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Definition Of Global Business Environment Management Essay

Chapter 1 stated the importance of business strategy for an EP company like PVEP for PVEPs operational and survival, Petrovietnam and all society when entering global business environment. Chapter 2 continuously outlined some important key issues from many sources of literatures to analyze the business strategy of an oil and gas company in upstream sector in such a changing and complex international business environment.

This chapter presented the impact of global business environment on an E&P’s business strategy through the general method - PESTLE analysis and competitiveness measure - Porter’s five forces model. Moreover, this section outlined the foundation of strategic capability and summarized the key issues from the business environment and the strategic capability of an E&P company that impact strategy development.

The literature review chapter also introduced five alternative directions for strategic development based on product/market growth matrix. Furthermore, the section aimed to provide different methods of pursuing strategy once the strategy direction has been chosen. Especially, the final part of the review encompassed the success or failure of a business strategy through success criteria.

THE IMPACT OF GLOBAL BUSINESS ENVIRONMENT ON AN E&P COMPANY’S STRATEGY

Definition of global business environment

In the context of a business firm, environment can be defined as various external forces that surround the firms and influence its decisions and operations. According to Coulson -Thomas (1991), “Organisations face an unprecedented range of challenges and opportunities in the social, economic, political and business environment. This external environment is characterised by uncertainty, surprise, turbulence and discontinuity”. Andrew Harrison also states in Business Environment in a global context: “No organization exits within a vacuum. Its strategies and operations are influenced by and must take account of its external environment.” Furthermore, external environment or business environment includes the activities of consumers and competitors, the government policies, technology developments, social and cultural context… (A. Harrison, 2010). The business environment is also considered as a complex adaptive system with many elements which operate independently and interact with each other.

Figure 2.1 - Key perspectives on the business environment

(Source: A.Harrision, 2010)

Globalization is the process, not a state. Globalization removes barriers between countries. It helps to increase efficiency of global resources allocation, develop global marketing strategies and change industry structure (Harrison A., 2010). Nevertheless, globalization may increase the gap between rich and poor, lead to cultural convergence and harm the environment (Harrison A., 2010). Globalization is driven by political, technological and economical factors. The global business environment is the environment in different countries with unfamiliar factors from domestic environment which affect firm’s decisions on resource use and capabilities.

Motives for going international

Oil and gas company’s motives for going global can be summarized in this table:

Table 2.1 - Factors affecting the decision to go international

Factors

Motives

Primary Motives

Profit-making opportunities: the opportunity of selling products in a foreign market may be attractive.

Business growth: Expansion in domestic market is difficult because of slow economic growth. Significant business growth could be possible through overseas expansion.

International reputation

Competitive advantage: increased scale of production, lower unit costs.

The Changing International Environment

International peace and stability

World economic growth and emerging regions

Reduction in trade barriers

Technological developments and skills

Country – Specific Factors

Political and economic stability

Culture and institutions

A country’s stock of “created assets”

Supportive government policies

Absence of “nuisance costs”

Access to Markets

Large and emerging markets: a company needs to enter both large developed economies and emerging economies for its international ambitions.

Access to a regional trading area

First-mover advantages: early entry into emerging economy brings first-mover advantage.

Need to follow the competition

Access to Resources

Resources are core business

Large quantities of resources are needed

Specialized resources are immobile

Cost reduction

Access to low-cost materials, energy or labour

Financial incentives

Avoidance of trade barriers

(Source: Harrison, 2010)

PESTEL analysis

Operating in many overseas projects, an E&P company needs to understand the environment to measure the effect of environment on its activities as well as how environmental forces might be influenced. PESTEL analysis provides a starting point for environmental analysis while a more detailed picture of an organization’s competitive environment can be gained by Michael Porter’s five forces model (A. Harrison, 2010).

PESTEL analysis is an excellent tool to identify and explain the key external factors (Political, Economic, Social, Technological, Legal and Environmental issues) affecting the performance of the firm.

Political

International trade regulation/tariffs: Each country has different regulations that impose on foreign oil and gas companies.

Government stability: Political stability of any country is placed with a great caution when a firm intends to expand to.

Economic

Economic factors are important aspects that concern the nature and direction of the economy in which an E&P company operates in. Energy demand will rise when global economy grows fast.

Interest rates: oil and gas signs many credit contracts to raise capital for its operations. Therefore, any rise in interest rate will affect its investment in overseas projects.

Exchange rates: Any change in exchange rate will immediately impact an oil and gas daily activities.

Economic growth: In the country of which the economic growth rate is low or suffering recession, the firm activities will be heavily affected.

Social

Income distribution: In energy industry, the income distribution has little influence on the customer demand. However, high average income countries will have higher energy consumption. These countries are potential market for an oil and gas company in upstream sector.

Figure 2.2 – Top world oil consumers (2011)

D:\Anh Linh tất dài\MBA\DISSERTATION\PVEP\Untitled.jpg

(Source: US Energy Information Administration, 2012) [1] 

Population demographics: Population demographics are an important aspect that influent an E&P company activities in foreign countries. The higher population growth rate could be reflecting either an increase in the birth rate, an increase in the life expectancy, and/or an increase in immigration (Tim Gu, 2009). All these changes could be resulted in increasing oil demand.

Technological

As mentioned by W. Howard Neal in his work – “Oil and gas technology development subgroup of the technology task group of the NC committee of global oil and gas” (2007): “Since the beginning of the modern age of oil and gas, technology has played a fundamental role in supporting the efficient production of hydrocarbons”. Technology developments have great impact on an E&P company’s operations. Technology has reduced the risk of exploration and cut the time required to drill a well. In the past, oil and gas companies spent little on R&D, they bough technologies from service and startup companies. Recently, new petroleum projects have become “more costly, less economical, and technically more challenging” (W. Howard Neal, 2007). Oil and gas companies in upstream sectors should consider applying new technology rather than keeping existing one. Understanding that the key to increasing recoverable reserves has been technology, companies are motivated to invest in Research and Development. Oil and gas companies can suffer from of economic risks when adopting new technology such as higher cost but less certain result. However, new technology could result in “faster, more effective resource recovery and a net economic gain for the company” (W. Howard Neal, 2007).

Legal

E&P companies conduct exploration, development and production operations under Licences. However, any fail to fulfil the terms or delays on obtaining or renewing the Licences will result in penalty or delay on investment (Genel Energy Plc Annual Report, 2011).

Environmental

An oil and gas company in upstream sector needs to aware of Health, Safety and Environment risks regarding blowouts, equipment failures, explosion…as the company has to follow international environmental guideline about safety requirements, environmental requirements and social impacts. Before entering into new markets, the company needs to aware of all applicable legislation and international codes of practice in this country.

Porter’s five forces model

In the past, competition was narrowed in only direct competitors. However, Michael E.Porter stated in this work “The five competitive forces that shape strategy” (2008) that “Competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products.” The strongest competitive forces will determine the industry profitability and become the most important factor when formulating the strategy (Porter, 2008).

While PESTEL analysis is the general method to investigate the impact of business environment on an E&P company, Porter’s five forces model is an important tool to analyze the industry in which the corporation operates from corporation perspective (Porter, 2008).

Figure 2.2 – Porter’s five force model

D:\Anh Linh tất dài\MBA\DISSERTATION\LITERATURE REVIEW\5 forces.jpg

(Source: Porter, 2008)

Rivalry among firms in the industry

As there are millions of E&P companies in the world with the same business, they face with serve competition. Rivalry could discount price, introduce new products and improve service to compete with other companies. All E&P companies worldwide are roughly equal in size and power; exit barriers are high and highly committed to the industry (Porter, 2008). Therefore, the intensity of rivalry is great.

Buyer power

Buyers who can contract for large purchases also press hard for price concession, delayed payments or returned products. All of these can sink an undercapitalized company. In oil and gas industry, buyers are powerful because each buyer purchases in large volume, buyers face few switching costs in changing vendors (Porter, 2008). Moreover, some buyers are intermediate customers. They buy crude oil as oil traders then gain bargaining power as they can affect the purchasing decisions of downstream customers (Porter, 2008).

Power of suppliers

An E&P company relies heavily on a unique input for its products such as platform, wellhead, long lead items, drilling bits which can only be supplied by a minor of technical companies such as oilfield service companies. Any delay in delivery or out of stock shall be constraints for its business. Moreover, the competition between suppliers may cause pressure on the price which leads to the price race, limits quality or shift cots to industry participants.

The threat of substitutes

A substitute which performs the same or similar functions as crude oil can be the threat for an oil and gas company. Renewable energy sources such as solar energy, nuclear power… limit the industry’s profit potential by putting a ceiling on prices (Porter, 2008).

Threat of new entrants

The profitable energy market tends to attract new entrants. They can increase the productive capacity serving the market, fight to increase market share that put pressure on prices, costs, and the rate of investment necessary to complete and even bring new resources to the competition.

The threat of entry puts a cap on the profit potential of an oil and gas industry. However, the threat of entry depends on the height of entry barriers and reaction from incumbents (Porter, 2008).

Supply-side economies of scale: new entrants will cope with supply-side economies of scale issue when they intend to come into the industry as the incumbents could produce at larger volume and enjoy lower cost per unit. If new entrants want to enter the industry on a large scale, they should accept a cost disadvantage.

Customer switching costs: in E&P sectors, customers will face high switching costs when they change suppliers. These costs could arise as oil buyers must investigate quality specification; test the compatibility of crude oil with their refinery…

Capital requirements: Large financial resources needed to invest in upstream sector can deter new entrants.

Incumbency advantages independent of size: An E&P company has quality advantage due to preferential access to the best raw material sources and highly specialized workers (Porter, 2008). New entrants may find it hard to bypass these advantages.

As of the height of entry barriers, threat of new entrants in E&P sector is low.

From Porter’s five force model, the company could understand the competitive forces, the underlying causes and reveals the roots of oil and gas industry’s current profitability (Porter, 2008). In addition, the five force model provides a framework for competition analysis that can be used as a starting point for developing the company’s business strategy.

DIAGNOSING STRATEGIC CAPABILITY

Foundation of strategic capability

Strategic capability can be defined as the resources and competences of an organization needed for its survival and prosperous. Any E&P company has its own resources and competences. A firm’s capabilities are diagnosed as a base to know how and to what extent the firm can manage the development of strategic capabilities (Johnson, Whittington and Scholes, 2008).

Figure 2.3 - Strategic capabilities and competitive advantage

Resources

Competences

Threshold capabilities

Threshold resources

Tangible

Intangible

Threshold competences

Capabilities for competitive advantage

Unique resources

Tangible

Intangible

Core competences

(Source: Johnson, Whittington and Scholes, 2008).

Capron and Hulland (1999) defined resources as: “stocks of knowledge, physical assets, human capital, and other tangible and intangible factors that a business owns or controls, which enable a firm to produce, efficiently and/or effectively, market offerings that have value for some market segments.”

Resources can be distinguished into two groups:

Tangible resources are physical assets of an organization like plant, finance and people.

Intangible resources are non-physical assets such as information, knowledge and reputation.

Moreover, a firm’s resources can also be classified into four different categories:

Physical resources: buildings, machines, production capacity.

Financial resources: cash, capital, creditors, debtors…

Human resources: knowledge and skills of employees

Intellectual capital: brands, patents, customer databases and business systems.

Competences are defined as skills and abilities by which resources are used effectively through the organization’s processes and activities (Johnson, Whittington and Scholes, 2008).

Capabilities are defined by Chandler (1990) as “a firm’s collective physical facilities and skills of employees.” Madhok (1997) describes capabilities as “a combination of resources that creates higher order competencies.” While Hoskisson et al. (2004) believed that “capabilities are the capacity to perform a task or activity in a integrated manner.”

Threshold capabilities are the minimum capabilities needed for the organization to meet the necessary requirements to be able to compete and to survive at all (Ken Garrett, 2010).

Unique resources are those resources that competitors cannot imitate or obtain and create competitive advantage (Johnson, Whittington and Scholes, 2008).

Core competences are skills and abilities which are critical to an organization to achieve competitive advantage that are difficult for competitors to imitate.

The importance of capabilities for strategic direction

Following Nicholas O’Regan’s work in 2004, “Organization capabilities have a positive impact on strategy deployment.” The capability enables firms to manage for the future by focusing on customer’s needs and requirements, while at the same time managing crises and problems arising in their environment.”

Strategy is considered as the main driver of competitive advantages (Larsen et al., 1998). Moreover, strategy is also one of the most effective ways for firms to cope with changes in the business environment (Hart and Bancury, 1994). Nicholas O’Regan (2004) also suggests that a strategy is the articulation of the means by which organizations convert its objectives into organizational capability so as to take advantage of external opportunities and minimize threats.

Kargar and Parnell (1996); Naffziger and Mueller (1999) suggested that “small firms using strategic planning perform better than non-strategic planning firms.” Therefore, it is clear that capabilities have a positive association with the factors used to generate strategy.

Strategic planning

Organizational Capabilities

Diagnosing strategic capability

So as to explore an E&P’s strategic capability, SWOT analysis is used to summarize the key issues from the business environment and the strategic capability of an organization that impact strategy development (Johnson, Whittington and Scholes, 2008). SWOT analysis is the starting point that helps organization to consider internal and external factors that an E&P company should take into account to improve its prospects of success.

Using SWOT analysis, a company could identify Strengths, Weaknesses of the company and Opportunities and Threats posed by external environment. SWOT analysis allows the company to identify the strategic focus. SWOT outcomes reveal the possibility of a supplier using a strength to capitalize on a customer opportunity and implementing an attack strategy which leverages the strength to deliver a better relationship to customers rather than competitors. In contrast, any threat that undermines the supplier’s position will require a defense strategy to be implemented to block the impact. However, sometimes strength cannot be used to take advantage of an opportunity because of being undermined by threat. In other word, the strength must be reinforced to block the threat. On other occasions, a weakness may cause difficulty to capitalize on an opportunity unless the strength existence can be leveraged. Therefore, the weakness should be neutralized (Sultan Kermally, 1999).

Figure 2.4 – The strategic application of the SWOT analysis

D:\Anh Linh tất dài\MBA\DISSERTATION\LITERATURE REVIEW\SWOT.jpg

(Source: Thorogood)

DIIRECTION FOR AN E&P COMPANY’S STRATEGIC DEVELOPMENT

When an oil and gas company decides to enter global business environment, the company needs to identify the direction for strategic development. Ansoff product/market growth matrix will provide the way to generate direction for strategic development based on new or existing products in new or existing markets.

Figure 2.5 – Ansoff’s matrix

http://www.tutor2u.net/business/images/Ansoff%20Matrix%20w500.gif

(Source: Johnson, Whittington and Scholes, 2008)

According to Johnson, Whittington and Scholes (2008), Ansoff's matrix provides four alternative directions for strategic development:

Market Penetration - the firm seeks growth by increasing share of its existing market segments with its existing product range. This growth strategy is quite risky and expensive. Furthermore, organizations pursuing the market penetration will cope with two constraints:

Retaliation from competitors: when a firm increases market penetration, it will make the competition more intense. Competitors in industry may create the price war. As a result, the share gains cannot compensate the expense arising from competition.

Legal constraints: greater market penetration may raise concerns from competition regulators who have powers to restrain powerful companies.

Market Development - the firm seeks to achieve growth by offering existing products to new markets. Market development can be in three forms:

New segments: the organization may offer existing products in new segments such as Starbucks sell its products to older age group.

New users: a product can be introduced to new users rather than traditional buyers.

New geographic: the organization could expand its business in new markets. For instances, Unilever – one of leading fast-moving consumer goods company entered Vietnam in 1995 to expand its dominance in Asia market.

Product Development - the firms deliver modified or new products or services to existing market segments. Although product development results in higher degree of innovation, it is still an expensive and high risk strategy for some reasons:

New strategic capabilities: as new technologies might be unfamiliar to the organization, this strategy may cause heavy investments and are likely lead to project failures.

Project management risks: Delays and increased costs during the project management can be the risk for all projects.

Diversification – this strategy takes the organization from both its existing markets and its existing products. The firm grows by marketing new products to new markets. Diversification is classified into two forms: related diversification and unrelated diversification.

Related diversification: the organization adds or expands its current products and markets within the capabilities or the value network of the organization.

Unrelated diversification: the organization expands its markets or products beyond the current capabilities and value network.

The Ansoff matrix provides four growth options. However, growth is not necessary a good option. Therefore, consolidation is added as a fifth option.

Consolidation: the organization will focus on their current products and current markets but they are not orientated to growth. Consolidation have two forms:

Defending market share: when the competition becomes more and more aggressive, the organization has to protect their current market share to sustain its business in the long future.

Downsizing or divestment: sometimes the market size is declining or the business size is reducing, selling some activities to other companies or downsizing by the needs or shareholders are the possible options.

METHOD OF PURSUING STRATEGIES

Once an organization has made a choice about the strategic direction, it then chooses the methods by which the strategic direction can be pursued.

The methods of pursuing strategies can be divided into three types: organic development, acquisition and alliances.

Figure 2.6 – Methods of pursuing strategies

(Source: Johnson, Whittington and Scholes, 2008)

Organic development

It has been stated that states that “Organic development is where strategies are developed by building on and developing an organization’s own capabilities” (Johnson, Whittington and Scholes, 2008).

Organizations pursue this method of strategy development for some reasons:

Enhancing knowledge and capability development.

Spreading investment over time: spreading costs overtime may be cheaper than paying a premium at a point in time required for acquisition.

Minimize disruption: Disruption can be minimized by the slower rate of change of organic development. Moreover, organic development helps to avoid the political and cultural problems arising from acquisition integration.

Achieving organization strategic goals: Organics development is a good way for managers to lead the business in line with the strategic goals of the organization.

Mergers and Acquisitions

A merger is a mutually agreed decision for joint ownership between organizations while an acquisition is where an organization takes ownership of other organizations.

In general, mergers and acquisitions are similar in one concept: they combine two separate firms into one single legal entity. However, they are different in some characteristics:

A merger

An acquisition

Two companies mutually agree to combine into one single entity.

The combination takes advantage of cutting costs, boosting two company’s shareholder values and increasing profits.

After merging, the new company will be more worth than the two companies in the past.

A larger company buys a smaller one with or without a mutual agreement. The target company will be ceased to exit and the acquiring company will established itself as a new owner.

The acquiring firm will offer a cash price per share to the shareholders of the target firm with a specified conversion ratio.

There are different types of mergers (Investopedia, 2010) [2] 

Horizontal merger: Two companies have the same product lines and markets. For example, if Mc Donald merges with Burger King, it will be horizontal merger.

Vertical merger: when a firm combines with a distributor or supplier. For instance, General Motors buy up Michelin Tyres to form vertical merger.

Market-extension merger: Two companies sell the same products in different markets.

Product-extension merger: Two companies sell different but related products in the same market.

Conglomeration: Two companies that have no common business areas.

According to Johnson, Whittington and Scholes (2008), organizations take mergers and acquisitions for major reasons below:

Speed of entry: Due to the slow internal development and the rapid change of products and markets, mergers and acquisitions are the only way to enter the market successfully.

The competitive situation: in the market where the market share is stable, it will be difficult for a new company to enter the market. Acquisition is a choice of the company to get risk of competitive reaction.

Financial markets: A company which owns a high P/E ratio or high share value may take an opportunity to acquire a firm which has low P/E ratio or low share value.

Exploitation of strategic capabilities: through acquisitions, the acquiring companies could leverage R&D or marketing skills overseas.

Cost efficiency: the combination of two companies will result in rationalizing resources such as land, office, facilities or gaining economies of scales.

Stakeholder expectations: Stakeholders may expect for continuous growth which can be delivered by acquisition.

Strategic Alliances

There are many definitions of strategic alliances. In common, strategic alliances are agreements between two or more companies (partners) to reach objectives of common interest (Margarita, 2009).

Douma (1997) defined a strategic alliance as “a contractual, temporary relationship between companies remaining independent, aimed at reducing the uncertainty around the realization of the partners’ strategic objectives (for which the partners are mutually dependent) by means of coordinating or jointly executing one or several of the companies’ activities. Each of the partners is able to exert considerable influence upon the management or policy of the alliance. The partners are financially involved, although by definition not through participation, and share the costs, profits and risks of the strategic alliance.” While Yoshino & Rangan (1995) described a strategic alliance as “a partnership between two or more firms that unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliance to contribute and to share benefits on a continuing basis in one or more key strategic areas, e.g. technology, products.”

According to Pellicelli (2003), strategic alliances could be all relationships between companies, with the exception of transactions based on short-term contracts such as acquisitions, loans, sales or agreements related to activities that are not important or strategic for the partners.

Strategic alliances have some characteristics which can be summarized below (Margarita, 2009):

Two or more organizations unite to pursue objectives of a common interest but remain independent subsequent to the formation of alliance (Yoshino & Rangan, 1995).

The partners share both the advantages and control of the alliance management for its entire duration.

The partners contribute their own resources and capabilities to the development of one or more areas of the alliance such as production, technology, marketing, R&D…

Organizations choose strategic alliances as their strategic methods for four potential benefits (Margarita, 2009):

Ease of market entry: A single firm may face difficulty entering international market because of many obstacles. However, entering into a strategic alliance with an international firm will provide benefits such as economies of scales, marketing and distribution advances, keeping cost of entry down. As a result, entry into overseas market becomes rapid and easier.

Shared risks: the competitive nature of business (when the market has just opened up or the market contains much uncertainty and instability) cause risks for a firm when it enters a new market or launches a new product. Strategic alliance is a way to reduce and control risks.

Shared knowledge and expertise: forming a strategic alliance can help a firm to gain knowledge, information and expertise in some areas that it lacks. The knowledge and expertise include production knowledge, government regulations and learning how to acquire resources.

Synergy and competitive advantage: Competition tends to be more effective when partners leverage off the strength of other firms, bring energy into the process that are hard to achieve if a firm enters a new market segment alone.

There are different types of strategic alliances which are listed below (Johnson, Whittington and Scholes, 2008):

Joint ventures: Margarita (2009) defined a joint venture as an agreement formed by two or more parties to establish a single entity to undertake a certain project. Each party has an equity stake in single business but shares revenues, profits and expenses.

Consortia: two or more organizations in a joint venture focus more on a particular project or venture.

Networks: organizations achieve mutual advantage by working in collaboration and do not rely on cross-ownership arrangements and formal contracts.

Franchising: The franchise holder will undertake some activities such as distribution, selling, and manufacturing while the franchiser’s responsibilities involve securing brand name, marketing and training.

Licensing: Trademarks, trade secrets and intellectual property are licensed to other firm for a fee.

Strategy evaluation

Three key success criteria can be used to assess the visibility of strategic options involving Suitability, Acceptability and Feasibility.

Suitability:

Suitability is concerned with the extent to which the strategic option fits with key drivers and changes in the business environment, exploits strategic capabilities, meets stakeholder expectations and builds on benefits.

There are various tools to assess the suitability of strategic options (Johnson, Whittington and Scholes, 2008):

The TOWS matrix: TOWS matrix is built on the information of SWOT analysis. Each box of TOWS matrix can be used to identify options that address a different combination of the internal factors (strengths and weaknesses) and external factors (opportunities and threats).

Figure 2.7 – TOWS matrix

D:\Anh Linh tất dài\MBA\DISSERTATION\CHAPTER 2 - LITERATURE REVIEW\TOWS.jpg

(Source: Johnson, Whittington and Scholes, 2008)

Ranking strategic options: the strategic options are assessed by key factors and each option is scored for ranking.

Decision trees: the decision trees illustrate the decisions and possible consequences. The options are eliminated and preferred options emerge by progressively introducing requirements which must be met.

Scenarios: this tool is used to look insights into a possible future course of events (Harrision, 2010). Strategic options will be considered in many possible future situations. Suitable options are those which are sensible in various scenarios so that they are kept in open need or contingency plan.

Acceptability

According to Johnson, Whittington and Scholes (2008), acceptability is concerned with expected performance outcomes of a strategy (the expected return, the level of risk and the likely reactions of stakeholder) and the extent to which these meet the expectations of stakeholders.

Return:

Return are benefits that stakeholders expect to receive from a strategy. Therefore, measures of return are the key criterion to assess the acceptability of a strategy.

There are four criteria to understand return: Profitability, cost benefit, real options and shareholder value analysis.

Profitability: Financial analysis is used to assess the financial return on investments in major projects. Of which, return on capital, payback period and discounted cash flow are three common approaches used. However, assessing profitability is only applied to tangible costs and benefits.

Cost benefit: Cost – benefit concept suggests that money value can be put on all costs and benefits of a strategy, including tangible and intangible returns (Johnson, Whittington and Scholes, 2008). This concept is mainly used for infrastructure projects. Although it includes intangible costs and benefits, this concept is difficult to quantify.

Real options: a strategy could be seen as a series of real options (sequence of decisions). This way is beneficial as it brings strategic and financial evaluation closer, values emerging options and copes with uncertainty.

Shareholder value analysis: This concept examines the impact of new strategies on shareholder value which is measured by total shareholder return and economic value added.

Risk:

Risk criteria examine the profitability and consequences of the strategy failure. Financial ratio projections and sensitivity analysis are used to assess the impact on gearing and liquidity and the sensitivity of each assumption on predicted performance.

Stakeholder reactions:

Stakeholder mapping can be used to test the reactions of stakeholders to new strategies through identifying stakeholder expectations and power.

Figure 2.8 - The power/interest matrix

(Source: A. Mendelow, 1991)

Feasibility

Feasibility concerns whether an organization obtains the resources and competence to deliver the strategy (Johnson, Whittington and Scholes, 2008).

In order to understand feasibility, two approaches are used:

Financial feasibility

This approach uses cash flow analysis and forecasting, and breakeven analysis to assess financial feasibility.

Resource deployment

The feasibility of a strategy could be understood wider by identifying the resources and competency needed for the strategy.

CHAPTER SUMMARY

The review has summarized all related theories to build a successful business strategy when an E&P company enters global business environment. These literatures can be listed as the steps from strategic position, strategic choices and strategy in action as follows:

Investigate the impact of global business environment on the global business strategy.

Diagnose strategic capabilities which have positive association with the factors used to generate strategy.

Identify the direction for strategic development based on new or existing products/new or existing markets.

Examine the methods of pursuing strategy

Assess the visibility of strategic options in terms of Suitability, Acceptability and Feasibility criteria.


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