Strategic Analysis Of ABB Group – Oil And Gas Industry

Financial position of ABB Group

Choose one oil field service provider and report on its position in the sector. The report should cover the period from the beginning of 2014 to the present day. The report should analyse the current state of the chosen oil field service provider, and then consider the strategic options available to that provider. The report should include the use of appropriate academic model(s) when considering the strategic options available to the chosen firm.
 

The study elucidates the concept of strategic management procedure in oil and gas industry with the help of a case study. ABB (ASEA Brown Boveri) Group is one of the well known Swiss multinational corporation and oil field service providers. The company operates around 100 countries in the areas of automation technology, robotics, and power. Moreover, it is successfully placed in 158^th rank in the Forbes Ranking List (Abb.com. 2016). As per the record of 2015, the total number of current employees is 140,400. The service they provide include oil and gas, chemicals, power, metal, minerals, pharmaceuticals, marine, pulp and paper, turbo charging etc. In seven business units, they have segmented their business operation and services. However, here the study concentrates on the two of its business units that are ‘Oil’, and ‘Gas & Chemicals’ (Abb.com. 2016).

Figure 1: Logo of the company

(Source: Abb.com. 2016)

The below table demonstrates the financial position of ABB Group in the present market.

	2013	2014	2015
Orders	$38,896M	$41,515M	$36,429M
Income from operations	$4,387M	$4,178M	$3,049M
Revenues	$41,848M	$39,830M	$35,481M
Net income	$2,907M	$2,594M	$1,933M
Cash flow from operating activities	$3,856M	$3,845M	$3,818M

Table 1: Financial report of ABB Group of past 3 years

(Source: Abb.com. 2016)

From the above table, it is shown that the amount of orders they received has been declined in the prior year comparing to the past year of 2015. Besides, the total incomes from the operations and revenues have also been decreasing since the year 2013. Hence, the net income also declined from $2,594M to $1,933M in that year. Furthermore, the cash flow of the company has also slowed down. This indicates that the company fails to implement effective strategy management policies in the present situation.

As per the mission statement of ABB Group, they aims to improve their business performances, drive innovation, employ skilled and experienced workers. Moreover, they aim to lower the environmental impacts in order to provide social benefits. Besides, their vision is to enhance the use of electric power and increase their productivity as well. They have wide geographic base along with broad product portfolio that create the strength point to acquire comparative advantages over its competitors.

Strategic Management of ABB Group

As per the viewpoint of Aguinis, Edwards and Bradley (2016), Strategic management is an approach that helps to specify the objectives and ultimate goal of the organisations. Through this process, the organisations develop various policies and plan in order to attain those objectives and fulfil organizational purposes. Carroll, Primo and Richter (2016) added that it is the process of strategy formulation, evaluation as well as implementation in the business operations to achieve a sustainable position in the market. Engert, Rauter and Baumgartner (2016) have put a different viewpoint that strategic management is a competition based theory that helps to maximize the profit. The organisations build certain strategies to develop sustainable competitive advantages over their competitors. Through gaining competitive advantages, they are able to enhance their revenues as well as profit and reach themselves in a better market position.

As mentioned by Dandagi et al. (2016), strategic alliance is an effective policy in which an agreement is signed between two or more organisations in order to achieve common objectives. Merger and acquisition (M&A) is an effective form of strategic alliance where the business organizations and their business units are merged or transferred. ABB Group has established a global commercial alliances with the company Samsung SDI last year (Abb.com. 2016). In this case, merger strategic approach is applied rather than acquisition. As both the companies are doing well in their business market, none of them takes over another company. As per the merger strategic approach, they jointly made a new entity with new management procedure to enhance both of the businesses. On contrast, following the acquisition approach, ABB Group would have ceased Samsung SDI or ceased by the company. There financial statements shows that neither of the company need to pursue acquisition approach in present scenario. It has been found that this certain strategic alliance is made to promote micro grid solutions globally. As micro grid systems comprise energy storage solutions, ABB Group engaged themselves in this join forces with the leading manufacturer of lithium-ion batteries. In today’s developing and emerging market, micro grid applications are enhancing in a rapid manner (Rothaermel 2015). In ABB Group’s next level strategy, it is identified as the key growth area that they should focus on.  In this strategy alliance, ABB Group acts as the parent company which enable Samsung SDI to make an effort to keep on the world’s best ESS company.

On the other way, other strategic approaches are there that include joint venture and diversification which are not followed by ABB Group. The reason behind not pursuing the joint venture approach is their different management styles and organizational relationship with other companies. Besides, it has been predicted by ABB Group that tactical decisions can be made because of raising any kind of misunderstanding about their individual roles in business market. On contrast, diversification is not followed as it needs to add new infrastructure and business operations which would increase the total expenditure of ABB Group.

Mintzberg’s 10 Schools of Thought

Merging approach helps ABB Group to enhance their growth and acquire competitive advantages over its competitors. If they would not have considered the merger strategic approach, they might confront strong competition from the rival companies. They have sensed that their business might confront strong competition which can create issues in their sustainable growth. This is the reason behind merging with the business of Samsung SDI.

ABB Group has categorized the fields of strategic management by incorporating Mintzberg’s 10 Schools of Thought.

Ten schools of thoughts	Strategies
The Design School	Through the SWOT analysis, the strategies are formulated. It has been found that their major weakness is shortage of liquidity. Their huge cash flows create the opportunity to increase their acquisitions of business operations.
The Planning School	In this section, the strategies are clearly formulated as well as controlled. Their parenting style helps them in setting different plans for different units.
The Positioning School	It defines that the organisation creates strategies and planning to make a position in the top of the competitors’ market position.
The Entrepreneurial School	As per this particular school of thoughts, the strategies are formulated in a visionary process.
The Cognitive School	It is a mental process of strategy formulation. The managers of the organisation pursue this particular thought of school at the initial stage of strategic management.
The Learning School	This specific school of thought is not pursued by the organisation. The management body of the organisation does not pay close attention on the time limitation.
The Power School	It defines that the strategies are formed and implemented by the stakeholders where the power of the organization is generated.
The Cultural School	In this school of thought, the strategies are formed in fundamentally collective and cooperative process.
The Environmental School	As it is less useful for strategy formulation, the organisation provides less importance to this school of thought.
The Configuration School	The organisation needs to transform their decision making structure in new innovative techniques.

Table 2: Applications of Mintzberg’s 10 Schools of Thought

(Source: Preez, van der Merwe and Matthee 2014)

According to Nguyen (2015), Porters’ Five Forces model is an effective strategic management tool to identify where the power of the business lies on. Moreover, it helps to indicate the current competitive position of a business and the position where they can move into. The five forces are Power of the Suppliers, Power of the Buyers, Competitive Rivalry, Threats of Substitution, and Threat of New Entrance.   

Power of the Suppliers: Ghandat (2015) stated that the uniqueness of the services and the products increases the power of the buyers. As the power of the suppliers increases, they achieve the power to drive up the price of the product they deliver to the organizations.

Power of the Buyers: In today’s growing competitive market, the consumers have the power to drive the product price down. In some cases, the organizations offer their products at lower possible price in order to retain their customers and capture the market more (Dobbs 2014).

Competitive Rivalry: Lee, Kim and Park (2012) stated that the ability of the competitors and the ability of own business determines the strength of the business over the rival firms.

Threats of Substitution: According to Nguyen (2015), the consumers tend to shift another product or brand when they have much purchasing options in their hand. More availability of substitute products leads the organizations to confront more challenges in obtaining competitive advantages.

Threat of New Entrance: The profitability business attracts new firms in the market and thus the competition in the present market increases in a rapid manner (Ghandat 2015). Therefore, the individual firms need to apply strong protection to their unique techniques in order to prevent new entrances.

In the context of strategy management, Medarac, Vignali and Vignali (2016) stated that Ansoff Matrix is an essential tool of planning process that represents a framework to help the management body in formulating growth plans. In this marketing strategy, four main growth alternatives are defined that include Market Penetration, Market Development, Product Development, and Diversification.

Strategic Analysis using Porters’ Five Forces model

Market Penetration: Veseli, Aziri and Veseli (2012) opined that in this particular market strategy, the organizations tries to enhance their market share in the present market scenario. Through innovative promotion and distribution strategy, the organizations increase their sales by offering existing products in the existing market.

Market Development: The market development strategy defines that the organizations offer their existing products in the new markets by expanding their business (Schawel and Billing 2012). The businesses with unique product technology have the ability to leverage their business in the new markets.

Product Development: In the strategy of product development, the organizations make plan to produce and deliver new products in the existing market (Medarac, Vignali and Vignali 2016). Through investing in the research and development and implementing innovative techniques, the firms achieve growth from the existing market.

Diversification: The diversification marketing strategy defines the process and planning of delivering new products in new markets (Banerjee 2016).   

Apart from the above mentioned two marketing strategies, another strategy analysis process is there that helps the organizations to analyze the macro environmental factors. The influential factors of PESTEL analysis include Political factor, Economical factor, Social factor, Technological factor, Environmental factor, and Legal factor (Yüksel 2012).

The political factors define the current political situations that affect the business. The factors include political stability, trade policy, trade restrictions, labor law, other4 government policies etc. Rachet (2014) added the economical factors influence the business operation most. Changes in rate of interest, inflation rate, exchange rate, economic growth are the factors that are considered in strategy planning process. According to Yüksel (2012), the social factors are the beliefs and attitudes of the local people. The rapid increase in technology drives the firms to confront more challenges in attaining competitive advantages over the competitors. Moreover, the increasing scarcity of raw materials aware the firms about the future shortages and thus environmental factors get high importance in present market. Apart from this the legal factors also affect the business process that includes product safety, advertising standards, consumers rights and laws etc.

Relationship between the models

The above section demonstrates three models of strategic analysis that helps to analyze the current market situation. Here, it is important to mention that the models are interlinked with one another to some extent. Through analyzing the market by Porter’s model the organizations can Ansoff matrix marketing strategy. Porter’s Model shows where the business has weak points and where they can dominate. In this respect, it is possible to consider a particular strategy that discussed Ansoff Matrix. At the same time, it is also essential to analyze the PESTEL factors that affect the present business or might affect the organizational operations in future. Through determining the current market outcome or predicting the future, the organizations are able to take proper decision to resolve issues and making growth. Moreover, The PESTEL analysis helps to reduce the threats and enhance the opportunities that an organization has experienced through Porter’s analyzing process.

The above discussion is based on three effective strategic management models that help the researcher to understand the need of strategic management tool in the present business scenario of ABB Group. The researcher assumes that among the above mentioned three models, Porter’s five forces model would help the business in acquiring its ultimate objectives. As per their mission statement, their prime objective is to enhance the business operations through incorporating innovative ideas and techniques. Moreover, skilled and experienced workers will be employed in order to strengthen the human resource. The reason behind choosing Porters’ five forces model is that this particular strategy management tool would help them to determine the power of their business along with the threats they have in present situation. Through analyzing the current business scenario, they would able to enhance use of electric power.

The researcher has found that the Ansoff matrix only concentrates on products and markets. Whereas, the Porter’s model covers the entire field of an business operations. Enhancing product quality and business market is not enough to achieve all the objectives that they set. On contrast, PESTEL analysis is an effective tool to analyze the business in a broader way. However, the researcher has analyzed that the business has a strong market position in the world market. Their present strategies are made by considering as well as determining the macro economical factors. Therefore, the researcher assumes that Porter’s Model would help them to lead their business towards growth. Moreover, it is expected that the present issues that they have would be resolved in upcoming years.

Through analyzing the business of ABB Group by Porter’s five forces model, it has been found that the power of the suppliers of the respective organization is high. The suppliers have high bargaining power over the price of the products because of the low number of the suppliers (Quintino, Lourenço and Catalão-Lopes 2016). It has been mentioned that in the competitive market, the buyers have high bargaining power to reduce the product price. This is one of the reason of reducing oil price in the present situation. However, they provides high barrier to the new entrants. They have strong protection over their unique techniques that prevent the new firms to implement same strategy in their business (George et al. 2016). Moreover, high profitability of ABB Group attracts new firm in the market. They receive low threat of substitute products because of their brand name. Though, the competition with the rival firms is high in respect of product price and technologies.

This particular strategic model helps them to identify the strength and weakness of the industry. It has been found that both the bargaining power of the suppliers and the buyers are high. This is the reason behind reduce in income and profit along with declining cash flow (van der Weshuizen and West 2016). Apart from this, they are able to know the biggest threat they have in the present is from its competitors. The goods and services offered by the competitors might attract the customers of the respective company.

After analyzing the business, the researcher here brings out a number of recommendations that would help the organization resolve the problems they have in present. In the prior section of this assignment, it has been discussed that how the Porter’s five force strategic analysis helps the organization to achieve their ultimate goal. In that context, the researcher suggests that the organization should implement new techniques and policies in order to bring innovation in their business. New technology implementation in the rival firms might create major challenge in an unsolved stage in the long run. Thus, apart from incorporating new technology, the researcher suggests to enhance the employability skills in order to obtain competitive advantages.

At the initial section of this assignment, it has been demonstrated that the company face issues in maintaining the increase in orders, revenues, income from operations, net income and cash flow. This indicates that the organization is facing major operational issues in the present situation. In this context, the researcher recommends that invest more capital in research and development. This would help them to achieve their vision of enhancing the use of electric power. Further, it would increase the productivity as well as supply of oil and gas. Moreover, their strength point in broad geographic base product portfolio should be maintained in order to keep a sustainable position in the competitive market.

Conclusion

This particular study concludes that ABB Group is confronting issues in enhancing the revenues and net income as well. This might make them face serious constraint in the upcoming years. Furthermore, the study has analyzed the present business of the organization through Porter’s five forces tool. It brings out the face that they have strong brand power but the less power over the product price. This is the reason that they face certain difficulties in raising the income curve. At the end of the study, the researcher has provided some suggestions in order to help the organization to achieve their mission and resolve the current issues.

Reference List

Abb.com. (2016). ABB Group – Automation and Power Technologies. [online] Available at: https://www.abb.com/ [Accessed 28 Mar. 2016].

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