Energy companies, by their nature, require large investments of finances, time, and, of course, technology. At the same time, there are uncertainties inherent in the nature of the business, which means that management is often forced to make decisions, especially those concerning large monetary investments, with only the approximate data, which can be quite uncertain and prone to change.
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In order to achieve its full potential and build an effective strategy, a company needs to conduct a SWOT analysis, to determine the businesses strengths, weaknesses, opportunities and threats (Mind Tools Editorial Team n.d.). Risk analysis is a key part of this process, and is vital for a successful strategy. By focusing its strategy on risk analysis, a business can identify potential issues that could undermine the current initiatives, reduce profits, and affect productivity. To be effective, risk analysis needs to me conducted on a several different levels.
First of all, the external forces which impact the energy market need to be considered (Ray n.d.). The global economy is one of the major factors affecting the energy businesses, even domestic ones. The profits of a company can be severely affected by changes in government politics, currency devaluations, international treaties, etc. In the most recent years, wars and terrorist attack have shown to play a drastic role on businesses.
Finance and major financial institutions also need to be monitored. While to an inexperienced entrepreneur they may seem less relevant, factors like interest rates, availability of loans and credit can impact an energy business in many ways, and, what is worse, they are few ways they can be controlled. Weather and geographical aspects bring their own risks, and, what is worse, affect economies at large. This means that drastic events like hurricanes and erratic weather can cause both damages and stagnation.
Laws and trends in both the local and global society have to be accounted for, and accommodated to avoid problems with the government and maintain consumer loyalty. Adverse changes in laws can limit businesses, and energy industry in particular has been under scrutiny from both the public and the governments to be more environmentally friendly. A good example of this is the UK 2010-2015 government policy for the energy industry (Department of Energy & Climate Change 2012).
Next, the business needs to consider internal resource capabilities to support their strategy. Management needs to understand its corporate model in order to be able to conduct a preliminary corporate analysis, in order to determine the markets and products that the company serves or is able to serve, what business units does the company consist of, how do they interact, and to develop a formal organization structure (Williamson et al. 2004).
Another important factor affecting the development of a strategy is the drivers of competition. The best way to study them is by using Porter’s Five Forces model of industry. The primary drivers is the treat of new entrants, threat of substitutes, the bargaining power of buyers (which is also affected by consumer preferences) and suppliers, and the overall industry rivalry (Porter 1998). There are many barriers of entry for new companies, including strict government regulations, need for patents, and availability of natural resources.
Thus, more focus needs to be placed on other forces. Clean energy, in the recent years, has started turning into a widely supported and globally trendy alternative to fossil fuels, upon which most energy companies rely, which the industry needs to consider to minimize the customer bargaining power by maintaining their loyalty (Hokroh 2014).
Overall, there are numerous fluctuating internal and external factors, like the company’s competitive advantage, available finances, the company’s current niche in the energy market, the geopolitical conditions, policies and trends, which need to be considered to maintain a strong market share and successfully manage not just risk, but also the inherent uncertainty, and thus make appropriate choices.
Department of Energy & Climate Change 2012, 2010 to 2015 government policy: energy industry and infrastructure licensing and regulation. Web.
Hokroh, M 2014, ‘An Analysis of the Oil and Gas Industry’s Competitiveness Using Porter’s Five Forces Framework’, Global Journal of Commerce & Management Perspective, vol. 3, no. 2, pp. 76-82.
Porter, ME 1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York.
Rey, L n.d., Seven External Factors of Business. Web.
Mind Tools Editorial Team n.d., SWOT Analysis. Web.
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Williamson, D, Jenkins, W, Cooke, P & Moreton, KM 2004, ‘Chapter 1. The first big questions: Where is the organization now?’, in Strategic management and business analysis, Elsevier, Amsterdam.