Analysis of SeaHorse Oil Company - Example

Business Plan Table of Contents Business Activity 3 Mission and Vision 3 Objectives 3 Industry analysis 4 Porter’s Five Force Analysis 4 PESTEL analysis 6 Market size and Growth 7 Competitor Analysis 8 SWOT Analysis of SeaHorse Oil Company 11 Competitive advantage 13 Market strategy 13 Product 14 People 15 Price 15 Promotion 16 Financial Analysis 16 Forecasted Sales Revenue (2016-2018) 16 Forecasted Income statement 17 Forecasted Balance Sheet 17 Cash Flow Statement 18 Breakeven Analysis 18 Resource and Financing 18 Managerial Capabilities 19 Risk and uncertainty 19 Reference List 21 Appendices 23 Business name and address: SeaHorse Oil Company Business form: Limited company Business Activity Providing business plan is mandatory for starting any business in a country as it highlights on basic requirements for the same. Business plan needs to be sanctioned by government authorities before actual execution of plan. The current business plan emphasises on operation and product of a new business that is to be opened in Saudi Arabia. SeaHorse Oil Company will be an oil provider in Saudi Arabia. It will be a limited company. Saudi Arabia is chosen for setting up the oil and gas company because it is regarded as the most important oil producer in the world with rich reserves of oil. SeaHorse will aim at producing and supplying crude oil and petroleum in Saudi Arabia. Saudi Arabia holds about 25% of oil reserves in the world. Oil has rendered Saudi Arabia a country of strategic importance (Yang, Zhu, and Liu, 2012). SeaHorse will have four main operating departments: International Relations, Commercial department for collecting revenue from sales, data management and Service department. The main value proposition of Sea Horse is that it extracts crude oil from the sea belt and ground by creating minimal impact on the environment. It also refines crude oil in order to obtain petroleum very efficiently. Mission and Vision Every company has to establish a vision for operating in long run. The vision helps the company to maintain a constant performance throughout the year and progress towards improvement. The vision of SeaHorse will be: to become the top performing refinery and oil supplier in the Middle East. The mission statement will highlight the deliverables to its shareholders. The company will aim at extracting and supplying crude oil to customers in Saudi Arabia. The company also looks forward to achieve operational excellence by exporting oil to neighbouring countries. SeaHorse will conduct its business in a safe and environment friendly manner, which is also economically optimal. The company will deliver best products and services to customers through its employees who will be highly efficient and can work in team to achieve a particular goal. They will be motivated for providing their best performance, which will lead to success of the company (Yang, Zhu, and Liu, 2012). Objectives The main objectives of SeaHorse will be the following: 1. The company aims at delivering its best to the shareholders who are also customers. 2. The company will recognise potential of its employees and motivate them so that they work efficiently. 3. The requirement of customers will be met by providing the exact required service. 4. SeaHorse also aims at maximising margins of the refineries. 5. The company aims at reducing the structural cost. 6. SeaHorse aims to maintain a robust management system with appropriate employee-employer relationship. 7. The company desired to increase the revenue by 5% after two years. Industry analysis SeaHorse belongs to the oil and gas industry, which is prominent in Saudi Arabia owing to rich oil reserve. Oil has elevated the position of Saudi Arabia in world market, positioning it as most strategically significant nation in the Arab world. The revenue from oil supports construction of wide national infrastructure. This also helps in funding social welfare program for the nation, where there is 28 million people, with only 22.5 million Saudi Arabian citizens (Yang, Zhu, and Liu, 2012). The petroleum sector of Saudi Arabia holds 75% of revenues. The value accounts for 45% of GDP and 90% of export earnings. It is observed that about 5.5 million individuals in the country work in the oil and gas sector (Yang, Zhu, and Liu, 2012). So, this highlights the reason behind considering oil and gas sector of the country as the most important one. The hydrocarbon sector of the nation is dominated by the world’s largest oil company, Saudi Aramco. The company has made plans to invest US $90 billion for expanding the capacity of crude oil and refining for the next five years (Yang, Zhu, and Liu, 2012). It can be inferred from the above discussions that Saudi Arabia is an appropriate place to open a new oil company for extracting and supplying crude oil and petroleum to the mass. The industry can be analysed with the help of Porter’s Five forces, which will identify whether SeaHorse will be successful in continuing its business in Saudi Arabia or not. The oil and gas industry has experienced dramatic changes for last ten years and have become highly competitive as a number of competitors have come into existence (Verrastro, Pumphrey and Hegburg, 2011). Porter’s Five Force Analysis Five Forces framework devised by Michael Porter’s indicates the degree of competition in an industry. It is dependent on five competitive forces: threat of substitutes, threat of entrants, power of suppliers and buyers and rivalry among companies in the industry. Nevertheless, success of a company is dependent on performance in its respective industry (Bunse, et al., 2011). The structure of the industry drives profitability and competition. To reveal the current profitability of an industry and predict future trends, it is necessary for a company to evaluate above mentioned five competitive forces. The five force analysis of oil industry in Saudi Arabia is highlighted below. Rivalry among the competitors - High Competition in Saudi Arabian market is high as Saudi Aramco dominates the market with maximum sale of barrels. Saudi Aramco is a state owned player, thereby enjoying highest preference during important deals of refining and expansion. So, it can be stated that SeaHorse will encounter huge competition from Saudi Aramco. Apart from the difficulties in local market, the company will have to face challenges from global market. The global market is dominated by oil producer giants like, Qatar Petroleum, Abu Dhabi National Oil Company and Shell. Hence, competition is high for SeaHorse in Saudi Arabian market as well as global market, on planning to expand internationally (Wei, Patadia and Kammen, 2010). Threat of new Entrants - Nil Oil industry is a very concentrated one. It is very cumbersome to explore oilfields, set up production units and create distribution networks. It requires huge investments and also consumes immense time. Actions pertaining to this industry also require approval from regulatory bodies and government. So, SeaHorse will have no threat of new entrants in Saudi Arabian market because of above mentioned factors. However, SeaHorse will have to undergo above formalities in order to set up the business in Saudi Arabia. Threat of Substitutes - Nil The depleting reserves of oil have accelerated search for substitutes like, solar power, bio fuels and nuclear power. Even so, currently, no such technology could be devised, which can form the exact substitute of petro products. Thus, it can be inferred there is practically no threat of substitutes for oil or petro products in Saudi Arabian market. Supplier Power - Nil SeaHorse will explore and drill oil for its business, which lowers dependency on suppliers. Therefore, SeaHorse will not encounter any problem in form of power of supplier. Buyer Power – Nil Saudi Arabia is well-known for its rich oil reserves. The oil companies in Saudi Arabia have good hold over customers as the latter has no impact on pricing of the essential goods. The customers cannot dominate global oil prices and thus, their bargaining power are nil in this industry. PESTEL analysis Political The political environment of a country is very important for a company. SeaHorse will have to receive approval from the government for starting business. So, plan for setting up the business in Saudi Arabia can be affected by governmental rules and regulations. The policies of SeaHorse will be dependent on government approval so as to maintain production and price of oil. This reliance on government can create challenge for the company for devising self-regulating strategies, which will trigger growth in Saudi market. Other than government, operation of SeaHorse can be impacted by increasing unrest in politics around the world, majorly in Saudi Arabia and other Middle East countries. Economic The Saudi Arabian economy relies upon oil distribution and production. The main driving force of the economy is petroleum. 75% revenues of the country are incurred from sale of petro products and it also includes 90% import of products. This had made large government owned oil companies like, Saudi Aramco, strong players in market. Apart from that, economic conditions of Saudi Arabia are very vital for the company as it controls the international oil pricing (Verrastro, Pumphrey and Hegburg, 2011). Social Saudi Arabia is regarded as an Islamic country. Islamic methods are accepted by the society. SeaHorse will be private limited company under the government and hence, it is anticipated to provide employment to nationals of Saudi Arabia. The company is expected to collect enough revenue in order to add value to the economy. It is predicted that SeaHorse should implement Corporate Social Responsibility (CSR) strategy for contributing towards improvement of the society and community as a whole (Checkland, 2013). Technological Technological development is needed for success of SeaHorse. Large scale projects will require advanced technologies, which can perform certain task promptly and efficiently. The global shift from greener and cleaner technology can assist SeaHorse to achieve desired goal in Saudi Arabian market. Environmental Environmental issues are most common in oil sector as oil manufacturing companies pollute the surroundings to a great extent. The business activity of SeaHorse can bring in controversy for the company, but market position has to be maintained by taking necessary steps to reduce emission and control pollution. Legal Numerous legal implications are developed for oil companies so as to regulate environmental issues globally. This particular trend of imposing legal rules has become prevalent in Saudi Arabia. The first environmental law was introduced in 2001. Even so, the law has succeeded in eliminating industrial wastes and limiting pollution as all companies need to abide by the rules. Market size and Growth The global consumption of oil is about 87 million bbl/d. The following figure elaborates the country-wise share of oil consumption. Figure 1: Country-wise consumption of oil (Source: Parsa, n.d.) From the above table, it is evident that Saudi Arabia consumes highest barrels of oil in the world. Thus, it can be highlighted that starting an oil company in such a country will be profitable for SeaHorse. The growth in oil industry is tremendous with respect to consumption and export around the world. Few dominating companies globally are listed below along with their production capacity (Xiao, 2011). Figure 2: Crude oil production companies (Source: Parsa, n.d.) It is evident from the above figure that Saudi Aramco is the highest producer of crude oil in the world and is situated in Saudi Arabia. This is a serious threat for SeaHorse. However, SeaHorse can establish its own market in Saudi Arabia and even plan for international expansion after a successful inception. Competitor Analysis The main competitor of SeaHorse in Saudi Arabia is Saudi Aramco. Saudi Aramco is regarded as the most expensive company worldwide with asset valuation of $2.2 trillion to $7 trillion. It possesses the highest number of crude oil reserves in Saudi Arabia and Middle Eastern. Saudi Aramco runs the biggest distribution network of hydrocarbon in the world. The main business activity of the company is exploring, refining and drilling of oil along with distribution of the same via shipping. The SWOT analysis of Saudi Aramco is given in the table below: STRENGTHS The company enjoys access to huge crude oil and natural gas base with increased production facilities Use of advanced technology and high capability to handle difficult projects. Local government provides strong support, which has enabled the company to become successful to a great extent. Saudi Aramco reigns in a monopolistic market. WEAKNESSES The company highly depends on single commodity i.e. crude oil. It has smaller downstream capacity It has small geographical reach Incapable of devising strategies independently. OPPORTUNITIES Rise in oil prices. Saudi Arabia is an emerging market for oil industry Increase in demand of oil due to development of new markets. Penetration opportunities and development of markets are available in Saudi Arabian and international markets. THREATS Impact of economic recession on demand. Increase of domestic demand for oil can take away the share of exports. Public policy against emission and pollution and environmental legislation. The SWOT analysis of Saudi Aramco indicates that it is the largest company in Saudi Arab with respect to asset and oil production. Hence, it can be inferred that SeaHorse will have to encounter several challenges from Saudi Aramco in context of competition. Other than Saudi Aramco, SeaHorse will have face competition from other companies operating globally. The companies are Qatar Petroleum, Abu Dhabi National Oil Company and Shell. Saudi Aramco, the main competitor of SeaHorse, operates in monopoly in the domestic market; so, comparison is drawn between strategies adopted by abovementioned companies, Saudi Aramco and SeaHorse in Strategic Group analysis. The figure provided below indicates Strategic Group analysis of the competitors globally (Amin, Razmi and Zhang, 2011). Figure 3: Strategic Group Analysis (Source: Author’s creation) From the above figure, it is evident that Saudi Aramco has moderate diversification of products and geographic coverage; whereas, Qatar has the least coverage and diversification. The highest product diversification and geographic coverage is achieved by Shell and Abu Dhabi National Oil Company. SeaHorse would incorporate small diversification, but moderate geographic reach so as to penetrate into a number of nations around the world with crude oil products (Siegler, Thompson and Schneider, 2011) SWOT Analysis of SeaHorse Oil Company The SWOT analysis of SeaHorse Oil Company helps in elaborating on factors that will add value to the company. The strength and weakness of the company are regarded as its internal ability/disability; whereas opportunity indicates external ability/disability of the same. The following can be depicted as strength, weakness, opportunity and threat of SeaHorse Oil Company: Figure 4: SWOT analysis of SeaHorse Oil Company (Source: Author’s Creation) Strength 1) SeaHorse can capture strong market position in Saudi Arabia as majority of world oil reserves is available there. 2) The company can spread its geographic presence by entering into joint ventures with different oil companies in developing nations. 3) It will integrate operation efficiently in order to achieve a good market share in Saudi Arabia (Baaij and Slangen, 2013). Weakness 1) One of the major weaknesses of oil companies is that oil spill from the reserves can spoil company image as environment is damaged. SeaHorse has to encounter this problem if it does not take necessary steps to avoid the same. 2) The law suit of Saudi Arabia plays an important role in framing policies, which protect the environment. These policies will restrict the business of SeaHorse by way of limiting the extraction process of oil (Boyle, 2007). Opportunity 1) SeaHorse can also concentrate on producing alternate source of energy. 2) In international grounds, SeaHorse can involve in joint ventures and collaboration in order to expand business globally. Threats 1) The environmental rules and regulations can threaten existence of the company. 2) Intense competition is another threat for the company. The biggest threat to SeaHorse in Saudi Arabia is Saudi Aramco. Competitive advantage The competitive advantage of a company is essential as it acts as a way of creating differentiation. The following can be regarded as the competitive advantage of SeaHorse: 1) Profit Maximization: SeaHorse will be a profit oriented company, which will be recognised by increasing revenue and profit over years. The company will have sufficient resources as well as support of government authorities, which will facilitate an undisturbed domestic business operation. Competition is severe in this market as Saudi Aramco reigns alone; but SeaHorse is anticipated to provide tough competition to Aramco after three years. 2) Socio-cultural: SeaHorse will be highly culture-oriented. It will have Arab identity and can become a formidable competitor in markets of Middle East. Nonetheless, it can hurt sentiments of others when the business will expand internationally. 3) Resource Based: The strategy of SeaHorse will be resource based. The company will own several rich oil fields worldwide, which will greatly contribute towards success of the company in Saudi Arabia. It should maintain excess capacity of production and gain the power to dominate oil price in world market. 4) Game Based: Game theory will be applied in order to examine strategic choices (Cuadra, Sanchez and Sapriza, 2010; Stevens, 2008). Market strategy The main focus of SeaHorse’s market strategy is on expanding capacity of production and meeting requirements of customers in local as well as global market. Figure 5: Prescriptive Strategic Process (Source: Verrastro, Pumphrey and Hegburg, 2011) The above figure indicates the tentative market strategy of SeaHorse. The figure depicts competitive advantage and links it with the vision and mission of the company. The figure is regarded as a tentative market strategy as this is a start-up company, which will look forward to achieve above mentioned goals in long run. Product The main product of SeaHorse is crude oil, which the company will extract from oilfields that it owns. The crude oil will be refined to obtain petroleum and other petro products. The company aims at owning rich oil fields in Saudi Arabia; it is already known that Saudi Arabia has rich oil reserves, which is why it has become the world’s largest oil producer. People The target customers of SeaHorse will be common mass of Saudi Arabia and Middle Eastern regions. These customers will not be targeted directly by the company; the direct customers will be petrol pumps who distribute petroleum to the mass. Price The price of oil is dependent on a number of factors like, economic and political conditions. The oil prices are determined by the government and thus, SeaHorse will have no power to price their products. It has been observed that with rise in oil price, sales of the oil companies around the world had fallen over years. The same pattern will be followed in case of SeaHorse (YCharts, 2014). The figure provided below indicates the fluctuations in oil price from 1960 to 2005. Figure 6: Fluctuations in oil price (Source: Federal Reserve Bank, 2007) From the above figure, it is evident that change in oil price over the years had brought about huge loss for oil companies as sales had declined to a great extent. Promotion SeaHorse can publish advertisement in newspapers so as to generate awareness among the mass regarding operation of the new company. Through the advertisement, company will portray all available products and services. As it is a new company, it will be difficult to obtain prompt response from the mass. Moreover, response will be low initially as Saudi Aramco has captured the major market of Saudi Arabia and Middle Eastern region. Financial Analysis The financial analysis of SeaHorse Oil Company is depicted below: Forecasted Sales Revenue (2016-2018) The following figure elaborates the predicted total revenue for three years 2015-2017: Figure 7: Forecasted Total revenue (2015-2017) (Source: Author’s creation) The above figure implies that sale of SeaHorse Oil Company is assumed to increase after 2 year at a rate of 5%. Forecasted Income statement The following figure elaborates on forecasted income statement of the company, which indicates profit of SeaHorse Oil Company for the period. Figure 7: Forecasted profit of SeaHorse Oil Company (Source: Author’s creation) From the above figure, it is identified that profit of SeaHorse Company is expected to rise to a considerable amount after 2 years. 2015 2016 2017 Change in profit (%)   -0.008488176 8.922611904 The above table highlights the change in profit over years from 2015-2017. The profit is expected to rise by 8.9% after 2 years. Forecasted Balance Sheet The forecasted balance sheet suggests that the company will maintain sufficient working capital so that lack of assets or cash does not harm operation of the business. It is very important to upkeep working capital of a company as whole operation depends on the available cash. Cash Flow Statement The figure presented below highlights cash flow of the company from 2015-2017. Figure 8: Cash Flow (Source: Author’s creation) It is observed that SeaHorse would encounter increase in cash flow after 2016 as there will be 5% increase in sales. Breakeven Analysis The break-even analysis of SeaHorse Oil Company points out that breakeven sales are 33, 52,347 Saudi riyal and the volume is 7981 barrels. Here, oil price for the three years is assumed to be 429 Saudi Riyal per barrel. Resource and Financing The source of finance for SeaHorse Oil Company will be acquired from owners of the oil company as well as the government if the business plan gets approved. It is expected that the government will invest 100000 Saudi Riyal for setting up the new business. The owners of the business are expected to contribute at least 50000 Saudi Riyal each, so that there is adequate cash to commence and support the business successfully. The rest of the finance i.e. 10000000 Saudi Riyal is borrowed from Saudi Arabian Bank. The amount of loan is justified as the company has to purchase oil fields in Saudi Arabia. Managerial Capabilities SeaHorse Oil Company will operate through four main departments: International Relations, Commercial department for collecting revenue from sales, data management and Operation department. These departments will consist of employees who are highly qualified in their job. Special skilled individuals are required for the drilling and operation department. All employees will be handled by human resource department and there will be no workers’ union. The workers will be allowed to present their view points before the human resource department. Risk and uncertainty Risk and uncertainties in business can have detrimental impacts in case right precautions are not taken by companies. So, it can be stated that predicting future uncertainties and risk is vital for the operation of a company. The risk of losing assets of business and uncertainties including natural disasters can force a company to cease operation. Oil and gas sector is one, which has a number of risks and uncertainties associated. The internal risk factors of a company are employee retrenchment, lack of adequate working capital, sudden accident of labour while drilling process, breakdown of machinery and lack of knowledgeable labours. These can cause catastrophic incidents in oil companies. Apart from these internal factors, there are external factors too. The oil sector is highly affected by dissimilar economic conditions of nations worldwide. The fluctuations in currency and unpredictable economic conditions can negatively affect growth of the companies in this sector. Similarly, SeaHorse can also encounter this problem. The company can get affected by currency fluctuations as this will reduce its total income. It has been observed that during the recession period, oil prices increased and stock prices of the oil companies slumped to a great extent. The oil companies during this period encountered huge loss. As a result, if recession strikes again in future, SeaHorse would face the same situation as other oil companies. Apart from recession and currency fluctuations, there are also certain uncertainties, which can affect the business of SeaHorse. One of the major risk factors that nearly all oil producing companies encounter is the risk of oil spill. The incidents of oil spill over years have caused huge damages to the image of concerning companies. The oil base in the ocean belt has severely harmed marine life on events of leakage and oil spill from the oil ships. This has entailed harmful effects for the environment. SeaHorse can face the same risk of oil spill if it does not take necessary step to avoid the situation. The oil base should be well-guarded and protected so as to avoid any scope for leakage. The oil ships of the company should be manufactured efficiently and examined properly before being used for transporting oil (Verrastro, Pumphrey and Hegburg, 2011). Abnormal weather conditions and sudden natural calamity can even destroy a business. In case of oil and gas company, it is highly recommended to build structure of the oil base and company in such a way that disasters do not impact immensely. The abnormal weather conditions restrict the labours from extracting oil from the ocean belt as sea is generally turbulent in nature. Similar challenges can be encountered by SeaHorse Oil Company as it will have oil reserves in the ocean belt. Another major issue is that of civil unrest in the country. This affects price of the oil to a great extent. The rise in price influences sales of the company. As a result, the company will encounter loss. SeaHorse can also face such situations if civil unrest breaks out abruptly in Saudi Arabia (Verrastro, Pumphrey and Hegburg, 2011). Reference List Amin, S. H., Razmi, J. and Zhang, G., 2011. Supplier selection and order allocation based on fuzzy SWOT analysis and fuzzy linear programming. Expert Systems with Applications, 38(1), pp. 334-342. Baaij, M. G. and Slangen, A. H., 2013. The role of headquarters-subsidiary geographic distance in strategic decisions by spatially disaggregated headquarters. Journal of International Business Studies, 44(9), pp. 941-952. Boyle, S., 2007. Impact of changes in organisational structure on selected key performance indicators for cultural organisations. International Journal of Cultural Policy, 13(3), pp.319–334. Bunse, K., Vodicka, M., Schönsleben, P., Brülhart, M. and Ernst, F. O., 2011. Integrating energy efficiency performance in production management–gap analysis between industrial needs and scientific literature. 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Appendices Appendix 1: Forecasted Sales Revenue Appendix 2: Forecasted Income Statement Income Statement of SeaHorse Oil Company (in Saudi Riyal)   2015 2016 2017 Revenue 12117347 12030061 18128500 Interest from other income   100000 120000 Total revenue and other income 12117347 12130061 18248500 Purchases 10005000 10003421 10003690 Production and manufacturing expenses 100000 100000 100000 Selling and distribution expenses 1200000 1200000 1200000 Research and Development 130000 150000 200000 Exploration 10000 10000 10000 Total expenses 11445000 11463421 11513690 Profit 672347 666640 6614810 Change in profit (%)   -0.008488176 8.922611904 Appendix 3: Forecasted Balance Sheet Appendix 4: Forecasted Cash Flow Appendix 5: Breakeven Analysis Read More