Economics
G.Pazylkhairova
JSC “Ordabasy
Corporation”, Kazakhstan
Techniques for analyzing
industries and competitors
Annotation: Theories, concepts and
models of strategic conduct for acting business can be taken as essential
information to develop concepts of strategic management when corporation enter
foreign markets, formulating competitive strategies on directions of activity
for business – units, incoming into corporation structure.
I.Introduction: It is advisable to use principles and methods of systemic approach to
the analysis of situation and forming strategies: use of systematic approach to
planning and realization of strategic objectives with application modern tools;
modeling of strategies and scenario approach; establishment of system net
models with the help of new tools letting keep functionality of objects of
management.
II. Statement of problem: . Companies
which have achieved definite success in internal market, aspire to enter the
world market. Assimilation of a new external market is each time a compromise between
decision usage, which has already been used on local markets and the necessary
adaptation level to the new markets. Methodic and analytic instruments accepted
in scientific and practical activity: BCG and GE matrix, method of forecasting,
technique of scenario analysis.
III. Results: To understand how the
future events will develop and what the future economic, political and social
conditions will be, oil companies have been using the scenario planning methods. Based
on the forecasts, plans and scenarios have been made; some of
them could have been be prepared for emergencies and consider the most probable
scenarios. The availability of alternative plans (scenarios) makes it possible
to reduce the time necessary for understanding the arising situation and for
required decision making. However, it should be remembered that the cost of
preparation of too many alternative plans can exceed the effect of their
possible use.
Four lines can be identified in the application of
scenarios for establishing the strategy: study of company’s resources; study of
business portfolio; determination of strategic actions (steps); test of the
elaborated strategy for different changes of business environment.
In respect to the oil and gas sector, the sequence of
steps in making scenarios would be as follows:
1) Construction
of scenarios of the development of energy resources by their types: markets of
oil, oil products, gas, and coal (for gas producing companies).
2) Modeling
of the behavior of energy market participants on the whole and separately for
each market. A scheme is formed and financial condition of the company, taxes
and rents, investment resources, etc., are assessed for each scenario. The
behavior of consumers and competitors, financial and material flows are also modeled.
Even under the developed market conditions it appears to be an extremely
difficult task: it requires investigating the behavior of capital markets,
financial inflows and outflows, economic and licensing policy of the
government, and synergy effects from the interaction of Holding subsidiaries,
etc.
3) Analysis
of the most probable scenarios is performed from the standpoint of individual
participants of oil, oil product, and gas market. At the same time, scenarios
of the most critical development are identified; the scenarios under
consideration are ranged according to the level of their attractiveness; and
probability and magnitude of opening new fields are assessed, etc.
The use of scenario approach in the formation of
strategy of oil and gas company development makes it possible to appreciate
better and to structure more clearly the set of problems to overcome.
Due to the fact that the scenario is prepared for oil
business companies, the predicted political, socioeconomic, and technological
events should be considered from the aspect of how they can affect the change
of such factors as the demand, offer, oil, oil product and gas prices ( in
certain scenarios: coal and electric energy prices), competitive ability at the
market, cost of capital, investment market trends, power balance in oil
refining, freight cost for basic supply
directions, pipeline pumping prices, taxes, quality of oil products,
refinery’s margin, etc.
The following scenario types have been identified for
the strategy generation:
·
global – a
scenario taking account of the world trends and social-economic and
technological development, for instance, the forecast of overall world oil
demand in 5 years ;
·
regional – a
scenario considering the development of individual regions where the company
will or will not be present, for instance, West, South Kazakhstan;
·
Country-wise – a
scenario considering an individual country, for instance, Russia, Azerbaijan;
·
Special – a
scenario considering the promotion of a group of commodities requiring major investments
to the market of a country or a group of countries. For instance, commissioning
of extra oil refining facilities to satisfy the needs for distillate at the
domestic market.
By the character of effect, the factors can be divided
into three typical areas:
1.
The structure of energy resource market (supply
and demand): will this business remain profitable for sellers? Will the
existing structure of buyers change in future?
2.
The economy of Kazakhstan: will the country’s
economy continue to depend on the energy resource export or are any changes are
possible in its structure?
3.
The technology: will the technology develop in the
economy in general and the oil sector in particular? What is the character of
technology development: based on independent development of individual science
branches (incremental way) or due to the integration of specialized science and
accelerating evolution?
It is necessary to answer the
questions: «what will happen if...? », will certain strengths change
Scenario À:
In future, preference in the national economy will be given to oil and gas. The
development of industry and technologies depend strongly on the condition of
fuel-energy complex (FEC) of the country. At the national level, the issue of
economy restructuring is discussed; however, the stress of money does not make
it possible to reject the preference to the development of oil and gas sector
over other sectors.
Scenario Â: The revenues from oil and gas are
directed for the national economy structuring. Fast spread of new technologies
(materials, computers, and communications) and gradual overcoming of
budget-trade deficit has become a basis for strengthening the international
political and economic cooperation with other countries. The economy of countries
continues to depend strongly on the energy carriers providing high income to
the supplier countries. Kazakhstan using the available technologies and
revenues from oil and gas supply, develops the resource base and diversifies
the economy.
Scenario Ñ:
Kazakhstan has made big efforts to maintain its positions in the depressing
world. The structural problems in the developed and developing countries have
resulted in crisis. However, the vigor to overcome them is absent and the
recession, therefore, continues. The protectionism and national self-defense
policy pursued in many countries helps to restrain the aggravation of
situation. Under these conditions, Kazakhstan seeks to implement its
competitive advantages in the energy sector for implementation of the national
economic survival strategy.
Scenario D:
The country is passing from the oil dependence to the global structuring. This
scenario represents further evolution of the economy based on the globalization
and informational support of the society. The progress in high-tech areas
(information technologies, biotechnology, material science) changes radically
the structure, character, and development lines of the global economy. The
dependence on raw material and energy resources becomes less significant, and
the value of information component in the product cost increases. In such
high-tech competitive environment Kazakhstan has been assigned an insignificant
part that necessitates the restructuring of the country’s economy.
The prepared four scenarios cover different variants
of the condition of energy resource market and possible restructuring of
Kazakhstan’s economy in future in conformity with the novel technologies and
new requirements.
The “market
share – market growth” matrix worked out by The Boston Consulting Group in the late 1960s can be used
for the portfolio analysis. The BSG method is the most well-known
instrument of portfolio management. BSG matrix can be used for identifying the
priorities in range of goods. To provide long-term process of value creation, a
company should have a range of goods: both, goods with a high growth potential
requiring investment of money and goods with low growth potential supplying
money. The BSG matrix includes two
parameters: market share and market growth. The company’s task is to determine
what is more beneficial for the company: when the product has a big share at
the market or when the product market quickly grows. The matrix considers only
the goods having extreme positions at the market (“stars”, “question marks”,
“milk cows”, “lime ducks” (sometimes literature cites “dogs”)).
Using two-coordinate matrixes, one determines the
strategic position of business unit and basic behavior models, the so-called
normative strategies to be used for the goal and strategy planning and
allocation of company’s resources.
The ease of using these models allows company’s
managers to structure and demonstrate visually the company’s strategic
problems, carry out analysis and work out the initial version of new strategy
and make amendments in the existing strategy. The shortcomings of this model
are the limitation of the model by two factors the selection of which can be
quite easily manipulated. The absence of financial indicators of the company’s
current and future development and its value as a criterion limits considerably
the possibility of using such models.
A more recent
and advanced version of BSG Matrix is the GE (McKinsey Matrix) Matrix or in other words, the “market
attractiveness – advantages in competition » Model, has been
elaborated jointly by General Electric and McKinsey. It is
more advanced in three aspects:
-market (sector) attractiveness instead of market
growth. The attractiveness includes more factors determining the sector/market attractiveness that the market
growth rate;
-the competitive advantage has replaced the market
share as a parameter of competitiveness assessment. The competitive advantage
also includes more factors determining the competitive advantage of a business
unit than only the market share;
- The GE
Matrix works in 3*3 format, whereas the BSG Matrix in 2*2 format.
The typical external factors affecting the market
attractiveness are: market size, market growth rate, market profitability
trends, competitive tension, general risk of revenues in the sector, barriers
to access, and possibilities of product and service differentiation,
variability of demand, segmentation, structure of distribution, technology.
The typical external factors effecting the competitive
attractiveness are: advantage of assets and competencies, relative advantage of
brand, market share, loyalty of clients, relative state of expenses (cost
structure compared to competitors), relative margin of profit (compared too
competitors), advantage of distribution and production facilities,
technological and other innovation activities, quality, access to financial and
other investment resources, advantage of management.
In this model, the attractiveness is assessed based on
the market appraisal, its profitability, availability, existing barriers, etc.
The advantages in competition are determined by the position taken at the
market, product potential, research potential, and qualification of managers
and the staff. The extreme positions in this matrix are those corresponding to
the investment strategies – growth and exhaustion – business aging. The scale
of three values is used in this matrix, the average value corresponding to the
interim evaluation.
The
shortcomings of the model are the necessity to process big amount of
information, difficulty of its evaluation, strong effect of human factor during
evaluation, impossibility to obtain quantitative assessment.
For
the sector analysis it would be methodically correct to be guided by M.
Porter’s concept of five market forces [1]:
·
Rivalry of competitors
· Influence
of suppliers
·
Influence of buyers
· Threat
of emergence of your product (service) substitute
· Barriers
for entering the market of other companies
The
following questions should be answered:
1.
What competition types are possible?
2.
How strong is the competitive activity?
3.
How strong is the influence of suppliers and buyers?
4.
What obstacles for new players do you see?
5.
What substitutes of your products or services are known to you?
For
the sector analysis, the following factors shall be taken into consideration:
o
How many companies operate in the
same sector
o
Their relative size
o
The share of the market belongs to
them
o
Their cost structure
o
Their profitability
o
How they sale their products
o
How much they spend for R&D of
their products
o
Their policy in respect of
advertizing and sales promotion
o
What resources they use
The entry to
each particular market with a certain type of commodity should be forecast by
modeling. It can be explained by the fact that the plans prepared by the
extrapolation of data on the sale results for a few past years began differ
significantly from the real situation due to a decrease in the growth rate,
change of the economy structure, and some other events. Therefore, companies have
started seeking after more efficient methods of planning and managing their
development.
The forecast requirement is determined by complexity
of the tasks to be solved and objects
to be forecast – big companies or groups operating in a permanently changing
business environment. The followings factors affect the selection of particular
forecast method:
1.essence of the problem to be solved;
2.complexity and structure of system;
3.dynamic characteristics of
forecast object;
4.type and character of information
and information support ;
5.period of time for which the
forecast is made, its correlation with the life cycle of commodity, service, or
raw material sources (oil or gas field);
6.requirements for forecast results
(accuracy, reliability, credibility);
7.qualification of the staff
preparing the forecast (predictors).
The modeling method is
one of the most widespread cognitive methods of science and is an integral part
of many studies.
Model represents a
certain abstraction replacing, during the study, the original. Economic models
determine the relationship between different parameters and economic indicators
of the process or system under study taking into consideration the limitations
imposed on them.
An important
procedure for the simulation is the measurement repetition making it possible
to obtain several scenario versions and to identify and adjust the behavior of
individual variable intervals most complicated in the study. Simulation makes
it possible to check the correctness of the scheme made and its stability on
variation of parameters, rate, their variation randomness, and their
compatibility. At the same time, no
incorrect analysis and simulation procedures that could affect significantly
the obtained results should be used.
References:
1.
Michael E. Porter. Competitive strategy. Techniques for Analyzing
Industries
and Competitors.-
The Free Press, 1998; M,2006 p.30