Strategic Management Report: Analyzing Joint Ventures in Energy Sector

This report provides a comprehensive analysis of strategic management, focusing on joint ventures within the energy sector. It begins with an introduction to strategic management and the operations of Cairn Energy, followed by an exploration of the motivations behind forming joint ventures, including capital intensity, risk mitigation, access to technology and resources, and supply chain optimization. The report then delves into the challenges and benefits of joint ventures, such as structural issues, goal alignment, trust development, expertise imbalances, communication difficulties, and the impact of agreements, unequal participation, and limited opportunities. It uses energy-related examples to illustrate these concepts and concludes with recommendations for improving the joint venture sector. The report highlights the importance of strategic planning and the advantages and disadvantages associated with different business structures in the energy industry, offering valuable insights into the complexities of joint ventures.

STRATEGIC
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Motivations behind the joint venture......................................................................................1
Challenges and benefits of your chosen energy sector joint..................................................3
Venture..................................................................................................................................3
Energy related examples.........................................................................................................4
Recommendations for improving the joint venture sector.....................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Strategic Management is a process through which a manager can identify the various
strategies that can be adopted in order to achieve success in business. Through implementing
competitive policies an enterprise can earn better profit than in comparison to normal revenues.
Cairn Energy was established in 1981 and it participates in different activities like producing,
refining, and distribution of energy. (Barney and Hesterly, 2015). Cited organisation is doing its
operations in different countries like India, Nepal, and Bangladesh. Following report is prepared
in order to understand the various advantages and disadvantage of running a joint venture. Later
the study will continue with how the drawbacks of same can be removed by taking various
actions against the problems that are faced by the management (Bettis and etal. 2016).
TASK 1
Motivations behind the joint venture
In order to start a new business an individual has various options like commencing it as a
sole trader, partnership firm, limited company etc. Person may choose the best option according
to his requirements. To understand the variety of alternatives it is necessary to understand each
so that advantages and disadvantages of all can be understood in detail. Sole trading is a process
of running business in which an individual is responsible for taking all the relevant decisions and
is self-employed (Buckley, Burton and Mirza, 2016). In case of any loss or profit made by
business it is shared by owner alone. There are various advantages of this type of business like
effective control is maintained as no interfere of any other party take place in its operations.
Profit need not to be shared with any other and also by offering personal care sole trader may
takequick decisions and can provide customer with their needs. Although it has variety of
supportive points, same has a number of drawbacks too. Liability is shared only by a single
person therefore in case of business debt owner will have to bring even his personal saving and
risk his property. Not only this the other major drawback of same is that it faces difficulty in
raising funds as individual capacity to invest is less than that of a partnership firm (Carraher and
Paridon, 2015).
Integrated Oil Company contains high degree of risk supported with same level of profit
earning opportunities. Therefore this business is more profitable to be started as a joint venture
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so that an individual can be protected against situations of loss. When licensing take place it is
not ensured that developer will surely find gas or oil in selected ground area therefore JV is a
way to spread these risk (Carroll, 2015). Companies have different options to pool in together
like:
Functional joint venture – Two or more organisation comes together and develop a new entity.
Each holds full control over the resources and capabilities so that development can take place.
Risk sharing joint venture – Under this system risk or finance is shared among two separate
entity. In this only one participant looks after the operations while other is responsible only for
funding or suggests in strategy level decisions.
Need behind starting the energy business as a joint venture are as follows:
Capital Intensity – Establishments of these projects can be too vast that it requires much
investment of finance and other resources. Therefore it may be difficult for a single company to
raise this much amount and therefore concept of joint venture may prove to be better in this
context.
Risk mitigation – No single organisation can enjoy full exposure as high risk is involved in it.
Therefore, expansion and development of same becomes slow which is not in case of joint
venture. Uncertainness are shared among distinct individuals and therefore they can take risk n
order to increase the productivity (Chiarini and Vagnoni, 2015).
Access to technology – Owners of sole proprietorship may face the limitation of restricted
resources whereas in case where tow companies join hands together they invite participants and
developers for various projects.
Access to resources – In case of new and big projects like gas and oil setup more resources are
required by the owners. Through the system of joint ventures increased capital and skills are
received which further help in maximisation of profit.
Supply chain optimisation – Optimisation of the supply chain can be achieved by bringing
together the various assets of different participants. For instance, cost of distribution can be
minimised if the companies which join hands together are at two distinct locations. Material will
be tan made available by the other partner and therefore in this way the whole business will
develop (Demil and et al. 2015).
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Political sensitivity – Joint ventures are better than takeovers or other acquisition as these are
more palatable to the legal authority and workers.
Challenges and benefits of joint venture
No mode of business can be termed as a perfect one. Each has some merits which comes
along with various demerits too. For instance Sadaf a petrochemical company which is a joint
venture between Shell organisation and SABIC face more difficulties in this industry than those
who are operating separately (Dess, McNamara and Eisner, 2016). Given below are the various
challenges and advantages which are faced by them during their operations -
Challenges
Inappropriate structure – The biggest problem which come across energy business is it faces
various fluctuation and therefore in case of uncertainty it is important that the selected partner is
capable enough to respond the situation. This is necessary that particular concern can take care of
joint activities. Therefore it becomes a crucial task to make the right choice of selecting partner
so that market changes like fluctuations in price fall or rice in oil rates situations cane be handled
effectively.
Alignment of goals and strategy – When people from distinct backgrounds and culture work
together under same roof it becomes difficult to make them agree upon common goals and
strategies (Helfat and Peteraf, 2015). Process of planning and making policies for various
projects becomes difficult. Also, business associates finds it difficult to explore and develop with
misaligned communication variation in priorities.
Development of trust – In case where different stakeholders invest their resources in different
resources to start a project they develop expectations against the same. If the results fails to give
desired outcomes than in that case trust among distinct partners gets effected. Therefore, in order
to avoid such situation pressure among each gets multiplied and joint venture teams than gives
more attention to decision making. They have to ensure that conflict and duplication of efforts
can be reduced to minimum.
Imbalance in level of expertise – No individual or group possess the same skills as that of
another. When a project under these companies take place variety of complex functions are
performed which are handled and controlled by person concerned (Karepova and et al. 2015).
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Therefore in that case each individual gives an entirely different results to business. Due to
variation in capabilities some may give the desired results and other may fail to do so. This
further leads to dissatisfaction among employees of enterprise who are giving better results as
their profitability also gets affected.
 Inappropriate communication – Another drawback of this type of business is that it
faces difficulty in establishing good communication among various department. As
when two distinct entities club together total human resource also gets increased.
Because of this management finds it difficult to convey message to all with same
quality as when same text go through various channels it looses its importance and
actual worth.
 Agreement – In case if any partner finds it difficult to continue with the joint
venture it becomes difficult for him to make exit. At the time of incorporation of
joint venture an agreement is made which bounds different partner with various
obligations.
 Nothing like equal participation – In the concept of joint venture major problem is
faced when unequal contribution is given by different individuals. This brings
feeling of dissatisfaction among those who are giving more efforts as they are also
paid same as that of others.
 Limited outside opportunities – When companies work as a joint venture their total
market get reduced as both the participant companies work on same projects that
will be giving its services in same market.
 Chances of unrealistic objectives – In case of joint ventures there are chances that
they take non practically possible decisions. This is because two different entities
from distinct backgrounds come together and take collective decision.
Benefits
 Spread cost and risk – The basic advantage of joint venture concept for cited industry is
that it reduces the total degree of any danger to business. As the sector of energy
enterprise require high investment it can bring great loss to an individual in case of its
failure. Therefore, through sharing investments risk is also distributed among all which
help partners to recover loss more easily.
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 Resource development – Oil and gas growth in country can be done only by taking a
risk of finance. Apart from this there will be many more requirements of assets which can
be made available through the concept of joint ventures. Under this system capacity of an
individual unit gets increased as total resources gets doubled. This way the management
is capable of producing more (Luo and et al. 2015). Technical assistance is also provided
when different individuals work together, each having some or other skills which further
helps in increasing the efficiency of project.
 Efficiency in challenge facing – Due to much intervention of government in this sector
maximum fluctuations take place in the external environment of this industry. Therefore,
when two different capable companies pool their resources together they become more
capable of facing the challenges. They can plan and make strategies towards the new
surroundings with more spirit. Hence, in this way flexibility in the business is ensured
which is very important for this type of industry.
 Increase brand image – In cases where one company from the two ventures has good
image in market than the other less famous organisation gets the advantage. Its image in
business market also gets increased which further helps in developing the total market.
Energy related examples
Cairn Energy is involved in two types of categories one is the upstream and the other is
downstream. Production department is handled by the upstream category while activities like
processing and distribution are done by the downstream sector. The energy companies are the
total of various distinct companies that are involved in production of energy through adopting
various options (Morschett, Schramm-Klein and Zentes, 2015). It has more than twenty five
licences in UK and has focussed in building and exploring more opportunities. By joining hands
with another companies it has increased its total market and customers. Its resources got
increased as new geographical area was added. Total assets and resources of same got increased.
In 1980 it was incorporated by Sir Bill Gammell than in 1988 it got listed in London stock
exchange. It than took entry in Bangladesh by merging with Holland sea search. Than together
they gave improved results and their productivity got increased. Than more efforts were given in
the same country to increase the supply. After that the same company in 1995 acquisition was
done in Holland which further increase the availability in Bangladesh of cited company. In 1998
it took gas for the first time from Sangu, and did market in Guda too. Its initial discovery was
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cambay basin and than was the Gauri in India. In 2005 it took oil from Gauri and than expanded
its total business (Nahavandi, 2016). It increased its total output to a great extent. It shows how
through the process of joint venture cited company developed with a great speed which further
helped same in achieving growth and expanding.
Recommendations for improving the joint venture sector
As discussed above there are various disadvantages of having a joint venture for these
companies efforts need to be taken so that they can give better results to business.
 Clear on objectives – Before starting on operations goals and priorities of each unit
joining hand together should be well communicated. This will help in setting vision to
whole organisation and accordingly operations can be carried out.
 Be ambitious – All those who are working as one unit should try to give same level of
efforts and dedication towards the project so that growth can be ensured. Everyone needs
to realise the importance of joint growth and this will also help in doing the decision
making more effective (Rothaermel, 2015).
 Ready to work in partnership – It is not just a mere contract that two distinct entities
will work together but also all those who are part of same should be ready to share their
knowledge and skills with others. Only than company can improve its results and
productivity.
 Obtain professional advise – There are many cases when companies go for the system
of join venture for the first time. In that case it is advisable to take an expert suggestion
who have complete knowledge about the industry. This will help in selecting the best
combination (Wilden and Gudergan, 2015). Help taken at initial stages will further help
in reducing the risk of loss in future.
 Effective control needs to be ensured – As in the process of joint ventures decision
taking power gets distributed there are chances that delay is done by top authorities. In
order to ensure control over various operation management should ensure that close
monitoring is practised in business so that productivity does not gets affected.
 Track benefits – In order to develop keeping control over various activities of different
entities is necessary (Slack, 2015). This way management will get to know about what
areas need to be developed which will further help in taking corrective actions against
them.
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 Create a culture of trust and strong relation – In order to carry out operations together
it is necessary that each member of different business entity has trust among themselves
so that they share the relevant information which can influence the operations of different
department.
 Effective communication – In order to avoid conflicts and misunderstandings among
various partners it is necessary that effective interaction is established at work place.
Management should ensure honesty and timely delivery of relevant message to the
concern person (Strumickas and Valanciene, 2015).
 Utilisation of resources – when business between two companies take place collectively
management of each should ensure that they do effective utilisation of provided assets
They must ensure that no wastage is done considering it of other as together they need to
give desired results so that objective can be achieved.
CONCLUSION
From given report it can be summarised that joint venture is a beneficiary option to be
adopted for business like energy operations. It requires high investment and resource to be
allocated therefore n individual can not afford to do the same. It is better if these business
operates not individually but in collaboration with other in order to share the total risk involved.
Preceding investigation shows energy sector faces various fluctuations in external environment
like change in demand or price with the change in time and in order to face these difficulties
group efforts are more beneficial so that no single firm suffers greater loss. Later the document
concluded with various recommendation that can provide help in removing the drawbacks from
the joint venture system of business,
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