Strategic Management - Tullow Oil Company - Essay Example

?ANSWERS Tullow Oil Company (TOC) is one of the largest independent oil and gas exploration and productions companies. Tullow Oil Company has morethan 100 licenses in 22 countries. Geographically Tullow Oil Company has conducted business in regions of the Africa, Europe, South American and Europe. Headquartered in London (UK), TOC operates through six subsidiaries. Currently, TOC has achieved significant success in Uganda, Ghana, Kenya and French Guiana (Market Line, 2012). Macro, meso and micro level assessment of TOC has been conducted as under: PESTEL POLITICAL Licensing issue, policies and political instability are critical factors with regards to political factors. Disturbance in North Africa and the Middle East had significant affect (Jones, 2012) while Uganda seized disputed license of TOC and held its 33% stake sale to heritage and CNOC (Mason, 2011c) ECONOMIC Significant source of revenue for country. Increase in tax from UK government of about ?10 billion resulted in increased concerns from oil and gas exploration companies claiming negative impact on job losses and household bills (Mason, 2011b) TECHNOLOGICAL Extensive technological expertise is required for oil and gas exploration. TOC has signed five year contract with FMC technologies for operations in Subsea services (PennEnergy Editorial Staff, 2013). SOCIAL Development of exploration plants results in social development of the country. Civil society stresses the accountability need of payment from oil and gas companies to counties and their respective utilization (Stewart, 2011). ENVIRONMENTAL Business has significant impact in the environment. Exploration in Savanna and Wetlands was warned for affecting natural land to elephants and lions by UNESCO (Manson, 2011a) LEGAL Governments are increasing pressures with increased tax system in lieu of depleting world oil reserves (Holmes, 2011). INDUSTRY ASSESSMENT Oil and Gas exploration industry is increasing competitive across the board. BHP Billiton, Centrica, Shell, E.ON, Bayerngas UK, Bridge Energy, ConocoPhillips, DONG Energy, Endeavour, GDF SUEZ, iGas, Perenco, Total and Tullow Oil forms around 60% of the UK oil production. Increased competitiveness is present in the industry despite of heavy capitalization which becomes a barrier to the industry. For instance, recent offer from Uruguay for the exploration received 15 bids from nine participants while four were granted rights. The offer made for 15 blocks yet accepted bids for nine only while every block had competition among more than three bidders (Webber, 2012). Owing to world’s increased need of energy the bargaining power of buyer is continuously reducing while the power of supplier is consistently rising. Renewable energy offering substitute are still not able to affect the demand of the energy. Intense competition has turned competitors to move towards strategic collaborative ventures. INTERNAL ASSESSMENT: Market Line (2012) has conducted in-depth assessment of Tullow and has identified following SWOT factors: STRENGTHS WEAKNESS Competitive advantage of leading oil and gas exploration business in Africa. Tullow has significant assets across Europe, Asia and South America in addition to Africa. The company has significant debt of around $2,854 million in 2011, which is a significant increase from $1,943 million in 2010. Hence, owing to growing competitive pressures huge debt can negatively impact Tullow’s capacity to compete. OPPORTUNITIES THREATS The acquisition that has been Tullow’s strategy to enhance its portfolio still offers great opportunities in future. Current developments in Uganda and Ghana such as development of Jubilee oil Field have potential for future development. Tullow has major capital projects underway while projects for FY2012 amounted around $ 2 billion. Capital expenditures incurred and planned offer greater opportunities for future. Big players of industry than Tullow has significantly greater strength from all perspectives such as technology, financial resources hence pose serious threats. Oil and gas industry is also facing consistent risks in every country from macro environmental factors posing pressure. STRATEGIC ISSUES From the above assessment it can be identified that Tullow is facing follows three strategic issues: Exxon Mobil, Total, Chevron Corporation, BP, Cairn Energy, BG Group, Shell being stronger groups are increasing pressure in the market for increasing respective share. Competitive pressure from these and other companies require Tullow for a comprehensive plan to deal with. Weakness of the company with respect to the debts is also increasing pressure for the company to sustain. Such as for the year 2011 Tullow was left with unutilized debt taking capacity of around $826 million (Market Line, 2012). This amount cannot support business in taking share in new capital venture or even debt requirement to meeting the business short term and long term requirements. The most significant strategic issue that Tullow is facing along with all the participants of the industry is depleting oil reserves across the world. This single factor is also causing increased pressure from the suppliers. It is also raising other pressures such as political pressures from the host countries’ suppliers etc; hence posing serious strategic issue to the business. Three strategic issues identified above require Tullow to devise comprehensive plan to deal as pressure will continuously rise as the time passes by. ANSWERS #2 All three strategic issues identified in the assessment above are critical for the Tullow Oil. Tullow Oil requires adhering significant attention to all these factors to meet the strategic challenges posed to the business from above three areas identified. Among the above three challenge the debt issue and the depleting can be regarded as the most important ones. The rationale for referred selection is the fact that depleting oil reserves would also increase pressures from the competitors in the industry would force uncompetitive business leave the industry as sustaining such pressures in capital intensive industry is extremely critical. Further, upon leaving such firm would sale respective assets to the businesses existing in the industry. Big giants, to increase and maintain dominance, would attempt to buy such reserves and hence increasing strength of respective portfolio and the concentration in the industry. Moreover, mergers and acquisitions also being widely used strategy in such capital intensive industry is highly increasing competition in industry as Tullow itself has long history of acquisitions (Market Line, 2012). Critical debt position will affect Tullow’s position to deal with increasing concentration pressures. Further, the depletion of oil reserves are causing rising pressures from suppliers. Understanding the importance of oil in today’s world political, economic and other risks are rising with decline in reserve level. In light of the above discussion, Tullow in order to remain among competitors that retain presence in the industry and expand their resource base require strong financial capacity. Financial strength is core to existence as technological and other developments are also dependent on such strength. While Tullow is facing pressure from extensively mounting debt that is reducing its capacity to remain agile for exploit rising opportunities. It is therefore in the significant interest of the Tullow to undertake takes strategic measures to deal with issues. The possible strategic measures for the purpose are as follows: ACQUISITION: Tullow has been undergoing acquisitions to add valuable assets to the portfolio. Jubilee field off the coast of Ghana is among the most attractive acquisitions of the Tullow in recent time. In addition, acquisitions of reserve rights shall be supported by acquisition of developed oil fields. Further, the strategy shall also focus on acquiring the neighboring field’s stake. This reduces significant cost pressures such as cost of managerial infra-structure, cost of technological upgrading suitable to the different fields, legal and social costs and so on so forth. It would also increase dominance of Tullow in particular area increasing its differentiating position among competitors and developing excellence. Strategy has been successfully employed by BHP Billiton in establishing its position among dominant players of Iron ore exploration. Increasing asset portfolio worth with strategy of acquisition provides opportunity to business to invest in technological expertise offering greater avenue for capitalization of advance technological investment. Hence, Tullow shall continue investing in expanding asset resources with greater consideration to above discussed factors. RE-ENGINEER PROCESS FOR INTEGRATING EFFICIENCIES TO SAVE COST To meet the challenge posed by the mounting debt it is advisable to Tullow to invest in technologies that provide more cost effective processes with greater advantage. Tullow has undertaken significant strategic acquisitions. Such as the years 2011 only Tullow made acquisitions of Nuon Exploration and Production (Nuon E&P) for $417.9 million in May, Ghanaian interests of EO Group for $305 million in July 2011 and Jubilee field Kwame Nkruma FPSO (with partners) in December (Market Line, 2012). Addition to portfolio provides greater opportunities to Tullow for developing and reengineering process of exploration and development that incurs comparatively less cost. The strategic concepts of economies of scale and learning curve provide opportunity to the Tullow to exploit efficiency possibilities within entire value chains. ENTER INTO RENEWBALE ENERGY PRODUCTION BUSINESSS Tullow being in the business of the oil and gas exploration is well equipped to the knowledge and expertise required for dealing with these assets. Owing to the fact that world oil reserves are depleting at a significant pace, though still significant time is present for such status to come, Tullow shall invest in establishing presence in the renewable energy production industry. Renewable energy consumption has taken significant place in the business models of corporations that have been extensively dependent on the energy consumption. Therefore, it is high time to develop presence in the leading industry of most near future. Tullow has in depth knowledge of the oil and gas exploration and production can leverage expertise to developing efficient and environmentally sustainable renewable energy set up. Related diversification would also contribute in dealing with extensively growing competitive pressure from the oil and gas industry. Among the three strategic options suggested to Tullow first two are to be adopted at the earliest to deal with rising weakness of the business followed by the adoption of last strategic option in the near long term. ANSWERS #3 VALUE CHAIN OF TULLOW The value chain of oil and gas exploration and development companies are set of complex activities. Tullow’s value chain has also been developed with complex structures facing challenges. The value chain of Tullow has managed to gain the success as Tullow has 77% of the global exploration and appraisal success ratio (Tullow, 2012). However, the efficiency has dropped over years as the success ratio has been 87%, 83% and 74% across the 2009, 2010 and 2011 (Tullow, 2012). Tullow has also been consistently adding value in its portfolio to add the value to shareholders. Half yearly result of 2012 reported value addition in the business development with new ventures in exploration included Africa & Atlantic Basin and strategic alliance with Shell (Tullow Oil, 2012). Tullow has also entered with incubation in East African Transform Margin and in north Atlantic region. In addition the business is consistently adding value with consistent efforts of the core campaigns in the discovery as well as follows up of the existing ventures. Tullow has alongside added monetary value to the chain with sale of the Uganda dilute (Tullow Oil, 2012). Along with adding value to the business with increased assets in portfolio, Tullow has been enhancing value chain with taking advantage of the regional opportunities in the areas of Uganda and Kenya (Tullow Oil, 2012). Such as pipeline in Uganda has been built so that connects to various countries internationally. For instance, the pipeline from Uganda transports to and receives from Kenya, Ethopia, Mumbasa and Tanzania (Tullow Oil, 2012). Hence, close knitting of value chain activities that provide greater capitalization opportunities are also being undertaken. The value chain of the Tullow has been making consistent efforts to integrate the sustainability factor in it. Building a sustainable Value chain is among the priorities set for the financial year 2012-2013 (Tullow Oil, 2013). Tullow has following three core principles for the purpose: Ensuring the protection of the environment to best possible level. Supporting the social development in host country Striking the critical balance between the environmental and social requirement and the commercial targets set for the business. Moreover, in order to integrate the sustainability in the activities of supplier relations Tullow has set five standards for the suppliers to be in line with 10 standards of UN Global Compact (Tullow Oil, 2013). In accordance with the VRIO framework, strong asset base that makes Tullow among the leading companies in Africa is a valuable resource that offers greater exploitable benefits to company. Value chain resources and capabilities are though extremely valuable yet do not significantly possess the characteristics of being rare and inimitable. Leading global competitors such as BHP has gone an extra inch in developing the value chain with more excellence. Hence, the owing to the rising competitiveness in the industry, Tullow has greater opportunities present to increase the strength of capabilities for the competitive advantage. For the financial performance assessment of the Tullow, following are the key ratios for the period of three years:   TTM 2012-12 2011-12 2010-12 Revenue USD Mil 2,344 2,344 2,304 1,090 Gross Margin % 57.4 57.4 59.6 46.4 Operating Margin % 50.6 50.6 49.1 24 Earnings Per Share USD 0.68 0.68 0.72 0.08 Net Margin % 26.63 26.63 28.17 6.51 Payout Ratio % 28.3 28.3 17.9 116.3     Profitability       Asset Turnover (Average) 0.23 0.23 0.24 0.16 Return on Assets % 6.24 6.24 6.81 1.05 Financial Leverage (Average) 1.76 1.76 2.23 2.16 Return on Equity % 12.38 12.38 14.97 2.24 Return on Invested Capital % 10.92 10.92 14.97 2.24     Liquidity/Financial Health   Current Ratio 1.05 1.05 0.77 0.9 Quick Ratio 0.76 0.76 0.2 0.23 Financial Leverage 1.76 1.76 2.23 2.16     Efficiency Ratios       Fixed Assets Turnover 0.58 0.58 0.69 0.42 (Morning Star, 2013) In-depth assessment over a period of decade revealed that Tullow has shown variation in the performance. Specifically first half of the decade the performance has been extremely worrying. For instance, in 2006 and 2007 the liability reached around 60% to 65% (Morning Star, 2013). In the similar period the current and quick ratio also decline to great extend. However, Tullow made efforts to improve the financial performance and in accordance with period under study overall performance on all aspects has improved. From Gross profit margin to liquidity ratios the performance has seen improvements signals. However, despite improvement from company perspective Tullow is still under significant financial distress as also pointed in research from Market Line. Similarly, the fixed asset turnover has generated improvement yet the performance has not improved significantly. It may be for reason that Tullow has focused attention in expanding the resource base. Therefore, the strategic option suggested to integrate efficiencies in the processes is of critical importance. Overall position of the Tullow has not been extremely attractive yet the fact remain that company has many opportunities present. Exploiting such opportunities such as improvement in fixed asset turnover refers that there exist chances for exploiting greater efficiencies. Therefore, Tullow can develop the comprehensive strategy that along with its existing focus on expanding resource base shall add value and strength to its financial position. ANSWERS #4 Business and market places are undergoing change consistently. These changes are increasing the competitiveness in the market and require business to be agile in responding to the changing dynamics. Along with increased pace in the market place the product life cycle and the technology life cycle has shortened and is expected to continue trend in future (Cai-feng, 2009). In addition, the procurement, production and activities that in collection constitute the final product to be offered to the customer are all consistently undergoing chain. All these activities, collectively called the value chain activities have become the field of battle for businesses in contemporary world. Businesses in order to gain the competitive advantage over competitor attempt to develop closely knitted value chain. To develop competitive advantage that differentiates business offerings from competitors in industry, business also make consistent efforts to gain excellence in value chain activities. Importance and role of value chain in differentiating business from other as winner has established one of the best examples in fast fashion industry. World renowned Spanish fast fashion retailer ZARA has differentiated itself from the competitors on the basis of the strongly linked value chain. ZARA has developed capabilities to excel in bottle necks of the value as its competitive advantage. Michael Porter defined value chain as a set of primary and support activities as given below: Business along with identifying the primary and secondary activities also identifies the sub activities of primary and support activities and then develop link among them. Competitive leaders of every industry are ones that identify the critical activities, their linkages and excel in knitting such components of value chain. ZARA, as an example, alike all other fast fashion competitors conduct all these primary and support activities. However, the competitive advantage has been built by ZARA by exploiting bottle necks. For instance, most fashion retailer develops design first and then procures the cloth for its production whereas ZARA in contrast procures the cloth first and then develops the design accordingly. Further, for procuring material ZARA has vertically integrated for manufacturing its own cloth and almost 60% of the cloth for ZARA brand is supplied by its own self. This has developed ZARA’s expertise and competitive capability in manufacturing the suitable cloth for its own designs and brand. Further, it also provides ZARA an increased control over cloth being the core resource of required for the clothing. This resource and capability reduces the time factor for ZARA that competitors require in procuring the cloth required for particular design and then further time is wasted in adjusting design in case the required type of cloth is not available. Hence, ZARA’s component of competitive advantage in procurement and inbound logistics is being derived from these activities of value chain (Zhelyazkov, 2010). Similarly, ZARA has further knitted the value chain where entire design department is present in a single huge hall. This allows designers to provide feedback at very similar point in time unlike competitors that have developed separate departments and therefore time is wasted in moving the design from one department to other. In addition, ZARA does not look for the expensive designers in its design team. ZARA has instead developed collaborations with fashion schools that provide more coherent resource for design team providing ZARA direct insight about changing liking pattern (Zhelyazkov, 2010). This also saves investment in marketing activities such as participation in the fashion shows etc. Further, ZARA manufacturing operations has set to manufacture small lot of every design that reduces the chances of unsold inventory burden. All these activities enable ZARA to replenish store twice a week in contrast to 15 days or even a season required by competitors (Zhelyazkov, 2010). In accordance with resource based view that discusses the resources and capabilities of the firm to become its competitive advantage has to fulfill the four characteristics of being valuable, rarity, in-imitable and organization. The core competencies of ZARA are noted to be as follows: Technologically integrated business model Strong design team with quick responding capability Unique inventory setting that keeps low stock Stocks are replenished immediately as storage is set within stores increasing its store capitalization and finally reduced production time (Zhelyazkov, 2010). All these capabilities of ZARA possess the characteristics for being competitive advantage. For instance, the technologically integrated business model has been extremely valuable for the business. Increasing connectivity and passing on liking pattern of the customers that come to the ZARA outlet at the fastest pace. In similar fashion unique inventory system with inventory storage in stores are difficult to be easily replicated by competitors. Hence rarity, in-imitable and capability of the ZARA to take advantage of such valuable resources and capabilities are evidence for the successfully knitted value chain (Zhelyazkov, 2010). Hence, despite ZARA have almost similar value chain components like competitors but capability of ZARA to exploit the activities in a distinguished manner has made the business model of ZARA success story in the international fast fashion spectrum. ANSWERS #5 Businesses are constantly striving to sustain success in the ever changing business environment. Every change in the environment poses an impact to the business directly and indirectly. Businesses in order to sustain the position as well as continue as growth prospect are subject to dealing effectively and efficiently with such changes in the business environment. Business environment being an external environment has impact that broadly originates from various factors. As businesses have to explore and exploit opportunities from business environment therefore it is required to consistently scan such macro environmental factors that offer opportunities to the business. Similarly change taking place in the macro environment of the business can pose a threat to the survival of the business. For the purpose, Harvard University Professor Francis Aguilar in his book "Scanning the Business Environment” introduced tool entitled EPTS in 1967. The tool was aimed at scanning the dynamics of the macro environment and later developed acronym as PEST. Further, it was then added with initials of two more factors and PESTEL has become the most widely used tool for scanning the macro environment in which business operates. The big picture presented by the PESTEL analysis provides significant insight to the business and plays crucial role in regulating the business decisions. Such as business makes market selection decision based on the situation of the business environment of the market it intends to enter. These factors does highlight the future possible feature of the business overall. Further, in wider spectrum it provides business an opportunity to equip itself to deal with rising challenges arising from the business environment. The Acronym PESTEL that has gained significant role in deciding the business is composed factors of Political, Economic, Social, Technological, Ecological (or Environmental) and Legal. As the name implies each component provides information to domain for business related to existing conditions as well as expected changes in future. For instance, Political factors provide information related to changes in the political scenario of the country or location business is assessing. Similarly, the technological factor provides information related to technological innovations as well as obsolesce that may provide opportunity to gain additional benefit or pose difficulty to business in maintaining operations and so on. However, as every domain is a complete field of the study in itself. Therefore, it is impossible for anyone to account the entire detail of each aspect within any single assessment. For instance, social factors in itself accounts the complete fields of studies of language, culture, population and its characteristics etc. Hence it is impossible for anyone to develop the complete assessment of all factors. Further, all information from every component of the PESTEL is not relevant to all businesses. As an example, the political disturbance in the Middle Eastern countries may have significance for one business only and not for the other. Therefore, employing extensive energy and resources to factor are expected to cost business more than the cost of entire businesses. Business in order to gain the benefit offered by the PESTEL analysis without wasting resources develop the PESTEL components relevant to respective businesses. For instance, McDonalds upon planning to expand its standing in any country, say Iran, would attempt to explore the political scenario of Iran. Moreover, the political factor assessment in such case would also be adhering attention to the relationship of America with Iran. Knowing the fact of unfriendly relation between the two countries the strategic decision to expand in Iran would prefer strategy that requires less capital investment. For instance, McDonalds in such case would prefer to establish 90% of all its business in Iran through franchising format. In such assessment the relationship of America with Afghanistan would not be given any attention. Similarly, technological factor in such assessment would attempt to explore the orientation of Irani population towards technology such as online ordering etc. Moreover, technological innovation of automotive animal slaughtering acceptability in Iran is also an important factor that would direct McDonald to plan its strategy to expand in Iran. Relevant information with respect to social trends will attempt to explore the percentage and age group of the Iran’s population favoring American brand as well as fast food etc. Hence, similar pattern will be followed by entire PESTEL analysis that will focus on factors that are relevant to business in that particular business environment. Therefore, it is important to understand that PESTEL analysis does not mean exploring all information of Political, Economic, Social, Technological, Ecological (or Environmental) and Legal domains of the entire world. Instead, PESTEL analysis is conducted in thematic way that only indentifies factors relevant to business. Dynamic that are expected to offer opportunity to the business in current or future times as well as dynamics that can pose a threat to the business are identified so that business can equip itself to exploit the opportunity and prepare to safeguard itself from possible threat. References Holmes, L. (2011). Cable Calls For Fines On Firms Failing To Disclose Tax Havens . Associated Newspapers Hoyos, C. (2010). The days when groups could simply produce and export a country's oil are long gone. The Financial Times Ltd Jones, H. (2012). Time to shell out on oil stocks?; The oil price is holding up well. How could investors profit, asks Harvey Jones . 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Britain backs bid to make mining giants reveal payouts: George Osborne backs a French proposal to expose firms' dealings with regimes in poor African countries, reports Heather Stewart . The Observer. Tullow Oil. (2012). 2012- Half Year Results. Available from http://www.tullowoil.com/files/pdf/2012_halfyear_factbook.pdf [Accessed 25 April 2013] Tullow Oil. (2013). Building a sustainable supply chain. Available from http://www.tullowoil.com/supplier_centre/index.asp?pageid=22 [Accessed 25 April 2013] Webber, J. (2012). Four groups win rights to explore off Uruguay; OIL & GAS . The Financial Times Ltd Zhelyazkov, G. (2010). Agile Supply Chain: Zara's case study analysis. Available from http://galinzhelyazkov.com/wp-content/uploads/2011/09/AgileSupplyChainZaracasestudyanalysis.pdf [Accessed 25 April 2013] Read More