Critical Perspectives on Business and Management - Case Study Example

Global strategy business report Nexus Energy Limited global business strategy report Table of contents: Page number: 1.0 Introduction………………………………………………………………………………….4 2.0 Methods of data collection and analysis……………………………………………………..4 3.0 PESTLE analysis of the current international business and economic environment…………………………………………………………………………………..…5 4.0 Five forces analysis of oil and gas industry…………………………………………….…...9 5.0 Analysis and justification of Qatar country location ……………………… ……………...11 6.0 Most appropriate entry mode- strategic alliance……………………………………………12 7.0 Foreign market positioning strategy………………………………………………………..16 8.0 Conclusion and recommendations …………………………………………………………17 9.0 Reference list:……………………………………………………………………………….18 10.0. Outlook of Qatar table……………………………………………………………………...7 11.0. Gulf Drilling International financial overview summary ………….…………………..14 Executive summary Nexus Energy Limited (ASX-NXS) is an ASX listed oil and gas exploration and production company that is headquartered in Melbourne in Australia. The company is committed to enhancing share value through investing in innovative technologies that aim at enhancing the exploration of oil and gas resources. The report will evaluate the operations of Nexus Energy and the attractiveness of Qatar and the best country to enter for its global strategy. The report will focus on the PESTLE analysis of Qatar, the attractiveness of the oil industry and SWOT of tGulf Drilling International Company as the preferred company to form a strategic alliance with in the entry mode. The best entry mode is forming a strategic alliance with Gulf Drilling International since it is less risky, less costly and will enable Nexus to control its operations, and gain more knowledge of Qatar market. The company must position itself as a technologically innovative oil and gas exploration company that is committed to ensuring sustainable communities. The company must localise the human resource management and marketing activities in order to enhance the reputation and gain higher market penetration. 1.0 Introduction The objective of the report is to guide the Nexus Energy management in their global strategy through identifying Qatar as the appropriate target country, the attractiveness of the oil and gas industry in Qatar and strategic alliance with Gulf Drilling International as the best entry mode in Qatar foreign market. The report will entail a detailed analysis of the current international business and economic environment of Qatar, analysis of the attractiveness of the oil and gas industry and the economic viability of Qatar as the most preferred country. In addition, the report will cover strategic alliance as the most appropriate entry mode in Qatar and Nexus Energy Limited strategic positioning to compete successfully in the new industry. The last part will be the conclusion and recommendations to the management. Nexus Energy intends to expand its business to Qatar and desires to do so through forming a strategic alliance with a local firm. The selection of foreign market entry mode is influenced factors such as the associated costs, market risks and the need for control of the foreign operations. 2.0 Methods of data collection and analysis The report will rely on secondary data collection and analysis methods. The report will utilise academic literature, global strategy models and recent market data to determine the best country of foreign market entry and the best foreign company that Nexus Energy must enter in to an international business. The report will conduct macro-environment analysis of the current international business and economic environment, determine the best foreign market entry strategy and the preferred market strategies in order for the company to attain competitive edge in the new market. 2.0 PESTLE analysis of the current international business and economic environment of Qatar This part will evaluate the attractiveness and business environment in Qatar using the PESTLE analysis model. The Political, economic, social-cultural, technological, legal and ecological environment (PESTLE) analysis is useful in understanding why the current international business and economic environment is suitable for the operations of Nexus Energy Limited and the oil and gas industry (Spulber, 2007). Political environment According to Spulber (2006), the current international political environment is characterised by debates on the need to enhance the current global output of liquefied petroleum gas, the concerns on terrorism, oil-related conflicts and concerns about the increasing oil and gas prices. The country is currently experiencing political stability and the government is encouraging multinational companies to buy concessions in different parts of the country. The geopolitical tensions and ongoing conflicts other Middle East countries such as Iraq and Kuwait has made QATAR a favorable destination for oil and gas companies Economic environment The international economic environment is characterised by recovery trajectory from the recent economic slowdown and growth in oil and gas outputs across the world (Peng, 2013). Qatar is the fastest growing economy with an average real GDP growth rate of 12 .4 percent and high current account surplus. The fiscal surplus stands at about 13.2 percent of the GDP and is occasioned by high hydrocarbons revenues and robust banking sector (Tallman, 2009). Social-cultural environment According to Bartlett and Ghoshal (1989), the social-cultural environment includes the beliefs, values and lifestyles of the society that shape the consumer demands in the energy industry. The social-cultural environment is characterised by shifts towards greener sources of energy such as wind power, hydroelectricity and solar energy mainly by the domestic consumers (Spulber, 2007). Technological environment Dransfield (2001) asserts the current international business environment is characterised by advancements in oil exploration and drilling technology due to huge investments in research and development activities across the world (Hiriyappa, 2013). The technological environment is conducive for Nexus Energy Limited activities since it will lead to a decline in the costs of exploration and efficiency in the drilling processes. Legal environment Hiriyappa (201) points out that the legal environment on oil and exploration business requires adherence with the licensing procedures since many multinational companies have encountered heavy fines due to oil spills and other accidents during the exploration process. Nexus Energy must comply with the Kyoto protocol that establishes legal commitments for countries to reduce greenhouse gases emissions Ecological environment Global warming and environmental pollution due to by-products and numerous oil spills is a high concern for the industry. The current ecological environment will require Nexus Energy to implement advanced technologies that reduce water, air and land pollution during the exploration and drilling activities (Tallman, 2009). Accordingly, Qatar government requires companies to implement health and safety precautions in to contain the inherent risks during transportation and refining in order to prevent environmental pollution. The company is required to have emission control programs, ensure quality crude oil and meet the environmental obligations (Henry, 2011). From the analysis, the current international business and economic environment is suitable for Nexus Energy internationalisation due to the increase in the global trade flows, stiff competition in the local markets, stable political environment and advancements in technology. Accordingly, the global energy industry has shifted its focus on development of environmentally friendly technologies in natural gas exploration (Dransfield, 2001). In addition, most of the multinational oil and gas companies have increased their capital spending on new assets and have undertaken geographic expansion in the high-growth emerging markets. Economic Outlook of Qatar Economic variables 2012 2012 2013 Projected 2014 Global average GDP growth rate 10 percent 11.7 percent 12. 4 percent 13. 3 percent 4. 5 percent Inflation 1.9 percent 2.2 percent 1.9 percent 1.8 percent 3 percent Investment as percent of GDP 24 percent 25 percent 27. 02 percent 36 percent 10 percent The table indicates that Qatar has attained constant growth in the GDP over the last three years and the growth rate is more than the global national GDP growth rate of 4.5 percent. The country is impressive for investment due to low inflation rates and high investments as per percentage of GDP. Qatar has invested heavily in oil and gas industry and has constructed modern infrastructure that will support direct foreign investments in the country. Accordingly, the country has high oil and gas reserves that have created high interest in the country among global investors. (Source: Economy Watch: http://www.economywatch.com/economic-statistics/country/Qatar/). The table above demonstrates that Qatar has a stable macroeconomic environment due to high GDP growth rate and commitment of the current government in attracting more foreign direct investments. The country location is adjacent to key export destinations that include China, Malaysia and Singapore. The business legal framework supports enforcement of contracts and the country has access to advanced technology to support oil and gas exploration and extraction operations. However, there is increased pressure to reduce the greenhouse gas emissions and geopolitical tensions with Middle East countries may deny the company access to those critical export markets. In summary, Qatar will provide excellent business opportunities for Nexus Energy in the global strategy. 4.0 Five forces analysis of the oil and gas industry The Michael Porter’s five forces analysis model will be useful in understanding the attractiveness of the oil and gas industry. The five forces framework comprises of the threat of new entrants, the threat of substitute products, bargaining power of suppliers, the bargaining power of buyers and the degree of rivalry in the industry (Hiriyappa, 2013). The profitability of Nexus Energy will be influenced by the profitability of the industry and thus five forces analysis is useful in understanding the attractiveness of the industry (Hill & Jones, 2012). Threat of new entrants The threat of new entrants in the oil and gas industry is low due to the huge financial capital outlay and equipments that is required to establish prospecting and drilling operations. The development of the oil fields costs billions of dollars and new entrants must acquire sophisticated exploration and drilling technologies in order to compete effectively in the industry (Nexus Energy Limited, 2014).. In addition, the high economies of scale enjoyed by the dominant firms makes it difficult for new players to enter the market since the established players have already secured large oil fields (Faulkner, 2002). The industry is also characterised by stringent licensing process since new players must acquire expensive prospecting licenses from the concerned governments in order to begin operations. Threat of substitute products Tallman (2009) asserts that substitutes limit the market and profitability of a product. Although hydroelectric, coal and solar energy are substitutes, oil and gas will remain irreplaceable in numerous sectors of the economy such as transport since it is cheaper. The drilling and exploration technologies have advanced and oil and gas are likely to become the cheaper sources of energy by 2030 (Faulkner, 2002). Bargaining power of suppliers The oil and gas industry has a complex chain of suppliers that include providers of exploration and drilling equipments, pipeline installers and scientific researchers and engineers. The suppliers have significant bargaining power due to the complexity of the upstream operations and thus oil and gas prices will remain high in the coming years (Kluyver, 2010). Accordingly, OPEC is a significant supplier and has a higher bargaining power since it can determine the grant of concession rights to the multinational companies. Oil companies face shortages of talented engineers and thus human resource costs are likely to increase in the industry (Tallman, 2009). Bargaining power of buyers The buyers bargaining power influences the industry through demand for lower prices and higher quality refined oils and liquefied petroleum gas. However, the global oil prices are determined by demand and supply in the mercantile exchange, but the buyers have limited power to influence the prices since companies hoard the commodity thus leading to higher prices (Dransfield, 2001). Accordingly, the industry does not have differentiated products, but the switching costs are high due to the cordial relationships between the multinational companies and refineries or national oil companies thus limiting the bargaining power of the buyers (Bartlett and Ghoshal, 1989). Intensity of rivalry in the industry The oil and gas industry has few large firms that operate as a cartel thus reducing the degree of rivalry in the industry. However, the decline in oil reserves has intensified rivalry in the exploration and drilling among the big players such as Royal Dutch and ExxonMobil thus forcing the smaller companies like Horizon to enter in to mergers and acquisitions in order to compete effectively. In addition, the exit costs are high due to the huge investments in terms of drilling machinery and the fixed costs consumer a considerable part of the production costs. From the five forces analysis, it is evident that the target industry is attractive due to low threats of new entrants, low bargaining power of buyers and minimal threat of substitutes. The degree of rivalry has intensified and thus Nexus Energy must implement an internalisation strategy in order to attain a competitive energy and increase its market share. 5.0 Analysis, evaluation, and justification of Qatar (QATAR) as preferred country Qatar is experiencing a high and consistent real GDP growth rate of an average of 12 percent and high expansion of the manufacturing sector, which is a consumer of large volumes of oil and gas (Stonehouse & Houston, 2013). Qatar has huge proven hydrocarbon reserves of natural gas and oil. Accordingly, the government has introduced incentives for companies that are interested in oil and gas prospecting in the country due to encourage more exploration and drilling and stop the dependence on the declining oil fields. The country has substantial mineral resources and state of the art transport network that comprises of roads and sea ports. The country is experiencing unprecedented period of oil exploration and economic development activities and recent discoveries of proven reserves has increased the global awareness of the QATAR oil and gas potential (Oxford Business Group, 2012). The country is at close proximity with Asia and thus Nexus Energy is capable of attracting qualified human talent from Asia and using Asian processing facilities. The country is experiencing political stability and favorable attitudes towards foreign direct investments that have seen the government grant several tax incentives to foreign companies willing to invest in the oil and gas industry (Oxford Business Group, 2012). 6.0 Strategic alliance with Gulf Drilling International as preferred entry mode According to the resource-view of internationalisation, Nexus Energy must pursue a strategic alliance with Gulf Drilling International in order to acquire intangible and non-replaceable resources from Gulf Drilling International. Nexus Energy will have access to large oil and gas fields, excellent talent and engineering machinery that will be provided by Kina Petroleum. Gulf Drilling International (GDI) is a growth-oriented company and specialises in provision of drilling rigs and associaited services to oil and gas companies in Qatar. GDI commands about 86 percent of the market share in Qatar oil and gas industry drilling services and is the preffred company that Nexus Energy should form a strategic alliance. GDI will provide superior technology and support services and enhance the pace of oil discovery thus leading to shared strategic benefits for the two companies (Gulf Drilling International Limited, 2014).. The strategic alliance will enable Nexus Energy to manage the foreign market risks and share exploration resources thus increasing the competitive edge of the firm (Culpan, 2002). Accordingly, Nexus Energy will benefit from Gulf Drilling International distribution infrastructure and political connections in order to facilitate the market entry process and market penetration. Hill & Jones (2012) outlines that strategic alliance entails shared benefits and shared costs thus both firms will share the risks inherent in the costly oil exploration activities. Accordingly, Nexus Energy and Gulf Drilling International will be capable of sharing knowledge, expertise and skills thus reducing the human resource costs. Wagner (2009) asserts that the strategic alliance option is less costly than mergers or acquisitions and Nexus Energy will be capable of utilising the existing GDI’s equipment and machinery. According to Gulf Drilling International website, Gulf Drilling International has a paid up capital f US $ 103.2 million and provides world class drilling services (Gulf Drilling International Limited, 2014). Gulf Drilling International is currently seeking partners with requisite technical and fiscal capabilities and thus Nexus Energy must establish a strategic alliance with Gulf Drilling International in order to enter the foreign market (Gulf Drilling International Limited, 2014). Strategic alliance is the preferred foreign entry mode in the oil and gas industry since the two firms share property rights and ownership and enables the companies to attain a higher financial strength (Culpan, 2002). In addition, the companies to the strategic alliance share exploration risks and the foreign firm gain more knowledge of the local economy thus facilitating market acceptance. In this case, other entry modes such as direct investments are risky while a joint venture is inappropriate since Nexus Energy will lose control of the operations (Hill & Jones, 2012). Gulf Drilling International financial overview summary 2011 2012 (US $) 2013 (US $) revenue 187. 8 m 244.7 m 358 m Net income 35. 6 m 56.8 m 95.6 m Current assets 123, 643, 553 114, 887, 888 154, 467, 774 Total assets 670, 997, 795 844, 955, 679 1, 248, 240, 486 Total liabilities 320, 399, 219 412, 540, 836 710, 194, 628 Total equity 350, 598, 576 432, 414, 843 538, 045, 858 Total equity and liabilities 670, 997, 795 844, 955, 679 1, 248, 240, 486 Gross profit 60, 295, 806 88, 787, 362 137, 240, 072 Dividends paid 25, 000, 000 25,000,000 40,000,000 (Source: Data retrieved from Gulf Drilling International 2013 financial statements: http://www.gdi.com.qa/English/Annual_report/AnnualReportList/GDI%20Annual%20Report%202013%20V.10.pdf). The excellent economic performance signifies the ambitious growth strategy that entails diversification and expansion of its oil and gas drilling fleet to meet the needs of the growing clientele in Qatar. The company managed to increase its revenues by 46 percent in 2013 while the net income grew by 68 percent. The company also managed to increase the 2012 revenues by 30 percent and the net income increased by 60 percent due to higher operational efficiency. The company has managed to increase its total equity and total assets thus further profits are likely to be higher. The company has also managed to increase its dividend payments. Strengths and weaknesses Strengths Gulf Drilling International has attained full utilization of its fleet and is committed to increasing the drilling fleets to cater for the growing demand. The company has introduced the lifeboat services and signed lucrative multi-year contracts that will lead to increased revenues for the company. The average downtime of its fleet was 1.27 percent GDI downtime in 2013 compared to an industry average of 2 percent thus indicating higher operational excellence. Gulf Drilling International is a reliable strategic partner due to the risky nature of oil and gas exploration activities and GDI’s excellent machinery and equipment base that has enabled the company to attain high market share in both onshore and offshore drilling operations. Weaknesses The main weakness facing the company is the high competition in the market and pressure to reduce the greenhouse gas emissions from the drilling activities. Opportunities Gulf Drilling International can utilise its superior drilling technology and experience to widen its market share in Qatar market. The company can form strategic alliances with leading oil and gas companies in order to increase its revenues. The company can invest more in drilling rigs and lifeboat services in order to improve the onshore drilling operations. Threats The greatest threat facing the company is the need to ensure the safety of employees and reduce the greenhouse gas emissions from the operations. 7.0 Analysis, evaluation and justification on best Nexus Energy preferred positioning in Qatar According to the SWOT analysis, Nexus Energy has superior oil and gas technology that will enable the company attain exploration efficiency and reduce the greenhouse gas emissions. However, the company suffers from various weaknesses such as high costs of environmental hazards reduction and lack of adequate safety measures at work sites. In this case, the company must utilise its advanced technology in minimising environmental hazards and the threat of intense competition in Qatar oil and gas industry. Nexus Energy must leverage on its technological competencies and leverage itself as an innovative oil and gas company that is committed to successful exploration and drilling of high quality crude oil while remaining committed to sustainable development of the communities. Implementing superior technologies will improve the success rates of the exploration, ensure efficiency in drilling and improve the refining processes (Stonehouse & Houston, 2013). In addition, the company will be capable of reducing the carbon emissions and minimise the risks of oil spills. The company must participate in corporate social responsibility activities such as water drilling and construction of schools in order to improve the corporate reputation and ensure faster market penetration (Stonehouse & Houston, 2013). Nexus Energy must also implement a decentralized decision-making structure to motivate the local management and improve the adaptation to the local culture and market needs. A geographic structure will allow the QATAR managers to take faster decisions and enhance the control of the operations. The geographic structure is the most appropriate since it will enable the company to respond to the local needs while allowing for international control and enhancements in the technology. In the marketing function, the company must respond to the cultural differences in the promotional campaigns and comply with the existing regulatory environment (Gong, 2013). 8.0 Conclusion and recommendations Oil and gas exploration is a risky business activity and thus Nexus Energy Limited must enter the Qatar country for its exploration and drilling activities. The oil and gas industry is attractive due to low threats of new entrants, low bargaining power of consumers and high capital outlay that is required to commence operations. A strategic alliance with local company such as Gulf Drilling International is the most appropriate entry model since it will reduce the inherent risks, minimise costs and ensure learning of the local market. The two companies will be capable of sharing exploration infrastructure and human talent thus facilitating the business activities and minimising overall operation costs. The management must position the business as an innovative oil and gas exploration company that is committed to using superior and environmentally friendly technology while taking in to account the need to ensure sustainable communities through avoiding pollution and enhancing the welfare of the society through charity contributions. The management must implement a geographical organisational structure in order to ensure faster decision-making and responsiveness to the local needs. The management must also localise the marketing activities in order to comply with the country culture. The management must seek upward and downward integration with the suppliers such as providers of machinery and refineries and distributors in order to enhance the distribution channels and minimise the business costs. In the pricing strategy, the company must follow the spot price that is determined by the global demand and supply at the New York Mercantile Exchange. The firm will be capable of attaining significant profit margins and investing in more exploration and drilling activities. 9.0 Reference List Bartlett, C.A and Ghoshal, S. 1989. Managing across borders: the transnational solution. Boston: Harvard Business School Press. Culpan, R. 2002. Global business alliances: theory and practice. Westport, CT: Quorum Books. Dransfield, R. 2001. Corporate strategy. Oxford: Heinemann. Faulkner, D. 2002. Strategy: critical perspectives on business and management. London: Taylor & Francis. Gong, Y. 2013. Global operations strategy: fundamentals and practice. New York: Springer. Henry, A. 2011. Understanding strategic management. Oxford: Oxford University Press. Hill, S & Jones, G. 2012. Strategic management: an integrated approach. New York: Cengage Learning. Hiriyappa, B. 2013. Strategic management and business policy. New York: Routledge. Gulf Drilling International Limited. 2014. ‘About US’, (web): Retrieved from http://www.gdi.com.qa/English/Pages/default.aspx. . Nexus Energy Limited. 2014. ‘An Australian oil and gas producers and explorer’, (web): Retrieved from http://www.nexusenergy.com.au/. Peng, M. 2013. Global strategy. New York: Cengage Learning. QATAR Chamber of Mines and Petroleum. 2014. ‘Petroleum in QATAR’, (web): Retrieved from http://Qatarchamberminpet.com.pg/petroleum-in-Qatar/. Spulber, D.F. 2007. Global competitive strategy. Cambridge: Cambridge University Press. Stonehouse, G & Houston, B. 2013. Business strategy. New York: Routledge. Tallman, S. 2009. Global strategy: global dimensions of strategy. Chichester: John Wiley & Sons. Wagner, T. 2009. Foreign market entry and culture. Muchen: GRIN Verlag. Read More