Introduction
The purpose of this report is to analyze SABIC Corporation. The analysis will focus on the firm’s external environment. PESTEL analysis will be used to analyze the macro-environment, whereas Porter’s Five Forces framework will be used to analyze the competitive environment. The firm’s internal environment will be examined with the aid of SWOT analysis. Based on these analyses, strategic management recommendations will be made to help the firm to improve its competitiveness in the industry.
The Industry
The global petrochemical industry is one of the major drivers of economic growth in the world economy. Before 1980, the US, Japan and Western Europe accounted for over 80% of the industry’s production. However, production and consumption has rapidly shifted from the western countries to Asia in the last two decades.
By 2010, production in the US, Japan and Western Europe had declined to 37%. Asian firms have increased their production in the industry due to their ability to access vast oil and natural gas reserves. Currently, the USA, China, and India are the main markets for petrochemical products.
Some of the top ten firms in the industry include BASF SE, BP plc, China Petro-Chemical Corporation, Dow Chemical Corporation and SABIC. The industry grew by 5% in the last five years.
This growth is attributed to increased consumption of petrochemical products in emerging markets such as China and India. According to the 2011 estimates, the industry is worth $600 billion. The factors that are likely to reduce the industry’s future growth include high oil prices, environmental concerns, and poor global economic growth.
The Business
SABIC is one of the largest and fastest growing firms in the global petrochemical industry. It was founded in 1976 in Riyadh, Saudi Arabia, where its headquarters are located. Even though SABIC is a public firm, the government of Saudi Arabia owns 70% of its shares. The company’s main products include chemicals, plastics, fertilizers, and metals.
Since its inception, the firm has maintained a remarkable financial performance. In 2011, SABIC recorded a net profit of $7.8 billion (SABIC). As at 31 December 2011, the firm had assets worth $88.74 billion.
Furthermore, it had more than 40,000 employees (SABIC). In the last ten years, the firm’s production increased by 197%. Consequently, SABIC has been able to expand its operations by joining over 40 overseas markets (countries). These markets are in Asia, America, Africa, and the Middle East.
SABIC’s Vision and Mission
The firm’s vision is to be “the preferred world leader in chemicals” (SABIC). In this regard, the objective of the firm is to increase its competitiveness by producing high quality products and services. Additionally, the firm aims at meeting the expectations of its shareholders by maintaining high financial performance.
Hence, SABIC’s mission is “to responsibly produce quality products and services through innovation, learning and operational excellence while sustaining maximum value for the shareholders” (SABIC). In order to achieve its mission and vision, the firm has strategically chosen to optimize its capacity by adopting the latest production technologies. It has also embarked on optimal application of its natural resources, as well as, training and empowering its employees. This will facilitate creativity, innovation, and high productivity.
SABIC’s Strategic Management Levels
SABIC has six business segments namely, “Chemicals, Polymers, Fertilizers, Metals, and Innovative Plastics” (SABIC). At the corporate level, a board of directors that consists of seven members leads the business. The board defines the firm’s broad objectives, and its diversification priorities.
In this regard, the board monitors the competition in various market segments in order to identify the threats and opportunities. Moreover, the board supervises the management by ensuring that the firm’s operations meet acceptable corporate governance standards.
At the strategic business unit level, each of SABIC’s segments is led by an executive vice president. The vice presidents lead management teams whose responsibilities include the following. First, they position the business against its rivals by implementing effective operations and marketing strategies (SABIC). Second, they monitor changes in demand for specific products, and the external forces that are likely to affect the business. This enables the management to align the firm’s strategies to changes in the market.
SABIC’s functional level of strategic management consist of experts whose main responsibility is to execute duties such as marketing, financial management, human resource development, production and managing R&D (SABIC). Each business segment has its own marketing, and production departments. However, financial management, as well as, research and development (R&D) activities are centralized. Generally, the responsibility of the management at this level is to implement the firm’s strategies.
Analysis of the External Environment
Political Factors
Tax policies and trade restrictions are the most influential political factors in the industry. In Asia and the Middle East, the local governments own most petrochemical firms. The governments in these regions use high tariffs and quota restrictions to protect local firms from external competition (KPMG).
On the contrary, the US and European markets have little restrictions to entry because they have fully complied with the World Trade Organization’s regulations on free trade. China, which is the second largest market for petrochemical products, has also eliminated tariff and non-tariff barriers to entry.
Chinese firms cannot meet the country’s demand for petrochemical products. Hence, the Chinese government encourages importation of petrochemical products to supplement local production. Within the Gulf Cooperation Council (GCC) region, local firms pay less than 2% import duty, whereas the non-GCC firms pay 7% import duty.
The government of Saudi Arabia does not impose corporate tax on local firms. Consequently, local firms such as SABIC have a competitive advantage over their foreign counterparts in the Saudi market. In Europe and the US, corporate tax is as high as 25%. This reduces the competitiveness of local firms.
Economic
Economic growth has a great influence in the petrochemical industry. In 2011, Saudi Arabia’s economy grew by 6.8%, thereby increasing the demand for petrochemical products. In the last five years, the BRIC economies (Brazil, Russia, India, and China) have grown at an average rate of 5%.
Consequently, they have emerged as the main markets for petrochemical products. In Europe and the US, production and demand has significantly reduced due to poor economic growth. In 2011, the GDP of the Euro-zone grew by 0.2%, and it is likely to contract by -1.3 in 2012 (Gill and Raiser 10-20).
The economy of the US is likely to grow by only 1.8% in 2012. Hence, demand will be low in these markets. The sharp increase in the price of crude oil and feedstock has led to high production costs in the industry. The European producers are the most affected by this increase in prices.
Technology
Technology plays an integral role in the industry because it determines production efficiency and product quality. The projected growth of the global expenditure on research and development (R&D) in 2012 is 5.2%. Japan, the US, China, and European economies account for more than 70% of this expenditure.
In Saudi Arabia, expenditure on R&D is as low as 0.25% of the country’s GDP. Nonetheless, globalization has enhanced technological transfer in the industry. Most producers from the developed world are joining emerging markets such as Saudi Arabia and India through acquisitions and joint ventures. This has facilitated technological transfers from the developed to developing countries.
Environment
Environmental concerns pose a great threat to the future of the industry. The industry heavily depends on oil for its production. However, the use of oil as a raw material, or as a source of energy is discouraged in most countries because it causes air pollution. Some of the industry’s products such as polythene, industrial chemicals, and plastics normally cause environmental pollution.
Consequently, their production is discouraged through high taxes. In the US and Europe, quantitative restrictions are being used to limit the production of polythene in order to protect the environment. Environmental regulations are low in the Middle East and Saudi Arabia. However, the demand in these markets is too little to accommodate local production.
Analysis of the Competitive Environment
Threat of New Entrants
The threat of new entrants in the industry is low. Joining the industry requires heavy investments in production plants and technology. These investments require a lot of financial capital, thereby discouraging potential firms from joining the industry. Most firms have established multiple production plants in various parts of the world (KPMG). The resulting economies of scale enable the firms to sell their products at low prices.
Hence, new entrants find it difficult to compete with the incumbents. Finally, the incumbents control the supply of raw materials, especially, in the Middle East and Asia. In these regions, the local governments own the petrochemical firms and the oil companies that supply the raw materials. Hence, the governments discourage competition from new entrants by regulating the supply of oil. The low threat of new entrants is an opportunity for SABIC to increase its production in order to serve all market segments.
Threat of Substitutes
The main substitutes for polythene and plastics are paper and light metals. Manure is the main substitute for fertilizers. Empirical studies show that the use of plastics and polythene for packaging is on the rise (KPMG). Similarly, the automobile and the manufacturing industries are shifting from the use of metals to plastics.
Polythene and plastics have become popular in production due to the low cost of manufacturing and using them. Most farmers prefer artificial fertilizers to manure because they are reliable and readily available. Consequently, the threat of substitutes is low in the industry. In this regard, the demand for petrochemical products is likely to increase in future as the world economy grows. SABIC can exploit this opportunity by increasing its output in order to get high profits.
Power of the Suppliers
The suppliers have moderate bargaining power in the industry. One factor that increases the suppliers’ bargaining power is the threat of forward integration. Oil or petroleum companies, which are the industry’s main suppliers, own most petrochemical firms. Furthermore, only a few petroleum companies are able to supply raw materials in the industry. However, the suppliers’ products such as crude oil lack differentiation.
Besides, the buyers (petrochemical firms) have low switching costs since they can easily shift from one supplier to another. This limits the suppliers’ bargaining power. The implication of this moderate bargaining power is that suppliers cannot exploit petrochemical firms through high prices.
Power of the Buyer
The buyers (petrochemical firms) have a high bargaining power. This is because they have low switching costs, and the suppliers’ products lack differentiation. The threat of backward integration is also high. Concisely, most petrochemical firms normally invest in petroleum companies (KPMG). The high power of the buyers enables them to negotiate for low prices for their raw materials.
Competitive Rivalry
There is a high competition in the industry. In the last two decades, rapid economic growth in Asia and the Middle East has led to the emergence of several petrochemical firms. However, most Asian countries are small. Thus, they are not able to consume all their petrochemical products. This has significantly increased the competition in the international market. The global petrochemical industry is mature.
Consequently, its growth rate is low. The fixed costs are also very high in the industry, especially, in the developed world. Concisely, high wage rates in developed markets such as the USA ($7.0 per hour) has significantly reduced the competitiveness of local petrochemical firms.
On the contrary, Chinese firms are more competitive because they are able to benefit from cheap labor ($2.0 per hour) in their domestic market. The high competition in the industry will lead to a reduction in product prices and profitability. Additionally, uncompetitive firms are likely to stop their operations in future.
Competitors
In 1980s and 1970s, the global petrochemical industry was highly fragmented. However, the demographic and economic changes that have taken place in the last ten years have led to consolidation in the industry. As competition intensifies at the domestic level, most firms are embarking on rapid expansion by joining overseas markets.
Concisely, most American and European firms are signing joint venture deals with their Asian and Middle East counterparts in order to sustain their competitiveness (KPMG). China and India are the preferred destinations for joint ventures and acquisitions due to their large market size and ease of doing business.
The top ten firms in the industry, which include BSAF SE, Exxon Mobil, SEBIC, China Petroleum, BP, and Dow Chemical among others, control 55% of the market. Competition among these firms focuses on product differentiation and cost leadership. Consolidation is likely to increase in future as firms try to create synergies by sharing their resources. Moreover, expansion of production capacity in the Gulf region is likely to increase competition in the next five years.
SWOT Analysis
Strengths
SABIC’s strengths include the following. First, the firm has remained profitable in the last five years. This makes it attractive to both local and international investors (Morgan Stanley). Thus, it will be able to access adequate capital to expand its operations. Second, it has heavily invested in advanced production technology.
The firm has several satellite research and innovation centers in the USA, Japan, China, and India. Through research and innovation, the firm develops at least 150 new products annually (SABIC). Additionally, it registers over 8,000 patents every year in various parts of the world.
Third, SABIC has a strong brand that is associated with high quality and reliability. Finally, the firm’s global presence enables it to reach customers in various parts of the world. Concisely, it has over 60 production plants that are located in different countries. Additional, it has sales offices in over 100 countries. This increases the visibility of its products.
Weaknesses
SABIC’s weaknesses include the following. To begin with, the government of Saudi Arabia owns a large percentage (70%) of the company’s shares. Hence, the government has a great influence on the company’s operations. Government control can be harmful, especially, if the ruling elite makes decisions that satisfy their interests at the expense of the company.
Moreover, members of the royal family hold key positions in the company. For example, the firm’s chairperson is a prince in the Kingdom of Saudi Arabia (SABIC). In this case, conflict of interest is likely to lead to poor governance in the company. SABIC has also not been able to manage its human resources effectively.
For example, the company’s top management in Saudi Arabia tends to have technical skills in areas such as engineering and oil production rather than financial skills. On the contrary, the company’s executives in Europe and the US tend to have administrative rather than technical skills. Hence, there are critical competency gaps that are likely to have a negative effect on the firm’s operations.
Opportunities
The opportunities that SABIC can benefit from include the following. First, the low threat of new entrants and substitutes is an opportunity for expansion. Concisely, new firms are not likely to join the industry due to the existing entry barriers. Additionally, superior substitute products are not likely to be developed.
Hence, SABIC can increase its revenue by expanding its output in response to future increase in demand. Second, lack of entry barriers in key markets such as China and Europe will enable the firm to increase its sales. Finally, SABIC has access to reliable and cheap supply of oil and feedstock in Saudi Arabia. By using cheap raw materials, the firm can improve its competitiveness by maintaining low prices for its products (KPMG).
Threats
The threats that are likely to affect the firm include the following. To begin with, high competition is likely to cause significant price reductions in the industry. Thus, profits will reduce, thereby limiting the firm’s ability to expand. Similarly, environmental regulations in major markets such as the USA, and Europe will limit the firm’s ability to increase production.
The economic crisis in Europe and the low economic growth rate in the USA are also likely to have a negative impact on the firm’s performance. The economic downturn in these regions has significantly reduced demand for petrochemical products. Moreover, there is high uncertainty concerning the future economic growth in these markets (Gill and Raiser 10-20). This uncertainty complicates the process of formulating strategic plans.
Strategic Management
Marketing Strategy
A well-formulated and implemented marketing strategy will enable SABIC to improve its competitive advantage. Due to the high competition in the industry, the firm should focus on identifying, and serving new market segments in order to increase its sales. The firm should also position its products as the best in the market.
In this regard, the firm will have to develop products that meet customers’ expectations, and are superior to those of the competitors. SABIC can successfully pursue a differentiation strategy because it has the financial resources to invest in superior production technologies. Apart from differentiation, the firm will have to maintain low prices in order to penetrate new markets.
Sales Strategy
SABIC should improve its relationship with its customers in order to defend its market share. Loyalty programs in which customers receive rewards for repeat purchases can help SABIC to improve its relationship with the customers. Excellent customer services will enable the firm to retain its clients. The firm should use multiple distribution channels such as wholesalers and retailers in order to increase its sales. Finally, the firm can overcome competition by implementing effective sales promotional activities.
R&D Strategy
SABIC’s R&D strategy should focus on product and process innovation. Product innovation is concerned with the improvement of the existing products and the development of new ones. The rationale of this strategy is that it will enable the firm to meet the emerging needs in the market.
Process innovation is concerned with the improvement of production efficiency. In this regard, SABIC should embark on developing technologies that lead to low pollution and production costs. This will enable the firm to sustain its low cost competitive advantage, and to avert resistance from environmentalists.
Human Resource Strategy
Acquiring the best talent in the industry will enable SABIC to improve its competitiveness. Consequently, the staff recruitment process should enable the firm to hire the right people. A diversity program will enable SABIC to manage its multicultural workforce effectively. Cultural conflicts are rampant in the firm because its employees are from diverse socio-cultural backgrounds.
The diversity programs should focus on promoting cultural tolerance by popularizing an organizational culture that is acceptable to all employees. SABIC should also implement a remuneration package that commensurate with the employees’ efforts. The employees who are able to meet their targets should receive special rewards for their efforts.
This will facilitate high motivation, commitment, and productivity. Finally, the firm should improve its staff training and development programs. Concisely, the training programs should enable the employees to acquire advanced skills in order to improve their productivity.
Conclusion
The global petrochemical industry has significantly grown in the last five years. Some of the main players in the industry include BSAF SE, Exxon Mobil, SABIC, and China Petroleum. The opportunities that are available in the industry include a low threat of substitutes and new entrants.
Additionally, the incumbent firms are able to benefit from technological transfers. Nonetheless, the competition in the industry is very high (KPMG). The increase in the price of oil and feedstock is likely to have a negative impact on the industry’s growth. Similarly, poor economic growth in key markets such as Europe and the USA is likely to slow the industry’s growth. SABIC can exploit the opportunities that are available in the industry by leveraging its strengths and minimizing its weaknesses.
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