Table of Contents
1.0 Executive Summary
4
2.0 Introduction
5
3.0 External analysis
5
3.1 Porter’s FIVE FORCES
5
3.1.1 Threat of Substitute Products and Services
5
3.1.2 Threat of New Entrants
6
3.1.3 Competitive Rivalry in the Industry
6
3.1.4 Bargaining Power of Supplies
6
3.1.5 Bargaining Power of Buyers
7
3.2 PESTEL Factors
7
3.2.1 Political
7
3.2.2 Economic Factors
8
3.2.3 Social
8
3.2.4 Technology
8
3.2.5 Environmental
9
3.2.6 Legal
9
4.0 Internal Analysis
9
4.1 Value Chain Analysis
9
4.2 Capabilities for Competitive Advantage
9
4.3 SWOT Analysis
10
5.0 Evaluation of business strategy
11
5.1 Strategic directions (Ansoff matrix)
11
5.1.1 Market penetration
11
5.1.2 Product development
11
5.1.3 Market development
11
5.1.4 Diversification
12
5.2 BCG Matrix (Product Portfolio)
12
6.0 Critical success factors
13
6.1 Suitability and Feasibility
13
6.2 Acceptability
14
7.0 Recommendations
14
8.0 Conclusion
14
References
15
1.0 Executive Summary
Essar Energy is an Indian owned company established in 1998 as part of the Essar Group Conglomerate which has two major interests: power transmission and generation and oil and gas exploration and refinement. The power generation capacity of Essar Energy is said to be 4,510 Megawatts. The total oil resources amount to 2,109 mmboe. There are three major companies that are responsible for refining and marketing the petroleum products for Essar Oil Limited: Stanlow Refinery in the United Kingdom, Vadinar Refinery in India and Kenya Petroleum Refineries Limited in Kenya. In India, Essar Energy boasts of a countrywide network comprising of 1640 fuel outlets that retail its fuel and henceforth it is the second largest power generating company in the private sector.
Essar Energy’s operations are highly dependent on external factors. To this effect the thesis shall use PESTEL and Porters FIVE FORCES frameworks to analyze the firm’s external environment and the value chain analysis mapping shall be used to analyze the internal environment . PESTEl analysis revealed that Essar Energy’s business portfolio is affected by political instability, the ever dynamic population characteristics, the global recession and the Indian government’s policy on foreign invetsmnet in the energy sector. Porters FIVE FORCES on the other hand revealed that the firms porducts faces threat from green sources of energy such as solar and wind energy, the increasing competition in the energy sector gloablly, and the increasing bargaining power of both suppliers and consumers of Essar Energy’s products. In addition, analysis of the company’s internal environment has reaveled that the developmnent and expansion strategies that the Essar Energy has initiated is working in favor of the firm.
2.0 Introduction
The scope of this repost shall be limited to an environmental audit of Essar Energy’s business portfolio especially in relation to the energy sector. The report shall also make every effort to recomend strategies that Essar Energy can rely on to weather the storms of future global economic turmoil. The report will employ various tools including PESTEL, Porter’s FIVE FORCES, SWOT analysis, BCG matrix and Ansoff Matrix to analyze the company’s current strategy of the organization.
3.0 External analysis
3.1 Porter’s FIVE FORCES
3.1.1 Threat of Substitute Products and Services
In recent times there has been a renewed interest in exploration of other means of power generation such as solar and wind energy. Essar Energy has made efforts to address this threat through the generation of solar energy. In addition to that, Essar Energy has also acquired machinery to produce greener fuels. For instance, annulus heater technology has been adapted in the Mehsana Oil Block.
3.1.2 Threat of New Entrants
The increasing demand for petrol in India has led to an increasing number of new entrants into the market. Globalization has also contributed to the increase in the number of multinational companies in the refinery business. The new entrants are very aggressive in their marketing campaign which presents a threat to older entities such as Essar Energy. The services offered by the new entrants are geared towards retention and attraction of customers. On the other hand, the new entrants require intense investment of capital in order to match up Essar Energy financial power. One of the strategies that have been used by new entrants is the reduction of prices which is a major challenge to Essar Energy.
3.1.3 Competitive Rivalry in the Industry
The increase in the number of companies that refine and market oil and gas in India means that there is an increase in the competition that Essar Energy faces. The Shell Group is one of the greatest competitors of Essar Oil Energy. The former has set up petrol stations all over India. Other companies that compete with Essar Energy include ONGC oil and Natural gas Corp Ltd, Guru industrial values Pvt.ltd and Cairn India. It is therefore necessary for Essar Oil Limited to observe higher standards of production and also aggressively promote their products in order to rise above the competition.
3.1.4 Bargaining Power of Supplies
With the diversity of refinery companies in the petroleum industry, there is a reduction in the bargaining power that Essar Oil Limited possesses. This is because some of the conditions offered by the competition are more attractive to the suppliers hence difficult to match up to. The competing companies such as ONGC oil and Natural gas Corp Ltd are therefore getting commodities at lower prices.
3.1.5 Bargaining Power of Buyers
The presence of high quality goods from other industry players makes it necessary for consumers to consider the switching costs. Essar Energy is the second best provider of oil and gas products thus the bargaining power of the buyers is high.
3.2 PESTEL Factors
Political
Restriction on private partnership participation
Political Instability
Government Policies as in deregulation
Economical
Growth rate of the nation
Increase in taxation
Increase in fuel prices.
Social
A change in population as in demography
Increase in income level
Technological
Energy efficient machines
Security gadgets
Environmental
Energy consumption controls
Protected animals/Areas
Legal
Government has permitted 100 % FDI in almost all areas of oil and gas sector In India.
Source: Essar Energy Results For The 12 Months Ended 31 December 2011.
3.2.1 Political
To begin with, a change in the political guard means that there are different policies that will be promoted which may not necessarily promote a favourable business environment. Political unrest such the religious tensions witnessed in Kashmir region are a threat to given that distribution and supply chains are disrupted. The government also has policies which govern the participation of private companies such as Essar Energy in the exploration and the production of oil and gas resources. The culmination of such factors could interfere with the expansion and growth of Essar Oil Limited.
3.2.2 Economic Factors
In the year 2007, the world was hit by an economic recession. As a result of the crisis, most nations including India were faced with a myriad of challenges such as a rise in the interest rates, crisis in the real estate sector and credit crunches. This impaired business including Essar Oil Energy which still had to run in spite the unfavourable economic climate at the time. In spite the economic crisis, the consumption of petroleum products grew by 4% during that period. Essar Oil Limited met the demand through imports.
3.2.3 Social
The population of aged individuals in India is increasing at an alarming rate as compared to the population of young people. This means that the number of individuals with purchasing power has been on a sharp decline given that the old have a diminished capacity to work and therefore earn income. If the trend is anything to go by, then Essar Oil Limited could face a challenge in the future.
3.2.4 Technology
Essar has made considerable efforts towards adapting innovative technology that is aimed at producing greener fuels and acquires machines that are more energy efficient for the purposes of drilling, exploring and refining oil. The adaptation of the new technology makes it necessary for the workers to undergo training. The workers are often trained by the licensors. Some of the new forms of technology that have been adapted include: annulus heater technology, catalytic reforming unit and fluidized catalytic cracking unit.
3.2.5 Environmental
Essar Oil Limited has made efforts to comply with the environmental regulations. Regular audits are carried out in order to ensure that the company is complying with the set regulations. Environmentalists have vehemently campaigned for the protection of animals that are found in oil exploration sites. With the increasing need for oil and gas, there is competition for the resources. In the future, Essar Energy might have to redirect its exploration efforts as a result of the inadequacy of resources.
3.2.6 Legal
The government has allowed for 100% foreign investment in all sectors of the oil industry: exploration, refining, marketing and oil production. Multinationals have therefore invested heavily in the sector resulting in an increase in the competition in the industry.
4.0 Internal Analysis
4.1 Value Chain Analysis
In 2010, Essar acquired coal mines in Indonesia and Mozambique which have 450 mmt of mineable resources. The Essar Project which is a sister company to Essar Oil Limited is responsible for the technological advancements made by the company in the construction, engineering and the equipment used. 11 of the 17 oil blocks that are owned by the firm are located in India. The commercial exploitation of these assets presents great opportunities for Essar Oil Limited.
4.2 Capabilities for Competitive Advantage
The power plants as well as the Vadinar refinery have a strong record of high performance which is said to be between 94 and 99%. In order to address the delays that characterized the power sector in India, Essar Energy adopted several strategies: they built better relationships with major overseas suppliers, construction and engineering of the power plant by Essar Energy and modularization of the design. As a result, Essar Energy was able to cut down costs of designing and constructing the power plant, lower the maintenance and operational costs in addition to deliver in good time. This move coupled with a strong corporate responsibility programme give the strategy an upper edge.
4.3 SWOT Analysis
Essar Energy’s strength lies in their strong financial performance and vast experience accrued over the years. It is also one of the largest private petroleum refining companies in India with a very robust business portfolio. Its major weakness lies in its extensive focus on India with regard to power generation. As a result of the focus on India, Essar Energy has failed to exploit other opportunities in other nations in relation to power generation. On the other hand, the deregulation of the oil industry in Nigeria and Ghana presents a golden opportunity for Essar Energy in addition to the already available opportunities in the Indian energy sector. The Indian economy has also grown considerably in recent times therefore resulting in an increase in the demand for oil and gas. This presents another opportunity for Essar Energy. There are three major threats that Essar Energy faces: the rising unemployment has resulted in low disposable income. This situation is worsened by the fact that the economic recession has resulted to reduced spending amongst the consumers in India. Finally, companies such as Natural Gas Corporation Limited and Cairn India are competitive rivals of Essar Energy therefore presenting a threat to the company.
Source: Essar Energy Results For The 12 Months Ended 31 December 2011.
5.0 Evaluation of business strategy
5.1 Strategic directions (Ansoff matrix)
5.1.1 Market penetration
Essar is regarded as the second largest petroleum company in India. In order to reaffirm its market position, the company has innovated and adapted technology that allows it to be at the forefront of producing greener fuels that have a greater appeal to the consumers with a concern for the conservation of environment.
5.1.2 Product development
Essar Energy acquired coal mines in Mozambique in 2010 which presents an opportunity to boost the coal resources of the company.
5.1.3 Market development
Essar Energy has a wide distribution network in India responsible for the distribution of its oil and gas. The recent acquisition of the Stanlow refinery in the United Kingdom diversifies its market interests in the United Kingdom.
5.1.4 Diversification
Essar Energy is no longer entirely focused on exploration and refinery of oil and gas. In recent times, Essar Energy has begun exploring the production of solar energy and c0al mining in order to diversify their portfolio.
Source: Essar Energy Results For The 12 Months Ended 31 December 2011.
5.2 BCG Matrix (Product Portfolio)
With the increasing demand for oil and gas in India, Essar Energy products continue to have a huge demand in the market. In order to meet the demand, the company has to increase its capacity to refine and retail its products. There is also a need for the company to enhance its capacity to explore and refine oil resources in other regions.
Source: Essar Energy Results For The 12 Months Ended 31 December 2011.
6.0 Critical success factors
6.1 Suitability and Feasibility
Essar Energy aims consolidating its position as one of the largest energy groups in India. The company’s strategy is aimed at ensuring that the company steadily grows in the fields of marketing, refinery, oil exploration and the generation of power. Essar Energy’s sustainability solely lies in its diversification strategies hence ensuring that the firm remains relevant in the changing economic times. To this effect, the company’s financial muscle plays a crucial role in ensuring the company’s business portfolios are not only sustainable but also economically viable.
The fact that Essar Energy has a global foothold with regards to fossil fuel exploitation and refining means that the current business strategies are feasible. However, the concentration of the company’s power generation operation in the local Indian market only is not feasible. Thus, for the firm to be fully feasible the scope of power generation must be enlarged to cover the rest of the world.
6.2 Acceptability
The current company strategy has been effective so far in that their profits have remained steady over the years while they have consistently managed to lower their production costs through the use of technology. Their corporate social responsibility programme has endeared them among the consumers thus they should continually strive to keep the standards.
7.0 Recommendations
Essar Energy should come up with a tacit strategy aimed at exploiting the opportunities to exploit the oil and gas resources in Ghana and Nigeria. The current strategies should be geared towards making the company the number one private petroleum company in India.
8.0 Conclusion
The analysis indicates that Essar Energy is strategically placed in the power sector. There is a need to look for opportunities to merge with multinational companies in order to increase the bargaining power and strengthen their position in the market.
References
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