Pestle analysis of the Wood Group

The wood group was founded in 1912 by Wood and Davison which the company used for ship repair and marine engineering firm to services the fishing fleet. In 1970’s oil & gas reserves were discovered in the North Sea and presented an ideal opportunity to convert marine engineering experience into engineering and support services. During the late 1990s Wood Group Engineering (North Sea) became a market leader in the North Sea providing integrated engineering, operations and maintenance services to BP, Shell, Talisman, Amerada Hess, BG, Enterprise Oil and ChevronTexaco. The company now is a leading independent services provider for the oil & gas and power generation markets. Currently the main focus of the company is on the environment by establishing the renewable energy services group and expanding their scope of operations within the alternative energy industry.

Wood group also known as John wood group is an energy services provider. The company is organised into to three divisions:

1. Engineering and production facilities

2. Industrial gas turbines overhaul and repair services for oil & gas and power generation services.

3. Production support

The core strengths of wood group are: facility operations & maintenance, field service of pumps, wellheads and valves clients, procurement & construction management, deepwater topsides, rotating equipments and power solutions, and renewable energy.

The wood group operates mainly in Europe and North America. It is headquartered in Aberdeen and employs about 29,000 worldwide and operating in 50 countries. In 2009 the wood group recorded revenues of $4,927.1 million, the operating income of $298.5 million and the net profit of $164.2 million.

Wood Group vision is to be a leading global energy services provider. The company global reputations has been built upon decades by offering a broad range of integrated services across the asset lifecycle and successfully managing the most complex engagements for their clients. They consistently seek to provide services and products that are recognised as market-leading and attempt to exceed their customers’ expectations and deliver superior returns. Wood group strategy is to achieve long-term sustainable growth by adding value to their customers’ operations with world-leading, highly differentiated products and services.

PESTLE

PESTLE analysis describes the macro-environmental factors used in the environmental scanning components of strategic management. It can be use for reviewing a situation, direction of a company, a marketing proposition, or an idea. The analysis is a useful tool for taking advantage of the opportunities and reducing the threats. Without knowing what external factors affect the organisation, it is difficult to manage the business in an efficient manner.

Figure 1: Macro-Economic Environment

Summary of PESTLE:

Political

World energy product markets have been increasing because of the threat of geopolitics instability.

Due to Co2 emission, government has set pressure on industry to improve and produce more sustainable form of energy

There are trading polices with certain countries

Restriction to import and export to certain countries

Restriction doing business with certain countries.

Fines for industry that pollute the environment.

Government taxes and price controls

Economics

Alternative high -quality energy technology increases the company’s revenue as customers seek for less greenhouse gas emissions

Companies benefit producing certain products from developing countries due to its cheaper labour cost.

Market is unstable as world economy is coming out of a world recession

Global economies are expected to grow within few years and energy demand will grow again.

Social/culture

Lately the nation has become more concern about the environment and their view has been more encouraging for renewable energy product.

Life expectancy is relevant to the company’s labour force. Company benefit in countries with higher life expectancy.

Health workplaces for oil and gas industry services are essential for long term success.

Technological

Renewable energy technologies have been increase to reduce the fossil fuels. E.g. Technologies such as wind power, tidal wave, hydroelectricity etc,

Many governments are providing tax advantages and other subsidies to make alternative energy sources more competitive against oil and gas.

Lots of research and development have taken place to promote further renewable energy.

Legal

The policy includes strong new safety standards for offshore drilling including demonstrations of ability to respond to future blowouts.

Heavy penalties for safety violations.

Carbon taxes i.e. penalties polluting the environment at a certain level.

Legislative measures are used in order to force business into behaving in a more environmentally sound manner

Environmental

Due to concern over the risk of global warming, a number of countries have adopted regulatory frameworks to reduce greenhouse gas emissions

High quality technology been research for better alternative energy performance

Industries been using program to identify ways to reduce carbon by:

managing waste more efficiently, using piloting carbon footprint measurements and exploring potential solutions for saving energy.

Description and detailed information of PESTLE are found in Appendix (A).

5 forces analysis

5 forces of model analysis is commonly used tool for competitive environment and its attractiveness of a market.

Figure 2- 5 forces of analysis: (http://2.bp.blogspot.com/_GuvqAqJmGHc/THH1QwMnWaI/AAAAAAAAAlo/0-4r9UfL67s/s1600/porters-five-forces2.jpg)

Barriers to Entry (High)

This force describes the level of entry of other companies to enter this type of industry. If the entry of the company is high the company would lose it profitability. Barrier to entry to these type of industry are high due to:

Large access to the suppliers and distributors ensuring widespread energy provision.

High technology cost

Dominated by major players

Mature market

Strict government policy and environment regulation requirements to operate in oil and gas services industry.

Large economies of scale required to achieve cost leadership which is essential in energy provision.

Large capital requirements to set-up operations

Importance of ethical brand identity because of nature of market (loyalty as a barrier).

Existing players have close customer relations .e.g. from a long-term service contacts.

High proprietary learning curve due to technological focus on alternative energy industry.

Competitive Rivalry – (medium)

This force describes the intensity of competition between existing companies. Within the oil & gas and energy services provider the competition rivalry between existing players are medium because of:

High exit barriers.

Not many major players in this type of industry.

High capital costs

Companies with similar strategies

High industry growth as alternative energy is vital for the long term future of the industry.

Various rivals in rationale for strategies to invest and enter industry.

High switching cost

Threat of substitute – (low)

Threat of substitute exists if there are alternative products with lower prices of better performance parameters for the same purpose. This would reduce the demand for a particular product and therefore would be a threat of consumers switching to alternatives.

Threat of substitute is low because lack of alternative renewable energy and only large industry can afford the renewable energy products.

Threat of substitute would be high if a company provides the latest technology and specialised services.

Bargaining power of buyers – (low)

Bargaining power of customers determines how much customers can impose pressure on margins and volumes. The buyers for energy service industry hunt for excellent quality product but with lower prices and for a better contract term. Bargaining of power for these industries is low because:

The brand loyalty is high

Availability of substitutes is low

Buyer incentives is high, in terms of tax breaks and energy provider buy-backs

Buyers volume are low

Low bargaining force of buyers

Depends service standards

Low elasticity

Switching to alternative product is difficult

Bargaining power of suppliers – (high)

Bargaining of supplier is the input required in order to provide the goods. The bargaining power of suppliers is high because:

The market is dominated by few large suppliers

The switching cost are high

There is not much substitute for providing field service of pumps, wellheads, rotating equipments, power solutions, renewable energy etc.

The energy services are mostly dominated by major companies. For these industries large amount of capital investment required significantly to reduces the number of companies and increase the power of existing players in the industry.

The suppliers in UK are threatened by large companies able to source their product abroad at cheaper deals.

Appendix (A) -PESTLE

Political

The oil and gas services industry has to follow a string of both provincial and federal government regulations when it comes to the production of energy resources. There are potential fines and sanctions that can be set by various governmental.

Wood group operating in a globalized environment with industries around the globe (now operates in 46 countries globally in continents such as Australia, Europe, Middle East and the U.S.); its performance is highly influenced by the political and legislative conditions of these countries when it comes to production of energy resources.

Their operations can adversely affect by political or regulation developments which are:

Access limitations – A number of countries limit access to their oil and gas resources, or may place resources off-limits from development on the whole. Many countries also restrict the import or export of certain products based on point of origin.

Fines – There could be potential sanctions and fined by the governments if they don’t follow their legal procedure. Government wants to make sure their product is environmentally friendly.

Restrictions on doing business – As a British company, wood group is subject to laws prohibiting British companies from doing business in certain countries, or restricting the kind of business that may be conducted.

Regulatory – Even in countries with well-developed legal systems where Wood group does business, they remain exposed to changes in law that could adversely affect their results, such as increases in taxes or government royalty rates (including retroactive claims); price controls; or other laws that increase their cost of compliance.

Economics

Economic factors are of concern to wood group, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is the global oil market prices that are primarily influenced by demand and supply forces. Supply shortage causes an upward movement in the price pressure. This may perhaps be due to factors such as:

Unplanned refinery shortage

Unexpected demand increases

Pipeline problems

Company’s revenue will increase if they provide good quality sources of alternative energy as government seeks environmentally free energy source. Market is unstable as world economy is coming out of a world recession and lower oil and gas prices contributed to a reduction in global E & P expenditure of around 15% in 2009. However global economies are expected to grow within few years time and energy demand will grow again.

Social/cultural

The company involves in many countries where population age, health and attitude vary. By identifying differences and similarities in culture to gain a better understanding of the culture issues related to the industry. Lately the nation had become more concern about the environment and their view has been more encouraging for renewable energy product.

Health and safety are one of the main goals of wood group’s business principles. Achieving and maintaining high standards of performance in health and safety plays an integral role in the sustainability of their long-term reputation and success. As health is part of wood group’s vision, their goal is to improve the quality of occupational health management by:

Maintaining a healthy workplace

Controlling more effectively the health risks arising from their activities

Promoting the benefit of healthy lifestyles for their employees via campaigns and health fairs

Life expectancy is relevant to the company’s labour force. In developed countries their life expectancy are high and therefore the work force labour would be greater compare to the developing countries.

Technological

Renewable energy technologies have been increase to reduce the fossil fuels. Many governments are providing tax advantages and other subsidies to make alternative energy sources more competitive against oil and gas. Governments are also promoting research into new technologies to reduce the cost and increase the scalability of alternative energy sources. Wood Group delivers solutions to maximize the availability of wind turbines, wave energy systems and other renewable energy projects. Wood Group is expanding its reach into the renewable energy industry and offers a dynamic set of specialized technical consultancy services to meet the needs of their global customers.

Wood Group is the world’s leading solution-independent engineering and management services provider for subsea developments and pipelines. Their reputation is built upon strong technical excellence and efficient project delivery. Wood group are technology leaders in several areas such as cryogenic pipelines, remote sensing, pipeline stabilisation and flow assurance.

Legal

Various government legislations and policies have a direct impact on the performance of Wood Group. National governments are concern with the environmental issues so therefore legislative measures are used in order to force business into behaving in a more environmentally sound manner. The policy includes strong new safety standards for offshore drilling including demonstrations of ability to respond to future blowouts and heavy penalties for safety violations.

Environmental

Due to concern over the risk of global warming, a number of countries have adopted regulatory frameworks to reduce greenhouse gas emissions. These include carbon taxes, increase efficiency standards and incentives for renewable energy. These requirements could make Wood Group products more expensive and reduce demand for hydrocarbons, as well as shifting hydrocarbon demand toward relatively lower-carbon sources such as natural gas.

Wood group has attempted to minimise adverse environmental impacts for their operations. In 2009, they introduced a carbon footprint pilot programme to help a better understanding of carbon management and identify ways to reduce carbon use throughout their operations. The program includes managing waste more efficiently, piloting carbon footprint measurements and explore potential solutions for saving energy.

http://www.economywatch.com/energy-economy/crude-oil-prices.html

http://www.investegate.co.uk/Article.aspx?id=20100302070000P5044

APPENDIX B – 5 forces

Barrier to entry (high)

There are many oil & gas industry services companies in the world, but barriers to enter to these types are enough to prevent the serious companies. Barriers to entry are high due to the high capital cost, significant regulatory environment and existence of scale economies are required to operate within the industry.

Recently an oil and gas service industry is growing at a very strong rate which is attractive to new entrants as alternative energy is essential at this time of the world. However due to present economic difficulty has contributed a large decline in attractiveness in these industries which deterrent the potential entrants. To maintain with the leading players in the industry strong research and development capability is required.

http://energybusinessdaily.com/power/barriers-of-entry-into-the-energy-industry/

Competitive Rivalry – (medium)

Analyzing an energy company it is really important to look at the particular region in which the company operating. The customers can choose their product by companies’ services standard and speed of delivery of their product. Technology can change the nature and the basis of rivalry among existing competitors in several ways. It can dramatically modify the cost structure and hence affect pricing decisions. The role of technology in product differentiation and switching costs are also important in rivalry. Another potential impact of technology on rivalry is through its effect on exit barriers.

Wood group rivalries are Aker Solutions, AMEC, KBR, Technip, Worley Parsons, and Baker Hughes. Wood Group is the leading oil and gas services in the North Sea. (ref). Wood Group global reputation has been built by successfully managing the most complex engagements for their customers, offering a wide range of integrated services across the asset life has noticeably increased the profitability of Wood Group business.

http://www.woodgroup.com/about-us/doing-business-with-us/pages/default.aspx

Threat of substitute – (low)

The threat of substitutes for energy services are low as they are generally gas, wind power, solar power, coal and hydroelectricity. Therefore they are not much substitute for renewable energy and only big company can have those products due to a very high capital cost. The threats of substitute of these types companies are commonly with those who offer better technology and specialised services such as directional drilling. (http://www.investopedia.com/features/industryhandbook/oil_services.asp)

Bargaining power of buyers – (low)

The bargaining power of buyers for Wood Group has increased by developing strong relationships by providing reliable project delivery and cost-effective. Their success in these areas is established by the continuing relationships with the integrated operators, national oil companies, independent operators and power companies throughout the world.

http://www.woodgroup.com/about-us/doing-business-with-us/pages/default.aspx

Bargaining power of suppliers – (high)

The energy services are mostly dominated by major companies. For these types of industries large amount of capital investment required significantly to reduces the number of companies and increase the power of existing players in the industry. The oil and gas services suppliers in UK are threatened by large companies able to source their product abroad at cheaper deals.