Critically analysing how the strategy of merger and acquisition has been used in the energy sector during the oil price drop of 2014 to 2016.
The strategic management has a significant role in recognizing the needs of organisations. It consists of setting objectives and examining the internal and external factors, affecting operations of the organisation (Sadler, 2003). In the recent decade, setting objectives, executing and implementing strategies are the most significant activities performed in the oil and gas organisations. The strategic management can enhance its effectiveness if organisations priorities get aligned with shareholders expectations, potential of corporate, and market conditions (Lynch, 2012). Therefore, to succeed in the market, it is essential for the oil and gas organisations to review and compare their performance with the prevailing companies in the market (Inkpen & Moffet, 2011). The paper intends to conduct an analysis on the energy sector to evaluate the process of using merger and acquisitions as a strategy during the period of oil price drop in 2014-2016.
The Impact of Internal and External Factors in the Management
The strategic management in an organisation can be considered as a set of decisions, which are required to formulate by the management to obtain the designed objectives (Lynch, 2012). The scope of succeeding the strategic management consists of the decisions, time scales and activities performed in the organisation. There are mainly three phases of strategic management, namely formulating plans, executing those plans and controlling the activities. The formulation of plans comprises of setting goals, objectives, visions, mission of the organisations and accordingly the second phase consists of putting the plans into practice. The implementations mainly focus on developing alternative strategies to reinforce previous strategies based on which the management can evaluate and control the existing strategy to enhance its effectiveness in accomplishing the organisational objectives. Thus, reassessing of the strategies is essential to examine the potential of the internal and external factors (Johnson. et al, 2013). In this regard, the strategic management can be considered as the guideline to obtain competitive advantage by leveraging the internal and external factors affecting the organisation. There are several internal factors that are continuously affecting the smooth functioning of the oil and gas companies in current market, which have been elaborated through the below sections (Grant, 2012).
Work Force: The success of an organisation largely depends on the performance of its employees. Therefore, the process of recruitment and training should be conducted carefully to enhance the capability of the organisation. Inefficient financial condition restricts the organisations to conduct proper training and development programs in enhancing employees’ skills and abilities. The turnover or the absenteeism of employees affects the functioning of an organisation.
Organisational Configuration: Effective structuring of job roles, specifications along with different levels of organisations will result in smooth flow of the work procedure. Proper management can easily reduce the possibilities of errors and chaos amid the workforce. However, inefficiency in the performance can pose challenge for the management to accomplish the acquired goals and objectives. Hence, inappropriate configuration of the organisation can create conflict among the supervisors and the subordinates, which ultimately leads to indecent coordination and inflexibility within the internal environment.
Execution: Parallel to planning implementing the strategies is also an essential element in which the managers play a significant role to maintain the team and encourage them to follow the instruction aligning with strategic priorities. Thus, improper management can force employees to become unenthusiastic in the decision making process or other activities.
Finance: Financial ability is a key factor that affects an organisation to ensure proper functioning along with risk management. Financial position of an organisation uplifts the business and helps to gain competitive advantages in the market. Thus, with the help of financial support the organisations can adapt new technologies to expand its market opportunities and preferences.
Market Competition: In the recent market, competition is one of the external factors that are continuously affecting organisations in both positively and negatively. The company needs to make new strategies to compete in the market, which on one hand enhance its future potential while on the other hand can lead towards complicated scenario. Therefore, the managers need to be updated with the trending situation in the market to manage the risks and aligning them according to the organisation goal.
Technology: The technological changes in the market have largely affects the cost and quality of supplying the energy. New and innovative technologies have been adopted in the energy industries such as nuclear power and solar energy to make the operations more effective for which the organisations concentrate on the improvements in conventional technologies and innovative designs in nuclear power (Oil & Gas Journal, 2016).
Geographic Influences: Nowadays, the numbers of organisation in the energy sector have visibly been increased for which the landscapes are dug in more depth to extract the resources. Therefore, there is a possibility of occurring geological hazard and continuous severe weather or climatic changes might become a vital threat for the energy industry.
Political Legal Factor: For the extraction of oil and petrol, companies need to fulfil the statutory requirements. However, there are differences in rules and regulations based on the states or regions. Apart from this, continuously increasing rate of taxes can also become a threat for the oil and gas organisations.
The weaknesses, strengths, opportunities and threats are evaluated considering the internal and external factors of the organisations in the energy industry.
Strengths: Effective organisational structure promotes efficiency in management and successful leadership styles. To gain expected outcome from the strategy it is important to maintain appropriate leadership style within the internal environment (Robinson & Scott, 2011). The oil and gas companies have more concentrated on enhancing the abilities of its workforce, which will eventually be beneficial in attaining the organisational objectives. Therefore, the companies have utilized proper execution and management style to obtain values and competitive advantages in the current market.
Weaknesses: It has been apparent that the oil and gas companies face issues regarding developing the resources due to weak financial condition, which on the other hand results in large uncertainty and price volatility. Although the companies opt for merger and acquisition, the energy industry still in an uncertain position wherein the companies with lower financial support will face huge challenge to survive in the market (Ventures Africa, 2015).
Opportunities: The innovative technologies have enables the energy industries to accelerate its growth in the market. The strategy provides huge opportunity specifically to the companies with comparatively weak financial condition by merging with other companies to increase its potential in long-run. The change in demographic factors such as increasing income level of the people also creates an opportunity to expand the business (Ventures Africa, 2015).
Threats: Consistently increasing rate of taxes is considered as a threat to the oil and gas companies. The current price environment is unsustainable wherein wide ranges of opportunities available but for limited companies. In this circumstance, companies with lower financial support can be dominated by other competitors. Furthermore, the drilling process adopted by the companies might also give rise to certain geological hazards, resulting environmental issues (Oil Price. com, 2012).
The BCG matrix is the guidelines for proper allotment of resources and compare among various business entities. The BCG matrix is usually divided into two aspects namely market growth and relative market share. Growth Rate of the Market represents the increase in sales or revenues of organisations, wherein high growth rate indicates more opportunities. Relative market share measures the market share of organisations against the existing competitors in the market in which large market share indicates large number of competitors in the market (Grant, 2010).
Figure 1: BCG Matrix
Source: (Muilwijk, 2014)
Oil and gas companies usually capture the maximum market shares across the world in which IT strategies enable the companies to adopt innovative drilling and extraction technologies. To retain the profitable position in the market, the companies must focus on the upstream for production and exploration, since it helps to obtain high profit and investment rates. The downstream consists of low capital in comparison to the upper stream (EY, 2015; Duică, et al., 2014).
With the support of the merger and acquisition strategy implemented by the industry, the oil and gas companies have huge scope to expand their business along with high profitability. Companies can merge or acquire other companies that can provide geographical advantages and strengthen the financial positions. Thus, this particular strategy of merger and acquisitions enables companies to obtain competitive advantages by reducing the price and increasing the market share as well (EY, 2015; Duică, et al., 2014).
In this regard, although the oil and gas companies concentrate on expansion, the market share might be still low even with high capability to prosper. To mitigate this concern, the companies can further adopt innovative technologies by using previous experience of exploration and production process (EY, 2015; Duică, et al., 2014).
Involving large numbers of employees or acquiring higher position can further lead the companies towards more complicated scenario, wherein conflicts within the internal environment can become a threat. This factor can also force the companies towards downturn i.e. dog position. Therefore, maintaining the operations along with appropriate techniques and strategies help the management to run the business more effectively (EY, 2015; Duică, et al., 2014).
In this perspective, it can therefore be affirmed that the strategy of merger and acquisition leads the energy industry in the star position. Due to continuous increase in operational cost and other factors the companies force to increase the oil price, which on the other hand consistently threaten to development of the industry. Thus, to improvise the profitability and the position in the market, the strategy of merger and acquisition have provided expected outcome through which the companies successfully managed the cost and other risk factors (Duică, et al., 2014).
The merger and acquisitions are the part of the business strategies in which the companies are integrated together to attain growth in the industry. The decisions regarding merger and acquisitions are based on the current business status of the companies, future threats and opportunities. In addition, the success of the companies can also be determined based on the effectiveness of strategy implementation process and priorities (Pennwell Corporation, 2016).
Concentrating on the oil and gas companies, in most of the situations, large companies seek to merge with the small companies with higher potential as through this it can attain profitability with own financial abilities and others potential. There are various processes to be followed by the two business entities for merger and acquisitions. However, the strategies might differ based on the company goal, strategic priorities and work process (Sunkara, et al, 2015).
Merger and acquisition strategy is a common practice in the energy industry to improve their technical and financial possessions. The companies seek to merge with other companies to enter into a new market or concentrate on surviving in this competitive market. The drop in price of oil and gas during 2014-2015 forced the energy industry to adopt this particular strategy to retain its market along with high profitability (Sunkara, et al, 2015; Gupta, 2012).
There are several opportunities that can be availed by oil and gas companies through financial position development. The increase in profit eventually reduces the costs of capital and increases the market share. In this situation, companies intend to purchase the undervalued assets or the companies with geographic advantage, core competencies and introduce the business from new dimensions. Through this strategy the companies aim to deal with the challenges, evident in dynamic business environment. In certain circumstances, companies cannot compete with the existing competitors in the market for which they choose to merge with other companies or being acquired. Thus, it can be considered as a tool to improve their declining profit margin (Sunkara, et al, 2015; Gupta, 2012). It has often been apparent that the oil and gas companies face issues due to delay in capital projects and supply shortage. The downturn in the industry significantly indicates weaknesses of the companies, which needs to be corrected to remain viable in long-run. In this regard, the merger and acquisitions will enhance the abilities of the companies by expanding and diversifying the business with support of other companies in the industry (Gupta, 2012).
This can be reflected through the example of Royal Dutch Shell and Britain’s BG Group Plc, which merged in 2015 for about $70 billion cash and stock. Through the merger, the Shell expects to expand their projects to East Africa and Latin America and the BG Group anticipates the market capitalization of about $240 billion. The merger is expected to facilitate with the savings of about $2.5 billion and thereby leveraging on the increasing cost and the spending incurred in oil and energy exploration approximately by 50% (Ventures Africa, 2015).
Similarly, the companies can further enhance their business through adoption of innovative technologies, which can be cited through the example of acquisition between the Permian shale and Occidental Petroleum Corporation (OXY). The acquisition between the Permian shale and Occidental Petroleum Corporation (OXY) has enabled the OXY to enhance their productivity. This has also facilitated the OXY to adapt new technologies and enhance potential for further expansion (Mawji, 2016). The acquisitions of energy transfer to Williams made the remarkable record as Second Largest Midstream in US, which performed between the Energy Transfer Equity LP and the Williams Companies Inc., approved by the directors of both the entities valued approximately $37.7 billion (Oil & Gas Financial Journal Staff, 2015).
Parallel to the opportunities due to merger and acquisition strategy, it also contributes certain limitations to the companies in implementing this strategy or strengthening financial and technological position in the market (Alam, Khan, & Zafar, 2014). The strategy of merger and acquisitions played significant role in uplifting the energy industries during period of 2014-2015 (Caves, 2008). However, there are certain other challenges faced by the oil and gas companies elaborated in the following sections:
Impact on the Employees and Shareholders: Due to the merger the companies will have the opportunities to access the technology and workforce of other companies for which they might decide to downsize the number of employees. In such circumstances, dedicated employees have to leave the organisations. The stated scenario can also lead the internal environment more complicated wherein the managements face issues to encourage employees according to the organisation goal due to the presence of miscommunication and misunderstanding as well as they can also be less intrigued to participate in the decision-making activities (Khartukov, 2016; Caves, 2008).
Organisational Culture: after merger and acquisition companies need to change their management and work procedure due to which the organisational culture, hierarchical flow might get affected. This factor often causes conflict and chaos within the work environment of companies. Employers need to structure new top management comprising members from both the companies for which they often face challenges in integrating common business strategies or priorities (Alam, et al., 2014; Caves, 2008).
Loss of Customers: The customers are considered as the main assets for business growth and expansion. After the integration of two different companies, maintaining coordination and trust among them is a vital concern during which the management unable to accomplish the necessities of the people, which ultimately results as loss of potential customers (Alam, et al., 2014; Caves, 2008).
Role Conflict: The confliction on the role is a common problem occurred after combining the two different business entities. The mangers and the employees having different organisational background and job roles might lead to confusion. The mangers might be unable to manage large numbers of employees of other companies, which often give rise to conflict on roles and responsibilities (Alam, et al., 2014; Caves, 2008).
Conclusions
The paper emphasized on the external and internal factors affecting oil and gas companies in the current market during the price drop in 2014-2016. The internal and external factors are illustrated by using SWOT analysis and BCG matrix presents different strategies adopted by the companies to maximize its market share. Based on the information and presented discussion, it can be concluded that the strategies of merger and acquisition have a significant role in strengthening the financial and technical resources of organisations. Although the companies are driven to follow the strategy due to low cost in oil and gas, they have successfully reinforced the current depleting business status. Apart from this, there are certain challenges evident in the process of merger and acquisition, which need to be corrected to obtain competitive advantages and gain expected outcome of the strategy. Thus, companies must develop certain techniques by concentrating on employees’ priorities and expectations of other stakeholders as well.
References
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