2.0 Introduction My organization (SABIC) is one of the leaders in petrochemical industry. It manufactures on a global scale in the Americas, Europe, Middle East and Asia Pacific, making distinctly different kinds of petrochemical products, commodity and high performance plastics, agrinutrients and metals (www.sabic.com), the most predominant product being petrochemicals. SABIC’s attractiveness could be evaluated using porter’s five forces framework and Porter’s generic strategies (Kelly and Ashwin, 2013). 2.1 Porter’s Five Force Model Porter (1980) identified five forces that could be used to analyze the immediate competitive environment of an industry. These forces are: the threat of new entrants; the bargaining power of suppliers, the bargaining power of buyers; the threat of substitutes; and competitive rivalry. Figure 1 below summarizes Porter’s five forces model.
Fig 1: Competitive Forces (Kelly and Ashwin, 2013)
2.1.1 Threats of Potential Entrants This describes how easy or difficult for new players to enter the industry or the relative ease with which a new entrant can establish itself in the same product market (Needle, 2015). For the petrochemical industry, the possibility of new entrants getting into the industry is quite low because of the high capital involved in startup, limited access to patented technologies, complex supply chain and other issues related to government and environmental regulations. Due to all these factors and limitations, the threat from potential entrants is low. However, if bank loans become more readily available and technology easily accessible to potential entrants, these entrance barriers could be lowered and firms could enter the industry thereby raising the threat level from new entrants.
2.1.2 Threat of Substitutes A substitute performs the same or similar function as an industry’s product by a different means (Porter, 2008). The materials produced by SABIC are used across several sectors to create everyday indispensable products. Currently and in the near future, alternative materials
to replace these wide arrays of products are unlikely. Thus, the threat of substitute products may be considered low. It is worth to note that new products are being developed every now and then through scientific innovation and research. So, there is likelihood that new products that could serve as alternatives to SABIC’s products might be developed in the near future. If this happens, the SABIC could lose the market share of its product. One may thus assume the threat from substitutes could increase to moderate. 2.2.3 Bargaining Power of Suppliers The basic raw material for SABIC is oil and gas. This feedstock is supplied to SABIC manufacturing plants by third parties and the prices and availability are driven by factors that SABIC cannot control. For instance, the prices of raw materials may vary as a result factors such as political, environmental, social and technological factors. The responses of the suppliers to their changing environment could also have a direct impact on SABIC’s overall production and profitability. So, the bargaining power of suppliers could be considered high. 2.2.4 Bargaining Power of Buyers SABIC supplies its product to markets all around the world just like its strong competitors like BASF, DOW Chemicals and DuPont. This makes more choices available to buyer. According to Needle (2015), buyers power increases as number of suppliers offering the same or substitute products increase especially where there is little or no cost involved in buyer switching from one supplier to the other. On the one hand, buyers of petrochemical products can choose among manufacturers thereby giving them a strong bargaining power. On the other hand, prices of petrochemical prices are well regulated thereby undermining the bargaining power of buyers and establishing some sort of balance in the market. 2.2.5 Competitive Rivalry Intense rivalry is related to the presence of a number of factors which include: numerous competitors of roughly equal in size and power; slow industry growth; lack of product differentiation; high fixed costs and the exit barriers (Kelly and Ashwin, 2016). Most of the factors listed above are attributes of the petrochemical industry. SABIC’s competitors have comparable sizes as SABIC and the existing competitive rivalry often take the form of jockeying for position- using tactics like price competition, product introduction, and advertising. In addition, customer’s sensitivity to price and low switching cost increases the intensity of competitive rivalry. SABIC has been able to stay competitive under this market situation because of its strategic involvement in product development, improvement of customer relations and offering customized services to its customers. 2.3 Porter’s Generic Model Employed by SABIC To further explore the attractiveness of SABIC’s business; Porter’s generic strategies could be used. According to Porter (1980), the following business level strategies could be employed to gain competitive position in the industry: cost leadership, differentiation and focus (Needle, 2015). Figure 2 below describes Porter’s generic strategies.
Fig. 2 Porter’s Generic Strategies (Kotha & Orne, 1989) 2.3.1 Cost Leadership Firms pursuing this strategy must aim to be the lowest cost producer, but still be able to compete in terms of product quality (Needle, 2015). SABIC applies this strategy and its products are characterized by relatively low prices and good quality. Most of SABIC’s manufacturing plants are in Saudi Arabia and majority of their feed-stocks manufactured by government owned companies are heavily subsidized by Saudi government. In addition, many SABIC plants are relatively new and employ newer technologies which are more energy efficient that many of its competitors that have been around for longer time. These lower SABIC’s variable cost of production, increases its profitability thereby giving it a competitive edge over its competitors adopting the similar strategy. However, if the government removes the subsidies, SABIC advantage as a cost leader in petrochemical industry may erode. 2.3.2 Differentiation The emphasis in differentiation is on achieving and maintaining a chosen form of differentiation such as style or quality that have certain unique dimensions that make them attractive to customers (Kotha and Orne, 1989). The only market where SABIC adopt differentiation is in steel industry which is a very small business units. SABIC has failed to become a cost leadership in the steel industry but it has succeeded in differentiating its steel products by producing ultra-high quality steel which dominates the market in the Middle East. 2.3.3 Focus This is a strategy relating to a niche product and niche market and occurs when an organization focuses on a single or set of related niche products (Needle, 2015). SABIC does not seem to have products that fall into this category and may be assumed not to be adopting this form of strategy. 2.4 Conclusion
Porter five forces help to evaluate the relative attractiveness of firms in an industry. With respect to SABIC’s operation, the forces that have the most significant impact are the bargaining power of buyers and suppliers, as well as competitive rivalry which is central to other forces. While porter’s five force model help to determine the industry’s long run profit potential, it assumed that once the analysis has been made, an appropriate strategy can be found. This could be misleading as strategy is much more complex (Needle, 2015). Secondly, Porter’s generic strategy provides a straightforward view on competitive options within product markets. This model has helped to identify SABIC’s dominant strategy as cost leadership which can be applied to a variety of products. However, considering that there may be limit on cost reduction and firms may copy each other’s method and continuously strive to reduce their costs (Needle, 2015), cost leadership may not necessarily be a source of competitive advantage in an industry. 2.5 Recommendations SABIC should venture into backward integration by forming a joint venture with its major international feedstock providers as a means of controlling the bargaining power of suppliers which affects profitability. This can be included in its vision for the next 5 – 10 years. Furthermore, SABIC should venture into new product development and increase its product portfolio to increase its market share. 2.6 References 1. https://www.sabic.com/en 2. Kelly, P & Ashwin, A. 2013, ‘The Business Environment’, 1st Edition. Cengage. 3. Porter, ME 1980, 'How competitive forces shape strategy', Mckinsey Quarterly, 2, pp. 3450, Business Source Complete, EBSCOhost 4. Needle, D 2015, ‘Business in Context: An Introduction to Business and its Environment’, 6th Edition eBook, Australia: Cengage Learning 5. Porter, ME 1980, 'Generic Competitive Strategies', Competitive Strategy (9780029253601) pp. 34-46 n.p.: Business Source Complete, EBSCOhost 6. Kotha, S. & Orne, D 1989. ‘Generic Manufacturing Strategies: A Conceptual Synthesis’, Strategic Management Journal, 10, pp.211-231
