Strategic Management Case Study Report: Saudi Aramco

Introduction

            Nouriel Roubini (2006) reveals several crucial macroeconomic issues and vulnerabilities in the global economy, such as the surge of energy demand that would raise the inflation in a country. Situations like this underscore the notion that oil price has great influence over the macroeconomics of a country. Some analysts point out that current oil price is caused by cartel agreements of OPEC members (Organization of the Petroleum Exporting Countries), which determine the volume of production in order to achieve a rise in price. Several researches indicate that oil price has a significant impact on macroeconomy, since it could send the global economy into recession, as it happened in the 1970s. While the increased price of goods may be caused by scarce resources and high demand, the undulating oil price may be due to economic and political events, since the rising price usually occurs on the trading floor, and not because of the scarcity of resources.

            One member country of OPEC that has the great influence in the oil production is Saudi Arabia, which is the only country that can increase oil production in order to offset market disruptions, as it happened during the Iraqi invasion of 1990 or the suspension of Kuwaiti output. Oil production in Saudi Arabia is done by Saudi Arabian Oil Company or Saudi Aramco, a state-owned national oil company of Saudi Arabia. It manages a broad range of global petroleum enterprises, ranging from exploration and refining to distribution and shipping. In addition, Saudi Aramco holds the world’s largest reserves (260.1 billion barrels as of end of 2010), and is about to become the largest oil company due to producing 7.9 million barrels per day (Saudi Arabian Oil Co, 2012a). As the business grows, Saudi Aramco diversifies its production to explore the world’s extensive reserves of natural gas liquids (NGL). It has started a joint venture with The Dow Chemical Company to build and operate the integrated chemicals complex in the Kingdom of Saudi Arabia (Saudi Arabian Oil Co, 2012k).

Given Saudi Aramco management’s objectives concerning the company’s future, we believe that product road map and business strategy have become the measure of the corporation’s sustainable development amidst their strong position as the world’s leader in oil production. Accordingly, this study explores whether Saudi Aramco has developed new products or services that would enable the company to diversify into new businesses. The study further examines whether a strongly positioned corporation such as Saudi Aramco would launch new products before the end of their current product life cycle or start exploring new businesses opportunities before their main product ends.

Strategic analysis (external and internal)

Internal Factor Evaluation

Business Development

Understanding the key internal strengths and weaknesses is important to evaluate corporate performance. Appendix 1 displays the result of Internal Factors Evaluation (IFE) of Saudi Aramco. The first internal factor is business development. The rate of Saudi Aramco in this internal factor is 4 out of 5 due to the fact that the company has prepared the future revenue generator, despite the fact that their oil reserves can hold for over 90 years. This factor is important for a world-class company such as Saudi Aramco as they stand to benefit from their monopoly status in the oil production and marketing in the Kingdom of Saudi Arabia. Another factor that may prevent Saudi Aramco from diversifying and expanding their services is the fact that they hold the world’s largest oil reserves which are estimated at 260 billion barrels. This provides Saudi Aramco with the reserve for about 90 years at average production of 7.9 billion barrels per day. This situation may prevent Saudi Aramco from developing new business if they think the vast oil reserves are just enough. However, it turns out that Saudi Aramco continues to diversify their services by not only managing more than 112 oil and gas fields in Saudi Arabia, but also providing refinery, petrochemicals, marketing, distribution and shipping services.

In addition, the company has also bolstered its position in the petrochemical industry by entering into partnership with the Dow Chemical Company. In July 2011, the two companies agreed on the formation of a joint venture and planned to build a fully-integrated chemicals complex in Jubail Industrial City in the Kingdom of Saudi Arabia. The new joint venture named “Sadara Chemical Company” is established following the feasibility study and front-end engineering, which were conducted in 2007.

The joint venture will handle about 26 manufacturing facilities by relying on Saudi Aramco’s project management and execution expertise. The fact that the facilities will utilize Dow’s industry leading technologies will make the complex one of the largest integrated chemical facilities equipped with flexible cracking capabilities. Total planned production of the chemical complex is estimated to reach more than 3 million metric tons of high value-added chemical products and performance plastics (Saudi Arabian Oil Co. 2012k). This business will capitalize the joint venture by serving the growing markets with energy, transportation, infrastructure and consumer products. In order to speed up the delivery of products, the venture will immediately build the complex, which will become operational in the second half of 2015 and reach full operational capacity in 2016.

The expected revenue is estimated to reach approximately $10 billion during the first two years of operation, and it is expected to create thousands of jobs. The total investment into the project is projected to reach over $20 billion. Commenting on this huge investment project, president and CEO of Saudi Aramco, Khalid Al-Falih, said that this mega project represents the Saudi Aramco’s ambitious downstream growth strategy and would position Saudi Aramco as the world’s largest integrated supplier of energy and petroleum-based derivative products (Saudi Arabian Oil Co, 2012k).

Innovation

            The second internal factor is innovation. This factor is also rated high, as innovation becomes key for a company to sustain their growth and outperform competitors. C.K. Prahalad and Gary Hamel refer to the collective learning and coordination expertise in a company’s product line. This competence further becomes the source of a competitive advantage and lets them introduce a variety of products and services that are not easily copied by their competitors. Despite being a monopolistic operation in oil production and distribution, Saudi Aramco attempts to embrace new technologies that will improve their oil production methods and quality of service. To date, the company has been awarded for over 100 patents, and it is going to come up with tens of hundreds more due to the extensive research and development facilities, such as the Research and Development Center (R&DC) and the Exploration and Petroleum Engineering Center Advanced Research Center (EXPEC ARC). Figure 1 shows the innovative culture that the company develops through the total patents granted, as well as the idea management system that involves employees to participate.

            Moreover, the company’s excellence in nurturing growth through innovation can be evaluated through the awards that the company has received, including the World’s Top 100 Companies for operational excellence in manufacturing. Another innovative culture in Saudi Aramco involves practicing innovative ways in everyday work, which has already spawned several groundbreaking technologies. For example, the company has introduced the GigaPOWERS^TM, which is the next generation reservoir simulator capable of providing the simulation of the largest oil fields at seismic resolution. The other breakthrough is the use of solar power for water desalination and power generation (Saudi Arabian Oil Co, 2012e).

Global Operation

The third internal factor is global operation. This factor is also given much priority, as the company operates in more than 70 nations all over the world and employs over 54,000 people (Saudi Arabian Oil Co. 2012g). The company’s major foreign affiliates are refining and marketing companies located in key markets, such as China, Japan, United States, and the Republic of Korea. Operating on a global scale makes Saudi Aramco the only energy company that serves the three major markets, such as Asia, North America, and Europe. Interestingly, Saudi Aramco, which represents the Kingdom of Saudi Arabia in oil production, is the most reliable supplier of petroleum energy, as they can increase the output at any given day in order to offset the increasing demand for oil, especially from key industrial markets.

In the future, the expansion into growing markets in Asia becomes key success factors for Saudi Aramco. This will be achieved due to the surging demand from this region, and especially from countries like China and India (Saudi Arabian Oil Co. 2012g).

Since all machines in the factories need fuel to run, they become the energy drain that consumes oil and its derivatives (high speed diesel) in large quantities. That explains the fact why the U.S. has become one of the world’s largest oil consumers (SEA.CA, 2003).

This is is not to say that a high price for oil is due to a short supply or very little production capacity. Today’s oil price situation is not influenced by interruptions of oil-exporting countries in the Middle East. It is getting even worse, since developed countries like China and developing countries like India are beginning to climb out of poverty, thus causing an increased demand for oil.

Figure 2 shows that United States, China, and India are among the countries that have been consuming oil in large amounts over the next two decades. To anticipate this huge demand for oil in the future, China has already closed deals with suppliers to receive over 7.8 billion barrels of oil within the next several years (Lyon, Lefton, and Weiss, 2010).

Figure 2           Oil consumption by Country

Source: Lyon, Lefton, and Weiss, 2010

Today, business, corporate and social responsibility is a very important aspect that differentiates a company from others. It also highlights a company’s commitment to make a positive impact on the society by working in partnership with local communities and government agencies to promote sustainable social and economic development. The campany carries out four main CSR programs. First is to give something back by volunteering in recreational and medical services. Second is to reach out to those in need by supporting cultural activities, events and entertainment in the Kingdom, conducting children art contests, and participating in programs for children with cancer and orphans. Third is to to make roads safer by launching Traffic Safety Signature Program (TSSP) to create a safer driving environment. Fourth is to donate funds to help small business projects for women, facilitate medical treatment, etc. (Saudi Arabian Oil Co, 2011).

Oversize Corporate Structure

 The company’s worldwide operation requires a large number of employees that need to be adjusted once the business is slowing down. To cope with this issue, the company has already differentiated its business into a broad range of oil business, ranging from exploration to distribution. To date, Saudi Aramco has over 55,000 employees that comprise 47,741 Saudis and 7,057 expatriates (Saudi Arabian Oil Co, 2012a).

Sales and Marketing

The weakness of Saudi Aramco lies in their global reach. The rising need for oil consumption in the lucrative markets in India, China, and other Asian countries draws industries towards this region. In addition, the figure also represents the trends in oil consumption in the three countries that are its largest consumers. As the demand for oil continues to rise, it will cause the costs of production to increase and lead to inflation. Developed countries such as the U.S., Japan, India, and China start seeking alternative energy sources to bring the costs down. The demand from India and China will also increase, as these countries are likely to become the world’s two most powerful economies in the future. According to many analysts, the growing demand for oil from Asian countries will soon exceed the figure of 40% (CBD, 2008).

 Figure 3 shows that within a five-year period, both India and China will experience a significant increase in oil consumption. China, for example, consumed about 4.80 million barrels per day (bpd) in 2000, and this figure increased to 6.63 million barrels per day (bpd) in 2004. Meanwhile, its counterpart, India consumed over 2.05 million barrels per day (bpd) in 2000, which quickly rose to 2.30 billion barrels per day (bpd) in 2004.

In 2004 alone, China surpassed Japan in terms of oil consumption. On average, the country consumes 6.63 million barrels per day (bpd) and the expected demand will total 5-7% per year. Similarly, India’s demand is also expected to grow to 4-7% per year from daily consumption of about 2 million (bpd) in 2004.

Figure 3           Oil Demands by Country

Despite the weakness in developing markets, Khalid Al Falih, Saudi Aramco’s chief executive, asserts that they would serve global demand for oil much better. The CEO specifically notes that Saudi Aramco would pay attention to the rising needs in Asia because of the two factors, such as demographic growth and growing economics (Milhench, 2011).

Table 1 provides a summary of internal factors evaluation by dividing the analysis into two groups: strengths and weaknesses.

Table 1            Internal Factor Evaluation (IFE)

External Factor Evaluation

Better Management of product lines

The analysis of Saudi Aramco’s operation in the oil industry suggests that they should manage their products better, as each of them requires massive investment. The company provides a wide range of services, such as exploration, refining, international shipping, and distribution. The recent plan to build the world’s largest chemical complex also requires huge investment of over $20 billion.

Globalization

Globalization affects the company in a negative way. Several researches indicate that the age of globalization brings economies into a new trend, where services grow at a significantly faster rate than manufacture businesses. Macro factors derived from globalization effects reduce growth of the manufacturing industry (International Labor Organization, 2006).

Environmental Concerns

Environmental issues in the oil industry pose a great problem as they may cause a severe damage to the environment. Therefore, Saudi Aramco should strive to be a company that shows its commitment toward preservation of the environment and contribution to the environmental improvement. An examples of a large-scale environmental damage caused by an oil company includes the Deepwater Horizon oil spill that occurred on April 20, 2010. There was an explosion in the deepwater of the Gulf of Mexico , which caused billions of dollars of damage. Another example the Exxon Valdez oil spill from in the sea of Alaska that took place on March 24, 1989 (Alaska Department of Environmental Conservation, 1993).

Fierce Competition

The world is going through an economization phase whereby people are constantly looking for cheaper products of the same quality. In the oil and gas industry, especially in refinery, distribution, and marketing aspects, competition is tough, as multinational oil companies target the same markets in Asia, Europe, and North America. Petroleum Intelligence Weekly’s Top 10 ranks Saudi Aramco as the best petroleum company followed closely by the NIO (Iran), ExxonMobil (USA), PDV (Venezuela), and BP (United Kingdom).

Table 2 provides a summary of external factor evaluation for Saudi Aramco by describing two factors: opportunities and threats.

Table 2            External Factors Evaluation (EFE)

Strategic directions and strategic objectives

Currently,  Saudi Aramco produces 1 of every 10 barrels in the world, which greatly affects the way it does business. The situation is such that the volatility of crude oil price may cause great losses for refineries and distributors. Therefore, to keep gaining profit from selling gasoline to end customers, Saudi Aramco should continue to develop technology that increases the efficiency of oil production. Today, 47 barrels of gasoline are made from every 100 barrels of crude oil (Energy Information Administration, 2006).

Under such circumstances, Saudi Aramco faces the challenge of efficiency of production. In their vision statement, the company states that they are going to transform themselves from a leading oil and gas company into a fully-integrated global energy and chemical company. There are several objectives that Saudi Aramco set themselves in order to reach their vision. First of all, they strive to be the most respected employers globally, which attract talented employees that help Saudi Aramco reach their goals. Secondly, the want to to be the finest oil and gas exploration and production business. Thirdly, they wish to be an integrated global-scale refining and chemicals business. In the fourth place, the attempt to maintain their leadership in innovation in the energy industry. In the fifth place, they try to strengthen their mission to be an export-oriented business (Saudi Arabian Oil Co. 2012i).

Key broad business-level and international strategies

As an oil company that has been awarded a contract to manage exploration of oil and gas in the Kingdom of Saudi Arabia, Saudi Aramco is determined to deliver better results as the prime driver of the Saudi economy. The revenue from their production accounts for about 86% of government revenue. In terms of business, Saudi Aramco plays a significant role in supporting the economy of the Kingdom of Saudi Arabia, generating jobs for Saudis and establishing new business opportunities for Saudi nationals (Saudi Arabian Oil Co. 2012b).

Internationally, Saudi Aramco has grown to be the largest petroleum company in the world that provides various services, including exporting and marketing of crude oil, petroleum products, natural gas liquids and sulfur, distribution services, as well as shipping of crude oil through their affiliated companies, refineries, and petrochemicals production facilities (Saudi Arabian Oil Co. 2012f).

Strategic implementation: General perspective

In order to achieve their vision as a global petrochemical company, Saudi Aramco conducts several initiatives in six different areas. The company’s six competencies are in line with their pursuit of competitive strategy. The first is to sustain the future of energy. At Saudi Aramco, they believe that in the future, renewable energy will play a significant role in fulfilling the fast-growing demands for energy, despite petroleum still being the vital commodity now. It is projected that by 2030 oil will remain the main supply for energy fulfillment (Saudi Arabian Oil Co. 2012d).

Second is to ensure the reliable supply, as Saudi Aramco not only fulfills the local demand, but also serves customers worldwide. For this reason, all people at Saudi Aramco work towards the same objective, which is to be the most reliable supplier of energy. When global supply of oil dropped due to the Iraqi war, Saudi Aramco immediately increased total output to offset the gap. This could be done as the company has the proven reserves with flexible production capacity. In addition, the company’s robust infrastructure also contributes to the reliable and sustainable supply of crude oil and refined products (Saudi Arabian Oil Co. 2012j). The reliability aspect also includes the competencies to provide a safe working environment to their employees. In addition, Saudi Aramco’s competency in producing environmentally clean products in clean facilities also supports the achievement of Saudi Aramco’s competitive strategy.

The third aspect is Saudi Aramco’s contribution to the economy of the Kingdom of Saudi Arabia. Saudi Aramco contributes nearly 86% of government revenue. Saudi Aramco plays a significant role in supporting the economy of the Kingdom of Saudi Arabia, generating jobs for Saudis and establishing new business opportunities for Saudi nationals (Saudi Arabian Oil Co. 2012b).

The fourth aspect is to develop human potential. Saudi Aramco is aware of the need to develop human capital in order to transform into a knowledge economy. As the transformation requires the empowerment of innovation and development of the Kingdom’s human potential, Saudi Aramco needs to develop their human resources. Fortunately, at the core of Saudi Aramco is a corporate culture of lifelong learning. Since its inception, Saudi Aramco has been developing excellent learning programs to equip their personnel with the necessary skills and knowledge to succeed. In addition, the company also supports vocational institutes and universities, thus contributing to the improvement of oil industry (Saudi Arabian Oil Co. 2012c). Moreover, Saudi Aramco’s competency in developing its employees’ skills is also in compliance with Saudi Aramco’s core competencies. This is because a petroleum company needs to respond to the needs of the fast-changing oil industry by training their employees to keep up with the challenges.

Strategic evaluation

SWOT Analysis exhibits the environmental analysis that is derived from internal and external environment.      Table 3 represents the SWOT analysis that suggests each four strategies according to the predefined 

Table 3            SWOT Matrix

Conclusion

Saudi Aramco is one of the most important petroleum companies in the world. As the main contractor for oil exploration in the Kingdom of Saudi Arabia, they hold the largest oil reserves that could secure exploration for the next 90 years at 7.9 million barrel per day. However, as the petroleum product is not renewable, Saudi Aramco needs to prepare the future revenue generator. In this case, Saudi Aramco has started a joint venture with the Dow Chemical Company. In addition, this situation also requires Saudi Aramco to establish product road map and business strategy to become the measure of the corporation’s sustainable development amidst their strong position as the world’s leader in oil production.