External And Internal Environment Analysis Of Schlumberger In The Oilfield Services And Equipment Industry

Introduction to Schlumberger

Your task is to produce a management report providing Strategic recommendations for schlumberger.

Schlumberger Limited is the globally acclaimed and world’s largest company in oilfield services. Schlumberger is a public limited company and it is in the industry of oilfield services and equipment. Schlumberger was established in the year 1926 in France and it has four executive offices in Paris, Texas, London and in The Hague. It serves in worldwide basis as it has its single entity services in more than 85 countries. Schlumberger employs more than 100,000 employees and the employees are from more than 140 countries (Slb.com 2018). Schlumberger Limited supplies services and equipment to petroleum industry such as seismic acquisition, well testing, formation evaluation. Directional drilling, artificial lift, software and information, well cementing and flow assurance. Schlumberger makes itself involved in the groundwater extraction and industry like carbon capture and storage. Schlumberger started its expansion in the year 1960 and till now the organisation has been taking the same process of acquisition and merging to expand the business.

In this study, external and internal environment analysis of Schlumberger is done to provide the range of potential solution. The emphasis is given on to achieve the competitive advantage of Schlumberger and the choice of final strategic decision is given at the end. All the data has been taken from the secondary sources to recommend with justification to grab competitive advantage to Schlumberger.

Industry overview and analysis

Schlumberger is an oilfield service and equipment industry is typically made up of the companies that are depended on mainly drilling expenditure of natural gas and oil producers. The demand for the fuels fluctuates in the economy; therefore the oilfield services stocks can be considered cyclical (Epmag.com 2018). Companies in oilfield industry consist of two main categories; one type provides various services that required evaluating, maintain and constructing in oil and gas wells; another one rents the drilling rigs to the companies. The prices of oil and gases are the key indicators for the performance within the industry. The prices of oil and gas industry affect mainly determination of the population growth, general business conditions and economic development (Hantschel and Kauerauf 2016). OPEC (Organisation of Petroleum Exporting Countries) plays the main role in setting the prices of the oil and gas, production cost and exploration of the oil and gas. There were almost 2,500 active rigs in the year 2010 worldwide and oil-drilling had the international focus. In North America, the natural gas drilling was important. Technological advancement came into existence and total rig reached the figure of 5,000 hit (Epmag.com 2018). Oilfield service organisations tend to be value-based and rig companies share are worth the market value of the equipment. Cash flow is used to value the stock and earning is essential. Revenue of Schlumberger was US$ 27.80 billion the year 2016 and operating was US$ 3.28 billion in 2016 (Slb.com 2018). Schlumberger named itself in Fortune Global 500 Company as it was ranked 297 in the year 2016.

Oilfield Services and Equipment Industry Overview

PESTEL analysis of oilfield services and equipment industry

Political: Political factors play a significant role in determining the profitability and risk in working oil and gas services and equipment industry. Schlumberger is a large organisation and it has to work in more than 85 countries. Therefore, political stability will provide an importance towards doing the business as single entities in different countries. Corruption is another factor of doing the business and less corruption will bring the best business and fresh employees. Each of the countries has a different legal framework and different intellectual property protections. Therefore, Schlumberger has to follow the trading partners and taxation policies of the country to do the business. Controlling hydrocarbon reserves permits the governments to sell rebate to various companies that grant exclusive rights for the production of oil and exploration of the oil. OPEC has the control 75% of the world’s oil resources and internal politics can hold back the upstream investment in many of the countries. According to Hantschel and Kauerauf (2016), political decisions of the world leaders can stimulate the use of cleaner sources of energy for the climate change issue. Kyoto protocol established the legal commitment for the countries to decrease the emission of greenhouse gas.   

Economic: Schlumberger works in the global arena and the macro environmental factors are associated with the saving rate, inflation rate, foreign exchange rate, savings rate and economic cycle. Schlumberger needs to assess the type of economic system in which the organisation operates and government intervention in the free market can also be assessed by the organisation. As opined by Hammami et al. (2018), exchange rate and stability of the host country needs to judge in order to operate in the global arena. In addition, GDP growth of the country and the oil companies’ infrastructure quality can help the business to grow. The global economy is dependent on the continual supply of the oil and gas at reasonable prices. The demand for the oil is depended on the economic growth of the country. When the demand for the oil and natural gas grows, the demands of the oilfield services and equipment eventually grow. Oil producers are exposed to the change in the exchange rate and it provides greater stability for the profitability of the organisations.

Social: Attitudes of the people and shared beliefs can impact on the business of Schlumberger. This organisation mainly depends on the employees and the skills of the employees to use the technology. Demographics and skill level of the employees is an important factor along with class structure, power structure and hierarchy. The organisation has various single entities, therefore, workplace culture needs to evaluate with social conventions. The share of oil and the total energy consumption drastically dropped in last decades. The clients of the organisation are mainly business entities and the common people start showing interest in alternative energies like solar, hydro and biofuel energy. Schlumberger takes initiative to do the social responsibilities for the betterment of the society. Therefore, the most of the big oil companies claim the supporting role in the development of the society.   

Political Factors Affecting Schlumberger

Technological:  In the oilfield sector, technology is very important as the industry is technology-driven. Technology is the key factor from the exploration of the oil to the refinement of the oil. Innovation and improvement of the technologies help the companies to upstream the process to extract a large amount of crude oil (Mittal and Groening 2016). Schlumberger uses the Wireline technologies as it needs to have the information to evaluate the subsurface information of the fluids and rocks. The organisations use the directional drilling to measure the rocks and wells. In addition, Schlumberger uses the technologies for well-services and testing services. Technologies help the companies to do the exploration work in ultra-deep-water reservoirs. Technology provides help in ultra-deep oil transportation and it provides help in long-term sustainability.

Environmental: In oil and gas sector, the environmental factor is important as the large exploration of the oil and gas eventually reduce the level of oil and gas underneath of soil. Extraction of the oil and gas leads to the oil spill and it harms the community and society. The emission of natural gas and the oil spilling in the oil platforms can harm the brand image of the oil companies and oilfields. Companies spend their shares to bring profit from the environmental refineries and restoration. Schlumberger makes the inactive sites as the gas processing sites, terminals and disposal of wastes and service stations. Safety and quality of the transportation are needed as transportation of hydrocarbon has inherent risks.

Legal: Oil industry and oilfield equipment industry is subjected to the legal restriction that ranges from specific drilling obligation, environmental and safety protection, employee rights and control over development and decommissioning of the field. Employment laws, data protection laws and consumer protection laws; all need to follow the company. Legal factors related to the large upfront concession fees, taxes and special royalties all should be followed by the company (Gupta and Grossman 2017). Recently, there are many laws like fuel specifications, emission control and climate change should be followed.  

Porter’s Five Forces analysis

Industry rivalry: Industry rivalry in the industry is not high as the global presence of Schlumberger makes the organisation solo player in the market. Under the umbrella of OPEC, many of the organisations play an important role to improve the technologies. Major players in the market are Larsen & Turbo, Nalco Champion, Baker Hughes and Halliburton. This force is medium. This force can be higher through big producers and other competitors are doing merger and acquisitions to increase competitive strength.

Economic Factors Affecting Schlumberger

The threat of substitutes: Threat of substitute in the market is limited as there are not many equipments and service providers that can manage the drilling, well measurement and extraction of oil. The technologies provided by Schlumberger are dominant are prevailing; still, the technologies are not irreplaceable easily (Yu et al. 2017). Drilling and exploration technologies are getting more sophisticated and competitors in the market are trying to improve the technologies. This force is low.   

The threat of new entrants: Threat of new entrants in the oilfield industry can impact on the potential competition. The threat of new entrant in the oil and gas sector is important despite the potential attractiveness of the industry. In oilfield service industry, barriers to entry are high as there is a huge capital requirement in order to make a new organisation in this sector. In oilfield service and equipment industry, the organisation needs to have high human and technological resources so that it can vertically position itself in the industry. The new organisation needs to have enormous up-front investment for the development of the company. The cost does not associate only with an exploration of the oil-field; but also the drilling service, labour, scientific research and materials and energy. Unit costs are high as economies of scale are high in this sector. Therefore, small and new companies cannot manage to handle a large amount of money. This force is low.

Bargaining power of customers: Customers can impact on the profitability of the industry as they can bid down the price in the industry and the customers can demand the high quality. The customers of Schlumberger are the oil and gas companies and oil is traded over the counters between two parties. Schlumberger has opportunities to do the business with the oil and gas companies. The customers do not have many options to choose other companies as Schlumberger is the largest equipment service providers in the industry (Ji et al. 2017). Among the customers; international companies, marketers, traders and distributors. The customers do not have much power to switch the company as customers do not face switching cost as the equipment and oilfield service is very important for the customers. This force is medium.

Bargaining power of suppliers: Suppliers can erode the future potentiality of the organisation as they can raise the prices (Rumelt 2012). The suppliers of Schlumberger are various as the organisation has many entities around the world. The organisation has a global presence and suppliers’ business relation must be good. The suppliers of the Schlumberger are equipment makers and the technology service providers. The Suppliers business relation with Schlumberger is based on reliability, trust, cooperation and communication. Schlumberger procures products through manufacturer and suppliers that expresses high quality and standards for the exceptional level of quality and services, solid delivery performance and competitive pricing and effective after-sale services. In this regard, in oilfield service industry, suppliers have a good role in providing the business competitive advantage through adding value through quality and support of the services and products (Moldown et al. 2015). The organisations use technologies that permit effective access to information and seek new technologies and local manufacturing. The switching cost of the supplier is high and suppliers have built up IT infrastructure with e-business transaction. This force is high in the market.

Social Factors Affecting Schlumberger

(Refer to Appendix 1 for Five Forces Table)

Ansoff Matrix

Market development: The industry of the oilfield service cannot be increased as the natural resources are limited. Most of the energy producing companies are putting stress to make renewable energies. Schlumberger is operating in such a sector where the no such scope is there to develop the scope of the business. The market is saturated. Schlumberger can find a new market to start its operation apart from 85 countries. The organisation can make a partnership with large oil and gas companies to give assistance in their exploration work in new countries and new geographical areas. New geographical areas are included in African regions and the new areas where no other companies penetrate.

Diversification: Schlumberger provides services of equipment through giving the supply to petroleum and natural gas industry such as processing and acquisition, seismic work, well testing, directional drilling, stimulation and cementing. Diversification strategy works in developing a new market with a new set of services and products (Barney 2014). In each aspect of oil and gas industry; Schlumberger has its entities. Schlumberger can start its work process apart from the oil and gas; they can start its journey in non-renewable energy resources. In case of non-renewable energy, the companies have to shift one of its centres in producing the alternative energy resources apart from oil and gas. Oil and gas resources have been depleting with time, therefore, the organisation needs to shift its target customers. The new market will be Europe where they will target the non-renewable energy market.

SWOT Analysis

Strengths:

• Schlumberger has quality Research and Development unit and this unit works intensely in order develop new technologies and equipment to make the work process easier to extract and explore oil field and natural gas.
• Schlumberger has always got the favour of the political parties in which countries it goes. Political support makes the organisation bigger with time.
• The strength of the organisation is the global presence as it already has its entities in more than 85 countries. In addition, the organisation has employed more than 120,000 employees from 140 different nationalities of the people (Slb.com 2018).
• Schlumberger has the largest market share in its industry as it is the largest oilfield service provider and the equipment service providers. The communication within organisation works well and the communication leads to better bonding with the employees.
• The staffs of the organisation are motivated and they are highly trained to get the work process done in less period of time. Schlumberger has a good set of technologies and it has technical capabilities to work for good.
• Most importantly, Schlumberger uses the merger and acquisition technologies in order to develop the market share. Schlumberger started its acquisition from acquiring Dow Chemical and in the year 1987, Schlumberger purchased Neptune and Schlumberger acquired software organisation GeoQuest system in the year 1992 (Reuters.com 2018).

Weaknesses

• Schlumberger has the weaknesses of legal issues as the organisation has been facing the legal issues from many of the countries. In addition, Schlumberger legal proceeding to combat with these issues is not strong.
• Schlumberger faces the issue of an oil spill in many of the countries and leaking of oil can contaminate the water. In addition, radioactive sources can cause the issue in the society. Therefore, Schlumberger faces the weaknesses in environmental issue.
• In recent time, the revenues of the organisation are declining and it declined by 2% in 2016 than 2015. In the North American section, revenue slumped 33% and earning is also declined (Epmag.com 2018).

Opportunities

• Schlumberger believes in merger and acquisition of the business. Therefore, the organisation can make acquisition of any of the renewable energy company in order to spread the business in the non-renewable sector.
• Increasing demand for oil and natural gas is another plus point for Schlumberger as in global market; the demand for oil and natural gas is high.
• Schlumberger can deploy commodity plan by improving the technology. In addition, supplier development needs to improve through making activities in different sections.

Threats

• In the global market, oil price fluctuates and therefore, the demand for oilfield services and decrease with time.
• In the market, there are environmental laws in different countries. The governments in different countries set different rules and regulations; therefore; Schlumberger needs to follow these rules.
• In some of the countries, economic stability is not good; therefore, Schlumberger may face the issue of low economic development.

VRIO Model

Resources of Schlumberger

Tangible resources
Financial	Schlumberger had the revenue of US$ 28 billion in 2016 and operating income of the organisation was US$ 3.28 billion. Total asset of the organisation was US 77.96 billion in 2016 (Slb.com 2018). Total liabilities of the organisation were 36.96 billion. In recent time, the financial condition of the organisation decreasing (Xuejun et al. 2017).
Physical	Physical resources are headquarters, equipment, modern facilities and offices in more than 85 countries. The headquarters are situated in The Hague, London, Paris and Houston.
Technological	Technological resources are associated with software, drilling, and directional drilling and flow assurance and formation evaluation.
Organisational	The organisation follows a hierarchical structure, coordination system and formal planning
Intangible resources
Human resources	The senior executives are smart and skilled and the numbers of the employees are 120,000. The employees belong to more than 140 countries.
Innovation and creativity	Innovation regarding the Schlumberger is associated with making merger and acquisition. The organisation is also involved with groundwater extraction and storage of carbon capture.
Reputation	The reputation of is associated with the largest in oil field industry and equipment. It has been in the industry for more than 90 years. It works on health and safety management to provide a safe environment for workers.

Table 1: Resources of Schlumberger

(Source: Self-researched)

Valuable: Resources of Schlumberger adds value for the organisation to exploit the opportunities. The resources are valuable to increase the perceived value of the clients and Schlumberger continually review the resources to add value.

Rare: Valuable and rare resources grant temporary competitive advantage (Ginter 2018). Rare resources are when the competitors do not have the same resources. Schlumberger is the largest organisation and it has a technological specification. It has 120,000 human resources.

Costly to imitate: The resources are costly to imitate as other organisations cannot imitate the resources. Schlumberger has been in the industry for more than 90 years and it has done many of the merger and acquisition. Resources were mainly developed through historical events.

Organisation: The resources need to organise perfectly in order to capture the value. The management and human resources is trying to capture the value by organising structure and culture. 

Primary activities
Inbound logistics	Raw materials handling and sending the equipment to the right place. Inbound logistics are maintained by employees’ KPI.
Operations	Assembling of the technologies and equipment with testing the equipment. The operation process is completely technology driven and human resources work together
Outbound logistics	Schlumberger Hub helps in doing outbound logistics. In some of the countries, the organisation does outbound logistics through NTRA (National Telecommunication Regulatory Authority)
Marketing and sales	Schlumberger does not do enough marketing and they have social media pages to show the environment and social responsibilities. They do marketing and sells through a web portal and share points.
Service	Installation of the technologies and equipment for drilling, well measurement and flow measurement (Wheelen et al. 2017). They provide services to the software and groundwater checking. Repairing of the equipment is another thing; the organisation needs to do.
Secondary activities
Firm infrastructure	Schlumberger has its entities in more than 85 countries. Therefore, the infrastructure of the firm is like general management and they do strategic planning after discussing with the shareholder. It has its name in Stock Exchange and Schlumberger has its executive headquarters in four places.
Human resources	Recruiting and development of the employees all are done by Schlumberger. It has more than 120,000 employees working in more than 85 countries. Most importantly, the employees belong to more than 140 nationalities. Human resources of the organisation are very strong.
Technology development	This is technology driven organisation. Therefore, technologies are used in drilling, well measurement, seismic exploration, flow measurement and checking of groundwater. The technologies and equipment all are world class.
Procurement	Schlumberger has procurement specialists and they ensure that each of the items and services must build and maintain the advance oilfield technologies. Schlumberger ensures that suppliers must send perfect products agreed terms. Procurement provides maximum values for the organisation through time.

Technological Factors Affecting Schlumberger

Table 2: Value Chain analysis of Schlumberger

(Source: Self-researched)

The key strategies of Schlumberger are to do the merger and acquisition in related oil and gas field so that the organisation can stay ahead from the competitors. As stated by Johnson (2016), merger and acquisition give synergies as well as economies of scale and it increases the cutting prices and operations. Investors can take the comfort of the idea that a merger can produce the increased market power. In addition, another strategy of Schlumberger is to integrate the hardware and software technologies in order to take full ownership of floaters, rigs and equipment. Schlumberger invested significant time on technologies as they have strong R&D team. New digital technologies can constitute significant portion to work on science and technologies. Schlumberger invested $800 million in development of technologies (Slb.com 2018). Information and experience must be mixed together to do the work through artificial driving lines. The organisation mainly experiences the deep domain knowledge of production operation and exploration that they have been gathered through more than 90 years of experiences. The strategy of competitive advantage is based on longest and most comprehensive commitment to innovation and technology. Schlumberger commits to excellence in service delivery anywhere and anytime. In addition, service integration is another key strategy of Schlumberger as it offers integrated service management.

• Schlumberger has been working in oilfield services and equipment sector where the demands of oil and natural gas have been increasing with time. However, the level of oil and natural gas is depleting over time. Therefore, Schlumberger has can diversification strategy in order to gain the competitive advantage. Schlumberger can diversify the business and they can shift one of its businesses to renewable energy. Schlumberger can take the strategy of acquisition of small renewable energy organisation. After that, Schlumberger can manufacture the technology of making renewable energy. Non-renewable energy is the future of energy sector as after certain time non-renewable energy will be finished. Diversification strategy will provide the reduction of risk of the business as the organisation is focused on the single aspect of oil and gas sector. Diversification of the business will also provide capital preservation as it allows the organisation to protect the capital it has rather than the rate of return. Diversification of the business will allow the long-term growth of the business at the same time.
• In the industry of oilfield services and equipment, the competitors are large as Halliburton and Larson and Turbo; these organisations can take the market share by providing services through minimising the cost. Schlumberger has been facing the issue of decreasing the revenue. Cost leadership can be taken by Schlumberger as the organisation can take the ‘service bundling’ or the service integration. Service integration is about offering large numbers of services together at low prices. Cost leadership strategy will provide a competitive advantage and it will allow Schlumberger to increase market share and revenue. High profit can be enjoyed as it increases the market share and competitors will be overshadowed.
• Schlumberger can take the differentiation strategy where they can shift in existing market from oil and gas to hydrocarbon and groundwater. Schlumberger can take the differentiation of the technologies where they can integrate the services to verify the hydrocarbon layer and the groundwater needs. Differentiation of the services of Schlumberger can provide customer loyalty and the organisation enjoys strong margin it is already a well-known name in the market.
• Schlumberger needs to improve the revenue, therefore, the organisation should increase the numbers of business clients. In addition, Halliburton has become most intense competitors of the Schlumberger. Core competencies of Schlumberger need improve through harmonising the combination of multiple resources and it needs to distinguish the organisation in the marketplace. The stock price has declined by 9% in recent time of Schlumberger. In upstream industry, Halliburton provides the services; Schlumberger can take the market share in this sector.

Service bundling is a combination of more than one service with the reward of benefits for the clients that take up the combined services. Service integration can lead to low prices for the clients of Schlumberger. Therefore, Schlumberger at first should focus on improving the revenues through service bundling strategy where the organisation can offer more services at fewer prices. Cost leadership in the market with service bundling will eventually provide large market share along with competitive advantage.

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