Business Strategy of ADNOC Campany - Essay Example

Five forces analysis Name Institution Date Table of Contents Five forces analysis 1 Name 1 Institution 1 Date 1 Table of Contents 2 Executive summary 4 Five forces analysis 5 Attractiveness of an industry 5 Five (+1) Forces analysis 6 1. Market entry 6 Cost disadvantages (Economies of scale and scope) 6 Lack of experience 7 Strong product differentiation / Customer loyalty 7 High capital requirements 8 Access to distribution channels 8 2. Industry rivalry 9 Market concentration 9 Stage of industry life cycle 9 Level of product differentiation 10 Exit barrier costs. 11 3. Bargaining power towards suppliers 11 Industry concentration and size of supplier 11 Importance of products and switching of costs 12 4. Bargaining power towards consumers/ customers 13 Industry concentration and size of customers 13 Importance of the product and switching cost. 13 5. Substitutes 14 Product for product substitution 14 Substitution of need 14 Other stakeholders 15 Internal 15 Government grants and local communities 15 Special interest groups and share holders 16 Porter's Five Forces 16 Conclusion 18 References 19 Executive summary ADNOC is a company based in the UAE and it deals with exploitation and exploration of oil and natural gas. Since its formation it has expanded its market share to international levels. It is also one of the most profitable companies in the UAE. The company is owned by the state but it works closely with stake holders from the private sector so as to achieve its main goals and objectives. The paper will discuss in details the applications of the five forces analysis in the organization. This will mainly include how the company was able to enter into the market, how it was able to deal with its rivals both locally and internationally. The paper will also discuss the bargaining powers of the suppliers of the company, the consumers and the substitutes. Since the company works with other stakeholders, their contributions will also be discussed in details. Five forces analysis Attractiveness of an industry This concept is used widely to determine how attractive the company is to the market. In the UAE, oil is a very lucrative trade which attracts a lot of profits and returns for the companies involved in the business. Abu Dhabi National oil Company, (ADNOC) is one player in the industry which has been quite successful in the UAE (Abu Dhabi National oil COMPANY, 2012). To analyze critically the concept of five forces, some of the factors that shape the market will also have to be discussed in details (ADNOC, 2012). These are the five forces as applied to the Abu Dhabi National Oil Company. The factors that shape the market mainly include rivalry, the bargaining power of the supplier, substitutes, market entry and the consumers. All these factors directly affect the operations of ADNOC. Five (+1) Forces analysis The graphical representation of the five forces analysis has five factors which affects the growth of the company. These factors are both internal and external. Rivalry is always placed in the centre of the graph surrounded by the other four factors. However a sixth factor is also considered a threat and it is the stakeholders. The stake holder plays a major role in the operations of the company and the same applies to ADNOC. The entry in the market will mean that the market share for the other companies will reduce and during the formation of ADNOC international companies were threatened by its entry. The bargaining power of consumers and suppliers will always affect the prices and thus determines the profits made by the company. This factor has seen ADNOC reducing the prices of oil and gas some point and increasing at some other point. This is mainly to reduce losses. The stakeholders on the other part play a vital role. This is because they may decide to give the company a grant or is will affect the development of the company. ADNOC receives grants from stakeholders like the government. This has ensured its growth. 1. Market entry Cost disadvantages (Economies of scale and scope) This is a market entry strategy that aims to benefit an organization through increasing the production of goods and reducing the cost (Ford, 2012). When ADNOC entered the market it had to use this strategy so as to become dominant in the market. It rapidly increased the production of oil and natural gas while lowering the cost. This was facilitated by improving the efficiency of the company and the leadership. As a result of this, the company was able to reduce its cost of operation after continuously producing more gas and oil. This factor was important in ensuring that the company grows and achieves its main goals and objectives. As the oil manufacturing plant was built and it became increasingly larger, the company started experiencing more reduction in the cost of production. This then resulted to more profits and thus the growth of the company. Lack of experience This is a very important market entry strategy. Lack of experience can prove to be quite a hurdle for a new company venturing in the market. This is mainly because no client knows the company and this makes it difficult for them to trust the company. When ADNOC entered the market, it was quite difficult to operate initially. The lack of experience was broadly on the fact that the company did not have enough data concerning the market trend and the company was little known. However this was corrected by employing managers and staff who had experience in the oil sector and with much determination they were able to steer the growth and success of the organization (Porter, 2008). Strong product differentiation / Customer loyalty For an organization to succeed and achieve its main goals and objectives, the customers have to be satisfied (Poter, 2008). This will ensure loyalty and retention of customers. However for a company that is entering the market, it may be difficult to attract customers and maintain their loyalty. However, with ADNOC this issue was not very challenging. Due to visionary leadership, the company entered the market and started producing new goods which were appealing to both the local and international customers. During its entry very few companies were exploring and exploiting natural gas. The organization thus capitalized on this and they were able to win the loyalty of the customers. Few years after its entry in the market, it became the leading company in natural gas exploitation (Andy, 2007). High capital requirements The capital required to start a business is always very high. It is therefore advisable that the company should have extra amount that will be used in the daily operations before the company grows. In the UAE, the oil market is quite competitive and requires huge investments so as to star a company. This is mainly because the tools and equipment for exploring and exploiting the natural gas is quite expensive. The equipment also requires frequent maintenance which is quite expensive. However for ADNOC, it was able to eat the high cost of capital due to the fact that it was established by the government. The government invested huge sums of money for the establishment of the company. It was also well equipped and it was thus able to grow smoothly (Northrop, 2012). Access to distribution channels It is a must for any organization to be within the distribution channel so as to make any meaningful gain. These channels are important in terms of ensuring that the goods and services produced by the company are marketed. However, it may be quite difficult for a new company to access the channels since it takes a lot of time for clients to built confidence on the organization. ADNOC was however succesful in accessing its distribution channel. This was attributed by the fact that it was producing new goods and services in the market and it was also being managed by personnel who are experienced in the oil industry. Although the company had experienced people and has government support it was not an influence in accessing channels. 2. Industry rivalry Market concentration Competition is one of the main challenges for most organizations in the market. This factor cannot be avoided. The only way to beat competition is by ensuring that the clients or customers are satisfied with the goods and services offered by the organization. This can be achieved by producing goods and services which are unique in the market. ADNOC was established more that four decades ago and it has established a large market share in Abu Dhabi. However most of its client is international. It faces little competition in the UAE but has quite a number of competing companies internationally. Most of the international companies are distributed all over the world and have same or more resources than ADNOC. Some of its international competitors include Total, Mobil and BP. Despite the huge competition, ADNOC has been able to beat its rivals and maintain its market share both locally and internationally. This is attributed mainly to the uniqness of its products (Andy, 2007). Stage of industry life cycle The industry lifecycle is mainly the stages at which an organization will have to go through before it eventually declines (Michael, 2001). It is mainly composed of five stages ranging from the point of entry to the point of decline. Since ADNOC was established, it has undergone the various stages up to the point at which it is currently. It started at the establishment phase where it was formed. It then underwent a marketing stage to advertise it self to the clients. This was followed by the innovative phase where it started producing new oil and gas products. These innovations were done with the aim of beating the competitors and rival both locally and internationally. This largely contributed to its growth and establishment of a huge market share. Currently it has already established its customer base and it mainly concentrates with production as compared to marketing. All these stages were very successful for the organization. Level of product differentiation When goods are being sold in the market, it is common to find similar goods being sold at different prices. This in most cases is attributed to the quality of the goods. The manufacturer of the good is also a contributing factor towards the differentiation. This is also used by different companies to out compete each other in the marker in terms of affordability. The quality of oil and natural gas produced by ADNOC is very high and certified this is quite appealing to the customers thus it popularity both locally and internationally. The prices of the goods produced by ADNOC ranges from one item to another. However despite the good quality, the products are quite affordable as compared to the other rivals both local and international. This factor has been important in maintaining and satisfying the customers (Andy, 2007). Exit barrier costs. These costs are mainly the costs that a company will incur case it is to leave the market and start offering different services (Johnson, 2006). This therefore forces most of the companies to continue operating in the market. ADNOC is a well established firm with many years of being in the market actively. It will be quite difficult for it to leave the market currently due to several factors. The company Hs made huge investments in fixed assets which it may find difficult to dispose. Most of the equipment is quite expensive and it can only be used for the purpose of oil exploration and drilling. The company also has a high number of employees with permanent contracts and the company will have to pay them huge sums of money incase it is to leave. This is because the company will be breaching the contract t signed with the employees. The suppliers will also sue the company if it leaves due to the nature of the contract it has signed with them. This will result to huge loss of money as compared to when the company was in operation. It is therefore evident that ADNOC will not be able to exit the market even if it is to face stiff competition from its rivals. It will be forced to continue operation whether it makes profits or losses (Yuval, 2005). 3. Bargaining power towards suppliers Industry concentration and size of supplier ADNOC is a multi billion company that is growing at a very high rate. It requires suppliers to supply it with various goods and services. This mainly involves supply of equipment and repair services. The suppliers who supply the company with the goods and services have the ability to change the quality of the goods and services or even the prices. The company thus maintains a good working relationship with its suppliers who have a higher bargaining power. The bargaining power of the suppliers is high based on the fact that it supplies the company with unique equipment which cannot easily be found. The company therefore prefers maintaining the suppliers that it has contracted. It is also expensive for a company to switch suppliers and thus it has to ensure that it continuously maintains good working relationship (Yuval, 2005) However, in order for the company to maintain its bargaining power, it has introduced strict rules and regulations for its suppliers so as to ensure that they work with the right suppliers at affordable costs. Importance of products and switching of costs The products and services produced by ADNOC are very important and it mainly includes oil and gases. These goods are quite precious all over the world and are quite expensive. However these products cannot be produced easily. It requires special tools and equipment to carry out the work. According to Porter (2008), these tools and equipment are quite unique and can only be supplied by very few suppliers. The company therefore relies heavily on the se equipment and the suppliers for providing them. It will be impossible for the company to work without these equipment and the services offered by the suppliers. The company on the other hand will incur high monetary loses if it switches the cost. This is mainly because the suppliers of the equipment have imposed a very high penalty for cancellation of it services. This in turn has made it very difficult for ADNOC to switch costs. Although the company is quite profitable and it can afford the costs, the management does not find it necessary to do so. This is coupled by the fact that the suppliers are in good working relationship with the company. 4. Bargaining power towards consumers/ customers Industry concentration and size of customers Several companies both local and international offer the same goods and services similar to ADNOC. The companies are quite competitive in terms of prices of the oil and gases. However, locally, the company maintains 68% of the market share in the production of natural gas. This has made it more competitive and popular among the customers who consumer the product made by the company. It has raised the bargaining power of the company and it is able to raise the prices of the commodities and still maintain its customers. The size of the consumers is quite large and is distributed all over the world. The products range in prices and are affordable to both the financially able and financially unable consumers. This therefore means that the products of the company are consumed by all classes of consumers. The bargaining power a company is based on its status and services rendered (Andy, 2007). The customers in this case are also fragmented wit completely lowers their bargaining power over the company. Importance of the product and switching cost. The products produced by ADNOC are quite important and is consumed all over the world. As a matter of fact it will be impossible for the world to live without consuming these products. Oil and gas which is the product that is produced by the company is quite precious in the world and is considered as one of the most expensive products to deal with in the world. The business is also regarded as one of the most profitable and it generates high revenue. This improves the economy of the country in which the commodity is found. Conflicts have also emerged in some countries due to the exploitation of this natural resource. Due to the number of companies dealing with this commodity, it may be easy for the consumers to switch cost without incurring any major costs. However the company has put in place measures to ensure that the consumers do not switch costs. In most parts of the world the prices of the goods have been adjusted to suit all classes of consumers. 5. Substitutes Product for product substitution Substitution mainly involves the goods or services that the consumer will be satisfied with it the same way as compared to another good (Northrop, 2012). The products manufactured by the company have little or no substitute at all in some areas. This puts the company in a very privileged position. Although products like kerosene for lighting lamps and gas for cooking have substitutes like electricity, it is not wide spread and easily available in remote areas. This therefore forces the consumers to purchase the products manufactured by the company. Other products like petrol and diesel for driving car engines and also machines have no substitutes currently. This uniqueness is what has enabled the company maintain its market share and increased profits. The consumer will also be unable to do without the products of the company and thus heavy dependence on it (Johnson, et al., 2006). Substitution of need Substitution for need is brought about by the fact that there are very many substitutes in the market. This creates a situation where the better substitutes will be consumed while the other substitute will be phased out. This preference is mainly dependant on the taste and preferences of the customers. The innovation of new products is also the main source of this substitution. In terms of the products produced by ADNOC, it is evident that the products produced by the company have no better substitutes. Electricity could be a better substitute for gas and kerosene but it is quite expensive and is not readily available. This therefore puts the company in a privileged position. The company will not be phased out due to substitution of its products. It therefore has a bright future and it will continue to expand and nourish (Michael et al., 2001). Other stakeholders Internal The company is well represented in its board of directors who are professionals from different groups of the economy. The company receives grants from the government which is important for its operations. However, the organization is able to meet its own costs of operation. The company also employs thousands of workers from the UAE and also expatriates. The workforce is comprised of professionals, skilled and unskilled workers. Government grants and local communities The company makes huge profits from the sale of its goods and services. ADNOC is ranked among the most profitable companies in the world. The money collected from the oil revenue is the major source of revenue from the Abu Dhabi government. The company has a long term project on the extraction of sour gas. This will also include the extraction of sulphur. The company aims at being the major supplier of sulphur in the world. These plans are spearheaded by the government together with the company. The company receives grants from the government to enable it develop new projects. The local community also benefits from the company. It has been involved in building of schools, awarding scholarship and infrastructure development. This has made the local community develop the sense of ownership of the company. Special interest groups and share holders The company is state owned and the government is the major stakeholder. It invests heavily on the company to enhance its growth so as to enable it fulfill its mandate. This has seen the company achieve great heights in its operations and services. The company also partners with other companies in the oil sector with a view of developing its capacity and markets its products. However most of these companies are based in the UAE. Special interest groups also work with the company to ensure that their interests are taken care of. Most of these groups are environmental lobby groups which ensure that the environment is protected during the oil exploration and drilling. Porter's Five Forces (Johnson et al., 2006), Conclusion ADNOC has been quite successful in its operations in the UAE. This according to the paper is attributed to the fact that the five forces strategies. The company was able to utilize all the principle in order to become the best in the UAE. The company has also employed all the management principles to establish a market share and beat its competitors. The consumers also have confidence with the products and services offered by the organization which has boosted its capacity. According top the paper, the company is ranked among the best in the UAE and it involves major stakeholders in its operations. Its competitors locally have been unable to beat the company. However most of the competitors are investing huge sums of money so as outdo the company. In response to this, the company has partnered with stake holders to launch new products. This is according to the paper. Despite the strategies by the competitors they still expect ADNOC to be the biggest challenger in the next five years. References ADNOC. (2012). Abu Dhabi National Oil Company. 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