Exxon Mobile Corporation is an American gas and oil company corporation. It was formed in 1999 by a direct descendant of John Rockefeller. It cam to be after the merger of Mobil and Exxon which later became ExxonMobile which is the largest company by revenue in the world standing at $404.5 billion by the end of the fiscal year 2007. By market capitalization it is the largest public held corporation in the world standing at $501.17 billion.
The company’s headquarters are based in Irving Texas from where its products are marketed all over the world under three different types of brands such as Esso, Mobil and Exxon. The company has several smaller subsidiaries such as SeaRiver Maritime which deals with oil shipment and Imperial Oil Limited of Canada which owns 69.6 percent of the shares in the company.
The company is functionally organized into a number of divisions that operate globally. The division are grouped into three categories for purposes of reference although the company owns several ancillary divisions such as minerals sand coals which are stand alone. The three divisions include upstream division which encompasses extraction, oil exploration, wholesale operations and shipping which is based in Houston, Texas.
The second operating division is the downstream division which encompasses refining, retail operations and marketing division which is based in Fairfax Virginia. The third operating division is the chemical division which is based in Houston, Texas. The company’s upstream division is the dominant source of cash flow which accounts for approximately 70% of the company’s revenue.
The total number of employees in all operations related to the company is eighty two thousand as indicated in the Corporate Citizen Report of 2006. The upstream division makes the largest share of the employees totalling to twenty seven thousand employees and the down stream division has only four thousand employees. By category the operating divisions are grouped as follows. The upstream division includes the ExxonMobile Exploration Company, the ExxonMobil Production Company, the ExxonMobil Gas and Power Marketing Company, the ExxonMobile Development Company and the ExonMobil Upstream Research Company.
The company’s down stream division consists of the ExxonMobile Refining and supply Company, the ExxonMobile Lubricants and Specialist Company, the Exxon Mobile Fuels Marketing Company as well as the ExxonMobil Lubricants and Specialties Company and the ExxonMobile Research and Engineering Company.
The chemical operating division include ExxonMobile Chemical Company. The ExxonMobile Services Company is composed of the ExxonMobile information technology, the Global Procurement, the Business Support Centres, the Global Real Estate and Facilities. Vertical integration is a management style that is used by multinational oil corporations in its management controls.
This is because vertical integration unites companies through a hierarchy where they share a common owner. Every member of the hierarchy deals with the production of products different from the other member and the products are combined to satisfy a common need. Vertical integration helps multinational oil companies to eliminate or avoid hold-up problem.
Hold- up problem denotes a situation where two sides such as the manufacturer and the supplier may be able to carry out their businesses activities very well and more efficiently by working hand in hand but they refrain from doing so due to the fact that one side may gain bargaining power over the other resulting into reduced profits. The multinational companies engaging in vertical integration are able to avoid hold-up problems that arise with vertical integration through entering into vertical agreements.
These are agreements that are entered into between firms down or up the supply chain from one another. Vertical integration has adequately helped the multinational oil companies to use their operating systems in the most desirable manner in order to promote better efficiencies and financial growth. There are three types of vertical integration that are used by the multinational companies in their business operations.
The first is the backward vertical integration where the company’s sets up their subsidiaries that produce raw materials or inputs that is used in the production of its products. The control of the subsidiaries set by the multinational oil companies ensures that there is a constant supply of the raw materials and inputs as well as ensuring that the quality of the products is upheld.
The second type of vertical integration adopted by the multinational oil companies is the forward vertical integration. The companies with this type of vertical integration sets up subsidiaries that market or distribute products to customers or they use the products themselves. The third type of vertical integration is the balanced vertical integration where the multinational oil companies sets up their subsidiaries that both distribute their outputs and supply the companies with the inputs.
In this respect multinational oil companies such as ExxoMobil adopts the vertical integrated structure because they remain active all the way along the chain of supply from the initial activities of locating the deposits of crude oil, extracting and drilling crude, carrying out the transportation of the crude oil round the world, refining it into finished petroleum products such as gasoline and petroleum, to the actual activities of distributing the retail stations that are owned by the company where it is finally sols to the consumer.
The benefits that multinational companies get from adopting the vertical integration structure are numerous. The first internal gain that multinational oil companies get from vertical integration is the lower transaction costs. The second internal gain includes harmonization of demand and supply along the products chain. The third internal gain is the higher investment and lower uncertainties in the company’s operations.
The fourth internal gain is the ability to use the market foreclosure to monopolize the oil market. However with all these internal gains there are internal losses that are experienced by the multinational coil companies when they adopt vertical integration as their strategy of management controls. The loss occurs when the companies experience higher organizational and monetary costs when trying to switch from some buyers and suppliers to other buyers and suppliers.
In terms of the benefits that the society gets from multinational oil companies adoption of the vertical integration management control strategy is the better opportunities that are availed by the companies for investment through reduction in uncertainties.
However the losses the society may experience as a result of the multinational oil companies adoption of the vertical integrated structures are the transformation of the markets into monopoly markets which means that prices for the oil products are fixed by the company and no longer by forces of demand and supply. The society may be disadvantaged when the company decides to increase the prices of the products unnecessarily citing various issues.
The other loss to the society may be the rigid structures of the organization through having shortcoming that are similar to the socialist economy. Intermediate components monopoly may result into price gouging which may lead or result into a throwaway society. There are more arguments that have stipulated the reason as to why the multinational oil companies such as Exxomobile Oil Company often adopt the vertical integrated structure.
The companies adopting vertical integrated structure are made to keep their infrastructures up to date all the year around because when new technologies are available the company has to reinvest in its infrastructures in order to keep up with the stiff competition. Adopting vertical integrated structures enables the company’s components to work harmoniously which translates into lower repair as well as down time costs.
The implications of vertical integrated structure are numerous many as mentioned earlier and they can be both negative and positive implications depending on how the oil company decides to carry out its vertical integrated structure. One of the positive implications is the reduction in costs transaction costs which enables the multinational companies record high profit growths from their operations.Some argue that vertical integration will eventually hurt a company because when new technologies are available, the company is forced to reinvest in its infrastructures in order to keep up with competition.
Some say that today, when technologies evolve very quickly, this can cause a company to invest into new technologies, only to reinvest in even newer technologies later, thus costing a company financially. However, a benefit of vertical integration is that all the components that are in a company product will work harmoniously, which will lower downtime and repair costs.
The second positive implication is the reduction in uncertainties which enables the company to invest widely and this explains the reason as to why the moil companies expand so fast internationally. The multinational oil companies should therefore continue adopting the vertical integrated structure in their operations because of the numerous benefits that accrues from the strategy.
References
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Williamson, O (2006),”transactions-Cost Economics: The Governance of Contractual Relations.” Journal of Law and Economics, (New York, New York Press).