Michael Porter's five forces: Oil industry

The following case study the product is oil. In oil industry, the competition is very common, we can see the oil price changing every day.Now I will use marketing eye to see the oil competition.

First step, I will description oil industry background and selected an organization for a warming up. Then, the second part is evaluate marketing segment and Michael Porter five forces analyze.

Product background

There is no doubt that the oil/energy industry is extremely large. According to the Department of Energy (DOE), fossil fuels (including coal, oil and natural gas) makes up more than 85% of the energy consumed in the U.S. as of 2008. Oil supplies 40% of U.S. energy needs. (Visit the U.S. Department of Energy’s Energy Sources information page for more insight.)

Before petroleum can be used, it is sent to a refinery where it is physically, thermally and chemically separated into fractions and then converted into finished products. About 90% of these products are fuels such as gasoline, aviation fuels, distillate and residual oil, liquefied petroleum gas (LPG), coke (not the refreshment) and kerosene. Refineries also produce non-fuel products, including petrochemicals, asphalt, road oil, lubricants, solvents and wax. Petrochemicals (ethylene, propylene, benzene and others) are shipped to chemical plants, where they are used to manufacture chemicals and plastics. (For more insight, read Oil And Gas Industry Primer.)

There are two major sectors within the oil industry, upstream and downstream. For the purposes of this tutorial we will focus on upstream, which is the process of extracting the oil and refining it. Downstream is the commercial side of the business, such as gas stations or the delivery of oil for heat.

Company Introduction

The Saudi Arabian Oil Company (Saudi Aramco), the state-owned oil company of the Kingdom of Saudi Arabia, is a fully-integrated, global petroleum enterprise and a world leader in exploration and producing, refining, distribution, shipping and marketing. The company manages proven reserves of 260 billion barrels of crude oil and it manages the fourth-largest gas reserves in the world, 263 trillion cubic feet. (see figue1)

Saudi Aramco employs more than 55,000 people and is headquartered in Dhahran in Saudi Arabiaâ€-s Eastern Province, which borders the Arabian Gulf. Operations span the Kingdom, with production and product distribution facilities linking all market areas. Major export shipping terminals are located at ports on the Arabian Gulf and the Red Sea, while domestic demand for automotive and aviation products is met through a Kingdom-wide network of strategically situated refineries.

Internationally, Saudi Aramco holds substantial joint venture and investment interests in refining and marketing activities in the United States, the Republic of Korea, Japan and China. Key market service support offices are located in major cities in North America, Europe and the Far East. Saudi Aramco, through its affiliate Vela International Marine Limited, owns and operates one of the world’s largest tanker fleets, which transports crude oil and refined products, internationally and domestically, amounting to 892 million barrels in 2008.

Saudi Aramco stands committed to providing a reliable supply of petroleum and petroleum products to communities and consumers around the globe. Throughout its history, Saudi Aramco has never failed, due to operational reasons, to meet a delivery commitment to a customer. The companyâ€-s ability to bring its spare capacity onstream in response to market needs has been repeatedly proven over the years.

Figue1.

Market segment

Bases for Segmentation in Industrial Markets

In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions.

Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might be segmented on characteristics such as:

Location

Company type

Behavioral characteristics

Location

In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region.

Company Type

Business customers can be classified according to type as follows:

Company size- Saudi Aramco is the largest oil corporation in the world with the largest proven crude oil reserves and production.

Industry – Oil industry

Decision making unit(DMU) (see figue2)

Figue2

Purchase Criteria- high purity, low price

Behavioral Characteristics

In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics may include:

Usage rate:

Oil and gas touch our daily life in familiar and unfamiliar ways. We live in an engry-hurgry world. Industry, agriculture and life as we know it depend on harnessing engry from a few natural sources. One of the most import engry sources is petroleum: oil and gas from the earth . it is a convenient and often the only sources of products and fuel that are essential to modern life.

Buying status- regular

Purchase procedure:

Downstream: Refers to oil and gas operations after the production phase and through to the point of sale, whether at the gas pump or the home heating oil truck

Upstream: The grass roots of the oil business, upstream refers to the exploration and production of oil and gas. Many analysts look at upstream expenditures from previous quarters to estimate future industry trends. For example, a decline in upstream expenditures usually trickles down to other areas such as transportation and marketing.

Target market

Developing counties

Reason: developing counties drivers increase>>oil demand ^

Developed counties

Reason: big demand of oil on life and manufactory

What is Michael porter five forces?

A number of year ago the renowned business strategist and one of the world’s best-known business academics Michael E. porter indentified five competitive forces that influence planning strategies in a model called porter’s five forces. Recently, porter updated this model to include the impact of the internet on the strategies that business use. As illustrated by figure1, the five forces are: (see figue3)

-Barriers to entry

-Degree of rivalry

-Threat of substitutes

-Buyers power

-Supplier power

Figue3: Michael porter five forces model

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Porter Five Forces analyze

1. Barriers to Entrants

The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:

Existing loyalty to major brands

Incentives for using a particular buyer (such as frequent shopper programs)

High fixed costs

Scarcity of resources

High costs of switching companies

Government restrictions or legislation

Case study:

There are thousands of oil and oil services companies throughout the world, but the barriers to enter this industry are enough to scare away all but the serious companies. Barriers can vary depending on the area of the market in which the company is situated. For example, some types of pumping trucks needed at well sites cost more than $1 million each. Other areas of the oil business require highly specialized workers to operate the equipment and to make key drilling decisions. Companies in industries such as these have higher barriers to entry than ones that are simply offering drilling services or support services. Having ample cash is another barrier – a company had better have deep pockets to take on the existing oil companies.

2. Supplier Power

This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power:

There are very few suppliers of a particular product

There are no substitutes

Switching to another (competitive) product is very costly

The product is extremely important to buyers – can’t do without it

The supplying industry has a higher profitability than the buying industry

Case study:

While there are plenty of oil companies in the world, much of the oil and gas business is dominated by a small handful of powerful companies. The large amounts of capital investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There isn’t a lot of cut-throat competition between them, but they do have significant power over smaller drilling and support companies. See the table 1 you know that Saudi Arabia is the top one oil exporter!

Table1

3.Buyer power

This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes, then the customer hold substantial power. Here are a few reasons that customers might have power:

Small number of buyers

Purchases large volumes

Switching to another (competitive) product is simple

The product is not extremely important to buyers; they can do without the product for a period of time

Customers are price sensitive

Case study:

The balance of power is shifting toward buyers. Oil is a commodity and one company’s oil or oil drilling services are not that much different from another’s. This leads buyers to seek lower prices and better contract terms.

4.Availability of Substitutes.

What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Here are a few factors that can affect the threat of substitutes:

The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea.

If substitutes are similar, it can be viewed in the same light as a new entrant.

Case study:

Substitutes for the oil industry in general include alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even nuclear energy. Remember, oil is used for more than just running our vehicles, it is also used in plastics and other materials. When analyzing an energy company it is extremely important to take a close look at the specific area in which the company is operating. Also, companies offering more obscure or specialized services such as seismic drilling or directional drilling tools are much more likely to withstand the threat of substitutes. (For more on oil substitutes, see The Biofuels Debate Heats Up.)

Potential entrants

”The search for a way out began after the Arab oil embargo of 1973-74, and reached a zenith with the Iranian Revolution of 1979. Many well-intentioned programs were undertaken, concentrating primarily on coal — coal as a gas, coal as a fluid and the improved combustion of coal.

But it was then, as it is now, a wild time for new entrants. Dozens of projects were funded including magneto-hydrodynamics, in situ coal gasification, garbage to electricity, battery research, cryogenic transmission research and energy storage in fly wheels.

Some, if not a majority, of the projects were pure science fiction.”

(Llewellyn King is host of television’s “White House Chronicle” on PBS.)

5.Competitive Rivalry.

This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:

Many players of about the same size; there is no dominant firm

Little differentiation between competitors products and services

A mature industry with very little growth; companies can only grow by stealing customers away from competitors

Case study:

Slow industry growth rates and high exit barriers are a particularly troublesome situation facing some firms. Until quite recently, oil refineries were a particularly good example. For a period of almost 20 years, no new refineries were built in the U.S. Refinery capacity exceeded the product demands as a result of conservation efforts following the oil shocks of the 1970s. At the same time, exit barriers in the refinery business are quite high. Besides the scrap value of the equipment, a refinery that does not operate has no value-adding capability. Almost every refinery can do one thing – produce the refined products they have been designed for.

Conclusions

Ultimately, Michael porter five forces are very useful to evaluate the oil industry. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the oil industry context in which the firm operates

For barriers to entry, Saudi Aramco is the largest oil corporation in the world with the largest proven crude oil reserves and production, it also is the state-owned national oil company, the Arabia government support Saudi aramco operation, so the new entries hard to best than me.

About supplier power, while there are plenty of oil companies in the world, much of the oil and gas business is dominated by a small handful of powerful companies. But Saudi Arabi is the top one oil exporter in the world so their supplier power are very large.

With buyer power, in global oil industry is imperfect competition , market structure is monopolistic , non-price competitive is very common so the buyer buyers to seek lower prices and better contract terms, the buyer power is high.

On the other hand, oil substitute products are coal, gas, solar power, wind power, hydroelectricity and even nuclear energy. But in now just developing.

Lastly, Saudi Aremco is rich and large, it can have big market share for a whole oil industry, the rivalry power is lower.

We can see that, Saudi Aramco the competitive forces is high by Michael porter five forces analyze.

Recommendations

Unfavorable situation A:

Cancer Risk among Oil Refinery Workers

”The possibility that excess cancers result from occupational exposures in oil refineries has generated a great deal of interest. Ecological studies and case-control studies in the general population have suggested a positive association between oil Industry activity and cancer rates, with more direct evidence provided by studies of refinery employees. The eight investigations of cancer risks among refinery employees are critically reviewed. The methodological strengths and weaknesses of these studies are evaluated with an emphasis on the likely impact on the results. While the results are markedly inconsistent across studies, there is some suggestion of excess risks for melanoma and for brain, stomach, kidney, and pancreatic cancers. Problems with exposure characterization, latency, and potential confounding factors limit all of the studies that were reviewed.”

[(C)1984 The American College of Occupational and Environmental Medicine]

Solution:

Use robot to refinery oil

Nowadays, advanced science and technology are commonly use in manufacturing processes. We can use robot to substitute human work. The benefits of using robots for refinery oil processes are numerous and include: increased productivity; improved and consistent output quality (which can also minimize the need for subsequent operations) reduced demand for skilled operators who are hard to find; greater reliability and ease of use; ideal for working in difficult environments or on unpleasant tasks; the ability to work tirelessly on long shifts; and it can reducing the labour cost, the cost down so the profit can up!it can upgrade the company competitive power!

Unfavorable situation B:

Fire risk in oil refineries

Refinery oil is a extremely dangerous work, it is because in refinery factory have so many Inflammable materials, so it easily case variable fire. I can say that, it is a big loss with a firm! Why? It is because fire loss is a big cost in oil industry, it also case casualties, our organization will needs to response a lot of reasonable.

Solution:

Camera monitoring

A probabilistic method is presented to evaluate the economic value of fire monitoring by closed circuit TV camera in petroleum refineries. The proposed model is restricted to the analysis of risk reduction in an area where fires can be caused either by pump failure or by failure of valves and lines. The benefits come from reducing the time during which the fire grows undetected. Fire growth and expected values of losses are analyzed by a Markov model that includes five phases: (1) active undetected growth, (2) detection, (3) fire growth at the beginning of the firemen’s intervention, (4) fire control, and (5) fire extinction. The results (e.g., the expected net present value of the investment) show that the proposed monitoring investment is attractive for an illustrative example.