales and distribution modules.
KEY FINANCIAL RATIO TRENDS
FINANCIAL RATIO TREND ANALYSIS
All strategic initiatives undertaken by the management translated into pronounced and vivid financial results during the last three years. PSO’s financial performance can be best explained when compared with Shell Pakistan. During the fiscal year 2005-06, PSO posted profit after tax of over Rs 7.5 billion or US$ 125 million (an increase of 33% over prior year), while Shell managed to maintain its profit at Rs 4.2 billion or US$ 70 million, almost the same earnings recorded two years back. Interestingly, PSO, during the same, period had displayed 74% growth in profit from Rs 2.3 billion (US$ 40 million) to Rs 4 billion (US$ 70 million) despite its struggling fuel oil business owing to availability of natural gas to power generation utilities in line with the government directives. PSO, being the sole supplier of power generation plants, has been absorbing the impact of fuel oil volumetric drop by focusing more on high margin products. Even during the first-half of the fiscal year 2004 (July-Dec 2003), PSO posted profit before tax of Rs. 3.25 billion (US$ 57 million) while the profit after tax stood at Rs. 2.12 (US$ 37million), up by 3% over prior year period. On the contrary, Shell Pakistan Limited, registered a profit before tax of Rs. 0.82 billion (US$ 14 million) and profit after tax of Rs. 0.57 billion (US$ 10 million), which was 35% and 33% lower than that during last year’s same period, respectively. From the financial analysis of the two companies, it can bee seen that PSO’s key financial indicators showed continuous improvement vis-à-vis its multi-national rival. PSO’s, return on equity went up to 31% from 23% (an increase of 8%) while Shell Pakistan showed only a marginal increase of 2% (from 19.6% to 21.4%). Shell’s return on capital employed showed an improvement of only 1% (10.2% from 9%) during the last three years, whereas the oil giant increased its return by 5.3 percentage point to 13.8% from 7.5%. Similarly, Shell’s return on assets increased of almost 1% during the same period (FY01: 8.8% & FY03: 9.7%) whereas the oil giant registered an increase of 5% (FY01: 7.5% & FY03: 12.5%) .
PSO’s stock has continuously been moving up during the last 2.5 years, which shows investors’ confidence on the company’s scrip as can be seen from the following graph:
INTERNAL FACTOR EVALUATION
IFE STRATEGIC EVALUATION
The overall score of strength and weakness is above average. Company employed and utilizing its strengths very well. Company though having the largest transportation fleet under its credit but it facing certain problems while managing it effectively. In addition to that weaknesses such as transportation inefficiencies and slow response to market changes have great impact on company’s operational efficiency. By incorporating the strengths with weakness company can further reduce its operating costs and build strong position in market.
The score also shows that there is a great potential for company to grow and further expand its business.
PSO owns 80% of transportation service with respect to industry. It is managing it in-efficiently because the problem lies with the theft of the inventory during the transportation process. Transportation Fleet is very important for PSO and theft is increasing the operational cost for company, therefore company must pay attention to transportation fleet and make investment in it to be more competitive.
COMPANY
AND
COMPETITIVE ANALYSIS
KEY SUCCESS FACTORS OF THE INDUSTRY
The Key success factors governing the oil marketing sector are as follows:
- Market Share
- Quality of Services/Products
- Financial Position
- Management
- Advertising
- Distribution Channel
- Technology
- Non Energy Products
- Customer Loyalty
- Transportation Network
The Key success factors that govern Pakistan’s oil marketing sector are primarily the quality of products and services that they provide to the customers. Along with that the distribution channels enhances the capability of them being available and present everywhere. Efficient use of technology, being financially sound are some of the internal strengths that play a major role in the success of that company. Coming to the competitive analysis the main competitors of PSO are two major companies, Caltex and Shell Pakistan with PSO being the industry leader with total market share of 79%.
A comparison between PSO and Shell, the two dominant competitors, reveals the contrasting strategy followed by each. While PSO continues to concentrate on bulk sales of heavy commodity products such as furnace oil, Shell is focusing on increasing its market share of lighter, brand sensitive, high margin products such as lubes and motor spirits that are primarily sold through retail outlets. The company has embarked on a heavy capital expenditure program to upgrade its retail outlets up to the Shell global standard and establish brand identity for its range of products.
COMPARATIVE STRENGTH ASSESMENT
Competitive threats and opportunities your company would need to address in order to gain competitive advantage
Through the model discussed above we came to know that PSO in terms of market share is the leader in the oil sector in comparison to its competitors Shell and Caltex. However this is true only for the domestic market. Internationally Shell has a well known presence in comparison to PSO. Thus one of the opportunities for PSO is to expand its market internationally. Financial ratios and trends of PSO have already been discussed and from the model above we can see that financially PSO holds a stronger position thus in order to extend its market and to expand PSO is financially capable.
The quality of service and products provided by PSO and Shell are at the same level thus
no competitive edge is there. In the non energy products it was found out that Shell leads the market where lubricants are concerned. Thus PSO should also enter the market with this product thus increasing its market share.
Particular internal competencies the company needs to develop or strengthen, to address the key success factors
The Distribution Channel of PSO is better than Shell. It is the biggest in the industry. If PSO plans to enter a new market then it needs to develop effective distribution network to cater to it. Transportation Fleet of PSO on the other hand does not provide a competitive edge and can be improved upon. As PSO’s network is quite out spread thus its transportation fleet should be efficient in catering to it. PSO should come with superior technology that may be able to monitor all operations regarding the transportation activities ranging from inbound logistics till delivery to customers.
Where technology is concerned PSO is quite sound and has a competitive edge over Shell and Caltex. As it is a fast moving industry thus adapting to new technology and change is needed for success. PSO can increase its advertising in order to build a better image of its products and services and to build awareness.
STRATEGIC ANALYSIS
AND
RECOMMENDATIONS
GENERIC STRATEGY ANALYSIS
In our view, currently PSO is practicing cost leadership due to the fact that it is a market leader and enjoys the economies of scale. We recommend PSO to continue to pursue low cost leadership but increase its market segment by expanding into the rural area or by global expansion that is in Afghanistan because it is the key beneficiary of such a development as the company enjoys strong infrastructure and pipeline support for product logistics. It stands to benefit from (1) pricing power over other players, (2) cost savings through its current infrastructure, and (3) hospitality charges on usage of its infrastructure by other OMCs. Therefore focusing on the Low cost strategy will provide success to PSO to gain competitive edge.
The companies that attempt to become the lowest-cost producers in an industry can be referred to as those following a cost leadership strategy. The company with the lowest costs would earn the highest profits in the event when the competing products are essentially undifferentiated, and selling at a standard market price. Companies following this strategy place emphasis on cost reduction in every activity in the value chain. It is important to note that a company might be a cost leader but that does not necessarily imply that the company’s products would have a low price. In certain instances, the company can for instance charge an average price while following the low cost leadership strategy and reinvest the extra profits into the business.
Firms that succeed in cost leadership often have the following internal strengths:
- Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.
- Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.
- High level of expertise in manufacturing process engineering.
- Efficient distribution channels.
Porter's Generic Strategies
Generic Strategies and Industry Forces
Primary activities of value chain how cost is reduced
-
Inbound logistics: Bulk purchases, owning own supplier
-
Operations: Economies of scale, standardized processes
-
Outbound logistics: Delivery in bulk of large orders.
-
Marketing and sales: Mass marketing
-
Service: Few large centralized service centers
Advantages and disadvantages of low cost leadership
Advantages
- High market share.
- Economies of scale.
- Intensive screening of budget requests.
- Use as barrier of entry for new companies.
Disadvantages
- Changes in manufacturing techniques and public taste not rapidly adopted.
- The company might not develop new products to meet changes in taste.
- There is usually only one room for one firm within industry to adopt this strategy.
- Technological breakthroughs may make the strategy ineffective.
TOWS
T
STRENGTHS & OPPORTUNITIES (SO)
S1, S4, S5, O7: PSO should penetrate and develop new markets in the rural areas especially of Punjab because of the increased traveling between the rural and urban areas. Since PSO has the best distribution network and largest storage capacity it can capture the share in rural areas.
S2, S6, O5: PSO should make efficient use of their infrastructure and of latest technology so as to provide customers with high quality and performance products and thus be able to serve a broader range of customers specially to the industrial zone where lot of development is taking place in order to boost the economy.
S2, O1, O6: Through efficient infrastructure and technology PSO can add more non energy products like motor oils, industrial oils, and greases, which differ in terms of physical characteristics and are also environmental friendly.
WEAKNESSES & OPPORTUNITIES (WO)
W3, O3, O7: PSO can develop effective distribution network to cater rural areas and enable the faster growth of the agriculture sector.
STRENGTHS & THREATS (ST)
S1, T4 : Since PSO has the great strength of high storage capacity it can overcome the threat of rising exchange rates by better managing its storage capacity so that when the prices of oil rise internationally or when there is an increase in exchange rates it may not incur losses or can avoid losses.
S2, T2: PSO should come with superior technology that may be able to monitor all operations regarding the transportation activities ranging from inbound logistics till delivery to customers.
S9, T3: PSO has maintained its financial position over the years so it should take advantage of it and do backward integration by forming strategic alliance with refineries. This will enable PSO to reduce their cost.
BCG MATRIX
Relative Market Share
High Medium Low
1.0 0.50 0.0
20%
-20%
BLACK OIL MARKET
Black Oil Market includes products like petrol, JP 1, furnace oil, high speed diesel etc. Industry recorded a growth of 2.2%. The market share of PSO in Black Oil Market is 73%.
WHITE OIL MARKET
White Oil Market includes products like lubes, greases, auto oil, marine oil etc. and it showed a growth of approximately 4% in the petroleum industry. The market share of PSO in white oil market is 27%.
STRATEGIES FROM BCG MATRIX
- PSO should invest in non-energy products which is the white oil market through product promotion and advertising to increase its market share.
- PSO should expand its retail outlet especially in rural areas to cater the growth of Agriculture sector. In this way the industry will become more attractive and as PSO is the market leader in energy products that is the Black Oil market, it will be benefited higher than any of its competitor.
SPACE MATRIX
Internal Strategic Position
External Strategic Position
CALCULATIONS:
SPACE MATRIX
GRAND STRATEGY MATRIX
Rapid Market Growth
Weak Competitive Position Strong Competitive Position
Slow Market Growth
STRATEGIC EVALUATION OF SPACE AND GRAND STRATEGY MATRICES
As the directional vector lies in the Aggressive quadrant of the SPACE matrix so PSO can utilize its internal strengths in the best possible manner to take advantage of external opportunities, overcome internal weaknesses and avoid external threats. Strategies that emerged from aggressive quadrant of the SPACE matrix and first quadrant of Grand Strategy matrix are:
- White oil Market with products like HSD, MOGAS, SKO, JP.
- Furnace oil market as the result showed that its consumption increases by 46% in the current year.
- Catering more rural areas especially of Punjab because of the increased traveling between the rural and urban areas.
- Aviation fuel exports to Afghanistan as there is huge deficiency of fuel supply especially for aviation sector and government level contracts can provide PSO estimated increase of 60% in revenue and 10% in ROI.
- Adding more non energy products (a) motor oils and industrial oils, and (b) greases, which differ in terms of physical characteristics (e.g., viscosity), commercial applications, and environmental fate.
The two strategies we recommend PSO to implement are the Market Development Strategies which are:
- Expansion into the Rural Area
- Global Expansion in Afghanistan
QSPM
STRATEGIC
IMPLEMENTATION
BALANCE BUSINESS SCORECARD
Financial Perspective
Customer Perspective
Internal Business Perspective
Innovation & Learning Perspective
REFERENCES
Internet:
Books:
Thompson & Strickland (2002), “Strategic Management Concepts and Cases”, 13th edition, McGraw Hill
Fred David (2005), “Strategic Management Concepts and Cases”, Tenth edition, Pearson, Prentice Hall
Articles/ Journals:
Kaplan, Norton (1992), The Balance Scorecard – Measures that drives performance, Harvard Business Review
Harvard Business Review Articles
