Strategic Management of Gazprom - Assignment Example

? Running head: Strategic management (GAZPROM Strategic management (GAZPROM 12th March Executive Summary Gazprom is a Russian based company that specializes in extraction of oil. In order to serve its customers effectively, the company has established various subsidiaries such as Urengony, Nadvm, Yamburg and Novabrsk among others. One of the major causes of stiff competition in the Russian oil industry is lack of barriers to entry. In addition to the high volume of oil produced in Russia, the high number of firms in the oil industry has resulted to price competition. Some of the key Gazprom shareholders include the Russian government, Gazprombank, Rosneftegaz, Gerosgaz and E.ON Ruhrgas. Gazprom products do not only experience high demand in Russia but also in foreign countries. Major factors that have contributed to the high demand of the company products include increased household income in Russia and improved marketing strategies adopted by the company. Based on the large number of employees who have appropriate skills, the company has adequate resources that has enabled it to effectively compete with its main rivals that include Novatek, Northgas, Transneft, Russneft, TNK-BP and Novatek and Rosneft among others. The primary aspects that Gazprom should emulate in its strategic planning include expanding financial allocation that is focused at exploring oil reserves in developing countries as well as differentiation strategies. In this way, the company will not only increase shareholders returns but also it will effectively face off its competitors in the oil industry. To ensure that adequate control of its operations, Gazprom should involve all the stakeholders that include the shareholders, employees, Russian government and the marketers. Introduction A strategic analysis of an organization is carried out to examine the various ways through which a firm can achieve a competitive advantage over its competitors in the market. According to Lorenzen (2006) strategic planning is a rhythmic procedure that gives managers a clear view of the firms internal as well as the external environment. Consequently, managers get to a position where the organizations strengths and weaknesses are studied and solutions put into effect to counter the weaknesses that detriment the operations of their businesses. This paper seeks to discuss the environment analysis, structuring and an organization analysis as well as strategic plan of Gazprom, a Russian based company specializing in extraction of natural gas. Environmental analysis Industry analysis Having been established in 1989, Gazprom has various production subsidiaries that include Urengony, Nadvm, Yamburg and Novabrsk. With its major production fields being Yamalo-Nenets Autonomous Okrug and Nadym-Pur-Taz region, the company has significantly led to an expansion of natural oil industry. Due to lack of barriers to enter Russian oil industry, the industry has attracted large number of firms making Russia to be the largest oil producer globally. For example, in 2009 the country produced 494.2 million tons (Edward and Robert, 2009). Key competitors in the Russian oil industry include Surgutneftegaz, Lukoil, Rosneft, Gazprom, Northgas, Transneft, Russneft, TNK-BP and Novatek. Rosneft controls the biggest market share followed by Lukoil, TNK-BP, Surgutneftegaz and Gazprom. The major customers of the Gazprom come from domestic users. Other customers are based in Europe, CIS countries as well Baltic States (Aarentsen, 2003). Based on the large volume of oil the European countries and other foreign states demands from Russia they have attained a power that significantly controls oil prices at the international market. In order to compete with its rivals, Gazprom has embarked on diversifying its operations to include transmission, processing of gases as well as marketing and distribution of gases. Other activities that the company has adopted include repair of the Unified Gas Supply System and power generation (Fahey and Narayman, 1986). On their part, competitors in the industry have emulated low prices to have more customers. However, due to strong control of Gazprom especially in the European market, the company has continued to offer competitive prices that have generated a number of price disputes with states such as Ukraine, Belarus and Armenia (Porter, 2008).Based on the fact that Gazprom operations are global, the Russian government has put adequate measures to control the monopoly power that the company enjoys (Coyne and Sujit, 1996). One of the major regulations includes 2006 Federal Law on gas export. External stakeholders and broad environment The main shareholders of Gazprom Company are Russian government, Gazprombank, Rosneftegaz, Gerosgaz and E.ON Ruhrgas. Based on the fact that the government owed more than half of the company shares, it has power over other shareholders in terms of management and policy formulation. In the same way, global economic forces have played a key role in the Russian oil industry. For example, the recent economic downturn negatively affected the prices of the Gazprom products thus reducing the total sales. The recent political revolution in Arab countries cannot be assumed in terms of the oil prices in the developed and developing countries. Due to the political instability in Libya and Tunisia, additional key oil producers, majority of customers went for Russian oil products resulting to increased prices. In order to ensure that Gazprom meets the needs of its customers, the company has embarked on technological development. These include extensive 3D seismic survey, establishment of compressor stations, gas trunklines as well Gazprom's Unified Gas Supply System (UGSS) (Elder, 2008). In this way, the company has undertaken oil exploration and prospecting in countries like Kazakhstan, India, Algeria, Libya and Tajikistan. Factors influencing demand and cost structure One of the major factors that influence the demand of Gazprom products is the economic trends of its local and foreign customers. Based on the opportunities in the emerging market, the company has effectively adopted marketing policies to enter the market (Kotler, 1997). In addition, the demographics factor has significantly improved Gazprom sales. This is especially due to the Russia high population and improved household incomes. The adoption of intensive capital is a key aspect that has caused increased fixed costs of Gazprom. However, the company adopts high level of capacity utilization thus covering the fixed assets leading to higher profitability. Strategic issues facing the oil industry in Russia Russian oil industry is faced with a number of strategic issues. First, the formation of European Union enhanced the operations of oil companies such as Gazprom among others through removal of trading barriers. Matthew (2005) argues that secondly, the opportunities brought about by the emerging markets have enhanced the sales derived from oil companies thus increasing sales and job opportunities. However, the performance of the oil companies may be affected by the increased number of oil companies thus reducing the international oil prices. Organizational analysis Evaluation of internal environment Oil industry’s strengths and weaknesses can be investigated by understanding the industries potential gains, main strategic ideas, development possibilities of the industry and the way costs are structured in that industry. Strengths of the oil industry can be a normal attribute or even in some cases a great weakness in a different industry (Goldmann, 2008). And as a result, a complete investigation of the Gazprom industry internal structure or organization can be used to depict a full industry analysis. The evaluation of the internal environment of the Gazprom industry will assist in comprehending the industries analysis structure. In the late 1989, in the Soviet Union gas services were handled by the countries government department of gas (David, 2004). It was in this year that Gazprom emerged into the market from the conversion of the governments department of gas into a fully working and independent company dealing with the gas services. In the coming years, Gazprom was subsequently made private even though the Russian authorities still own a large portion of the establishment. Resources and capabilities As depicted by Mitrova (2009), Gazprom Company possesses major assets in the gas operations in Russia and has been in the control of the main pipeline from the year 2006 thus causing its competitors to depend heavily on Gazprom assets in their operations and distribution. Gazprom had an employee base of around 221,337 by the year 2008 who were employed in its main operations. The largest percentage of these were the normal company workers who accounted for approximately 64.1% while 23% accounted for the well trained personnel in the specific department of the company (Lusch and Lusch, 1987). A smaller percentage of about 10% were in the managerial area of Gazprom while other employees accounted for the remaining 2.1% (Yenikeyeff, 2011).In the purpose of enabling the Gazprom Company achieve its goals and objectives efficiently, the management opted to create subsidiaries such as the Gazprom marketing and trading limited (GM&T) and Gazprom marketing and retail limited (GMTR) who would simplify the large task of efficiently delivering the gas services to its clientele in the local and international market (Porter, 1979). Gazprom has a large retail clientele in the un-molded United Kingdom market and has subsequently raised the gas services in this market by around 500%. Gazprom has over the years had crucial ties whereby great companies in well positioned sectors are meant to gain profits in addition to playing a role in the growth of the interests of Russia nationally. This idea has caused Gazprom to fall under the alleged national champions. Gazprom is also in control of the media, financial services via banks, building and also in the insurance business hence the term national champions. Gazprom is comprised of a robust board of directors who are greatly involved in the management activities of the establishment. The top leaders include the chairman Viktor Zubkov, Deputy Chairman Alexey Miller and Director General of Gazprom export Alexander Medvedev (Matthew, 2004). The firm has also put in place a management committee that is by a large portion involved in the smooth running and management operations of Gazprom. Gazprom industry boasts of a set of well trained personnel who are strategically placed in their respective areas of specialization. These specialists account for about 23% of the entire employee population as stated earlier and this by far plays a huge role in achieving quality service to the firms’ services to its client base locally and internationally (Porter, 1980). Evaluation of strategies Alexei Miller in the year 2008 claimed that Gazprom would end up being one of the richest establishments in the globe having a 1 trillion dollars capitalization. By the year 2009, financial problems globally initiated the drop to around seventy five billion dollars in capitalization. Hence, the boards strategies as at that period, greatly suffered a huge blow that affected Gazprom operations. The removal of Rem Vyakhirev as Gazproms CEO and with his replacement Alexei Miller in the 2001 led to the development of the firms strategies. The new higher gas prices policies that came into place enabled the company’s financial gains to grow massively. Sources of competitive advantage Gazprom is able to strategically place itself in a competitive gas market. With Gazprom owning the main gas distribution pipeline in Russia, the firm was able to gain a competitive advantage over its competitors in the market such as Novatek, Northgas, Transneft, Russneft, TNK-BP and Novatek and Rosneft among others (Woodruff, 2006). In addition, the power of the company to control oil prices and well trained managers are key aspects that have enabled the company to attain a competitive position in the oil market. Developing a strategic plan Strategic direction and major strategies Based on the extensive market for oil products, it is essential for Gazprom to target wide market for its products. For example, the company should increase its financial allocation to explore oil reserves in developing countries. In this way, the company will effectively exploit expansive oil reserves in the Third World countries. Another vital strategy that Gazprom should emulate is differentiation strategy. This is based on its extensive financial resources and effective distribution system that the company enjoys. Allocation of more resources for research and development (R&D) will ultimately enhance the innovation culture of the company thus, appropriately meeting the needs of its customers both locally and internationally. Evaluation of opportunities and recommendations Through the use of the cost/benefit analysis, the adoption of differentiation strategy that includes diversification of its operations the company will attain financial benefits that will off set the financial costs. Due to the increased demand for oil in the international market, the company sales will significantly increase. This is based on its targeting wide market strategy that involves exploiting oil resources in the developing countries. In the same way, the strategies will have positive implications on the shareholders returns. As a result of the cut-throat competition in the oil industry, the future position of Gazprom will highly depend on how effective the company faces its competitors. In this regard, Rainer and Turban (2009) argues that it is fundamental for a company such as Gazprom to utilize e-marketing, effective distribution channels as key marketing techniques in the international oil market. Implementation and control In order to adopt the strategies that will make the company attain high profits, it is imperative to employ the duties of internal and external stakeholders. These include the employees, the shareholder, the management team, the government as well as the marketers. In targeting wide market, company should establish distribution branches particularly in the emerging markets and in the entire region it targets (Ireland, 2008). The financial strength of Gazprom is a major strength that will make the company attains its goals. In the same way, the high technology and skilled man power that the company has employed will improve the competitiveness of the company in the international market. To ensure that the company operations are streamlined it is imperative to establish administration centers in various countries that the company intends to penetrate. Conclusion Based on the above analysis, it is clear that strategic management is vital in ensuring that companies attain competitive positions. Owed to the ever-changing business atmosphere, it is essential for managers to undertake extensive study of the internal and external factors that affect their businesses. In addition, managers must consider the implications of external stakeholders as well as competitors in order to put effective policies that address the weaknesses and threats that face their organizations. To undertake proper strategies companies must effectively identify the resources that are needed. In this way, financial managers will come up with appropriate budget that covers all the associated revenues and expenses. The stiff competition that Gazprom and other oil companies face can be addressed by developing a strategic plan as discussed in this paper. Through evaluation of the opportunities that exist in the international oil market, Russian oil industry has a great opportunity of meeting the world oil demand and improving the global economy. References Aarentsen, M. (2003). National reforms in European gas. London: Sage. Coyne, K and Sujit B. (1996).Bringing discipline to strategy. The McKinsey Quarterly David C. (2004). Russia: the new oil giant. An industry perspective. New York: Kent Publishing, Edward M and Robert C. (2009). Gazprom wants 10 pct of US natgas market in 5 yrs. London: Sage. Elder M. (2008). Russian leaders pledge to stimulate oil production. International Herald Tribute. Retrieved 2012-03-04. Fahey, L and Narayman, K. (1986). 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