Letter of Authorization
August 22, 2010 Dear Reader: Being a student of Strategic Management course, our course facilitator Dr. Fasihul Karim Siddiqui has authorized us to prepare a report pertaining to Strategic Plan of Pakistan State Oil Company (PSO) for Summer Semester 2010. Sincerely, Rabia Jamal (ID # 2008-3-38-8319) Maqsood Ahmed (ID # 2008-3-39-8326)
Letter of Transmittal
Dr. Fasihul Karim Siddiqui Faculty of Strategic Management Institute of Business Management Karachi. Dear Sir: The term report of Strategic Management on “Strategic Plan of Pakistan State Oil Company (PSO)” is enclosed for your kind perusal. This report is being prepared by applying strategic principles and conducting detailed analysis on the findings keeping in view the internal & external environment of the company. Through this letter we would like to thank our instructor for giving us the opportunity to prepare Strategic Plan for the largest Oil Marketing Company of Pakistan.
Sincerely, Rabia Jamal (ID # 2008-3-38-8319) Maqsood Ahmed (ID # 2008-3-39-8326)
Table of Contents Executive Summary....................................................................................................................................... v 1.
Business Balanced Scorecard ................................................................................................................ 1
2.
Company Profile .................................................................................................................................... 2
3.
2.1.
History ........................................................................................................................................... 2
2.2.
Equity Shares................................................................................................................................. 2
2.3.
Products ........................................................................................................................................ 3
2.4.
Market & Customers ..................................................................................................................... 3
Vision, Mission & Corporate Objectives ............................................................................................... 5 3.1.
Vision............................................................................................................................................. 5
3.2.
Mission Statement ........................................................................................................................ 5
Analysis of Mission Statement .............................................................................................................. 5 Improved Mission Statement ............................................................................................................... 6 3.3. 4.
Strategic Objectives ...................................................................................................................... 6
Internal Assessment .............................................................................................................................. 7 4.1.
Management ................................................................................................................................. 7
Board Audit Committee ........................................................................................................................ 7 Board Finance and Operation Committee ............................................................................................ 7 Board Human Resource Committee ..................................................................................................... 7 Management Committee ...................................................................................................................... 7 Core Leadership Team .......................................................................................................................... 7 Employee Leadership Team .................................................................................................................. 8 Executive Committee ............................................................................................................................ 8
5.
4.2.
Marketing ...................................................................................................................................... 8
4.3.
Finances ........................................................................................................................................ 9
4.4.
Operations .................................................................................................................................. 10
4.5.
Management Information Systems ............................................................................................ 11
4.6.
Internal Factor Evaluation Matrix (IFEM).................................................................................... 12
External Assessment ........................................................................................................................... 13 5.1.
Consumer Markets...................................................................................................................... 13
6.
6.
7.
5.2.
Competitors ................................................................................................................................ 13
5.3.
Suppliers...................................................................................................................................... 15
5.4.
Economic Condition .................................................................................................................... 15
5.5.
Regulatory Environment ............................................................................................................. 16
5.6.
External Factor Evaluation Matrix (EFEM) .................................................................................. 16
5.7.
Competitive Profile Matrix.......................................................................................................... 16
Strategy Formulation .......................................................................................................................... 18 6.1.
TOWS Analysis Matrix ................................................................................................................. 18
5.2.
Basket of Available Strategies ..................................................................................................... 19
5.3.
SPACE Matrix............................................................................................................................... 21
5.4.
Grand Strategy Matrix................................................................................................................. 22
5.5.
BCG Matrix .................................................................................................................................. 23
5.6.
Internal-External (IE) Matrix ....................................................................................................... 23
5.7.
Decision Matrix ........................................................................................................................... 24
5.8.
Qualitative Strategic Planning Matrix ......................................................................................... 26
5.9.
Strategy Selection ....................................................................................................................... 27
Strategy & Long Term Objectives........................................................................................................ 28 6.1.
Strategy ....................................................................................................................................... 28
6.2.
Long Term Objectives ................................................................................................................. 28
6.3.
Comparison of Long Term Objectives ......................................................................................... 28
Strategy Implementation .................................................................................................................... 29 7.1.
8.
Recommendations ...................................................................................................................... 29
Specific Objectives .............................................................................................................................. 30
Appendix 1 - Finances ................................................................................................................................. 31 Balance Sheet.......................................................................................................................................... 31 Income Statement .................................................................................................................................. 32 Appendix 2 – Organization Chart ................................................................................................................ 33
Executive Summary The purpose of this report is to develop strategic plan of Pakistan’s largest Oil Marketing Company, Pakistan State Oil (PSO) by applying basic principles of Strategic Management. This report covers Internal & External assessment of the company, Strategy Formulation, Selection, Evaluation and Long Term Objectives for the period of 7 years (FY 2011 – FY 2017) and its Implementation. A Balanced Business Scorecard has also been developed for the company. Findings in this report indicate that the huge circular debt in the economy, unreliable source of supply from Oil Refining Companies and decreasing profit margins are the major challenges that PSO is currently facing. Another challenge faced by the company is the forward integration by the various Oil Refining Companies. Pakistan State Oil has strong Research and Development department. Using their internal strength of research and development along with increasing energy demand and requirement of alternate energy fuel they can make use of their available resources to improve their position in the market. We have suggested following strategies to Pakistan State Oil:
Research and improve alternate energy products such as Bio-Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSO’s debtors to pay off their liabilities to PSO
v
1. Business Balanced Scorecard Financial Perspective Objective
Profitability
Revenue Growth
Customer Perspective Objective Customer Satisfaction and Retention
Market Share
Target 95% Satisfaction
70% of Retail consumers
Initiative - Cost effective and efficient alternate fuel - Customer Loyalty Programs - Corporate Social Responsibility
Target yr 1: 2% yr 2: 3% yr 3: 4% yr 4: 5% yr 5: 6%
Decrease in Trade Debts and Payables
7% per anum 40% of existing Debts & Payables after 5 years
Initiative
- Decrease in production cost - Work with Government to eliminate economic constraints like circular debt
Internal Business Perspective Objective Utilize Storage Capacity Use of IT and ECommerce Ensure Health and safety of workers
Vision & Strategy
Target 90% capacity Order confirmation with in 24 hours 0% accidents
Initiative - Improved distribution - Certified Equipments - Building Certified IT infrastructure
Innovation & Learning Perspective Objective Increased Employee Satisfaction Enhanced Employee Competence
Target Turnover rate < 10% 2 trainings per year for each key employee
Initiative - Employee Development Program - Employee benefits and promotions
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2. Company Profile Pakistan State Oil, the largest oil marketing company in the country is currently engaged in the marketing and distribution of various POL products, including Motor Gasoline, High Speed Diesel, Furnace Oil, Jet Fuel, Kerosene, LPG, CNG, Petrochemicals and Lubricants. In addition to this we also import different products according to their demand pattern and possess the biggest storage facilities representing 80% of the country’s total storage capacity.
2.1.
History
The creation of Pakistan State Oil (PSO) can be traced back to the year 1974, when on January 1st; the government took over and merged Pakistan National Oil (PNO) and Dawood Petroleum Limited (DPL) as Premiere Oil Company Limited (POCL). Soon after that, on 3rd June 1974, Petroleum Storage Development Corporation (PSDC) came into existence. PSDC was then renamed as State Oil Company Limited (SOCL) on August 23rd 1976. Following that, the ESSO undertakings were purchased on 15th September 1976 and control was vested in SOCL. The end of that year (30th December 1976) saw the merger of the Premier Oil Company Limited and State Oil Company Limited, giving way to Pakistan State Oil (PSO).It is considered as one of the most successful mergers in the history of Pakistan. After PSO’s inception, the corporate culture underwent a comprehensive renewal program which was fully implemented in 2004. This program over the years included the revamping of the organizational architecture, rationalization of staff, employee empowerment and transparency in decision making through cross functional teams. This new corporate renewal program has divided the company’s major operations into independent activities supported by legal, financial, informative and other services. Inorder to reinforce and monitor this structural change, related check and balances have been established by incorporating monitoring and control systems.Human Resource Development became one of the main priorities on the company’s agenda under this corporate reform.
2.2.
Equity Shares
PSO has 200 million shares authorized for public offering and it has currently 171,518,901 shares floating in Karachi Stock Exchange. The stock price on August 02, 2010 was Rs. 282.54 making the total market capitalization of the company at Rs. 48.43 billion. Apart from the public offering of the equity shares, Government of Pakistan holds 54% majority stakes in the company, including both direct holdings of the Federal Government and indirect holdings through GOP owned institutions.
GOP
18 28
54
Institutions Individuals & Others
Figure 1 - Shareholding Structure of Pakistan State Oil
2
According to the Privatization Commission of Pakistan, Government of Pakistan is in the advanced stages of divesting 51% of its stakes in PSO to a strategic investor.
2.3.
Products
Pakistan State Oil deals in both White Oil and Black Oil markets. White Oil consists of High Speed Diesel (HSD), Gasoline (which includes the Retail Fuel and Gaseous Fuels), JP-1 (Jet Fuel) and Superior Kerosene Oil (SKO). Black Oil consists of Furnace Oil and Light Diesel Oil (LDO). Besides selling Gasoline, Furnace Oil, Jet Fuel and HSD, Pakistan State Oil also caters to the vast customer base of lubricants in the country. PSO sells two types of lubricants; Automotive Oils and Industrial Oils, catering both types of customers in this area as well. Pakistan State Oil also exports JP-8 Jet Fuel to Afghanistan. It is being used by the DESC and NATO forces.
2.4.
Market & Customers
PSO caters to POL (Petroleum, Oil and Lubricants) requirements of a wide spectrum of customers comprising the retail consumer, various industrial units, government, power projects, aviation and marine sectors of Pakistan. PSO industrial consumer dominance in the government sector can be judged by the fact that all the major government entities like OGDC, Pakistan Army, Pakistan railways, Navy, NLC and PAF Wah have entrusted PSO to meet their POL needs. Besides supplying fuel to national power utilities like WAPDA and KESC, PSO is the sole furnace oil supplier to all Independent Power Projects (IPPs) in Pakistan. PSO also supplies fuel to industrial units like textile, cement, agriculture, transport etc. Its industrial consumer base includes prestigious entities like the Presidency and the Prime Minister Secretariat, where PSO has developed consumer outlets for timely refueling of their fleets. Furthermore, PSO also serves the fuel needs of both national & international air carriers. It also provides jet fuel into-plane refueling facilities at 9 airports of Pakistan i.e. Karachi, Lahore, Islamabad, Peshawar, Multan, Faisalabad, Turbat, Pasni and Sialkot. PSO also supplies fuel to ships at Karachi Port, Korangi Fish Harbor & Port Qasim. Moreover, we cater to the fuel requirements of Pakistan Navy, Maritime Security Agency, Karachi Port Trust, PNSC, Faisal Marine Oil Services (Pvt) Ltd. Pakistan State Oil also has strategic investments in related projects such as:
Joint Installation of Marketing Companies (JIMCo) – PSO holds 62% stakes of the facility which is operated by PSO itself. It has maximum daily throughput of 17,000 kilo tons. Asia Petroleum Limited – PSO holds 49% stakes in the company which operates 82 kilometer pipeline as well. It has a capacity of 3.6 million tons per annum.
3
Pak Grease Manufacturing Company –PSO holds 22% stakes in the manufacturer of the specialized grease catering to the requirements of many the customers including Pakistan Steel and Armed Forces Pakistan Refinery Limited – PSO holds 18% stakes in Pakistan’s third largest oil refining company. The annual capacity of this refinery is 2.2 million tons per annum White Oil Pipeline Project – PSO holds 12% stakes in this project which is a joint venture of PSO, Shell Pakistan (26%), Caltex Pakistan (11%) and PARCO (51%). It is a 817 kilometer, 26 inch diameter pipeline dedicated to transfer refined products from PARCO to the other regions of the country.
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3. Vision, Mission & Corporate Objectives 3.1.
Vision
The Vision of Pakistan State Oil is as follows: To excel in delivering value to customers as an innovative and dynamic energy company that gets to the future first.
3.2.
Mission Statement
The existing Mission of the company is: We are committed to leadership in the energy market through a competitive advantage in providing the highest quality petroleum products and services to our customers based on:
A professionally trained, high-quality, motivated workforce that works as a team in an environment which recognizes and rewards performance, innovation and creativity, and provides for personal growth and development. The lowest-cost operations and assured access to long-term and cost-effective supply sources. Sustained growth in earnings in real terms. Highly ethical, safe, environment-friendly and socially responsible business practices.
Analysis of Mission Statement There are nine essential components of Mission Statement of any organization. We will be analyzing the mission statement of the Pakistan State Oil to see if it has these components. Mission Statement Component Customers
PSO “… our customers based on ...”. The term is quite vague and it does not identify the target customers of the company. Products or Services “… providing the high quality petroleum products and services to ...”. This component is correctly defined in the mission statement Markets The geographic market is not specified in the mission statement. Technology This component is not specified in the mission statement of PSO. Concern for Survival, growth “Sustained growth in earnings in real terms”. This and profitability component is specified in the mission statement. Philosophy This component is not specified in the mission statement. Self-Concept “We are committed to leadership in the energy market through a competitive advantage in providing…” This component is defined in the mission statement. Concern for Employees “A professionally trained, highly qualified…. For personal growth and development”. This 5
Mission Statement Component Concern for Public Image
PSO component is specified in the mission statement. “Highly ethical, safe, environment-friendly and socially responsible business practices.”.This component is specified in the mission statement.
Improved Mission Statement We are committed to leadership in the energy market of Pakistan through a competitive advantage in providing the highest quality petroleum products and services to our retail and industrial customers based on:
3.3.
A professionally trained, high-quality, motivated workforce that works as a team in an environment which recognizes and rewards performance, innovation and creativity, and provides for personal growth and development. Excellence in our core activities and a passion for satisfying our customers’ needs in terms of total quality management. Innovative and technologically advanced systems and procedures. The lowest-cost operations and assured access to long-term and cost-effective supply sources. Sustained growth in earnings in real terms. Achieving higher collective and individual goals through teamwork Highly ethical, safe, environment-friendly and socially responsible business practices.
Strategic Objectives
The existing strategic objectives of Pakistan State Oil are as follows:
Maximize profitability in the Lubricants business through segmented marketing and brand promotion. Explore potential markets for the export of fuels and lubricants. Expand the PSO Cards Business by enhancing the customer base, efficient distribution and brand partnership. Enhance our reach and add to our network of New Vision Retail Outlets (NVROs). Develop bio-fuels and expand the gaseous fuels business. Revamp the C-store network; introduce Quick Service Restaurants and develop strategic alliances with local and international franchises. Revamp organizational structure and various functions in line with the best corporate practices. Streamline systems and procedures in accordance with the changing business environment. Ensure full HSE compliance in all our operations and try to meet a zero accident objective through effective system development, training, inspections and audit. Reinforce quality assurance by acquiring the ISO 9000 quality management certification of various departments, and expansion of MQTU network.
6
4. Internal Assessment Internal environment is essential for any organization as it helps the company to formulate and adapt to the new strategies. Pakistan State Oil also needs to assess its internal environment before the formulation and implementation of any strategy. The internal environment consists of the way of management at the organization, marketing and advertising, financial situation, operational processes and the information management. In this section, we will first discuss the internal factors affecting Pakistan State Oil. Later, we will present an evaluation of PSO’s response to the key internal factors using the strategic management tool called Internal Factor Evaluation Matrix (IFEM).
4.1.
Management
Pakistan State Oil is managed by a Board of Directors called Board of Management in PSO, headed by Mr. Syed Naveed Qamar, Minister for Petroleum. Mr. Irfan K. Qureshi is the Managing Director of the organization and the Board of Management also have 8 directors. Apart from the Board of Management, there are seven other committees headed by different directors. Board Audit Committee Board Audit Committee is responsible for recommending to the Board of Management the appointment of external auditors by the company’s shareholders and it considers any questions of resignation or removal of external auditors, audit fees and provision by external auditors of any service to the company inaddition to the audit of its financial statements. The Board of Management is bound to act according to the recommendations of this committee unless there are strong reasons to do otherwise. Board Finance and Operation Committee The Board Finance and Operation Committee primarily review the financial and operating plans of the company and all matters relating to them. It reviews the existing and proposed annual business plans, analyzes the profit margins and approves major operating expenses and suggests appropriate measures and remedies to improve company's performance by analyzing the economic conditions of the country. Board Human Resource Committee The Board Human Resource Committee is responsible for making recommendations to the Board of Management to maintain a sound plan of organization of the company, effective employees’ development program and sound compensation and benefits plans. Management Committee The Management Committee, or Man-Com, is a business strategy committee that meets on a weekly basis primarily to steer and review all key projects from conceptualization to implementation. Man-Com also reviews budgetary proposals and weeds out non-essential ones. Upon its approval, a final business plan is prepared and sent for Board approval. It also reviews major business issues and takes decisions accordingly. Core Leadership Team The Core Leadership Team comprises of the Executive Directors and General Managers of the company. It is chaired by the Managing Director. In this meeting various company initiatives and progress on different assignments are discussed. 7
Employee Leadership Team The employee leadership team meets on a regular basis and reviews all matters pertaining to human resources including recruitment, transfers, disciplinary actions, promotions and employee benefits. The committee also reviews succession plans and organizational developments. Executive Committee The Executive Committee is another high level committee which meets once in a month to review dayto-day company affairs. The committee members share their problems as well as key accomplishments with other committee members. It is chaired by the Managing Director and it comprises of EDs / GMs / DGMs / Departmental Heads of the company. An important thing to note is that Pakistan State Oil is a semi-government institute while government is having the majority stake of 54% in the company, therefore one of the directors is the Joint Secretary (EF&P) and financial advisor on petroleum and natural resources to the Ministry of Finance. This is one of the reasons that the company has been under influence of various financial matters such as the issue of the circular debt.
4.2.
Marketing
Pakistan State Oil has introduced various new ways to market the POL (Petroleum, Oil and Lubricants) products. They were the pioneers of introducing the cards business in the OMC industry. The customer loyalty cards product is a way to pre-pay for the future fuel consumption. This product proved beneficial also for the Fleet and Corporate Card customers. The corporate customer base has increased to more than 10,000 corporate accounts serving more than 100,000 customers. Pakistan State Oil has also joined hands with United Bank Limited as a corporate partner. UBL is the third largest bank in Pakistan having a good customer base in credit card business. UBL has issued Pakistan’s first Auto Credit Card named; UBL PSO Auto Credit Card. UBL and PSO are offering high value incentives and discounts on fuel and other automobile related products on the usage of the Auto Credit Card. PSO had also successfully introduced yet another technology-driven initiative for large corporate fleet accounts, namely the Vehicle Identification System (VIS) that confines the delivery of fuel to authorized vehicles only. Pakistan State Oil also puts greater emphasis on the Non-Fuel Retail (NFR) Business in order to diversify and strengthen the bond with its customers in a bid to provide convenience and services that distinguish it from the competition. Providing a diversified range of services at strategically selected locations, NFR aims to enhance PSO’s brand image and generate supplementary revenue for the Company by utilizing the capacity of PSO’s valued retail space and by leveraging the advantage of a captive target market. Collaborating with renowned local and international banks, PSO has launched financial facilities such as ATMs and Banking Centers that provide the ease of 24-hour banking services in a secure environment.
8
Customers can also find Pizza Hut and Dunkin Donuts outlets available at selected PSO retail outlets in Lahore and Karachi. As an additional revenue stream, NFR has also introduced advertising platforms at the retail forecourt and provides opportunities for distinguished brands to establish in-store alliances for PSO’s Shop Stops. PSO is lagging behind in marketing its Lubricants to the automobile and industrial customers which is proving to be a minor weakness. Despite being a market leader in the fuel sector, PSO is lagging behind its competitors in the sales of lubricants.
4.3.
Finances
Pakistan State Oil has a very strong balance sheet if we only go by numbers as it has Rs. 182.5 billion assets. In reality, the balance sheet has a huge amount of receivables and payables. Various government institutions and autonomous bodies owe more than Rs. 41 billion to PSO. Power companies like HUBCO and KAPCO also owe about Rs. 60.4 billion to PSO. On the other hand, Pakistan State Oil is under a heavy debt of Rs. 136 billion to various domestic and foreign suppliers. The weak economic condition of Pakistan is clearly shown on Pakistan State Oil’s balance sheet. The heavy debt incurred by PSO has made the company a very risky prospect for the investors and it has to pay higher financial charges due to the increased risk of defaults despite of strong revenue stream. The 3-years Balance Sheet and Income Statement of Pakistan State Oil can be found in Appendix 1. Table 1 - Financial Ratio Analysis of Pakistan State Oil
Financial Ratios
2010
Liquidity Ratios Current Ratio Quick Ratio
1.1183 0.8338
1.0666 0.7536
1.2362 0.5709
Activity Ratios Receivables Turnover Average Collection Period Inventory Turnover Total Asset Turnover Fixed Asset Turnover
8.1011 45 20.3132 4.8068 67.8153
8.9341 41 17.6736 4.6882 48.4168
17.2016 21 9.3523 4.5883 51.9274
Leverage Ratios Debt-to-Asset Ratio Long Term Debt-to-Asset Ratio Debt-to-Equity Ratio Times Interest Earned
84.65% 1.61% 5.5164 2.7655
86.40% 1.65% 6.3510 -
75.64% 1.90% 3.1050 16.4128
3.33% 3.11% 1.03%
0.42% (0.77)% (0.93)%
5.15% 3.85% 2.41%
Profitability Ratios Gross Profit Margin Operating Profit Margin Net Profit Margin
2009
2008
9
Financial Ratios Return on Asset Return on Equity Earnings Per Share Price-Earnings Ratio
2010 4.96% 31.20% 52.76 4.9317
2009 (4.36)% (32.09)% (39.05) -
2008 11.06% 45.38% 81.94 5.1434
Growth Ratios Sales Net Income Earnings Per Share
21.92% 235.10% 235.10%
23.33% (147.66)% (147.66)%
41.88% 199.67% 199.70%
The revenues of Pakistan State Oil increase to Rs. 877 billion. The chairman of Pakistan State Oil has set his sight on the sales target of Rs. 1 Trillion by the end of 2012. The cost of goods sold is generally high and about 96% revenues earned go to the sales Tax, IFEM and the cost of goods sold. The net profit margin is merely 1% in 2010 as the financial charges have increased due to the increase of riskiness of Pakistan State Oil. Pakistan State Oil incurred heavy inventory losses during 2008-09 due to the fuel prices crashed by 75% from US$ 141/barrel to US$ 33/barrel. We can also observe that Pakistan State Oil have started to maintain lesser inventory as the fuel price fluctuation increased. The inventory levels have come down from Rs. 62.36 billion in 2008 to Rs. 43.18 billion in 2010. The decreased inventory levels have helped Pakistan State Oil to increase the inventory turnover ratio; but the ever increasing Accounts Receivables have not helped them and the Average Collection Period has doubled to 45 days in 2010, which was 21 days in 2008. The liquidity ratios for the company do not have any impact because the major portion of current assets and current liabilities consists of the receivables and payables respectively. Pakistan State Oil has devised a strategy of matching the maturities of the current assets and current liabilities in order to maintain the liquidity ratios. The little mismatch is covered by short-term borrowing by the financial institutions. An important point to note here is that Pakistan State Oil reported a growth in Sales Revenue over the past 3 years.
4.4.
Operations
Pakistan State Oil is currently engaged in the marketing and distribution of various POL products. In addition to this, it also imports different products according to their demand pattern and possess the biggest storage facilities representing 80% of the country’s total storage capacity. The company has the largest distribution network comprising of 3,620 outlets out of which 3,384 serve retail customers, 53 outlets cater to the agriculture sector and 183 outlets serve the bulk customers. Out of a total number of 3620 outlets, 1,735 have been upgraded as per the New Vision Retail Program with the most modern facilities. Moreover, there are 37 company owned and company operated (Co-Co) sites to serve PSO’s retail customers. The idea of setting up Co-Co sites is to make these stations flagships under maximum 10
supervision and intense scrutiny to maintain the highest level of efficiency, service and customer care. In addition to retail customers, more than 2,000 industrial units & business houses, power plants and airlines are being catered to by PSO's different departments. PSO possesses huge infrastructure facilities from Karachi to Gilgit. This entails 9 installations and 12+1 depots with a storage capacity exceeding 1 million metric tons, representing over 80% of the total storage capacity owned by all oil marketing companies. To optimize storage utilization, the company has recently also provided hospitality to refineries and other oil marketing companies that include Chevron, Total PARCO and Hascombe. The modes used for the product movement of POL products by PSO include tank lorries, tank wagons and pipeline. PSO has a fleet of around 6,000 tank lorries. Around 1,200 tank lorries, equipped with tracking and pilfer proof systems, have been upgraded as per international standards which are engaged in delivering quality fuels across the country. With the inception of the White Oil Pipeline Project (WOPP) from Karachi to MehmoodKot via Shikarpur& the MFM (MehmoodKot / Faisalabad / Machikey) pipeline, the pattern of supplies from Karachi has drastically changed as the entire white oil movement from Karachi has been switched over from tank lorries to pipeline. PSO has an equity partnership in this project with a 12% shareholding. PSO has set up a state-of-the-art Lubricants Manufacturing Terminal (LMT) at the Korangi Industrial Area in Karachi to cater to all kinds of lubricant customers including automotive, hi-street and industrial consumers by meeting the national demand through products of international standards. PSO is working at a fast pace for the commercial launch of Ethanol Blended Petrol ‘E10 Gasoline’ in major cities of the country. The new fuel ‘E10 Gasoline’ formulated by blending ten percent ethanol with petrol has been introduced as part of the government’s strategy to promote alternate energy resources. PSO initiated research and development work on bio diesel in 2008. Tests have been conducted on vehicles and generators. PSO is now in consultation with the Government of Sindh, the Government of Balochistan, the Ministry of Petroleum & Natural Resources, the Ministry of Food Agriculture & Live Stock, the Alternate Energy Development Board, the Pakistan Agriculture Research Council, and the Small and Medium Enterprise Development Authority to make further inroads in this important area which has the potential to save precious foreign exchange for the country
4.5.
Management Information Systems
A state-of-the-art Computerized Maintenance Management System (CMMS) has been deployed to integrate all maintenance activities for retail outlets. This system has been implemented to ensure complete traceability of complaints regarding all breakdown issues at retail outlets. It also provides realtime data regarding all pending complaints along with any repetitive defects in any equipment. The system also serves as an information hub and helps in quick and accurate decision-making. During 2009, PSO was also awarded the ISO/IEC 27001: 2005 – Information Security Management System certification in recognition of its secure multi-site provision of IT Services to PSO offices and Departments. PSO is the first Company in the Oil & Gas Industry in Pakistan that achieved this milestone. 11
ISO 27001:2005 reflects the quality certification as per the latest internationally recognized standards that should be implemented by the Information Systems departments of any organization. The objective of ISO 27001 is to provide organizations with a common basis for maintaining information security and assurance for the confidentiality, integrity and timely availability of information assets. In Pakistan, only 11 organizations including IT companies/software houses mostly affiliates of foreign companies, are ISMS certified.
4.6.
Internal Factor Evaluation Matrix (IFEM)
Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or evaluating major strengths and weaknesses in functional areas of a business. IFE matrix also provides a basis for identifying and evaluating relationships among those areas. Table 2 - IFE Matrix for Pakistan State Oil
Key Internal Factor Strengths Highly managed company with set strategic objectives Highly trained and motivated workforce Storage capacity of 80% of the total country storage Largest retail outlets network in the country Market leader in all types of fuel products Increasing sales revenue over the past 3 years Sole provider of Furnace Oil to Power Companies ISO certified Information Management System Strong Research and Development Largest market share in aviation business Weaknesses Low profit margins Government interventions due to semi-government structure Declining market share to small competitors Not a market leader in Lubricants sector High financial charges incurred due to riskiness Total
Weight
Rating
WS
0.05 0.05 0.10 0.06 0.10 0.06 0.05 0.05 0.10 0.05
4 4 4 4 4 3 3 3 4 4
0.20 0.20 0.40 0.24 0.40 0.18 0.15 0.15 0.40 0.20
0.10 0.05 0.10 0.03 0.05 1.00
1 2 2 2 1
0.10 0.10 0.20 0.06 0.05 3.03
The Internal Factor Evaluation Matrix score for Pakistan State Oil is 3.03. It represents that PSO’s response to the internal key factors is above average.
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5. External Assessment The external environment is always important for a company’s performance; as it also helps in setting the tone for any organization’s future strategies. Pakistan State Oil is no different than other organizations. It has always been affected and influenced by the external environment that consists of Consumer Markets, Competitors, Technology, Suppliers, Labor Market, Economic condition and Regulatory Environment. In this section, we will first discuss a few of the external factors which are affecting Pakistan State Oil. Later, we will present an evaluation of PSO’s response to the external environment using the strategic management tool called External Factor Evaluation Matrix (EFEM).
5.1.
Consumer Markets
Pakistan’s retail consumer market is much diversified. Customers are not loyal to any OMC product and they use any available fuel or lubricant. There is also perceived low product quality among the retail customers. Retail customers have started to prefer Gaseous fuel over White Fuel which has helped Pakistan in becoming the largest Gaseous fuel market. The power companies are the major consumers of the industrial fuel in Pakistan. Apart from these companies other industries like textile also use industrial fuel such as furnace oil and Light diesel oil. Aviation and Marine sector is also one of the major fuel consuming sectors of Pakistan.
5.2.
Competitors
Pakistan State Oil is the largest Oil Marketing Company in Pakistan, currently engaged in storage, marketing and distribution of various POL (Petroleum, Oil and Lubricants) products. It possesses market share of 50.5% in White Oil and 85.9% in Black Oil markets. Pakistan State Oil has 68.6% of total market share of the country. Pakistan State Oil is facing fierce challenges from its competitors in the White Oil market. The market share of PSO is declining constantly from 61% in 2008 to almost 50% in 2010. PSO, however, is being able to maintain and increase its market share in Black Oil market over the years. PSO’s Industry market share had decreased from 71% in 2008 to 68.6% in 2010. The loss of market share in While Oil industry is sighted as the major cause of decline in the industry market share over the years. PSO lost its market share to AttockPatroleum, TOTAL/PEARL and Bosicor (Now Byco Petroleum).
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0.60%
Industry Market Share
3.20% 0.70% 4.20% 4.10%
0.50%
0.30%
PSO
6.40%
Shell Attock Patroleum
11.60%
TOTAL 68.60%
Caltex Bosicor Hascombe OOT Company Ltd
Figure 2 - Industry Market Share of OMCs as of June 2010
Bosicor has rebranded itself as Byco Petroleum earlier in 2008. It was an oil refining company which has also started marketing the petroleum products. It has carried out a major marketing campaign within the major cities. It is posing a major threat to PSO’s White Oil retail customer business. Considering that PSO has been in the market for more than 35 years and has the biggest storage, distribution and selling network in the country, Byco Petroleum will have to work hard for capturing their share of market from PSO. 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%
PSO Shell Caltex Attock Patroleum TOTAL Hascombe Askar Oil OOT Company Ltd Motor Gas
HSD
SKO
JP1
LDO
FO
Bosicor
Figure 3 - Product-wise Market Share of OMCs
On the other hand, TOTAL/PEARL is an OMC of Pak-Arab Oil Refinery (PARCO), which is a major supplier of the petroleum products to various OMCs in Pakistan. A similar trend of Forward Integration by the other oil refining companies might also emerge as a threat to Pakistan State Oil.
14
Chevron Pakistan has recently decided to divest its aviation business in Pakistan and they are seeking bids from the existing OMCs in Pakistan. It can become an opportunity for PSO to increase the market share of Jet Fuel supply to its aviation customers.
5.3.
Suppliers
Pakistan State Oil gets the POL products from many of the major Oil Refining companies in Pakistan. The major suppliers are Pakistan Refinery Limited, National Refinery Limited, Attock Refinery Limited, PakArab Refinery and Byco Petroleum. PSO holds 18% stakes of the Pakistan Refinery Limited, so are the other OMCs. The three suppliers, in Attock Refinery Limited, Byco Petroleum and Pak-Arab Refinery Limited, have their own OMCs as well. Therefore the reliability on these suppliers has been reduced and they pose a major threat to PSO.
5.4.
Economic Condition
Pakistan’s macroeconomic environment faced massive challenges of the war on terror, the deepening of the financial crisis which pierced into the domestic economy through a substantial decline in the country’s exports, the return of expatriates due to layoffs in international markets, a visible slowdown in foreign direct inflows and the devaluation of the Pakistani Rupee. The oil prices remained stable between US$ 60 to 80 per barrel, but there was an increase in domestic fuel prices. This increase leads to a decrease in the consumption of the White Oil throughout the country and an upward trend of using CNG (Compressed Natural Gas) in the domestic vehicles. Pakistan has become the world’s largest CNG consuming country with around 2.5 million CNG vehicles on the road. The circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy. Former finance minister Saukat Tarin quoted that in real terms the circular debt has swelled to Rs. 108 billion which mainly includes non-payment of Rs. 42 billion by KESC, Rs. 21 billion by the government of Sindh and Rs. 15-16 billion from commercial consumers to the Pakistan Electric Power Company (Pepco). Unless the government deals with the economics of power generation by boldly tackling the issue of growing circular debt quickly, it will be almost impossible to get the IPPs to fully utilize existing installed capacity, much less attract new investments in the power sector. The economic condition of the country has also slowed down the automobile industry in the country. There are still enough vehicles on the road because the easier automobile financing facility before the global financial meltdown. The trend of purchasing old cars is increasing as well and the energy demands will increase in Pakistan. The industrial sector is worst affected by the existing economic condition, many industries have closed down which is a reason of decline to HSD sales in Metric Tons terms. The demand of Fuel Oil, also 15
known as Furnace Oil, has increased due to its use in energy sector companies such as WAPDA, KESC and IPPs.
5.5.
Regulatory Environment
The fuel prices in Pakistan are regulated by the Oil and Gas Regulatory Authority (OGRA). It reviews the fuel price fortnightly and adjusts the domestic prices according to the international prices. The Ministry of Petroleum has decided to deregulate this mechanism earlier this year. Government is planning to transfer the rights of setting the fuel prices to the Oil Refining companies. It might become a threat for PSO because many of its competitors are the forward integration of some of Oil Refining companies.
5.6.
External Factor Evaluation Matrix (EFEM)
External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing. Table 3 - EFE Matrix for Pakistan State Oil
Key External Factor Opportunities Operating in largest CNG consuming country in the world Increase in the energy demands in the country Deregulation of Oil Industry Chevron is liquidating its aviation business Search for alternate energy sources Threats Constantly growing circular debt Unreliable sources of supply (Refineries) Devaluation of Pakistani Rupee Decline in consumption of White Oil Products Fluctuation of oil prices in international markets New alternatives to the industrial energy requirements such as solar energy Deregulation of the mechanism of setting fuel prices in Pakistan Scarcity of CNG in the country Forward integration of oil refining companies (suppliers) Total
Weight
Rating
WS
0.10 0.10 0.08 0.02 0.05
4 3 2 2 3
0.40 0.30 0.16 0.04 0.15
0.15 0.05 0.05 0.10 0.05 0.05
2 2 3 3 2 3
0.30 0.10 0.15 0.30 0.10 0.15
0.05 0.05 0.10 1.00
3 2 2
0.15 0.10 0.20 2.60
The External Factor Evaluation Matrix score for Pakistan State Oil is 2.60. It represents that PSO’s response to the external environment is above average.
5.7.
Competitive Profile Matrix
Competitive profile matrix is an essential strategic management tool to compare a firm with the major players of the industry. Competitive profile matrix shows the clear picture about a firm’s strong and weak points relative to its competitors. The Competitive profile matrix for PSO will compare the firm with three important competitors Shell Pakistan, Chevron (Caltex) Pakistan and BycoPetroleum.
16
Table 4 - Competitive Profile Matrix for OMC Industry
Critical Success Factors Market Share Product Quality Customer Service Customer Loyalty Storage Capacity Social Responsibility Environmental Issues Marketing & Advertisement Profit Margins Number of Outlets Total
W 0.20 0.10 0.10 0.10 0.10 0.10 0.05 0.05 0.12 0.08 1.00
PSO Rating WS 4 0.80 3 0.30 3 0.30 2 0.20 4 0.40 3 0.30 4 0.20 3 0.15 2 0.24 4 0.32 3.21
Shell Rating WS 3 0.60 4 0.40 4 0.40 3 0.30 2 0.20 3 0.30 3 0.15 3 0.15 2 0.24 3 0.24 2.98
Chevron Rating WS 2 0.40 4 0.40 3 0.30 3 0.30 2 0.20 3 0.30 3 0.15 3 0.15 1 0.12 2 0.16 2.48
Byco Rating 1 3 2 1 3 1 1 4 1 1
WS 0.20 0.30 0.20 0.10 0.30 0.10 0.05 0.20 0.12 0.08 1.65
Pakistan State Oil certainly has a competitive edge over its competitors. Shell is the closest competitor of Pakistan State Oil. Byco Petroleum has recently started its campaign to acquire the retail customers’ market share. It will take a lot of hard work to Byco to beat the already established OMCs in the industry such as PSO and Shell Pakistan. Chevron/Caltex Pakistan also poses minor competition to Pakistan State Oil.
17
6. Strategy Formulation 6.1.
TOWS Analysis Matrix 1. 2. 3. 4. 5. 6. 7. 8.
Strengths Highly managed company with set strategic objectives Highly trained and motivated workforce Storage capacity of 80% of the total country storage Largest retail outlets network in the country Market leader in all types of fuel product Increasing sales revenue over the past 3 years Sole provider of Furnace Oil to Power Companies ISO certified Information Management System Strong Research and Development
9. 10. Largest
market aviation business
Opportunities 1. Operating in largest CNG consuming country in the world 2. Increase in the energy demands in the country 3. Deregulation of Oil Industry 4. Chevron is liquidating its
aviation business 5.
Search for alternate energy sources
Threats 1. Constantly growing circular debt 2. Unreliable sources of supply (Refineries) 3. Devaluation of Pakistani Rupee 4. Decline in consumption of White Oil Products 5. Fluctuation of oil prices in international markets 6. New alternatives to the industrial energy needs such as solar energy 7. Deregulation of mechanism of setting fuel prices in Pakistan 8. Scarcity of CNG in Pakistan 9. Forward integration of oil refining companies (suppliers)
share
1. 2. 3.
Weaknesses Low profit margins Government interventions due to semi-government structure Declining market share to small competitors
4.
Not a market Lubricants sector
leader
in
5.
High financial charges incurred due to riskiness
in
SO Strategies Increase CNG retail outlets in major cities and towns of the country (S4,S5,O1,O2) Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (S1,S3,S5,O2,O3) Build a new Oil Refinery (S1,S3,S5,O2,O3) Invest in Chevron Pakistan’s liquidating business (S1,S5,S10,O4) Research and improve alternate energy products such as Bio-Diesel and E10 (S1,S5,S9,O2,O5) Diversify in alternate sources of energy such as Solar and Wind Energy (S1,S9,O5) ST Strategies Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (S1,S3,S5,T1,T2,T3,T4,T7,T9) Build a new OilRefinery (S1,S3,S5,T1,T2,T3,T4,T7,T9) Research and develop new products as White Oil substitute (S5,S9,T4,T8) Diversify in alternate sources of energy such as Solar and Wind Energy (S1,S9,T6)
WO Strategies Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (W1,W2,W3,W5,O2,O3) Build a new Oil Refinery (W1,W2,W3,W5,O2,O3) Research and improve alternate energy products such as Bio-Diesel and E10 (W3,O2,O5)
WT Strategies Work out a formula and convince government to facilitate PSO’s debtors to payoff their liabilities to PSO (W2,W5,T1) Diversify in alternate sources of energy such as Solar and Wind Energy (W3,T6,T8)
18
5.2.
Basket of Available Strategies
The following strategies can be formulated form the TOWS Matrix. We will discuss each strategy and its rationale in this section. Strategy 1: Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (Generic Strategy: Backward Integration) This strategy will be useful for PSO in many ways. There is an increase in the energy requirement in the country especially for the furnace oil. Pakistan State Oil imports the furnace oil at higher cost and supplies it to the various industrial consumers such as Independent Power Projects (IPPs) and other industries. This strategy will help in reducing this cost of goods sold since the refinery will be producing the furnace oil and other petroleum products from the crude oil; and crude oil prices are considerably low in the international market. The freight charges on the imports will also be cut when furnace oil will be produced in the country. It will also help in increasing the profit margins of the company and improve the credit risk profile of the company. It will also help in averting the circular debt problem between the domestic oil refining companies and Pakistan State Oil to some extent. Government of Pakistan is also deregulating the oil industry and the rights to setting the POL products are going to be set by the Oil Refining Companies rather than the Oil and Gas Regulatory Authority (OGRA). It will prove beneficial to have majority share in an oil refining company as it will give Pakistan State Oil some control in setting the POL products prices. Pakistan State Oil is also facing unreliable supply of petroleum products from their existing oil refining companies. Most of Pakistan State Oil’s competitors are forward integration of these oil refining companies which prefer their own distribution more than Pakistan State Oil. Pakistan State Oil has been surviving the challenge because of the Government majority share in the company. Strategy 2: Build a new Oil Refinery (Generic Strategy: Backward Integration) This strategy is an alternate to strategy 1. It has all the benefits similar to strategy 1 but it is more of a longer term solution since developing an oil refinery takes 5 to 7 years, depending on its size and capacity. Strategy 3: Increase CNG retail outlets in major cities and towns of the country (Generic Strategy: Market Penetration) There is a huge potential of increasing Revenues by selling more CNG. Pakistan has now become the largest consumer of CNG and it has more than 20 million CGN vehicles on the roads. This strategy might not be as effective as should be because of the scarcity of natural gas in the country and Government’s inability to acquire new sources of natural gas. Strategy 4: Invest in Chevron Pakistan’s liquidating business (Generic Strategy: Horizontal Integration) Pakistan State Oil is the largest supplier to JP-1 Jet fuel to the domestic and international airlines but the sales have decreased in Metric Tons terms during the FY 2009-10. Shell Pakistan’s market share had marginally increased with Chevron’s market share decreased to 1.5% from 3.0% in previous year. Investing/acquiring this business will increase Pakistan State Oil Jet Fuel market share marginally. 19
Strategy 5: Research and improve alternate energy products such as Bio-Diesel and E10 (Generic Strategy: Product& Market Development) There is an increase in the energy requirement in Pakistan for both industrial and retail customers. Pakistan is the largest CNG consuming country but natural gas is scarce. Alternate fuel solutions are extremely necessary. Pakistan State Oil can bank upon its strong research and development facility to improve its two alternate fuel products names Bio-Diesel and E10 retail fuel. This strategy will help Pakistan State Oil in two ways. One, it will help them in catering to the increasing energy requirements and two, it will help them in consolidating the White Oil market share which they have been losing to small competitors. Pakistan State Oil can use their market leadership characteristic in developing new markets as well as in penetrating the existing markets for these new products. Strategy 6: Diversify in alternate sources of energy such as Solar and Wind Energy (Generic Strategy: Concentric Diversification) The strong research and development department can also help Pakistan State Oil to diversify the business to other related energy products such has Solar and Wind energy. It will help in catering to the increasing energy requirements in Pakistan. Strategy 7: Research and develop new products as White Oil substitute (Generic Strategy: Product Development) The scarcity of natural gas in the country and declining trend of White Oil brings out another opportunity to develop a new substitute for the white oil. Pakistan State Oil has the research and development team which have been developing new fuel products. Strategy 8: Work out a formula and convince government to facilitate PSO’s debtors to pay off their liabilities to PSO (Generic Strategy: No Specific Strategy) The circular debt has caused the major problems for the whole Pakistan economy. Pakistan State Oil is worst affected by the circular debt as many debtors owe around Rs. 108 billion to PSO. On the other hand, PSO also owes around Rs. 136 billion to various creditors such as domestic and international oil refineries and various financial institutions. Pakistan State Oil needs to work out a formula so that they can convince government to facilitate their debtors to pay off liabilities they owe to PSO. It will not be an easy task but mid-term strategy of 3 to 4 years can be devised where Government can pay off its on debt to PSO which is about Rs. 41 billion. They can also facilitate the entities like KAPCO and PEPCO to pay off their bills of around Rs. 60 billion over a certain period of time. Pakistan State Oil can use this cash stream to pay their debts to various other ORCs and financial institutions to bring debt-related ratios of their books down. Other Strategies There are some other strategies which Pakistan State Oil can adopt, which were not present in TOWS analysis matrix. Increase marketing of lubricant products to capture more market share in lubricants sector (Generic Strategy: Market Penetration) 20
5.3.
SPACE Matrix
The SPACE matrix is a management tool used to analyze a company. It is used to determine what type of a strategy a company should undertake. The Strategic Position &ACtion Evaluation matrix or short a SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related to the competitive position of an organization. Table 5 - SPACE Matrix Components Calculation
Financial Strength Return on Asset Leverage/Debt Management Net Income Earnings Per Share Inventory Turnover
Rating 3.0 2.0 3.0 4.0 2.0 14.0
Industry Strength Growth Potential Financial Stability Ease of Entry in the industry Resource Utilization Profitability
3.0 3.0 3.0 5.0 2.0 16.0
Environmental Stability Rate of Inflation Technological Changes Competitive Pressure Barriers of Entry
-4.0 -3.0 -4.0 -2.0 -13.0
Competitive Advantage Market Share Quality Customer Loyalty Technological Knowledge Control over suppliers and distributors Conclusion Industry Strength Average is: 16.0/5 = 3.10 Financial Strength Average is: 14.0/5 = 2.80 Directional Vector Coordinates: x-axis = IS + CA = 3.10 – 2.60 = 0.50
-1.0 -2.0 -4.0 -2.0 -4.0 -13.0 Competitive Advantage Average is: -13.0/5 = -2.60 Environmental Stability Average is: -13.0/4 = -3.25 y-axis = FS + ES = 2.80 – 3.25 = -0.45
21
-6
-5
-4
-3
-2
6 5 4 3 2 1 0 -1 -1 0 -2 -3 -4 -5 -6
1
2
3
4
5
6
Figure 4 - SPACE Matrix for Pakistan State Oil
The graph falls in 4th Quadrant of the SPACE Matrix which suggests that Pakistan State Oil need to adopt competitive strategies. The competitive strategies include all the integrative and the intensive strategies. The SPACE Matrix also suggests that the company should bank upon the industry strength rather than on the environmental stability while making its strategies.
5.4.
Grand Strategy Matrix
Grand Strategy Matrix has become a popular tool for formulating alternative strategies. Any organization can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants. The Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market growth. Pakistan State Oil operates in a rapid growth industry, since the annual sales revenue grow by more than 5%. The company has a very strong competitive position as it is the market leader in almost all the areas of operation in the industry. Rapid Market Growth
PSO Strong Competitive Position
Weak Competitive Position
Slow Market Growth
Figure 5 - Grand Strategy Matrix for Pakistan State Oil
22
Pakistan State Oil is located in the 1st Quadrant of the Grand Strategy Matrix. PSO is in the excellent position according to the GSM. Continued concentration of the markets as well as products (intensive strategies) is an appropriate strategy for Pakistan State Oil. Pakistan State Oil can also adopt integrative and related diversification strategies.
5.5.
BCG Matrix
The BCG matrix is a chart that helps corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. While analyzing an industry, this Matrix can also be used to place various companies according to their relative market share with respect to the industry leader and the company’s growth in the industry. Pakistan State Oil is the overall industry leader among all Oil Marketing Companies. Its growth has also been good over the past 4 years. 1
0.5
0
20 PSO
QUESTION MARKS
CASH COWS
DOGS
0
-20
Market Growth Rate
STARS
Relative Market Share Figure 6 - BCG Matrix for Pakistan State Oil
According to the BCG Matrix, Pakistan State Oil is a Star company which higher growth and highest market share. Considering the fact that it is a market leader, any slowness in growth may only push it down to become a ‘Cash Cow’. Currently, BCG matrix suggests integrative and intensive strategies for Pakistan State Oil.
5.6.
Internal-External (IE) Matrix
The Internal-External (IE) matrix is another strategic management tool used to analyze working conditions and strategic position of a business. The Internal External Matrix is based on an analysis of internal and external business factors which are combined into one suggestive model. 23
1.0
2.0
3.0 PSO
2.0
1.0
IFE Matrix Total Weighted Score
EFE Matrix Total Weighted Score
3.0
4.0
Figure 7 - IE Matrix for Pakistan State Oil
Pakistan State Oil is located in 4th Quadrant of IE Matrix. The company should adapt grow and build strategies which include integrative and intensive strategies.
5.7.
Decision Matrix
The decision matrix method is a quantitative technique used to rank the multi-dimensional options of an option set. It is frequently used in engineering for making design decisions but can also be used to rank investments options, vendor options, product options or any other set of multidimensional entities such as strategic options from a basket of strategies. Table 6 - Decision Matrix for Pakistan State Oil
Generic Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation
SPACE Matrix Y Y Y Y Y Y N
Grand Strategy Matrix Y Y Y Y Y Y Y
BCG Matrix Y Y Y Y Y Y N
IE Matrix Y Y Y Y Y Y N
Total 4 4 4 4 4 4 1
N
N
N
N
0
N N N N N
N N N N N
N N N N N
N N N N N
0 0 0 0 0
According to the decision matrix, Pakistan State Oil must adopt integration and intensive strategies. Concentric diversification strategy is not recommended by the decision matrix at the moment. The following sets of strategies may then be considered as the one strategic option for the company in next 5 years to 7 years. 24
Strategy A This strategic option will consist of the backward integration strategies along with the strategy to overcome the debt problem of the company. The following strategies will be a part of this strategic option.
Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited Build a new Oil Refinery for the long term competitive advantage Work out a formula and convince government to facilitate PSO’s debtors to pay off their liabilities to PSO
Strategy B This strategic option will consist of the market penetration strategies along with the strategy to overcome the debt problem of the company. The following strategies will be a part of this strategic option.
Increase CNG retail outlets in major cities and towns of the country Increase marketing of lubricant products to capture more market share in lubricants sector
Strategy C This strategic option will consist of the productand market development strategies along with the strategy to overcome the debt problem of the company. The following strategies will be a part of this strategic option.
Research and improve alternate energy products such as Bio-Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSO’s debtors to pay off their liabilities to PSO
Now we will evaluate these three strategic options using the Qualitative Strategic Planning Matrix (QSPM).
25
5.8.
Qualitative Strategic Planning Matrix
Key Factors W Opportunities Operating in largest CNG consuming country in the world Increase in the energy demands in the country Deregulation of Oil Industry Chevron is liquidating its aviation business Search for alternate energy sources Threats Constantly growing circular debt Unreliable sources of supply (Refineries) Devaluation of Pakistani Rupee Decline in consumption of White Oil Products Fluctuation of oil prices in international markets New alternatives to the industrial energy requirements such as solar energy Deregulation of the mechanism of setting fuel prices in Pakistan Scarcity of CNG in the country Forward integration of oil refining companies (suppliers) Strengths Highly managed company with set strategic objectives Highly trained and motivated workforce Storage capacity of 80% of the total country storage Largest retail outlets network in the country Market leader in all types of fuel products Increasing sales revenue over the past 3 years Sole provider of Furnace Oil to Power Companies ISO certified Information Management System Strong Research and Development Largest market share in aviation business Weaknesses Low profit margins Government interventions due to semi-government structure Declining market share to small competitors Not a market leader in Lubricants sector High financial charges incurred due to riskiness Total
Strategy A AS TAS
Strategy B AS TAS
Strategy C AS TAS
0.10 0.10 0.08 0.02 0.05
2 4 4 1
0.20 0.40 0.32 0.05
4 2 1 2
0.40 0.20 0.08 0.10
1 3 3 4
0.10 0.30 0.24 0.20
0.15 0.05 0.05 0.10 0.05 0.05 0.05 0.05 0.10
3 4 3 2 2 4 2 4
0.45 0.20 0.15 0.20 0.10 0.20 0.10 0.40
1 1 1 3 1 1 1 1
0.15 0.05 0.05 0.30 0.05 0.05 0.05 0.10
2 3 2 4 3 3 4 3
0.30 0.15 0.10 0.40 0.15 0.15 0.20 0.30
0.05 0.05 0.10 0.06 0.10 0.06 0.05 0.05 0.10 0.05
4 4 2 3 2 4 2 -
0.20 0.40 0.12 0.30 0.12 0.20 0.20 -
1 1 4 2 4 1 1 -
0.05 0.10 0.24 0.20 0.24 0.05 0.10 -
2 3 3 4 3 2 4 -
0.10 0.30 0.18 0.40 0.18 0.10 0.40 -
0.10 0.05 0.10 0.03 0.05 2.00
2 4 4 4
0.20 0.20 0.40 0.20 5.31
1 2 2 2
0.10 0.10 0.20 0.10 3.06
4 3 3 3
0.40 0.15 0.30 0.15 5.25
26
5.9.
Strategy Selection
The strategic option A turns out to be more favorable for Pakistan State Oil as it has the highest QSPM score of 5.31, however, we recommend strategic option C to Pakistan State Oil which stands second in QSPM with the score of 5.25. Strategic option C consists of Market Development and Product Development strategies of alternate fuel products of Pakistan State Oil. The company has already been working on the two new products namely, E10 which is blended fuel targeting the efficient performance of the retail customers’ vehicles and Bio-Diesel which is produced using the natural seed oil. It will also enable PSO to price these products accordingly after the deregulation of oil industry since they will be producing these products. The company may still be facing the threat from its suppliers for unreliable supply of POL products and it may also not have an upper hand in setting the fuel price despite being an industry leader, but the strategic option C provides the company a unique competitive advantage of introducing efficient and environmental-friendly fuel in the market. Strategic option A gives a competitive advantage to the company and more control on setting the fuel prices, but it cannot be adopted for various reasons. Pakistan State Oil has very high debt ratios and very low net income margins we do not recommend strategic option A to the company because this option is more capital intensive. PSO will already be working with the Government of Pakistan to convince them to facilitate its debtors to pay off their liabilities to PSO; therefore they cannot expect the Government to rise funding for any new acquisition or construction of the Oil Refining Company. The financial costs incurred by the company are also very high and more borrowing will be more costly and only add to the risk of the company. The company may, however, adopt this strategy after resolving the debt issues and bringing down its financial costs; by that time the company must focus on acquire more market share in the alternate fuel business.
27
6. Strategy & Long Term Objectives 6.1.
Strategy
Pakistan State Oil needs to adopt the combination of following Low-cost Leadership, Market and Product development strategies.
6.2.
Research and improve alternate energy products such as Bio-Diesel and E10 Research and develop new products as White Oil substitute Work out a formula and convince government to facilitate PSO’s debtors to pay off their liabilities to PSO
Long Term Objectives
Here are the long term objectives for Pakistan State Oil.
6.3.
To work with Government of Pakistan to reduce company’s portion of circular debt by 60% by FY 2017. To increase profitability to at least 6% by end of FY 2015 To have at least 25% revenue in FY 2016 from the alternate fuel products To have revenue growth of at least 7% per annum till FY 2017 To enhance the E-10 blending facility at 60% storage facilities by FY 2013. To improve and launch Bio-Diesel as a substitute of White Oil by FY 2014. To train employees to adapt to technology advancements in alternate fuel by FY 2015.
Comparison of Long Term Objectives
The existing strategic objectives of the company, given in section 2.3, are also related to the intensive strategies of Market Development, Market Penetration and Product Development. The proposed Long Term objectives back the strategies adopted by the company at the moment of increasing its market share by using Intensive strategies.
28
7. Strategy Implementation 7.1.
Recommendations Board of Management must purse with the Government of Pakistan on a formula to reduce the company’s portion in the circular debt of the country. The Ministry of Petroleum, Ministry of Finance, the Finance Department of Pakistan State Oil and the related finance departments of the debtors and creditors of the PSO need to sit together to reach on an agreement to discharge their liabilities to each other. A 5-year plan must be devised in this regard before the end of FY 2012 and the implementation of this plan need to start from FY 2013 till FY 2017. The decreased debts and receivables will help stabilize the company and the economy in general. This stability will translate into higher net profit margin. Increase the supply of alternate fuel, especially E-10 blended fuel, to all the retail outlets of the country by FY 2014. It can be achieved by installing Fuel Blending facility at 20 out of 30 storage facility of the country by the end of FY 2013. The E-10 fuel can be carried in the existing modes of transport of fuel such as tank lorries, therefore its availability at all the retail outlets is possible. The increased availability of alternate fuel at the retail outlets will in turn increase its portion in the total revenues. The lower production cost will help in increasing the gross profit margin. Research, in collaboration with Singaporean and Malaysia OMCs, on Jatropha fruit (edible) oil to produce more cost-efficient, environment-friendly fuel as a substitute of White Oil and CNG. Pipri Marshall Yard is being used as the research facility at the moment. Plantation of Jatropha seed is recommended on large scale in order to produce sufficient Bio-Diesel for launching the product and maintain uninterrupted supplies. Arrange for trainings in Singapore and Malaysia for having the basic knowledge and innovative ways of extracting fuel-oil from the non-edible seeds. It will help to produce alternate fuels more efficiently.
29
8. Specific Objectives Table 7 - Specific Objectives for Pakistan State Oil Departments
Operations 2011-12 2012-13
Install fuel blending facility at the 8 major storage facilities in large cities of the country (4 in Punjab, 2 in Sindh, 1 in Khayber Pukhtunkha and 1 in Balochistan). Install fuel blending facility at the 12 storage facilities in the country. (4 in Punjab, 4 in Sindh, 2 in Khayber Pukhtunkha and 2 in Balochistan)
Logistics 2011-12 2012-13 Supply 2011-12 2012-13 2013-14 2014-15 2015-16 Construction & Retail Facility 2011-12 2012-13 2013-14 Each Year Procurement 2011-12 2012-13 2013-14 Each Year Retail Fuel 2011-12 2012-13 2013-14 2014-15 2015-16 Legal 2012-13 2014-15 Finance 2011-12 2012-2017 2012-2017
Arrange for stand-by tank lorries in the country, 70 in Punjab, 50 in Sindh, 15 in Khayber Pukhtunkha and 15 in Balochistan. Arrange for additional stand-by tank lorries in the country, 100 in Punjab, 75 in Sindh, 30 in Khayber Pukhtunkha and 20 in Balochistan Ensure the import of 15,000 metric tons extra HSD for E-10 fuel Ensure the import of 40,000 metric tons extra HSD for E-10 fuel Ensure the import of 70,000 metric tons extra HSD for E-10 fuel Ensure the import of 100,000 metric tons extra HSD for E-10 fuel Ensure the import of 140,000 metric tons extra HSD for E-10 fuel
Ensure the availability of storage tanks for E-10 at 800 retail outlets in the country. Ensure the availability of storage tanks for E-10 at addition 1200 outlets (2000 in total) Ensure the availability of storage tanks for E-10 at addition 1600 outlets (3600 in total) Ensure that any new retail outlet has storage tank for E-10 fuel Ensure the procurement for the dispensing units for E-10 fuel for 800 retail outlets Ensure the procurement for the dispensing units for E-10 fuel for additional 1200 retail outlets Ensure the procurement for the dispensing units for E-10 fuel for addition 1600 retail outlets Ensure that there are dispensing units available in inventory for new retail outlets Achieve alternate fuel sales equal to 2% of total annual sales Achieve alternate fuel sales equal to 5% of total annual sales Achieve alternate fuel sales equal to 11% of total annual sales Achieve alternate fuel sales equal to 18% of total annual sales Achieve alternate fuel sales equal to 25% of total annual sales Get the patent for E-10 fuel for the next 15 years Get the patent for Bio-Diesel for the next 15 years Ensure to have an agreed plan for circular debt removal in collaboration with the Government ministries and related parties such as debtors and creditors Ensure that the agreed plan is being carried out Ensure that the Net Profit Margin is increased by 1% each year.
30
Appendix 1 - Finances Balance Sheet as of
March 2010
June 2009
ASSETS Non-Current Assets Property, Plant and Equipment Intangibles Long Term Investments Long Term Loans, Advances and Receivables Long Term Deposits and Prepayments Deferred Tax
June 2008 (Rupees in ‘000)
6,312,778 40,324 2,390,408 289,979 90,721 3,819,539 12,934,749
6,987,025 68,872 2,153,514 405,870 83,655 5,033,273 14,732,119
7,460,549 105,502 2,701,097 477,745 79,098 407,337 11,231,328
109,182 43,182,366 108,277,693 756,822 320,341 13,630,913 3,263,488 169,540,805 182,484,554
112,143 40,698,209 80,509,830 418,015 551,803 12,806,779 709,627 2,883,118 138,689,524 153,421,643
115,814 62,360,067 33,904,728 396,220 401,433 15,681,790 3,018,640 115,878,692 127,110,020
1,715,190 26,288,793 28,003,983
1,715,190 19,155,595 20,870,785
1,715,190 29,249,864 30,965,054
931,837 2,002,363 2,934,200
854,718 1,673,020 2,527,738
834,598 1,574,148 2,408,746
136,532,117 688,512 391,404 12,918,724 1,015,614 151,546,371
110,123,702 688,512 556,380 18,654,526 130,023,120
81,067,565 726,116 217,928 10,997,908 726,703 93,736,220
182,484,554
153,421,643
127,110,020
Current Assets Stores, Spare Parts and Loose Tools Stock in-trade Trade Debts Loans and Advances Deposits and Short Term Payments Other Receivables Taxation Net Cash and Bank Balance Net Assets in Bangladesh EQUITY AND LIABILITIES Share Capital Reserves Non-Current Liabilities Long Term Deposits Retirement and Other Service Benefits Current Liabilities Trade and Other Payables Provisions Accrued Interest/Markup Short Term Borrowing Taxes Payable
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Income Statement
Gross Sales Sales Tax and IFEM* Net Sale Cost of Products Sold Gross Profit Other Operating Income Operating Expense WPPF & WWF Other Income Profit/(Loss) from Operations (EBIT) Financial Costs Share of Profit of Associates Profit/(Loss) before Tax Taxation Profit/(Loss) after Tax (Net Income
Jul’09 to Jun ‘10
Jul’08 to Jun ‘09
877,173,254 (134,415,303) 742,757,951 (713,591,707) 29,199,244 1,479,054 30,645,298 (8,080,568) (1,331,317) (9,411,885) 6,095,348 27,328,761 (9,882,010) 17,446,751 516,401 17,963,152 (8,913,556) 9,049,596
719,282,176 (106,586,587) 612,695,589 (609,685,478) 3,010,111 1,451,666 4,461,777 (10,815,121) (10,815,121) 776,686 (5,576,658) (6,232,056) (11,808,714) 451,850 (11,356,864) 4,658,329 (6,698,535)
Jul ’07 to Jun ‘08 (Rupees in ‘000) 583,213,959 87,935,426 495,278,533 (465,254,907) 30,023,626 1,396,527 31,420,153 (9,283,021) (9,283,021) 313,860 22,450,992 (1,367,898) 21,083,094 294,318 21,377,412 (7,323,617) 14,053,795
*IFEM = In-Land Freight Equalization Margin
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Appendix 2 – Organization Chart
Managing Director
Executive Director (Finance & IT)
GM Information System
GM Finance
Executive Director Marketing
GM Retail Fuel
GM Industrial Customers
GM Aviation, Marine & Export
GM Lubricants
DGM CNG & LPG
DGM Non-Fuel Retail
DGM Cards
GM Alternate Energy & New Business Dev.
Executive Director Supply
GM Operations
GM Logistics
GM Supply
GM Construction and Retail Facilities
GM Procurement
GM Quality Assurance
DGM Health Safety & Environment
GM Human Resource
GM Legal
GM Security Services and Administration
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