Strategy in the Oil Industry

This report analyzes the strategies employed by oil companies, focusing on mergers and acquisitions (M&A) as a key approach to navigating the challenges of fluctuating oil prices and increasing competition. It examines both internal factors (value system, human resources, stakeholders, company image) and external factors (political, economic, social, technological) influencing strategic decision-making. The report highlights the benefits and challenges of M&A, including cost effectiveness and the complexities of stakeholder relations. Several case studies are referenced to illustrate the application of M&A strategies in the oil industry. The conclusion emphasizes the importance of thorough analysis of internal and external factors in developing effective strategies for success in the energy sector.

STRATEGY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
INTERNAL AND EXTERNAL FACTORS...................................................................................3
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
ILLUSTRATION INDEX
Illustration 1: Fluctuating oil prices from 2007 to 2016 .................................................................4
Illustration 2: Total deals in sector from year 2014 to 2016............................................................6
Illustration 3: Total deals in countries between 2014 to 2016.........................................................8
Illustration 4: Total fluctuation in M&A deals in oil industries between 2014 to 2016................11
Illustration 5: Top ten upstream deals in 2016...............................................................................12

INTRODUCTION
Strategy is a set of activities that are to be mostly structured and implemented with a
purpose to attain the expected forms of results by placing better techniques and methods to
acquire the attention of the market (Ben‐Amar and McIlkenny, 2015). Similar to this, the report
is also providing information on the factors and methods of formulating and implementing an
effective strategy which is capable of overcoming the plans and objectives that are to be
achieved by them.
INTERNAL AND EXTERNAL FACTORS
According to the study of Grant (2015), it has been assessed that for developing an
effective strategy for an organisation, they need to analyse the situation in order to determine the
internal and external factors. Both the factors would help the managerial team of organisation to
formulate strategy for accomplishing the desired forms of targets. The internal factors are present
within the firm which are highly responsible to impact the management and their business
activities from internal aspects. On the other hand, the external factors are determined as the
elements that are existing in the extrinsic environment of the organisation. Both of the factors
have great impacts on the overall working and functioning of the business. On the contrary to
this, the research made by Teece (2010), stated that the internal and external are the factors
which generally affects the operational and functional processes of the firm. Thus, it is
significant for the management team to assess such factors before planning any strategy.

In that context, the energy sector in one of the most leading and earning market for many
corporates and business geeks. Many companies invest their money, capital and share funds
within the cited sector. The emerging market of energy sector has motivated and attracted
numerous oil companies to be a part of it. But, in the recent search made by Doyle and Von
Windheim (2015), witnessed that the oil companies are facing a great impact of falling price rate
which creates various types of difficulties. The rising number of troubles and problems has
provoked them to identify the market needs and requirements, analyse the situation for
determining the factors that could be consider as the main areas and elements to formulate
strategies. The research made by Chadwick and Cashen (2015) addressed that the most common
and highly preferred techniques for stabilising their business in the energy sector is merging and
acquisition. The reason is specified as it reduces the influence of negative impacts and helps the
companies in accessing new markets, acquiring new customers and generate better forms of
results.
In that respect, the management of oil companies should be capable of addressing the
entire kinds of internal and external factors that are responsible to impact the strategy defined by
them. For this, they should conduct any strategic and efficacious analysis so that both the factors
are appropriately addressed with their number and level of impact (Hassan and Kouhy, 2015).
Illustration 1: Fluctuating oil prices from 2007 to 2016
(Source:Olson, Slater and Hult, 2005)

Moreover, following are the list of internal and external factors that are need to be considered for
formulating a specific strategy for the oil companies:
Internal factors
The organisation needs to evaluate the internal factors that are to be addressed by them
within their business environment via internal assessment which specified the following aspects:
 Value system: The value system of the founders and those at the leading position of the
dealings has crucial role on the choice of business, the mission and objectives of the
organisation which defines their overall set of business policies and practices. It is a
widely acknowledged fact that the stage at which the value system is shared by all in the
organisation is an essential element is highly contributing to success (Cannizzaro and
Weiner, 2015). This supports them to gain better forms of results and achievements, as it
helps them in valuing their resources and accordingly, determining the market position
and their effectiveness in attaining higher revenues.
 Human resources: The characteristics of the human resource like skills, qualities, morale
values, commitments, their attitude towards work, etc., is highly effective in contributing
to their overall strength and weaknesses of an organisation. Moreover, oil companies face
it difficult to conduct a restructuring or modernization in their human resource team
because of actions performed by employees (Bourmistrov and et. al., 2015). They have a
high level and number of workforces that supports them to execute the business
operations in systematic manner.
 Stakeholders: They are the promoters of the business which generally aids their
efficiency and efforts on addressing better functions and operations for the organisation.
In that respect, the oil companies main stakeholders are their customers, shareholders and
governments. The participation of these stakeholders in their market and with business
creates a link between their effectiveness in generating more revenues and establish better
position in the energy sector (Peng, Wang and Jiang, 2008). It is necessary for the
companies to maintain their relation and overall connectivity with the firm that would
help them in expanding their market boundaries in the international sector.
 Company's image and trust: It is vital that an organisation should create a strong market
image and build impelling brand trust so that company can gain more benefits and overall
achievements. The organisation needs to address their present value and trust among the

customers in order to ascertain their brand worth. This would help them to create better
sources for accomplishing more opportunities existing in the concerned market (Augier
and Teece, 2009).
Along with this, the oil companies needs to find out the entire number and level of
internal factors that are responsible to impact their strategy of acquiring better market and gain
better forms of revenues.
Illustration 2: Total deals in sector from year 2014 to 2016
(Source:Montgomery, 2011)
External factors
It has been examined that the causation of external factors are very high over the business
and their strategy to gain better market values and outcomes. The external factors mostly affects
the strategy in indirect manner from the outside environment of the business. However, the
impact is in dual aspect (negative or positive) but eventually bring changes in the efficiency in

leading the sector. For this, the following are the external aspects that needs to be considered
while defining an effective strategy to lead the business to greater heights:
 Political factors: The instability in government and related political parties are the main
factors that mostly influence the effectiveness of oil companies in sustaining in the aimed
market and engaged sector. It has been ascertained that the political parties affects the
business of petroleum industries by imposing and structuring state strategy for gaining
electoral or economic for developing the country (Langenberg, 2007). Moreover, the non-
governmental organizations also influence the oil market by promoting and organising
anti-pollution campaigns or programmes for liberalization from the fuel market. The
rising restrictions from the paramilitary group conduct influence on oil industries by
blackmailing them or through imposing some fees and charges in the territories that are
generally controlled by them which eventually results in cutting down the oil prices for
political gains.

Illustration 3: Total deals in countries between 2014 to
2016
(Source:Pagani, 2013)
 Economic factors: This are the factors that mostly influences the supply and demand of
the oil price, complementary goods, substitute resources, etc. and creates issues for the oil
companies to conduct better business activities. In addition to this, the USD exchange
rate which includes petrol-dollar policy and oil price implementation and processing, the
price full oil barrel over stock exchanges, variation in economic condition on regional
and worldwide stages, fluctuation in valuation of the known reserves, alteration in
interest rate for financing, inflation in stock market indexes, etc. are also determined as
the most impacting factors of economic factors (Peng and Khoury, 2009). Due to the
rising need for fuels and oils among the transport activities (road, rail, aviation and naval)
the oil industries has gained high form of valuation and overall reputation. The sector is

highly influenced by variation among the prices that represent almost 60 % of
petrochemical industry, agriculture industries and energy production unit.
 Social factors: The increasing adaptability of transportation facilities and services, the oil
companies has faced many challenges of addressing new areas and sources of refining
fuels, ways of optimum utilisation of resources and techniques of faster transportation. In
addition to this, the rising population and their standard of living are counted among the
threats for the oil companies. For instance, the options for moving one place to another
are highly promoting and thus, people mostly consider travelling via heavy and faster
vehicles consumes more fuel (Schrader, Freimann and Seuring, 2012). Along with this,
the ability of maintaining more than one vehicle with a person increases the demand for
fuels and oils. Thus, the specified standardization also affect the working of the overall
working and business of the oil companies.
 Technological factors: This factor is one of the highly impacting set of elements which
mainly affects the external as well as internal environment of the business practices. The
main impact causes by this factor is the increasing adaptation to the new and advance
theories that mostly affects the oil company financial resources and available capital.
Moreover, the workforces also requires updated technical equipments, strategical
approaches and professional machineries for conducting the business operations and
functions that are to be accomplished by them (Verbeke, 2013). Oil companies requires
high level of investments for acquiring innovative technologies and equipments with an
aim to acquire better part of the market.
Along with this, the oil companies need to ascertain the values and market determination
for them by identifying some other sources and areas that are highly useful in implementing and
developing an effective strategies for achieving greater values and benefits. However, the study
of Watson and Wixom (2007), stated that an organisation needs to evaluate the number of
competitors and their overall competitive abilities present defines their capabilities of
accomplishing better targets. Furthermore, the following information should be considered by
the managerial aspects of oil companies for addressing ways of creating an impressive set of
action plan for generating higher competitiveness and defeating competitors:
 Threats of new entrants – As examined by Adams (2016), which contributed that the
emerging boundaries of energy sector is attracting numerous companies to participate in

the race of earning more revenue and gain better reputation. By this, the existing
companies faces great form of competitiveness and this impacts their efficiency in
leading the market. However, launching an oil company requires huge capital and thus,
the existing participants faces less competition. Hence, the threat of more competition
from new entrants are low.
 Bargaining power of suppliers – It is also low as there are very fewer number of
suppliers present in the oil and gas industries. They are aimed on low cost production and
thus business researches for identifying alternative energy sources and conduct
investments of high amounts so that best results could be attained by them in form of
revenue and market image (Doucette, 2016). Oil industries generally uses vertical
integration growth strategy to expand their market and increases their earning capacity
that involves acquiring and merging the other businesses at assorted levels of operation
for impacting the supply chain of firm.
 Bargaining power of buyers – It has been assessed that oil and fuels are the main
element of energy sector which is among the essential products in an economy. It states
that market elements mainly purchase oil in bulk amount and thus, they need to maintain
their relations with the customers or buyers. Moreover, the loss of one buyer could affect
the company in earning higher revenue (Hoffman and Woody, 2013). By this, it can be
ascertained that bargaining power of customers in energy sector is quite low as the
number of oil companies existing in the sector is also few.
 Threat of substitutes – As the option of selecting the substitutes in the oil industries are
high, which results in addressing various alternative energy sources. However, there are
numerous companies that contribute huge amount in bio fuel technologies in respect to
environmental, social and political pressures. In addition to this, the rising production of
oil related products and natural gas by different oil industries are highly substitutable
(Klettner, Clarke and Boersma, 2014). Thus, rivals of firm can boost up their products as
secondary for the company's products.
 Level of competition – It has been witnessed that the competitiveness among oil
companies increases with the fall in the oil prices. As the amount for fixed charges and
production charges increases when the companies faces impact of reduction in rate of oil.

Thus, the level of competition in the oil industries is as per the market situation and
changes accordingly.
For developing an effective, it is crucial for the management teams of oil industries to
consider the entire factors for establishing a stronger and better market approaches and achieving
targets. In that context, the most appropriate strategy of increasing the market in energy sector is
by Merger and Acquisition (M&A). It supports them in gaining various resources and areas that
are mainly used by the previous business (Ben‐Amar and McIlkenny, 2015). This includes their
customers, suppliers, investors, shareholders, employees, assets, etc. and hence, it is highly
necessary to assess the situation prior to conduct the operations or action plan of acquiring or
merging with some other businesses.
For instance, Royal Dutch Shell’s $82 billion acquisition of BG Group alone made up
77.6% of the top 10 upstream deals during the year. Moreover, including the value of this mega
deal, the overall value of M&A transactions for 2015 was also down 20% year by year.
Moreover, they must consider the following examples and case studies of oil industries which
selected M&A as their strategy to sustain in the energy sector:
Illustration 4: Total fluctuation in M&A deals in oil industries between 2014 to 2016
(Source: Bourmistrov and et. al., 2015)

Furthermore, the oil companies needs to assess the benefits and challenges for M&A in
order to determine, develop and implement the most appropriate strategy for accomplishing the
proposed set of objectives and overall achievements from the energy sector. In that context,
following are the benefits and challenges for oil companies to select M&A as their strategy:
Benefits
 It generates high values in forms of revenue for the company but only when the strategy
is effective and properly implemented (Verbeke, 2013).
 It helps in gaining cost effectiveness and reduces cost of production, when the industry
has acquired a particular company with a suitable amount.
Challenges
Illustration 5: Top ten upstream deals in 2016
(Source: Chadwick and Cashen, 2015)

 Most of the companies faces great impact of formulating and planning a strategic action
structure for M&A. Due to less number of oil companies, every member is generally
known by the others. (Benefits of Mergers and Acquisitions, 2016).
 Maintaining the relation with the stakeholders is also among the greatest challenges for
the oil companies. For this, they must consider communication as the factor to create a
link with them.
CONCLUSION
The report is concluding about a wide information about implementing and formulating
an effective set of strategies that is highly beneficial in attracting market attention and achieving
benefits. It is necessary that an organisation should create a strategy by analysing the available
resources in their sector and accordingly, determine the set of action plan to generate desires
outcomes.

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Online
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