History, Development, and Growth
NAMA Chemicals is a multinational petrochemical company that was incorporated in Jubail, Saudi Arabia in 1992. The company’s vision is to “meet customers’ needs consistently and to offer innovative solutions that enhance their satisfaction” (NAMA, 2013). In order to achieve this mission, the company focuses on utilizing advanced technology to produce high quality products.
NAMA specializes in the production of chemicals such as epoxy, hydrochloric acid, anhydrous caustic soda, calcium chloride, and sodium. In early 1990s, NAMA focused on serving the Saudi Arabian market by using locally available raw materials to manufacture its products. During this period, the company’s main customers included Saudi-based textile, oil, food, and drug manufacturers who needed chemicals to produce their products.
From mid 1990s, the company focused on joining overseas markets through foreign direct investments. In this regard, the company joined Switzerland and Germany (NAMA, 2013). Additionally, it serves Africa, the USA, China, and India through exportation of its products.
NAMA is also affiliated to other companies such as JANA, Arabian Alkali, and NAMA Industrial Investments, which it co-owns with other petrochemical companies in Saudi Arabia. These affiliates have enabled the firm to join international markets and to increase its revenue.
Strengths
First, the company has vast knowledge of the Saudi and global petrochemical market. This has enabled it to gain 6% of the world petrochemical market within its 30 years of operation (NAMA, 2013). Second, NAMA is capable of raising non-interest bearing capital from its shareholders, as well as, loans from banks. These sources of capital enable the company to expand by constructing new manufacturing plants, as well as, to finance its research and development initiatives.
Third, NAMA uses advanced technology in production, which enables it to manufacture high quality chemicals without causing adverse environmental damages. Fourth, the company has a diverse and talented workforce that consists of nationals from over 15 countries (NAMA, 2013). Thus, it is able to overcome the cultural conflicts that multinational corporations usually face in overseas markets. Finally, NAMA has a strong brand image that is associated with high quality in the global petrochemical industry.
Weaknesses
First, the company has a narrow product range. Concisely, it specializes in the production of chemicals rather than manufacturing a wide range of petrochemical products (NAMA, 2013). Reliance on chemicals always exposes the company to the risk of price and demand fluctuations, especially, when its customers (manufacturers) are recording poor financial performance.
Second, NAMA has a very poor financial record because it has been making losses since 2009 (NAMA, 2013). This will reduce its ability to raise capital for expansion and new product development.
Third, serving overseas markets through exportation lowers the competitiveness of NAMA’s products. This is because they are subject to high import duties in countries such as China. Finally, NAMA’s top management consists of managers with high qualifications in areas such as chemical engineering rather than business or management disciplines. This leads to poor management, which partly explains the company’s inability to return to profitability.
PESTEL Analysis
Political Factors
The main political factors that influence the performance of petrochemical firms include energy policies, as well as, liberalism and protectionism in global trade. Following the increase in public outcry concerning the pollution caused by fossil fuels, most western countries implemented policies that encourage the production of clean energy.
The resulting decrease in oil and natural gas production reduced the competitiveness of western petrochemical manufacturers. Consequently, most western producers have been relocating to Asian and Middle East countries such as Saudi Arabia, UAE, and Singapore, which have high oil production and liberalized economies (Kalkman & Keller, 2011, pp. 1-25).
This has led to high competition in Asian and Middle East economies, which have small domestic markets. Moreover, exportation from Asia is difficult due to the high tariffs charged in overseas markets such as the European Union and Africa. Thus, high competition in the Middle East and high export tariffs reduces the competitiveness of NAMA.
Economic Factors
Inflation (high feedstock prices) and GDP growth are the main economic factors that influence the performance of the industry. In 2012, North America managed to reduce the price of its natural gas through increased exploration, thereby lowering the production costs of USA-based manufacturers (Margeson & Masterson, 2012, pp. 20-40). Nonetheless, low gas prices are expected to reduce the profits of oil and gas companies in the medium term, thereby lowering gas production.
Currently, Europe has the highest oil prices, thereby increasing the production costs of its petrochemical firms. Though China has limited supply of oil and gas, its petrochemical firms benefit from low labor costs. Asian and Middle East countries have access to low cost feedstock, but their domestic markets are small. These trends mean that NAMA has the opportunity to produce for the international market.
Nonetheless, the Euro-Zone has a low demand due to its economic crisis. Similarly, the USA will not have a high demand because its GDP is expected to grow by less than 2% in the next 5 years (Todeva & Fu, 2012, pp. 46-72). However, GDP growth in the emerging market economies is expected to average 6.5% in the next 5 years. The resulting increase in demand in these markets will improve NAMA’s earnings.
Social Factors
Rapid population growth and urbanization in emerging markets is expected to increase demand for goods such as drugs, textile, processed food, fertilizers, and automobiles in the next five years (Todeva & Fu, 2012, pp. 46-76). These products are manufactured using the chemicals produced in the petrochemical industry. Thus, an increase in their demand will raise the demand for NAMA’s products.
Technology
In the last five years, Europe and the USA have significantly reduced their investments in research and development. In 2012, investments in research and development in Europe and the USA increased by 2.8% and 2.1% respectively. However, investments in research and development increased by 8.9% in the Asia-Pacific region (Todeva & Fu, 2012, pp. 46-72).
Additionally, the relocation of western petrochemical firms to Asia and the Middle East has resulted into technological transfers, which improve eastern firms’ competitiveness. Technological transfers from the west and increased investment in research and development in the Middle East enables NAMA to access advanced technologies, which will improve its competitiveness.
Environment
Petrochemical companies pollute the environment through greenhouse gas emissions because of their dependence on fossil fuels. Additionally, the chemicals they produce have adverse environmental effects.
Thus, the industry is characterized with high regulation, which involves scientific verification of the environmental impacts of each product (Margeson & Masterson, 2012, pp. 20-40). Moreover, petrochemical firms pay high emission taxes, especially, in Europe and the USA. These taxes lower the profits of companies such as NAMA.
Legal Factor
Consumer protection laws have a great influence in the petrochemical industry. In most countries, petrochemical products that are used as ingredients for processed food are subject to intense regulation. This involves setting high product quality standards, which are expensive to meet, thereby increasing production costs.
Porter’s Five Forces Analysis
Threat of New Entrants
The threat of new entrants in the industry is low due to the following reasons. First, joining the industry requires a significant amount of financial capital and advanced technologies, which potential investors do not have. Second, the incumbents have achieved economies of scale through multi-plant production systems (Kalkman & Keller, 2011, pp. 2-30).
This gives them a competitive advantage over new entrants. Finally, the incumbents have an advantage in accessing raw materials (oil and gas) due to their large capacities. Concisely, oil producers prefer to supply large petrochemical firms who offer high prices and purchase large quantities. The low threat of new entrants is an opportunity for NAMA to increase its production in order to satisfy existing and emerging market needs.
Power of Buyers
There are very many buyers (petrochemical firms) in the industry who compete for the limited supply of oil and gas. Additionally, the threat of backward integration is low because most petrochemical companies lack the capacity to drill their own oil and gas. Nonetheless, petrochemical firms have low switching costs since they can easily shift from one supplier to another.
Moreover, suppliers’ products (oil and natural gas) have very low differentiation. In this regard, petrochemical firms including NAMA have a moderate bargaining power in the industry. This gives them a chance to negotiate for low prices for feedstock (Witcher & Chau, 2010, p. 214).
Power of Suppliers
The suppliers (oil and gas companies) have a fairly high bargaining power due to the following reasons. First, there are no substitutes for their products in the industry. Second, the demand for oil and gas is very high in other industries such as transportation and manufacturing.
Thus, oil companies can only sell to petrochemical firms if the later offers high prices. Third, the threat of forward integration is high because most oil and gas companies have the capacity to establish their own petrochemical subsidiaries (Kalkman & Keller, 2011, pp. 1-25). Nonetheless, petrochemical firms have low switching costs and suppliers’ products lack differentiation. The high power of suppliers means that they can charge high prices for their products, thereby increasing NEMA’s production costs.
Threat of Substitutes
Chemicals such as hydrochloric acid and epoxy do not have direct substitutes because they are used for a variety of applications in different industrial processes. Additionally, available substitutes tend have low quality. For example, most experts agree that epoxy resin is superior to its substitutes such as polyester resin (Todeva & Fu, 2012, pp. 46-72). In this regard, the threat of substitutes is low. This is an opportunity for NAMA to continue manufacturing high quality products in order to earn high profits.
Competitive Rivalry
The threat of competitive rivalry is very high because of the following factors. First, the industry has a large number of firms that are competing for the global market. Second, the industry’s growth rate is low, thereby forcing firms to employ intensive marketing strategies to increase their earnings and market shares.
Third, most companies have focused on product differentiation, thereby increasing competition on the basis of quality and benefits. Finally, storage costs of raw materials such as oil and finished products are very high. The high competition is a threat to NAMA’s growth because prices for its products are likely to decline, thereby reducing its profits. Additionally, it is likely to lose its market share to firms that are more efficient (Witcher & Chau, 2010, p. 95).
Industry Life-cycle Analysis
The global petrochemical industry is characterized with following trends. To begin with, differentiation and cost leadership strategies have become the norm in the industry. In Europe and North America, most producers are pursuing cost leadership strategies in order to maintain their profitability.
In particular, they focus on implementing cost reduction strategies such as lean manufacturing in order to eliminate wastes. Additionally, most western petrochemical firms have contracted manufacturers in countries with cheap labor such as China to produce their products (Kalkman & Keller, 2011, pp. 1-25).
The resulting reduction in production costs enables western petrochemical firms to improve their profitability. In Asia and the Middle East, companies are pursuing both differentiation and cost leadership strategies. Unlike the west, Asian and Middle East markets still have segments that are not fully served, thereby necessitating product differentiation.
The industry recorded a low growth in the last ten years. For example, in Asia-Pacific and Latin America, the industry grew by 5.7% and 3.2% respectively (Todeva & Fu, 2012, pp. 46-72). In the EU and NAFTA trading blocs, the industry grew by 1.3% and 1.4% respectively. The low growth has led to high competition in nearly all regions. Additionally, several segments have emerged as firms focus on serving emerging market needs.
Finally, the main objective of firms in the industry is to defend their market shares (Todeva & Fu, 2012, pp. 46-72). In this regard, they are focusing on marketing their products through promotional activities such as relationship selling, advertising and offering discounts on bulk purchases. Furthermore, the incumbent firms are concentrating on extending the life cycles of their products. This involves conducting research and development in order to improve existing products.
The trends discussed in the foregoing paragraphs mean that the industry is at its maturity stage. In this regard, demand for NAMA’s products is likely to reduce as the industry approaches its decline stage. Additionally, the company can run out of business if it will not be able to withstand the high competition in the industry.
SWOT Analysis
The external environment analysis revels that NAMA faces several threats in the industry. These include high power of the suppliers, expected decline in demand due to the maturity of the industry, intense regulation, and high competition. Nonetheless, the industry has opportunities such as the expected increase in demand in emerging market economies, access to low cost feedstock in the Middle East, low threat of new entrants, and low threat of substitutes.
Despite the threats in the industry, NAMA can still pursue its corporate strategy profitably. In particular, its talented workforce will enable it to develop high quality products that satisfy customer needs and meet global quality standards.
Similarly, the workforce has the capacity to achieve process innovation, thereby enabling the company to avoid breaching environmental laws and the costs associated with it. Moreover, NAMA’s access to advanced technology will enable it to reduce its production costs and to expand its product line. In this regard, the company will be able to serve new market segments.
NAMA has a strong brand image that is known for quality. This strength will enable it to overcome intense competition in the industry. This is because customers usually prefer to buy products from companies whose products are associated with high quality. Since NAMA sells mostly to manufacturers, the demand for its products is likely to remain stable if it keeps its promise of supplying high quality products to the customers.
Even though NAMA has been making losses in the last four years, it is still financially stable. The company’s current ratio (CR) decreased from 1.71 in 2011 to 1.26 in 2012. Despite this decline, the company is still liquid. This is because its CR of 1.26 means that it can pay all its current debts in the short term without difficulties. NAMA’s debt-to-equity ratio declined from 0.42 in 2011 to 0.47 in 2012.
The company’s low debt-to-equity ratio means that it does not depend on debts to finance its expansion activities. The advantage of the low debt-to-equity ratio is that it will enable the firm to access capital from its shareholders and from local banks (Witcher & Chau, 2010, p. 275). In particular, any capital injected in the company for expansion purposes is likely to improve its revenues. The resulting increase in profits will enable the firm to pay the interest charged on its loans.
The company can utilize the borrowed capital to finance activities such as marketing and product development in order to overcome competition. Nonetheless, the company might be denied credit due to its inability to return to profitability in the last four years. Despite the financial challenges facing the company, its competitive position is still strong. Thus, it is likely to overcome the threats in the industry if it leverages its strengths.
NAMA’s Corporate-level strategy
NAMA’s mission is to “supply customers with the highest-quality products and services, while maximizing value for all stakeholders through strategic growth” (NAMA, 2013). The company has set four strategic goals in order to achieve its mission.
These include becoming the fifth largest epoxy producer in the world, exceeding international quality standards, and maintaining acceptable corporate ethics, as well as, using advanced and clean technologies to avoid environmental pollution. These goals support NAMA’s corporate strategy, which focuses on the production of various chemicals for the manufacturing sector in Saudi Arabia and overseas markets. The merit of this strategy is that focusing on one product line (chemicals) enhances specialization.
Firms that specialize in producing a few products are often able to maintain high quality standards and to satisfy the needs of their clients. Nonetheless, specializing in chemicals is not appropriate due to the current industry trends. In particular, fluctuations in demand for chemicals will continue to impact negatively on the company’s sales and profits. Additionally, focusing on one segment (manufactures) denies the company the opportunity to serve other segments such as individual users of chemicals.
Initially, NAMA focused on joining international markets through foreign direct investments (NAMA, 2013). However, the company has since resorted to joint venture deals in order to join overseas markets. The rationale of this strategy is that it enables NAMA to share risks with its partners in overseas markets. Joint venture deals also enable the company to utilize its partners’ resources such as distribution channels, financial capital, and market knowledge.
In addition, the deals improve NAMA’s ability to penetrate overseas markets by serving the clients of its partners. These benefits improve the competitiveness of NAMA in overseas markets. The disadvantage of this strategy is that NAMA’s strategic goals might conflict with those of its partners, thereby lowering its competitiveness.
NAMA’s Business-Level Strategy
NAMA has two main divisions namely production of chemicals and provision of services. In the chemical production division, the company follows a differentiation strategy by manufacturing a variety of chemicals that are meant for specific industrial applications.
The rationale of pursuing a differentiation strategy is that NAMA produces chemicals that are used by particular clients rather than the mass market. The competencies that enable NAMA to pursue the differentiation strategy include the following. First, the company has access to cutting-edge technology through its research and development department (NAMA, 2013).
Research enables NAMA to develop new products and to modify existing ones in order to satisfy the needs of each client. Second, NAMA has talented employees who are able to utilize their creativity to find solutions to customers’ needs. Finally, NAMA has a good corporate reputation or brand image that is associated with high quality. This enables it to charge premium prices in order to recover the high costs of producing high quality products.
The services division focuses on manufacturing chemicals on behalf of overseas petrochemical companies. These services are usually provided by NAMA’s affiliates. The company pursues a cost leadership strategy in its services division.
This is because the main factor that motivates overseas companies to hire Saudi-based firms to manufacture on their behalf is cost reduction. Thus, NAMA employs its resources efficiently to manufacture chemicals on behalf of its clients at a low cost (NAMA, 2013). The competencies that enable it to pursue this strategy include the following.
To begin with, NAMA has access to financial capital that enables it to establish low-cost production plants and to increase the capacity of its existing facilities. For example, it used 436 million Saudi Riyal to expand its epoxy plant in 2010 in response to increasing demand. Additionally, NAMA has an efficient supply chain system that enables it to reduce the cost of transporting raw materials and finished goods.
Structure and Control System
NAMA uses a product organizational structure to manage its employees and operations. In particular, the company has been organized into divisions that specialize in the production of specific products.
For example, Arabian Alkali, which is one of NAMA’s subsidiaries, specializes in the production of anhydrous caustic soda (NAMA, 2013). This organizational structure enables NAMA to allocate adequate resources to each product line. Additionally, it enables the firm to improve efficiency in decision-making processes, thereby enabling it to respond to market needs in time.
The managers who are in charge of each division report to the top management that oversees the operations of the group (NAMA, 2013). The management has put in place a performance-based remuneration system in order to motivate managers and their employees to achieve the firm’s strategic objectives.
This involves paying high salaries to employees in order to encourage them to improve their productivity. Moreover, the firm uses intrinsic rewards to improve the commitment of its employees. This involves rewarding employees who are able to achieve non-financial goals such as cooperating with other divisions, engaging in ethical behavior, and working effectively within teams.
Recommendations
First, NAMA should expand its product line in order to improve its profitability. In particular, it should diversify its product portfolio by introducing consumer goods such as soaps, packaging materials (polythene), synthetic fiber, and brushes. Introducing these products is possible because they are also made from feedstock.
The rationale of introducing consumer goods is that their demand is more stable than that of chemicals. For example, people will continue to buy soaps even during recessions albeit in small quantities. On the other hand, manufacturers who buy NAMA’s chemicals can close during recessions, thereby forcing NAMA to run out of business.
Second, NAMA should hire managers with qualifications in finance and management rather than technical skills in engineering. Hiring managers with the right qualifications will enable the firm to understand market dynamics and to develop the right solutions (Witcher & Chau, 2010, p. 146). The process of changing the management team can be done over a one-year period through effective succession planning.
Finally, the company should focus on entering overseas markets through joint ventures rather than exporting. This will enable it to improve the competitiveness of its products by avoiding high import duties in overseas markets (Witcher & Chau, 2010, p. 187). This recommendation can be implemented in the next three years because the company will require adequate time to find the right partners in various overseas markets.
References
Kalkman, J., & Keller, A. (2011). Global petrochemicals: Who is benefiting from the growth in the new world? London: Competence Center Global Chemicals.
Margeson, J., & Masterson, B. (2012). Global Chemistry Industry. Ottawa: Canadian Chemistry Association.
NAMA. 2013. About us. Retrieved from http://www.nama.com.sa/.
Todeva, E., & Fu, Y. (2012). Multinational investment projects in the petrochemical industry in China. Journal of Knowledge Based Innovation in China, 2(1), 46-72.
Witcher, B., & Chau, V. (2010). Strategic management: Principles and practice. New York: McGraw-Hill.