Imperial Oil, founded in 1880 is a giant petroleum producing company, with its headquarters located in Calgary, Canada. It is the second largest integrated petroleum company in Canada and has registered a phenomenal growth since its inception. Its operations consist of exploring and producing oil, manufacturing and distributing petroleum products for energy sources, producing chemicals for industrial and domestic use through innovative and sustainable technology. ( Annual report, 2016) reports a cash generation of $22 bn from operations only during 2010-2015. Its performance can be evaluated from the growing dividends paid to its shareholders in last 21 consecutive years. Imperial Oil boasts of great organizational priorities such as prudent investments, efficient cost management and innovative technologies to maintain its industry leading position (Annual Report, 2013).
It is evident that Imperial Oil has consolidated its position in the Canadian Petroleum Industry by implementing an exemplary strategy based on using its core competencies and displaying an astute perception of the opportunities. This paper intends to investigate the strategies and the core competencies which have helped Imperial Oil to attain this position. An analysis of the core competencies and financial performances is presented to gain an insight into the tangible and intangible resource management of Imperial Oil. An analysis of the primary and secondary value chain network and Key Success Factors is undertaken to understand the plans that has succeeded in gaining a competitive edge for Imperial Oil in the petro chemical industry.
Some of the key terms which have been used to express the advancement of Imperial Oil have been explained using scholarly resources to impart a greater understanding of the concept of strategic management and its elements. Strategy has been used as a term that covers the process of analyzing, selecting and implementing a course of action to reach an organizational objective. (Starkey & Dobson, 2004) has combined two approaches towards strategic management and concluded that it consists of all such processes that enable an organization to respond and survive in an unpredictable atmosphere. The authors have further asserted that in order to understand the strategy of a firm one has to study the factors that have brought the firm its present position. This may include an understanding of the reasons for producing its particular range of products and services and its plans for the future. A model depicting strategic processes of an organization proposed by the authors has been presented in the appendix 1.We follow the same analogy for Imperial Oil to understand its strategies. A value chain analysis based on Porter’s model (1985) has been conducted to present Imperial Oil’s integration of its three major businesses along with its partnership with Exxon to understand how the company uses its value chain to build a competitive advantage in the Industry. A resource based analysis of tangible and intangible resources is the first step towards assessing the available resources and their deployment to get a cost efficient and value added performance as well to realize its future goals. Analysis of present resources also provides a basis for core competency analysis.
Resource Based View Analysis
The Resource Based View (RBV) analysis was proposed by Barney & Clark (2007), who stated that a company enjoys a sustained competitive advantage when it is creating more value than the company just behind it in its industry and when other companies cannot duplicate the benefits of this strategy. Since resources are distributed unevenly across companies, sustained competitive advantage must be derived from the heterogeneous and immobile resources performance (Barney & Clark 2007).
Tangible Resources
Resources that can be measured using physical units are tangible resources. The significance of Tangible assets does not lie in its resale value only but on its ability in a business organization to produce goods or provide a service (Nordmeyer, 2013). These resources may also be used as collateral for loans or to improve the company's cash flow through sale. Tangible assets increase a firm's market value. Tangible resources may be classified into financial resources, technological resources and physical resources. The resource based view (RBV) analysis attempts to evaluate the available resources and its potential in building a competitive advantage in the Industry. Therefore we evaluate the tangible resources of imperial oil to estimate its present status of available resources and analyze them to formulate a strategy for the future based on them.
Financial resources. Financial condition or availability of funds can be determined through its value of capital, fixed and current assets, investment and cash reserves. Imperial oil has registered a profit for 21 consecutive years and has been paying dividends to his shareholders. In 2010, Imperial distributed $364 million to shareholders through dividends and share repurchases. The investor report (2016) states that the company has raised a total cash revenue of $57 billion in the period 2010- 2015, from operations, sale of assets, dividends and investments. The financial ratios of the company have been shown in the Appendix 2.
The Analysis of its financial performance shows that the company has invested sensibly in competitively advantaged assets with long term value. Its investments reflect a disciplined approach and efficient cost management strategy that has enabled it to stay ahead of the Industry till now. However, the ever increasing competition has induced it to base its investments upon prudent scope of new investments (Corporate Overview, 2016), aiming for improvement in productivity of its asset mix. It can be inferred that the financial position of the company is quite stable. The future financial strategy focuses on increasing its revenues from expansion of operations in Oil sands at Cold Lake, Alberta and controlling costs and generating superior long-term investment returns to its shareholders. Imperial Oil Summarizes its financial management strategy in its plans of delivering competitively priced supplies to customers and superior return to shareholders (Annual Report, 2010). Imperial Oil claims that its investment decisions have long-standing implications so they do not rely on short-term fluctuations in commodity price for making long-term investment strategy. It plans to invest between $35 and $40 billion by 2020 primarily future growth projects that will more than double upstream production scales by 2020.
Technological Resources. The exploration and extraction of Oil by Imperial Oil is carried out using the latest technology in oil and gas extraction. The downstream and chemical projects have concentrated on developing alternate sources of energy based on technological innovations. In 2010, Imperial received regulatory amendment approval for its technological improvements to enhance environmental activity; lowering land use footprint through directional drilling technique, cogeneration technology for greater fuel efficient production of steam and electricity and technology to control air emissions of Sulphur (Annual Report, 2012). The technological resource analysis can be based on the fact that Imperial oil has used it not only to increase its production capacity but also for conserving the ecological atmosphere. The operations of IO has been grouped under three categories; upstream, downstream and Chemicals. The upstream production consists of oil exploration and extraction, downstream is concerned with manufacturing and refining petroleum products and chemical industries. The Chairman’s speech (2009) gives an insight into the strategies followed in all three operational processes.
The upstream strategies include ensuring operational integrity, identifying and following profitable exploration opportunities, investing in projects that result in better returns, and optimize resource profitability through technology up gradation. The efficiency of the strategy can be judged from the fact that total proved and non-proved resource base increased to 15 billion oil-equivalent barrels in 2009 after royalties, which represented more than 150 years of production. It refined the operations in Cold Lake site development and optimized the technology in the industry to triple bitumen extraction rates, reduce surface footprint, and decrease freshwater consumption by 85 percent per unit. Many technological developments and research patents that Imperial initiated at Cold Lake now serve as the basis for the industry’s turnkey projects. On the downstream business, IOL encountered an economic downtrend due to the global recession, yet managed to hold on to its resources by pursuing a strategy of maintaining superior operations, steering the industry in efficiency and effectiveness, capitalizing on the integration of activities and using prudent investments for better returns. This has resulted in maintaining strong leadership position in Downstream and Chemical businesses.
Analysis of the strategies followed for technological developments reveals that Imperial Oil has always focused on long term gains instead of short term returns. This is perhaps the reason why it retained its industry leadership even during the global recession when many companies went bankrupt and survived with inputs from the State and by downsizing its human resources. Imperial Oil has always professed to follow a strategy of responsible development and has used technological research to support this strategy; the reduction in toxic emissions and an effort to conserve the natural resources by adopting efficient technology affirms its commitment for responsible development. This not only assists in attracting the goodwill of people but also improve its productivity by employing technology that is more efficient. Imperial Oil has many expansion plans rolling using technological innovations like the Nabiye Project, Kearl Oil sands which will enable it to extract bitumen using proven technologies and integrate paraffinic froth treatment technology resulting in more energy efficiency and a higher grade of bitumen. All this has been accomplished through investments in assets which added to the turnover and gain a competitive advantage by gaining access to 250 million barrels of previously undeveloped resource. The future strategy governing technological advancement consists of recognizing the future trends in energy efficiency, sustainable development and demand for Oil and petroleum products and investing in expansion of operations to meet the projected energy demands through responsible development.
Physical Resources. Physical resources constitute production processes and infrastructure and measurable components of human resources such as strength of manpower in different locations, qualifications, training and education, turnover rates and productivity rates per employee.
Imperial Oil produces oil and gas resources using world-class technology using best practices for responsible development. It applies modern modeling and advanced boring facilities and process engineering for refinement and treatment of oil and natural gas, efficiently and safely (About Imperial, 2009). It invests in the development of innovative technologies that improve resource recovery such as injecting steam underground to heat the bitumen so that it can be pumped to the surface. The key production assets are identified as wholly-owned heavy oil operation at Cold Lake, 25 percent interest in Syncrude, world's largest oil sands operation and oil and natural gas production fields across Western, Northern, and Eastern Canada (About Imperial, 2009).
As per the report (2009), Imperial oil is a major producer of heavy oil at the Cold Lake in situ operation. Cold Lake presently produces 140,000 barrels of crude oil approximately per day and is the largest thermal in-situ operation in the world. At Syncrude, an integrated oil sands mining, extraction and upgrading facility north of Fort McMurray, Alberta, there is a total capacity greater than 350,000 barrels of synthetic crude per day, as per key production facts reports (2009). It is a leading producer of conventional crude oil and natural gas, and operates several oil and gas wells in Alberta, across Western Canada and the Northwest Territories. Here production has reached a saturation stage as oil and gas reservoirs are being increasingly depleted. To maintain profitability of this business, operating efficiencies, cost controls and the use of enhanced recovery technologies are incorporated.
The success of Cold Lake operations is attributed to R&D where $300 million was invested since the project's commercial start-up in 1985. Since then, resource recovery rates have nearly doubled to about 30 percent, while only a fifth of the water required in 1985 is being used currently.
As a future strategy IOL is scanning new opportunities, such as the Nabiye project which would add new facilities and 30,000 barrels a day to production. On the human Resource front Imperial Oil relies on professionals from a wide range of departments, including Controller’s, Treasurer’s, Law, Procurement Services, Human Resources, Tax and Surplus Property Management for administrative purposes. But it recruits professionals from Geology, Geophysics, Engineering, Environmental Science, business Administration for its core area. The tangible part of human resources can be measured in terms of its work force strength in different locations and at various levels of the organization, the investment in the salaries and other schemes, training and development costs, etc. Imperial Oil provides valuable opportunities to learn grow and evolve for its workforce because of its industrial leadership position. Imperial Oil gives the necessary impetus to its employees for continuing their learning and development in their chosen vocation, as well as in obtaining an insight into the other aspects of the oil and gas business. The tangible results of training and development programs can be measured as the increase in productivity or turnover per employee. At present it employs a workforce of spread over its numerous locations from coast to coast.
An analysis of the human resource procurement and management strategy reveals that Imperial Oil believes in recruiting fresh candidates preferably using its own recruitment methods. It then trains the employees to attain their full potential in their respective fields. Since the Oil and gas industry requires highly specialized skills in certain areas like extraction, refining and production, the organization imparts a multifaceted training program that equips the employees with the skills necessary for the varied descriptions of the jobs. It also offers a remuneration package that is best in the industry to compensate for the field jobs in remote locations as well as provides retirement and other benefits to its workforce to win their commitment and loyalty. However, its HR policies reflect an efficient work life balance design for its employees.
The future projects of Imperial Oil described above will require skilled manpower at its various locations. In order to fulfill its HR requirements it has a recruitment and selection plan in offing to be conducted in a step by step manner, followed by a well integrated learning and development program. Imperial Oil claims that its dedicated manpower offers it a competitive advantage in the industry which cannot be equaled by any of its rivals (Annual Report, 2012).
Intangible Resources
Resources which cannot be represented by fixed quantities are known as intangible resources. Intangible resources have a significant impact on strategy formulation. The main intangible resources of a firm are the competence of its human resource, innovations in technology and reputation as well as its organizational capabilities (Ichrakie, 2013).
Imperial Oil has a competitive advantage in both its intangible assets and capabilities. It exhibits an influential leadership at the top, innovative technology in its process of responsible development and a strong financial credibility among its shareholders. All these assets make a strong impact on its strategy of assessing the future energy needs and sustainable development in steering the company towards its objectives through innovative technology. The investors have supported IOL’s ventures because they are assured of receiving attractive dividends on their investments from previous experience.
If a VRIO (Value, Rarity, Inimitability, Organization) analysis of the resources is undertaken, it is evident that Imperial Oil enjoys a Competitive Advantage over others in the industry in certain tangible and intangible resources. Its access to a large area of natural Oil Sands and gas basins adds value to its operations, as well as is a rarity which cannot be imitated or duplicated. It has the potential of remaining ahead of the industry using this asset in the future. Similarly its competent and trained workforce whose loyalty is ascertained through remuneration which is best in the industry and an effective work life balance policy provides a competitive advantage of it. The financial stability of the resources and the growth in revenue in the last 5 years is another favorable factor which enabled it to maintain its industry leadership through value integration of all its three operations during recession and distribute dividends.
There is a marked competitive advantage evident in the VRIO analysis of intangible resources too. The intellectual advantage can be judged from a leadership that has enabled it to show profits for 21 consecutive years through innovative expansion of its operations, prudent investments and responsible development. The value chain integration has also provided the necessary goodwill from all its stakeholders and supports its unprecedented growth.
Value Chain Analysis
Value chain analysis is a powerful tool used to identify the key processes within the organization that forms the value addition system which provides a sustainable competitive advantage for a firm. (Porter, 1985) presented the value chain model as an interdependent system or network of activities, connected by linkages which provides a vital source of competitive advantage. The value chain analysis is concerned with the interaction of two areas divided into primary and support activities (Appendix, Figure 2). Primary activities are essentially linked to production, while support activities builds the necessary infrastructure for value addition operationsPrimary activities Primary activities, (Porter, 1985) include; (1). Inbound logistics or processes consisting of receiving the raw materials from suppliers, storage, handling and movement in the firm.(2). Operations are activities related to manufacturing or service provisions (3). Outbound logistics facilitate distribution of the final product or service to the end users. (4). Marketing consists of promotional activities aimed towards building awareness about the product (5). Service after sales
Secondary activities The support activities comprise of Procurement which deals with all activities related to purchasing the raw material, Human Resource Management function executes responsibility of recruiting, training, motivating and rewarding the workforce of the company, technology development that is concerned with technological innovation, training and knowledge and Firm Infrastructure which includes administrative control, finance, accounting, and corporate strategy etc.
Value Chain Analysis of Imperial Oil
Imperial Oil has used the forward and backward integration strategy in its value chain and presented a competitive advantage that cannot be rivaled easily. Its upstream, downstream and chemical businesses have been synthesized into a value chain in which its own products from the upstream projects act as the raw material for its downstream and chemical businesses. Also in order to strengthen its value chain Imperial Oil has built a pipeline from Alberta refineries to supply the market. However it has also started its outbound operations through rail service to avoid delay in delivery because of pipeline problems. It allows quick delivery of crude to refiners, both on the West Coast and East Coast and all across the U.S., adding value to a long-life resource thus providing a service that has given a competitive edge to the company. Its partnership with Exxon Mobil has been a significant step to access distribution outlets across Canada. The degree of integration of the value chain can be inferred from the fact that it utilized 92% of its upstream capacity to feed the downstream and chemical business to focus on premium customers through high capability distribution outlets and profitable partnerships (Annual Report, 2013). The value integration and synergy analysis can be derived from the 2015 annual report which presents a framework of all three businesses that facilitate equity crude placed in all netback market; cost advantaged feed stocks for refineries and chemicals, highest value sales channel and optimized transport network.
Imperial Oil has also integrated its supporting functions like human resources, procurement and other administrative functions into its value chain to build a system that ensures a cost efficient and uninterrupted supply to its customers. Its specialized and efficient human inventory offers it a margin according to Porter’s model and keeps it ahead of the industry. Even the investments that are made by IOL for expansion are driven by its value adding capacity. According to reviews, the acquisitions by the company must fit into its value chain to produce long life viability and offer a competitive advantage through the application of technology or operational know-how to deliver a result above and beyond what others can do with it. However the best support function that has added an exclusive value to its operations is its strong R&D which has been dubbed by its CEO Richard Kruger as the lifeblood of Imperial that creates sustainable value through continuous innovations (Statsny, 2015).
Core Competency Analysis
Every business has a specialized and strong area which it uses advantageously to gain an edge over its competitors. This could be superiority in technology, leadership, access to raw material, cost or quality leadership etc. Known as core competency, this specialized area can be utilized to create an exclusive consumer segment and carve out a niche for itself in the industry. Identification of the core competency can be done by the VRIO analysis and further divided into analysis of organizational capabilities and key success factors. Organizational capabilities consist of specific knowledge, skills and abilities. A VRIO analysis helps us to determine the key success factors responsible for the current performance of the company.
Organization capabilities analysis of Imperial Oil
An analysis of Imperial Oil’s resource utilization and value chain analysis helps us in identifying its organizational capabilities. Subjecting them to VRIO analysis helps us to assess the key success factors that have enabled it to reach its present status of industry leadership. Kruger has identified some areas which are exclusive to Imperial Oil, an ongoing R&D process which provides technology options as and when needed, a competitive spirit, its access to large areas of oil and gas producing basins, its transportation network and imparting value addition to its shareholders. Kruger’s own experience in the Oil and gas industry has sharpened his instincts and bestowed upon him the leadership skills that enabled him to take decisions which have brought the company to its current position of technological leadership, financial stability and operational efficiency in all segments of its business.
VRIO Analysis. AVRIO analysis reveals that technology has helped Imperial to obtain many patents and proprietorship rights of many processes, something that not only added value to its operations, but also turned out to be rare. Thus technology has provided Imperial Oil with a competitive advantage both in cost and quality leadership in bitumen recovery. This continuous up gradation in technology has been possible because of its substantial investments in R&D. Therefore on the basis of the VRIO analysis R&D in technology can be identified as one of the core competencies of Imperial which has been confirmed by Kruger (Statsny, 2015). Technological inputs for ecological sustainability have been instrumental in getting sanctions for its Kearl Project which has helped the company leap ahead of the industry average in production.
Another resource that has distinguished Imperial is its access to vast reserves of Oil and Gas and its strategy of acquiring and developing the oil producing sites to meet the projected energy requirements of future. This has helped it to maintain the feed stocks for its refineries and chemical plants and add to their cost efficiency. Also this has assured its customers of uninterrupted supply of crude even during industry shortage. As per the VRIO analysis this factor rates quite high in value, rarity, inimitability and originality making it a core competency.
The consistent growth of Imperial reflects an exemplary foresight of its leadership, the ability to withstand economic fluctuations and invest carefully in profitable projects that adds value for its shareholders. This has conferred on it a reputation of delivering profits even during tough times, an image that wins the confidence of all its stakeholders. A high VRIO rating can be assigned to this asset of the company.
Key Success Factors
Key success factors or KSFs are those features of an organization that have contributed substantially towards its successful performance. Technological R&D, access to massive supplies of oil and gas and astute leadership are resources that have been marked as three core competencies of the company. All assets three of the mentioned above have been identified as the KSFs. All three of these factors individually and in combination have imparted Imperial Oil a distinguished position in the Canadian Oil and Gas sector, enabled it to sail through rough weather without downsizing and maintaining the profitability of its businesses year after year. A discerning and able leadership has enabled it to take a proactive approach toward cost cutting and responsible development making it a company which has earned the good will and confidence of its customers, environmental regulators and shareholders which too can be termed as rare and imitable assets for the company.
References
About Imperial. (2009). Retrieved from : http://www.imperialoil.ca/canada-english/about_what_upstream_produce.aspx
Annual Reports. (2009, 2010, 2012, 2013, 2016). Retrieved from: http://www.imperialoil.ca/Canada-English/Files/
Chairman’s speech. (2009). Retrieved from :http://www.imperialoil.ca/canada-English/files/n_s_speech100429_bhm.pdf
Investor days: Corporate overview (2016). retrieved http://www.imperialoil.ca/Canada-English/Files/imperial_corporate_overview.pdf
Barney, J. B., & Clark, D. N. (2007). Resource-based theory: Creating and sustaining competitive advantage. Oxford University Press on Demand.
Ichrakie, F. (2013). Intangible Resources as Key Determinants of Job Network Providers' Success: A Resource-based Study. Australian Journal of Business and Management Research, 2(11), 43.
IMO key Statistics: Imperial Oil Ltd. (2016). Retrieved from: http: // www.marketwatch.com/investing/stock/imo/profile
Nordmeyer, B. (2013, August). Tangible vs. Intangible Resources. Retrieved from:
http://yourbusiness.azcentral.com/tangible-vs-intangible-resources-20874.html
Porter, M. E. (1985). Competitive advantage: creating and sustaining superior performance. 1985. New York: Free Press.
Statsny, R.P. (2015, November). Playing to win: Imperial Oil wins Producer of the Year 2015.Oilsands Review, Retrieved from :http://www.oilsandsreview.com/index.php/oilsands-news/oilsands-business-features/11495-imperial-oil-wins-producer-of-the-year-2015
Starkey, K., & Dobson, P. (2004). The Strategic Management Blueprint.
Appendix 1
Figure -1 Strategic management model (Starkey & Dobson, 2004)
Figure. 2 Value Chain Model (Porter, 1985)
Financial ratios of Imperial Oil ( Source: www.marketwatch.com/investing/stock/imo/profile, 2016)
Valuation
P/E Current
30.73
P/E Ratio (with extraordinary items)
57.50
P/E Ratio (without extraordinary items)
34.15
Price to Sales Ratio
1.52
Price to Book Ratio
1.63
Price to Cash Flow Ratio
17.70
Total Debt to Enterprise Value
0.18
Efficiency
Revenue/Employee
4,418,947.00
Income Per Employee
196,842.00
Receivables Turnover
16.15
Total Asset Turnover
0.60
Liquidity
Current Ratio
0.68
Quick Ratio
0.38
Cash Ratio
0.04
Profitability
Gross Margin
11.70
Operating Margin
7.27
Pretax Margin
7.63
Net Margin
4.45
Return on Assets
2.67
Return on Equity
4.88
Return on Total Capital
3.66
Return on Invested Capital
3.91
Capital Structure
Total Debt to Total Equity
36.35
Total Debt to Total Capital
26.66
Total Debt to Total Assets
19.73
Long-Term Debt to Equity
28.02
Long-Term Debt to Total Capital
20.55
