SUSTAINING COMPETITIVE ADVANTAGE IN THE GLOBAL PETROCHEMICAL INDUSTRY: A SAUDI ARABIAN PERSPECTIVE

NAME: Ria Agustriana NIM : 29111321 CLASS: R 46 - A

MASTER OF BUSINESS ADMINISTRATION INSTITUT TEKNOLOGI BANDUNG 2013

The External Environment: Opportunities, Threats, Competition, and Competitor Analysis

The external environments influences firms as they seek strategic competitiveness and above average return. A firms external environment creates both opportunities and threats. The understanding of condition in its external environment that the firms gain by analyzing the environment then matched with knowledge about its internal organization as the foundation for forming the firms vision, mision, and implementing the strategic actions. The strategic actions are inffluenced by the condition of three parts: the general, industry, and competitor of its external environment.

a. The General Environment: elements in the broader society that affect industries and their firms. It consists of seven environmental segments: demographic, economic, political/legal, sociocultural, technological, global, and physical. Identifying opportunities and threats is an important objective of studying the general environment. To increase understanding of the general environment, firms engage in external environmental analysis. This analysis has four parts: 1) Scanning: Through scanning firms can identify early signals of potential changes in the general environment and detect changes that are already under way. 2) Monitoring: To observe environmental changes to see if an important trend is emerging from among those spotted through scanning. 3) Forecasting: To develop feasible projections of what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring. 4) Assessing: To determine the timing and significance of the effects of environmental changes and trends that have been identified. b. Industry Environmetn Analysis: Has a more direct effect on the firms strategies competitiveness and ability to earn above average returns. The Porters five forces model competition has been developed as one of the most often used business strategy tools to analyse the competetive game in industries. 1) Threat of new entrants: How easy or difficult is it for new entrants to start compete and what barriers exist?

2) Bargaining power of buyers: How strong is the position of buyers, can they work together to order large volumes? 3) Bargaining power of suppliers: How strong is the position of sellers, are there many or only few potential suppliers, is there a monopoly? 4) Threat of substitute products: How easily can our product or service be substituted, especially more cheaply? 5) Intensity of rivalry among competitors: Is there a strong competition between the existing players, is one player very dominant or all equal in strenght/size?

c. Competitor Analysis: Focuses on each company against which a firm directly competes. The analysis informs the firm about competitors future objectives, competitors current srategies, competitors assumption, and competitors strengths and weaknesses. The result of an effective competitor analysis help the company to understand, interpret, and predict its competitors action and responses.

Case Summary: Sustaining Competitive Advantage in The Global Petrochemical Industry: A Saudi Arabian Perspective

Saudi Arabia has been on the path of economic growth, even in the middle of widespread decline globally. Saudi Arabia use its competative advantage to remain competitive. Oil and gas reserves remaining Saudi Arabias greatest natural asset and largest single source of revenue and well known as a leading producer and exporter of oil. Saudi Arabia account for more than 5% of the worlds petrochemichals production and also the largest producer of MTBE (Methyl Tertiary Buth Ether) with a global share of around 15%. Saudi Basic Industries Corporation (SABIC) established as a result of govenrments plan and became the third largest producer of petrochemical with 16 manufacturing subsidiaries that are growing.

The Petrochemical Industry in Saudi Arabia Domestic Consumption in Saudi Arabia is low, due the small size of market. Therefore the industry in general pursued an export-oriented strategy, as a result of more than 76% of

its petrochemicals production is being exported. Two major markets for saudi exports are the Middle Eastern and East Asian region. From the analysis we can define the key strenghts of Saudi Arabia petrochemical industry located in: the low costs of feed stocks, low costs of utilities, large scale of production that cause the average fixed costs and average variable costs lower than competitor, lower capital cost due to lower initial costs and last the presence of an efficient infrastructure. There were also some weaknesses in petrochemical industry: lack of technological and skills of personnel, lack of management expertise, and lack of the ability on marketing approach, product development and providing technical support. Industry Analysis: Porters Five Forces Model To maximising SABIC corporate value creation, we use Porters five forces model to analysis the petrochemical industries to creating competitive strategy and analysis the attractiveness of an industry structure. The model also determine the long run profitability of the petrochemical industry in Saudi Arabia.
Threat of new entrants Big firms dominated market Cooperation with existing firms for a new firm to enter market. Complexity and size plants will be expensive to build. High Technology needed. Access to market is limited.

Suppliers power of bargaining Suppliers scattered around the globe. Low on switching costs to another supplier Reasonable price and Rivalry between firms Merger and Acquisitions between major players. Exxon, Shell, BASF chemical company, Dow Chemical, Mitsubishi. Equal in size and market power. Price war due the sluggish growth rate. No quality differences. Customer easily switch from one supplier to another. Costs of leaving market is high.

Buyers power of bargaining Numerous customers from around Nations, the world Indian (Gulf sub-

continent, Far East, Middle East, Africa, Europe, Japan) Some product dependence on a single country like China gives bargaining power to buyer. Focusing on a single nation will pose threats and find alternative markets.

greater credit facilities. Critical raw material have a high bargaining power.

Shirtage in supply may jeopardise production

Threat of substitutes Concerns about the environment, it will lead to biochemical substitution.

From the analysis above, we can generates some strategy and practical implication to improve Sabic competitiveness among competitiors on the industry. 1. The company should trained the human resources well the local employees has same managerial and technical skills with the expatriate that has been hired in company. The vision and mission of company must be reflecting with the performance of all employee, department, manager, and firms of SABIC. 2. Aggressive marketing and distribution channel needed to sustain the profitability in global market so they can penetrate a new and untapped markets like Far East and South East Asian region. 3. Empowering the Research and Development (R&D) division so they can creates some extension product lines, a world-class quality product that differs SABIC firms from other competitors. Its better to create a uniqueness of the product that will give the firm an advantage point. 4. Improving high technology to support the operational of firms. 5. Offering the long-term contract to customer (one year or more) with one or combination price so the existing customer will prefer to choose SABIC among other competitor. 6. Smaller and medium firms should merge in order to strenghten their capital base, increase productivity and cut costs.

Lesson learned from the case Saudi Arabia petrochemical industry has strong attractiveness and long-run industry profitability and competitions. The petrochemical industry has helped Saudi Arabia to gain and maintain its competitiveness. However, the presence of competitors which are regional and international reduces the effectiveness of Sabic in the international markets. By analyzing the external environment of the industry with Porters five forces model, Sabic can select several strategies that can be applied immediately to the company. Sabic has to pay attention more to the human resources, marketing and distribution channel, research and development division, high technology that needed to strenghten their position even they are already one of the biggest player in the industry. The product substitution will be one of the threats for the firms, as many customer aware about the important to keep the environment clean. New comer and new competitor will always come, the strategy needed to anticipated competition from foreign companies that will enter Saudi Arabia.