Industry And Competitor Analysis Of Schlumberger

An oilfield services company provides the infrastructure, equipment, intellectual property and services needed by the international oil and gas industry to explore for, extract, and transport crude oil and natural gas from the earth to the refinery, and eventually to the consumer. (Wikinvest, n.d.)

Schlumberger Limited is no exception to these parameters supplying technology, information solutions and integrated project management that optimize reservoir performance for customers working in the oil and gas industry. (Schlumberger, Backgrounder, 2011).

Today, the company employs more than 113,000 people of over 140 nationalities working in approximately 85 countries. The company’s revenue reached $39.54 billion in 2011, reflecting that market conditions were positive, driven by improved worldwide activity. (Schlumberger Ltd, 2011)

Schlumberger being a leading oil field service provider in Middle East has to keep a constant tab on its existing competitors and the new entrants to the oil field services industry. Given the industry context mentioned above, the main aim of this business report is to analyze the competitors and the relative market conditions to understand the macro-economic variables of the industry, as outlined below.

The company does have a competitive advantage over other firms but no competitive advantage is permanent. This report will provide insights into the speed with which the competitors are able to acquire the skills needed to duplicate the benefits of Schlumberger’s value-creating strategy and also determine how long this competitive advantage will last. (Ireland, Hoskinsson and Hitt, 2011).

The initial analysis of the report would focus on the qualitative aspects of the industry. Industry strategic frameworks would be used to depict the conditions prevailing in the global oil field service industry. The oilfield services (OFS) industry faces a lot of economic, technical, geographic and operational challenges (Painter and Grandjean, 2009). Thus an analysis to investigate the business environment and the factors affecting the industry would be carried out through an appropriate framework.

In order to run a successful business, the company should have a competitive advantage in the market. This would be analyzed through desired models, which will identify the sources of competitive forces Schlumberger would face in the market.

The later part of the analysis would focus on the strategic approach of Schlumberger and positioning of the company in the market with regards to its competitors. The strategic approach and the market position would be through a thorough analysis of the competitors and how successful they are in implementing those strategies.

In addition to that the Strategic approach will also focus on the General and the Industry environment affecting the company within the UAE market.

The objective of the report is to ensure that Schlumberger is aware of the changes going on in the external environment in the Middle East effecting its ongoing strategies and business plans and also to keep a tap on its competitor’s new strategies and the advancements they are making. It is also to ensure that their current strategies are in line with the business environment and if not, what changes can be brought it in order to keep it at par with the other competitors within the industry.

The final outcome of the project will assist Schlumberger not only in maintaining their strong position within the industry, but will also help them in forecasting the changes in advance and develop their business plans accordingly.

Chapter 2: Literature Review:

Porter five forces Model:

To have known about the industry, we need to analyze as to how a company can sustain in this competitive market. In order to do that, there are a number of strategic analysis frameworks and this section will help us to know the appropriate framework for analysis. To do a strategic analysis at an industry level, we have different frameworks such as SCP Paradigm, Porter five forces model and Value Net model.

The Structure Control Performance paradigm is one of the frameworks which is used to analyze the industry and provide a detailed view of the industry. This framework which is derived from the Industrial Organization (IO) economics studies the market based on the three elements and also interprets the relations between them. (Fu, 2003). Mason (1939, 1949) and (Bain, 1951, 1956, 1959) as cited in (Goddard, 2005) had developed the SCP paradigm. It defines the relationship between the market structure, company conduct and company performance (Ajlouni, 2010). ‘According to this approach, the structure of a market influences the conduct of the firms operating the market, which in turn influences the performance of those firms. (Goddard, 2005).

Thus the SCP paradigm analyses the industry in three steps. First, the structure analyses the number and size distribution of buyers and sellers, barriers to entry, product differentiation, vertical integration and diversification. (This would be discussed later in the chapter). Second, the conduct describes the behavior of the firms through business objectives, pricing policies, research and development, collusion and merger. (This would be discussed later in another chapter). The third, performance describes the parameters for the performance of the industry through profitability, growth and allocative efficiency. (This would be discussed later in the chapter).

The SCP Paradigm was based mainly on empirical research than on theoretical aspect and it was one of the dominant models till the early 1980s. (Slade, 2003). Thus there were many criticisms about the model about the importance of the three factors in the model and the empirical researches done on this paradigm. One of the main problems for the managers in the later years was to analyze each parameter for the three factors in the paradigm and it was a long process considering all the factors in the industry. To respond to these criticisms, Schmalensee, 1990 came up with a New Industrial Organization (NIO) where theories where based on strategy and conduct. Game theory was one of the theories and it was a decision making theory where firms do not have to depend on the various factors prevailing in the industry but have a choice from a number of various strategies. Many economists did go against this concept and raised many criticisms. (Goddard, 2005). Then in the further growth of the Industrial Organization, Porter’s model was introduced.

One of the well-known and an important framework is Porter Five Forces Model. Porter’s five forces is heavily influenced by the SCP Paradigm as we the ‘Structure’ part of the paradigm is basically the Porter Five Forces model and the other performance is outcome of Porter’s model which is the profitability. (Goddard, 2005). Micheal E.Porter in 1979 developed this model which attempts to handle the main forces which affect the industry structure. Porter five forces model tries to explain the industry structure and the competitive conditions by evaluating the following forces: the risk of new entry in the industry, the degree of rivalry among established competitors, the bargaining power of buyers and suppliers, and the threat of substitute products. According to Porter, stronger the forces of the model, the business environment of the industry seems to be more challenging and is less attractive to the investors; whereas if the forces are weak, the companies seem to be profitable as there would be less competition in the industry.

According to Kevin Coyne and Somu Subramanian in 1996, this model is built under three essential assumptions: First, the buyers, suppliers, substitutes and competitors are not related and do not interact with each other in the industry. Second, capital will increase to companies that have a structural advantage over the competitors and potential entrants which is true in the oilfield service industry. Third, uncertainty is low which lets the companies in the market to plan properly and prepare a strategy accordingly. (The McKinsey Quarterly, 2001).

Also according to Mintzberg(1994), Porter assumes that future of the industry can be forecast based on the current climatic conditions in the business environment. And he discards this assumption by explaining that technological innovations in the industry make the forecast practically impossible.

Every model has its limitations and criticisms and Porter Five forces model is no exception to it. The limitations are: First, the model was based originally on the economic situation in the eighties with its strong competition and relatively stable market structures. It focuses externally (though value chain has an internal focus) and assumes stable and identifiable markets. Second, it is not able to take into account new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. Third, Porter only considers the industrial factors where as it ignores the firm resources available to the industry which are the primary determinants of the profitability of the industry. Resources transform a short-run competitive advantage into a sustained competitive advantage as they are valuable, rare, in-imitable and non-substitutable. Finally the fourth, as and when the companies expand, they diversify themselves into various other markets and other regions. The model does not consider these factors while analyzing the industry.

Brandenberger and Nalebuff in 1985 too identified an important flaw in the Porter model. In their book Coopetition(Competition + Co-operation), they discuss that there may be positive and negative firm interactions while the positive interactions the model tends to ignore. This means that the model ignores the strategic alliance between industries which help each other to bring out a finalized product. These are mainly known as complementors in business terms. Thus Brandenberger and Nalebuff in addition to suppliers, consumers and competitors introduced a new force namely the complementors. Thus they introduced a concept of “Value Net” which is an extension to the Porter’s five forces model and this model was known as the Value Net model. Porter’s five forces analysis threats to profits whereas Value Net model analysis threats and opportunities available to the industry. (Industry Analysis, n.d.)

‘Porter concedes that developing a strategy in a new emerging industry or in a business undergoing revolutionary technological change is a daunting proposition’. (Downes and Mui, 1998). According to Downes and Mui, Porter explains that this new digitalized and technology related world, developing a strategy is a tough task and this does not mean that the old rules are invalid. But if we look around in today’s environment, every industry is need of technology or makes use of technology. Thus Downes and Mui introduced three new forces to the Porter five forces model namely Digitalization, Globalization and Deregulation. (Downes and Mui, 1998). These forces are the forces which drive the current era of business and mainly Digitalization.

Thus Porter’s framework’s main problem which has been identified in this era of business is the digitalization where industries are getting redesigned with technology at a much faster pace than it used to earlier and the sustaining competitive advantage over other firms is diminishing due to technology.

Though in the above discussion, it seems that Porter five forces seems obsolete as it does not consider digitalization but if we consider it with its assumptions and limitations, it is one of the important management tool used in any business. The reason for choosing the Porter Five Forces framework was due to the following. This particular model is known to be well tested and it has been under use for more than three decades. In spite of the fact that the model has been criticized for its limitations and assumptions, it is one of the very few models which has been thoroughly analyzed by various scholars. Finally, as it is a widely used framework it is easier for companies and other academicians to clearly interpret about the industry as compared to other models used for the analysis of the industry.

Porter’s Competitive Framework:

In order to sustain in today’s competitive business environment firms must consider the industry under which it operates, focus on its internal assets that affect the firm’s performance and determine the capabilities of its rivals. (Ireland, Hoskisson and Hitt, 2011)

Hence, firms are required to maintain focus on their competitors within an industry and carry competitor’s analysis by analyzing the strategy of its direct competitors who have the capability of offering similar product and indirect competitors who can offer products that can substitute the products of the firm (Substitute Competitors).

According to Grahm, L (2005), ‘A knowledge of competitive dynamics is generally regarded as an essential starting point for successful strategy formulation’.

Thus there are different strategic frameworks available which would be helpful to do a competitor analysis. The most prominent frameworks available are Porter’s Competitive Framework and SWOT analysis. Porter’s Competitive Framework is a framework which is used to analyze the industry on four elements namely: future goals, current strategy, assumptions and capabilities where future goals discusses what drives the competitor, current strategy discusses what a competitor is doing or can do, assumptions discusses the assumptions held by the firm about itself and the industry and capabilities discusses strengths and weaknesses. (Porter, 1980). This is one of the prominent frameworks but a lot of researches had postulated their ideas on competitor analysis which is discussed below.

A lot of scholars have defined what a competitor’s analysis is but the most difficult part is the evaluation of the competitor at a firm level. (Tsai, Su and Chen, 2011). A number of studies have been conducted on how a competitor could be analyzed at a firm level. Porac et al, 1995 presented a cognitive model which is developed where the firm observes its competitor’s actions and reactions and then decide on its strategy. Also, Baum and Lant (2003) illustrate that resemblance in geographic location, price, and size are sufficient for a firm to have an idea of their competitors. Also Chen in 1996 gave a different prospective of competitor saying that a competitor analysis was mainly based on market commonality and resource similarity. But many researchers found the two-firm concept to be difficult to relate with the competitor analysis.

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Competitor’s analysis is necessary for every company because there may be certain gaps which the company might not foresee while making competitive decisions. Zajac and Bazerman(1991) did discuss the relation between the strategic decision making competitive analysis and named the gap between them as ‘competitive blind spots’. They discussed how a wrong assumption by a firm about its competitor may result in blind spots. Rothschild, 1979 too discussed on where the companies many miss the link while competitors and what are the questions to be posed for a proper competitor analysis. (Tsai, Su and Chen, 2011) gave a different prospective the competitor analysis by introducing the concept of ‘competitor acumen’. It illustrated the relationship between the firms in the industry and also understand the extent to which a firm can understand its competitor.

Every researcher mentioned above has challenged the Porter’s framework but none of these have the same prominence as Porter’s framework. But there is a challenge which the framework faces. Porter does discuss that when a competitor analysis is done, a firm should know both its direct (current) and indirect (emerging) competitors. However, it does not discuss whether a firm should consider all its competitors, only the top three or four or just a bunch of them. Thus the firm has to analyze the industry first, identify its competitors and then go for competitor analysis.

The SWOT analysis is Strength, Weakness, Opportunity and Threats which discusses the firm’s advantage in comparison to other competitors in the marketplace. SWOT analysis has a lot of advantages like it is a simple framework, helps a firm to improve its focus an can be applied to many intelligence reports like market intelligence. The analysis has a drawback as well where it can be too private and disconnected from the realities that are impacting the company. (Evans).

Since Strength and Weakness part is been covered in the Capabilities part of the Porter’s framework and Opportunities and Threats are also discussed. Thus Porter’s framework is an important competitor analysis tool despites its limitation.

Chapter 3: Oilfield Service (OFS) Industry:

Background of the Oil Field Service Industry

The current energy sector, where there is an involvement of both the production and sale of energy, comprises of the petroleum (oil and gas industry), electric power, coal, nuclear power and the renewable energy industries. The petroleum industry plays an important role in this sector as oil and gas accounts for a large percentage in world’s energy consumption which is around 56%. (BP, 2012). The petroleum industry is mainly classified into two main activities – upstream and downstream activities.

The upstream activities in this industry are the exploration and production activities. The exploration activities include locating the hydrocarbon reserves, such as oil or gas reserves, which can be done through desk study, aerial survey and seismic survey. After locating the reserves, the next step is to drill the surface and pump the hydrocarbon out of the reserves. This can be done both on the onshore and offshore through rigs. After the drilling and having established the size of the oil field, the next step would production and development activity where the oil and gas is produced through various techniques and services.

After the oil and gas has been removed from the reservoir and brought to the surface, it is then taken to the refineries where the downstream activities begin. The downstream activities in the industry include refining and processing of the oil and gas products and then further distribution of those products through various distribution channels like the various retailers, distribution companies, chemical plants, etc.

The important industry related to the upstream activities is the oilfield service industry. The oilfield service industry provides equipment and services which are utilized in the exploration and extraction of the hydrocarbons mainly oil and gas. The oilfield service industry is thus the backbone of the oil and natural gas industry providing various services and equipments for the industry to run.

(Etechinternational, n.d.)

Demand for the oilfield service industry:

The demand for the oil field services industry in the market can be measured in terms of the revenue generated by the industry over the years. Given below is the revenue generated by the industry in USD billion over the years from 2007-2011 and it also shows the forecast of the industry for the next five years till 2016.

(Source: MarketLine, 2012)

Figure 1: Revenue of the Oilfield Service Industry in Billion $

The global revenue of the industry had been on the increasing trend till the 2008 where it reached a high of USD 361.9 billion. There was a decrease in the revenue in 2009 to USD 256.9 billion where the revenue declined by 29.1% which was mainly due to the global economic and financial crisis which resulted in the drop in the oil price. The WTI Crude Oil Price (refer Appendix 1) indicates that the oil price was once at the peak in 2008 at $145.16/barrel (Yahoo Charts, 2012) and then there was a sudden drop in the oil price and this price drop did sustain in the industry for quite sometime. This drop in the price of the oil led to loss of billions of dollars to the industry due to various macro and micro-economic factors in the market. (Hamilton, 2009) But later on after the financial crisis, the industry started to improve its business and now since the market has been stabilized and is seem to be rising is expected to reach global revenue of $638.4 billion by 2016.(MarketLine 2012)

Knowing the basics of the oilfield service industry, let us know look into what are the indicators which help us to understand the growth in the industry and the factors which influence the growth of the industry.

2.1a Upstream Capital Spending:

The oilfield service industry has been mainly dependent on the upstream or the exploration and production industry as the oilfield service industry does not provide its services directly to the consumers but to these exploration and production companies. Thus the growth of the oilfield service industry depends upon how the upstream industry performs and spends. (Ernst and Young, 2011). The upstream industry is basically segregated into large integrated super-major oil and natural gas companies, international independent oil and natural gas companies which are also known as the International Oil Companies(IOC’s), and the national or state-owned oil companies also known as the National Oil companies(NOC’s). Thus the upstream spending will result as a combination of all these three types of companies.

The upstream spending seems to be on a rising high over the past few years and is expected to be on an increasing trend for the next few years. This upstream spending mainly consists of both the capital expenditure (CAPEX) and the operational expenditure (OPEX). (Rigzone, 2012). As CAPEX refers to an investment in a business, thus more the investment in the upstream industry, better is for oilfield service industry.

The upstream capital expenditure has been on an increasing trend over the past few years and the total spending was estimated to be USD 450 billion in 2011(Brown, n.d), which was at an all time high over the years and the oil field service industry seems profitable at this juncture. The oil and gas exploration and production CAPEX for the past decade and for the next few years is shown below.

(Source: Combination of WoodMackenzie Corporate Analysis Tool and Upstream Service cited in Brown,n.d and Energy Equipment and Support Services Oilfield Services Sector Report, 2010, please refer Appendix 2 and 3)

Figure 2: Upstream Capital Expenditure from 2001 – 2013

In the above figure we see that the upstream capital spending which does not include the exploration and appraisal spend. In this graph, we see that the expenditure has been increasing until 2008, where there was a dip in 2009 due to the global economic and financial crisis. The spending of the E&P industry is mainly due to the major IOC’s and NOC’s which contribute about 50-55% of the total spending. (Worldoil, 2012).

2.1b Rig Count:

There are many indicators where the investors of oilfield service industry can measure the growth or the demand for the industry. The upstream capital spending is one of the principal indicators which provide insights on how the industry is generating the revenue but the major concern with the upstream capital spending is that the figures are not released on a timely basis as it is shown in the quarterly or the annual report. So it is difficult to have updated information on a timely basis like weekly or monthly about the industry.

Thus, to have timely updates on the industry, there is another useful indicator which helps the investors know the industry demand worldwide. This indicator is known as the rig count. The rig count indicates the number of rigs which are currently active in the industry and this shows the ease of use of rigs, and in which area the demand of the industry is more and also it indicates the demand for labor. It is a very easy and a quick access to growth in the oil field service industry. It is used by many companies, analysts like for example Wall Street analysts use the rig count for profit projections for the oil field service companies (Sprehe, 2004).

There are a number of rig counts available to serve the industry like the Baker Hughes, Smith Tools but the most commonly rig count used is the Baker Hughes (BHI) rig count as it is one of the oldest rig counts in the industry. Baker Hughes Rig count gives a weekly update on the North America rigs and a monthly update on the International rigs.

Area

Last Count

Count

Change from Prior Count

Date of Prior Count

Change from Last Year

Date of Last Year’s Count

US

17-Aug-12

1914

-17

10-Aug-12

-60

19-Aug-11

Canada

17-Aug-12

326

+27

10-Aug-12

-160

19-Aug-11

International

Jul-12

1264

-21

Jun-12

+114

Jul-12

(Source: BHI Rig Count as on 20-Aug-12)

Table 1: Baker Hughes International Rig Count displaying the active rigs.

As we see in the above table, it shows the update on the active rigs in the America, Canada and International where if we observe that the last count for the America rigs is on the 17-August 2012(weekly) whereas for International it is July 2012(monthly). This table also analyses the changes in the active rig count from the date of prior count. This table also portrays on how the industry has grown comparing from last year’s figures. (Baker Hughes Investor Relations, Rig Count, 2012).

The Baker Hughes rig count measures the number of rigs which are actually being drilled at a give point of time on a weekly (North America) and monthly (rest of world) basis. This indicator also provides additional information like rig count by states, or whether the rigs were used for drilling the oil or the natural gas from the surface. A lot of products and services are required for an active rig and thus the use of these products and services show the demand for the services provided by oilfield service industry. (Brener, 2008). An increase or decrease in the rig count also shows the job market in the oil industry where increase in rig count increases the opportunity for more jobs for the oilfield workers.

The BHI count considers the count of ‘active’ rigs which means the rigs which are actually drilling holes on the land or the sea to extract the oil or the gas. Therefore, if a rig is being transferred from one location to another, or is being involved in non-drilling activities like casing, or completion and production activities, then Baker Hughes does not count the rig as active, even if the activity is still being performed at the field by a number of suppliers and outworkers. Though the rig count shows a lot about the drilling activity, it does not show many other important factors. The factors which the rig count does not portray are production activities, depth, cost and location. (Brener, 2008).

The below chart shows the average rig count worldwide from 2000 to June 2012 and we can observe that number of rigs have been on the increasing trend apart from when there was a dip during the financial crisis which hit the industry.

(Source: Baker Hughes Investor relations, Rig Count 2012).

Figure 3: Average rig Count according to Baker Hughes International

The average rig counts for 2011-present from the various geographies is shown in the Appendix 4 where we observe that North America has been leading all the way and that’s where the companies generate their maximum revenue from. There are various other companies which use rig counts internally and do not show publicly how the company’s rig count. One of the companies is Schlumberger and its details are provided in the Appendix 5.

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2.1c Industry Trend:

The trends of an industry help us to understand what are the current issues and their effect, and also help us to consider what are the current matters taking place and speculate the likelihood of the impact in the future. There have been many other micro and macro factors which affect the industry trends like the oil demand and supply, fluctuation of oil and gas prices and most of these factors have been interdependent to each other in one way or other. Like, if we see fluctuations in the current price and future prices of oil and natural gas, it has an influence the spending levels of the energy industry which in turn influences demand in the industry. The following table shows the relation between the WTI oil price, upstream capital spending and the rig count.

Year

WTI Crude Oil Price($ per barrel)

Upstream CAPEX(Billion $)

Average Rig Count

2011

98.83

450

3465

2010

91.38

410

2985

2009

79.39

378

2304

2008

44.6

435

3336

2007

95.95

350

3116

(Source: WTI Crude Oil Price – The oil price at the end of business year – Yahoo Charts.

Upstream CAPEX – Combination of WoodMackenzie Corporate Analysis Tool and Upstream Service cited in Brown,n.d and Energy Equipment and Support Services Oilfield Services Sector Report, 2010, please refer Appendix 2 and 3.

Average Rig Count – Baker Hughes Average Rig Count)

Table 2: Relation between WTI crude oil price, upstream CAPEX and avg Rig Count

Thus the above table shows the trend in the industry indicating that the demand in the industry depends on the Upstream CAPEX and Rig count which is dependent on the WTI crude oil price. This shows that as when crude oil price increase, there is a tendency for the investors to invest more in this industry. We see a dip in 2008 due to the economic crisis but in this year we saw that the highest was $145.16 per barrel in July and the lowest was $30.28 per barrel in December. The average rig counts has also seen a dip during the year 2009 from 2008 indicating that there was less demand of labor work during the year. Thus we can propose that the Rig Count depends on the Investment in the Upstream Industry which inturn depends on various factors such as crude oil and gas fluctuations.

Having known the trend in the industry we need to analyze how a company will maintain its profitability in this economic situation which holds good also for the future as well. This can be analyzed in the next chapter using the Porter Five Forces Model.

Chapter 4: Porter five forces analysis:

In order to know the profitability of an industry, the corporate strategists suggest using the Porter five forces model in order to anticipate the competitive environment. Porter, 2008 said ‘Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time’.

The Porter 5 forces are: Rivalry among existing customers, Threats of substitutes, Power of suppliers, Power of buyers and Threats of new entrants. The impact of the forces on this industry is shown in the following table.

Forces

Impact

Rivalry among the existing competitors

HIGH

Power of Suppliers

MODERATE

Threat of Substitutes

LOW

Power of Buyers

MODERATE

Threat of New Entrants

LOW

http://www.12manage.com/images/porterfiveforces.gif

Threat of new entrants(Low):

Coming into an industry where the competitors have been established in years and giving them a pay for their money is not an easy task. An ideal new entrant tries to enter and capture the market share and put pressure on the competitors directly by new technology and new ideas.

The impact of the new entrants in the oilfield service industry is low. The presence of global market players such as Halliburton, Schlumberger and Baker Hughes create high barriers to entry in this industry and also the significant investment required to set up services like the offshore and onshore rigs. Apart from the investment a new entrant requires skilled labor and manpower which would help it establish in the industry. Finding skilled labor in the oil industry is one of the major challenges faced by the industry.

The economies of scale like replication of projects, management techniques, standardization is also very high in this industry creating the high barriers of entry. (Sahu and Parekh, 2012)

Thus high barriers of entry are an added advantage to the firms and are major determinants of a firm’s profit. This allows the existing firms in the industry to maintain their monopoly advantage in the profits. (Ajlouni, 2010)

The key success factor to a new entrant in this industry is resource required like skilled labor and manpower, investment without which the company cannot produce economies of scale and is considered an expensive barrier.

Bargaining power of buyers(Moderate):

The customers in oilfield service industry include the exploration and production companies which are basically the large integrated major and super-major oil and natural gas companies, U.S. and international independent oil and natural gas companies which are also known as the International Oil Companies(IOC’s), and the national or state-owned oil companies also known as the National Oil companies(NOC’s).(Baker Hughes, 2011).The IOC’s are the ones which are publicly owned and there are certain companies which are the world’s largest publically owned companies. These largest publically owned companies are known as super-majors. These super-majors include BP, Chevron, ExxonMobil, Shell and Total. The national oil companies such as Petrobas, Iraq National oil Company, Personas, etc are ones which are fully or partially owned by the national government.

The oilfield service companies compete with each other by bidding low cost services to win contracts from their customers. The factors which are needed to be considered with the cost are the quality of the service they provide along with speed at which it is delivered. Thus the low cost plays an important role because there is intense competition between the international oil companies and the national oil companies and so there is immense pressure on the oilfield service companies for lower prices, higher quality, and faster delivery.

Also the presence of differentiated product which the company can provide is essential as it would prevent the customer to switch from the range of oil field service providers available in the market. Companies like Schlumberger and Halliburton provide their own technology which is not available in other companies. For instance, Schlumberger recently launched IsoMetrix marine isometric seismic technology which captured the wavelength which is returned in three dimensions providing the solution of the precise images of the subsurface. (MarketWatch, 2012) This is the first ever technology in the industry and this motivates the customer to buy the product.

The bargaining power of the buyer is moderate as it depends on the demand of services in the upstream industry which in turn depends on the demand of oil in the industry. Increase in the demand of oil will lead to more investment projects in the upstream industry and thus the companies would demand more for the oilfield service industries.

Thus the key success factor in bargaining with the buyers is the differentiated product which would help the company to succeed over other companies.

Bargaining power of Suppliers(Moderate):

The power of suppliers has low impact on the oilfield service industry. The power of suppliers mainly depends on the factors like quality of the product, time of delivery, the price of the product. (Porter, 2008).

Suppliers in this industry might vary depending on the structure and the function of the equipment and service the company provides. In this industry suppliers supply raw materials which are used in the manufacture of drilling rigs and other useful equipments. The inputs for the rigs such as iron, steel would have numerous local suppliers to compete in the market. On the offshore and onshore sites, food and other supplies are necessary for the staff to carry out the operations and the suppliers would have greater power. Thus the switching cost of suppliers is high in this industry.

Apart from this, companies manufactures and supplies the products by themselves which doesn’t allows them not to have the involvement of third party suppliers and other distributors in the market. For instance, Baker Hughes manufactures and supplies drill bits and fixed-cutter polycrystalline diamond compact (PDC) bits. It supplies them to the upstream exploration industry globally. (Baker Hughes, Datamonitor, 2011) Thus the bargaining power of this industry is considered moderate.

Thus the key success factor for bargaining from suppliers would be manufacturing its own equipments in order to avoid the supplier involvement.

Threat of substitutes(low):

‘A substitute is a different product which provides the same service or function, such as different modes of transport’. (Wetherley and Otter, 2011, p19).

There is no direct or particular substitute for the products in this industry. The products and services like drilling bits, artificial lift, and wire-line technology are difficult to replace and there are no substitutes available for these. But there are times when companies change their product like Halliburton recently changed the product guar gum, a key ingredient in fluids used in the hydraulic fracturing process by Permstim (Seeking Alpha, 2012) which is a clean, tough and provides the same functionality in a cost-effective manner. The reason the company changed it was because the company had purchased excess guar gum in the beginning and the cost of guar gum was very high for the first two quarters therefore reducing the profit margins.(Financial Post, 2012). Thus the companies substitute their product in these situations.

The companies which invest heavily on R & D try to come up with innovative technologies which act as a substitute for the existing technologies. But these technologies take several years to be launched even though its performance is better. Thus the overall threat of substitute is low in this industry.

Thus the key success factor in threat of substitutes would be innovative technology and high investment on Research and Development.

Rivalry among existing firms:(high)

The rivalry among the existing firms is very high in the market as the leading players in this industry namely Schlumberger, Halliburton, Baker Hughes and Weatherford are the most competitive global players in the top of the industry and have very little to differentiate among them. With high exit barriers and huge fixed costs, it would be difficult for the companies to divest their assets when they leave the marketplace thus increasing the rivalry power. Thus the rivalry among the firms is high and will be discussed in detail in the following chapter.

The key success factors can be summarized as follows:

Porter’s 5 Five forces

Key Success Factor

Threat of New Entrant

Skilled Labor and Manpower

Bargaining power of buyer

Differentiated Product

Bargaining power of supplier

Manufacturing own products and equipments

Threat of Substitutes

Technology Innovation

Chapter 5: Identification of leading companies in the OFS market:

This section would provide an analysis on the identification of the leading companies in the OFS Industry in the Middle East.

5.1 Overview of the Oilfield Services Market in Middle East:

Let us now look at the oilfield service market in the Middle East for the past few years. Since 2003, Middle East Oilfield Service sector has seen a significant increase and there has been a huge investment in this sector till the next five years. (Deloitte, 2011). Then there was a significant decrease in the revenue of the industry not only in the Middle East but also throughout the world due to financial and economic crises which hit the world. But after the considerable decline in 2009, the global oil and gas equipment and services market recovered the next year. The market did accelerate strongly in the year 2011 and the same is expected for this year 2012. (MarketLine, 2012).

C:UsersvarunDesktopvarundocscompetitorsCapture.PNG

(Source, Telegraph, 2011).

The Oilfield service companies in the region are competed by a number of private companies, both international and domestic players. While most of the customers opt for the International players like Schlumberger, Halliburton, Weatherford and Baker Hughes for the services, many NOC’s are encouraged to support the local players for their growth as this industry is ruled by the international players. Many opportunities are being provided to the local players and they are expanding in various markets with partnership alliances and providing solutions expected by the NOCs. But in certain markets the opportunity for private and local companies is scarce like in Iraq but only five companies are asked to participate in the country’s oil fields namely Schlumberger, Halliburton, Weatherford, Baker Hughes and Oil Serv. (Deloitte, 2012).

Thus knowing the trends and market environment in the Middle East, we further conduct a competitor analysis on Schlumberger to sustain its competitive advantage.

5.2 Identification of competitors in the Middle East market:

Competitor identification is an important activity for managers and businesses to keep an eye on the competitive environment in the industry and develop strategies depending upon competitor’s actions. (Peteraf and Bergen, 2002). (Smith et.al, 1992) as cited by (Peteraf and Bergen, 2002) recognizes competitor identification to be an important pre-requisite for competitor analysis and for postulating a firm’s strategy.

The Oil field Service Firms may be three types. The first type of firm is the one which produce and sell expensive kit for the use of the onshore drilling rigs or offshore seabeds. The firms which can be included in this category are FMC, Cameron and National Oilwell Varco. The next category of firms is the one which own and lease out drill-rigs. These companies which can be placed under this category are Transocean, Seadrill, Noble and Rowan. The third category is the one in which the companies are mainly utilized in exploring and extracting the oil from the oil reserves. This type of firm is the one which we would be mainly concentrating on in this report. Thus the companies which are dominant in this are Schlumberger, Halliburton, Baker Hughes, and Weatherford International. (Economist, 2012). These companies provide support and services to the oil companies and help extracting the oil.

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Given below is the revenue which the leading companies generated in this sector for Q2 2012 globally and in the Middle East.

Sl.No

Company

Symbol

Middle East Revenue

Global Revenue

1

Schlumberger

SLB

$2,193

$10,350

2

Halliburton

HAL

$1,059

$7,234

3

Baker Hughes

BHI

$804

$5,005

4

Weatherford

WFT

$782

$3,778

The figures presented above are from the annual report 2011 of the respective companies. Here if we observe Schlumberger has generated the maximum revenue over other companies and is the leading oilfield service company.

This report is going to concentrate mainly on the company Schlumberger and how its direct competitors are affecting the business of the company. In the following chapters would be the competitive analysis using the Porter’s framework where an insight would be shown on how the competitor’s future strategy would be and what the parameters are which Schlumberger would have to concentrate upon to sustain its competitive advantage over other companies.

Overview of Schlumberger in the Middle East:

Schlumberger is a one of the leading oilfield service companies globally and has major percentage of market share in the global oilfield service sector. The company has always had a competitive advantage over the competitors in all the regions except North America where Halliburton is the leading oilfield service provider. It can be seen from the below graph where it shows the revenue of the different companies in different regions for 2011.

(Source: 2011 Company Annual Reports)

The company generates is maximum revenue from the North America which is about 33.6% of the total revenue. From the Middle East, the company generates 22.1% of its revenue.

Schlumberger has its offices spread over the Middle East region with its headquarters in Dubai. In 2006, Schlumberger had inaugurated Middle East’s first Research Centre known as the Schlumberger Dhahran Research Center (SDRC) in Saudi Arabia which was opened in view to meet the global energy demand. In 2007, the company had opened a Middle East training Centre in Abu Dhabi which helps professionals attain the various skills required in the oil field service industry. This training Centre aims to develop the required skills and manpower which is one of the challenges faced by the industry.

Having known about the competitors and an overview of the company, let us construct a comparative table of Schlumberger with its competitors to get a better picture of the market.

Comparative table of Schlumberger with its competitors:

Porter’s framework of Competitor Analysis:

Having known that there is high rivalry among the existing competitors, it is necessary to have a thorough competitive analysis for Schlumberger to sustain their competitive advantage over other companies. A proper competitor analysis helps to analyze the existing firms in the current and how are they performing. A framework for competitor analysis is essential for companies as it will portray how the competitors are impacting in the environment.

Competitor Analysis helps in positioning a business to maximize the value of the capabilities that distinguish it from its competitors. (Porter 1980). It helps us in understanding the various strategies and steps adopted by the competitors in order to seek maximum market share. This in turn enables us to highlight the attributes of our products and services which will help in attracting the target market.

While doing the Competitor Analysis we focus on the four different heads –

Competitor’s Assumptions

Competitor’s Objectives

Competitor’s Strategy

Competitor’s Capabilities

Below is the analysis of the company and the ‘Assumptions’ part is not discussed as the assumptions about the industry are discussed in Other Chapters in the report. The Current Strategy has been explained in Appendix with the use of Strategic Diamond and has been summarized for every competitor.

Schlumberger:

Future Goals: One of the visions in short term is to find conventional oil is to meet the challenge faced by the oil and gas industry

Current Strategy:

Capabilities – Strengths and Weakness:

Strengths:

Schlumberger’s greatest strength it is the market’s leading oil field service company globally except North America but if we consider the overall market share of the company, it the strong market leader.

Schlumberger has been huge investment on building in technology and it’s the leading company in most of its product line. It is the only oilfield services company that includes seismic services as an integral part of its portfolio of technological products.

Weakness:

Baker Hughes:

Future Goals:

In 2009 our global Supply Chain organization set a goal to simultaneously generate $300 million in cost savings over three years, and we’re pleased with our progress towards that goal.

Current Strategy:

Capabilities – Strengths and Weaknesses:

Strengths:

Wide Product Portfolio – Baker Hughes is one of the companies in the market which has diverse products in different markets as shown in the comparative analysis. (Datamonitor, 2011)

Strong focus on R & D – R &D is always important to a company which helps it develop new products and technologies and these give a competitive edge over the other firms. R & D will lead to innovation which will lead to higher economic returns and production rates. It has invested around $324 million, $283 million and $231 million for the years ended December 31, 2011, 2010 and 2009, respectively. (Baker Hughes Annual report, 2011)

Weakness:

Halliburton:

Future Goals:

When Halliburton considers its values, believes that ‘supplier diversity’ gives the company a competitive advantage in the market. Over the years the company, supplier diversity forms a very import part of long-term strategy and this forms Halliburton’s Vision which is ‘to be recognized as global leader in supplier diversity among the oilfield services.’ Thus its future goal is to establish an effective Supplier Diversity process which helps them to establish itself as a global leader. While at a sustainability level, its goal is to be welcomed as a good corporate neighbor.

Current Strategy:

According to the Annual Report, 2011, the current business strategy is ‘to secure a distinct and sustainable competitive position as an oilfield service company by delivering services and products to our customers that maximize their production and recovery and realize proven reserves from difficult environments’.

At an operational level, Halliburton in 2011 carried out several initiatives which would help the company to increase manufacturing production in Eastern Hemisphere and restructure the service delivery platform to lower the delivery costs.

Capabilities – Strengths and Weaknesses

Strengths:

The company strength has been the North American market where the company generates the maximum revenue when compared to other different regions in the world.

In the above figure we observe, Schlumberger is the market leader in all the regions except North America where Halliburton has an advantage. It has an advantage there because of its low-cost and highly efficient “frac of the future” model as a different model and tough to reciprocate. (SeekingAlpha, 2012) The fully integrated drilling solutions have also given an advantage to the company over others. (MarketLine, 2012).

Weakness:

The company has been involved in many litigation issues like the BP Deepwater Horizon incident which occurred in 2010(Information Management, 2012) and Barracuda-Caratinga arbitration. These litigation issues spoil the reputation of the company and also loss in margins which is its one of the weaknesses. (Halliburton, Annual Report, 2011).

Weatherford:

Future Goals:

Current Strategy:

Capabilities – Strengths and Weaknesses:

Strengths:

Focus on Growth – The company has always focused on the growth strategy and its International growth has been one of its strengths when compared to its competitors. (Weatherford, EBSCO).

Weatherford Laboratories are the largest in the world with a huge network of 38 labs in 22 countries. (Weatherford, Annual Report, 2011).

Weakness:

Tax Issues – The multi-national tax structure is complicated, and the company has reported material weakness in its financial reports of 2010 and 2011(Weatherford, Annual Report, 2011). Weatherford has still not resolved these tax issues and has identified an aggregate of $92mn of prior period expenses in 1Q12. (Bank of America, 2012). The company believes that f it does not resolve these issues fast, it might lose customers which indirectly affects the share price and end up in litigation issues.

Over-leveraged – The company has been over-leveraged when compared to the competitors in the industry and need to bring the ratio of debt/total capital ratio.

Competitor Array:

Having done the competitor’s analysis above, Competitors Array is also one of the tools to conduct Competitor’s Analysis by ranking the competitors with respect to industry success factors. To form competitor’s array we need to list the competitors, determine the key success factors (shown in appendix), rank the key success factors by weighing them and then rate each competitor on each of the key success factor. Finally multiple the weight and rating and total it. Rank the companies from highest to lowest total. The ratings and the rankings of the various competitors are shown below. The ratings of each competitor have been given on a base of 10.

Methodology:

Below is the competitor array for Schlumberger and we have considered the key factors as discussed in the Porter’s five forces model. We have not taken the key success factor for bargaining power of supplier as supplier information of the companies is not easily available. Instead we have considered Health and Safety as one of the key success factor.

Key Success Factors

Weighting

BHI

HAL

SLB

WFT

Technological Innovation

40%

28

24

36

20

Price of Equipment and Services

30%

18

27

21

15

Global Talent (Manpower)

20%

10

12

16

10

Health and Safety

10%

9

5

6

6

Total

100%

65

68

79

51

Ranking

3

2

1

4

Findings:

Global Talent (Manpower): In this Section, Schlumberger has been given a higher rating than the other competitors as the number of employees in this company is higher than the other companies. The other companies have been rated based on the number of employees which were recorded at the end of the previous year.

Price of Equipment and Services: Halliburton has been given a higher rating than other as it has carried out several initiatives last year which would help the company to increase manufacturing production in Eastern Hemisphere and restructure the service delivery platform to lower the delivery costs.

Technological Innovation: For this factor, Schlumberger has been rated the highest as the company had spent the most last year in their Research and Development activities. Thus more the spending on the R and D activities more would the technological innovation. Baker Hughes has been given next higher rating as it has one of the largest Research and Development Centers and has a diverse product range.

Health and Safety: In health and safety, Baker Hughes has been awarded the highest rating as it one of the safest companies according to Newsweek Green rankings.(Baker Hughes, Annual Report, 2011). Schlumberger has been rated next as it has recorded high number of fatalities last year and hopes to improve in the forthcoming year. Halliburton has had issues with safety as well due to the BP Deepwater Horizon incident as it was one of the companies involved as well and it looks to improve on health and safety.

Recommendations:

Over the next five years, the Middle East region will see a significant rise in hydrocarbon production because most of the countries have been dependant on this region for the supply of oil. (show in appendix).(BP Statistical Review, 2012).The change in oil production over next few years may not be the same for all the countries and may be increase or decrease accordingly. Like the medium-term forecast according the International Energy Agency (IEA) for different countries in Middle East are: a significant increase in Iraq, moderate growth in the United Arab Emirates, no change in Saudi Arabia and Kuwait, and a reduction in Iran over the next five years. (Panorama, 2012). Whereas for the gas production, gas production in the Middle East has increased considerably for the past 10 years which in disparity with oil production, which has remained not unchanged as compared to gas. (show in appendix). Below in the diagram shows the top oil producing countries in the Middle East.

In some countries like Saudi Arabia, the United Arab Emirates and Iran, this increase has been due to the relative strong growth from the local demand, whilst in countries like Qatar, the main reason for increase has been the increasing demand in the gas exports. (Panorama, 2012).

In order to attain forecast production levels, drilling activity, both on and offshore must grow at a dramatic rate thus increasing demand for rigs and associated drilling services.

Halliburton aims to lower delivery costs in Eastern Hemisphere.


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