Individual Strategic Analysis - Origin Energy - Case Study Example

Individual Strategic Analysis Origin Energy Table of Contents Contents Contents 2 1. Introduction Origin Energy is Australia’s largest gas-fired power generation company which is responsible for operating natural gas fuelled power stations in Victoria, New South Wales, Queensland, and South Australia. Involved in gas and oil exploration, power generation and energy retailing, serving four million customers, providing around four thousand jobs, and responsible for over one hundred shareholders, Origin created its own Strategic Direction Division which will be responsible for driving new innovations and growth of the company’s business strategy. Origin considers innovation as a reflection of customer need thus developments within the company are often based on analysis and insights influenced by customer needs, products and pricing, and regulatory strategies. This information is then translated into marketing plans and ultimately in delivering suitable and efficient product and services. Section 3 analyses the oil and gas industry where Origin Energy belongs. It include discussions of issues concerning the industry’s social, cultural, and environmental impact as well as value chain activities that are essential to its success. Section 4 is about Origin Energy’s strategic direction and identification of sources of its competitive advantage while Section 5 is an analysis of Origin’s strategic strengths and weaknesses and chosen strategy that could help Origin sustain its market position. Executive Summary Origin Energy is large organisation in the oil and gas industry and greatly influenced by its business environment. Since the success of organisations belonging to the oil and gas industry is determined by its reputation and effective management of external stakeholders being affected by its operations, Origin business strategy is marked by reputation building and maintenance, compliance with specific regulations, extensive marketing campaigns, and key policies that generally protects its image as an honest and responsible company. However, analysis reveals Origin’s lack of dynamic capabilities to cope with the rapidly changing environment and challenges in extremely competitive global market. There is no indication that Origin is attempting to build or develop dynamic capabilities anywhere in their business policy thus this study recommends adding dynamic capability building to existing strategic approaches to ensure sustainable competitive advantage. 2. Analysis of Selected Industry – Oil and Gas The oil and gas industry is global in nature as the worldwide demand for energy made the industry operates in every corner of the globe. In 1994 alone, the world energy demand reaches around 8000 million tonnes of oil. Oil and gas represents 63% of the world energy consumption while coal, nuclear energy, and hydro-electric power represents the remaining 37%. Manzano (2005) reported that the total value of trade of these products to be around $615 billion in 2002 (p.6). Natural gas accounts for 30% of the rise in world primary energy demand (Ruster & Neumann 2006, p.2). The common goal for the industry therefore is more likely to increase production to meet the world energy demands. Australia is world’s leading exporter of coal and has large reserves of natural gas which make it third biggest LNG exporter in Asia Pacific. However, the 2010 study of Australia’s energy consumption suggest that it is consuming more oil and gas than it produced. According to the Australia’s Department of Resources Energy and Tourism (2011), crude oil and LNGs are two of the 10 highest value commodities in the country while the average increase in energy consumption is 1.7% a year. In summary, the country’s energy consumption is now accounting to 32% of Australian energy production (p.3). The industry therefore is still lacking behind in meeting local energy demands (Taiyou Research 2011, p.2). Figure 2.1 – Australia’s Origin Energy meeting only half peak electricity demand (source: Origin Energy) However, oil and gas exploration, processing, and retailing is not a simple business as it often involves avoiding the industry’s ecological side effects or minimize adverse impact on the environment. For instance, oil spills can damage land and create water and air pollution. Recently, the industry’s social impact particularly in remote communities has also attracted attention (UNEP, 1997). The United Nations Conference on Environment and Development or UNCED created Agenda 21 to tackle issues concerning the energy industry. These include protection of the atmosphere, land sustainability, combating deforestation, protecting oceans and fresh water sources, safe use of toxic chemicals, waste management, and important dimensions of social change and the impact of the industry’s development projects on cultural values. Agenda strongly affect national policies and the role of the business sector in protecting the welfare of the community where it operates (UNEP, 1997). The oil and gas industry comprises three sectors – upstream where exploration takes place, midstream where production, processing, refining is being done, downstream where marketing and distribution of the final product is performed (UNEP, 1997). Since the downstream sector is the one concern about distribution and marketing, it has the responsibility to organized, plan, produce, price, promote, distribute, and disseminate ideas for the satisfaction of customers. Marketing is important to the success of the industry thus it is often charge of using “aggressive strategic marketing behaviour” (Akinyele 2011, p.303). A value chain is generally known as chain of activities being performed in order to gain some value and for this reason, the oil and gas industry is often concentrating on upstream, midstream, and downstream sectors activities to give their products more added value. Exploration, recovery, and production of crude oil and natural gas are activities in the upstream sector, refining, distribution, and sale in downstream while processing, storing, marketing, and transporting of goods in the midstream. In terms of value chain, it can be assume that the oil and gas industry’s success is dependent on its ability to create value for its customers and maintain harmony of the interconnected sectors of the industry. Similarly, its competitiveness is also reliant on the attractiveness of the industry that also demands long-term winning strategy and effective leadership (Pillai et al, 2010, p.5-6). Figure 2.2 – LNG Value Chain (Source: Ruster & Neumann 2006) Literature reflects the pioneering character of the industry in research and developments but there are also some issues concerning the traditional isolation between sectors of the industry. These issues highlight the lack of well developed supply chain and attempts of the industry to transform traditional supply driven approaches into a more customer focused direction (Manzano, 2005, p. 6). The natural gas industry in particular has turned from being an expansive and regional energy supplier to global energy source. It has become flexible and its markets become linked while its traditional framework is rapidly moving away from monopolistic structures to competition. Consequently, organisational behaviour of market participants is changing as evidence by the growing number of strategic partnerships, engagement in all stages of production value chain, integration of downstream activities into the import markets, integration of upstream activities to ensure continuous supplies, and long and short-term trading activities accompanied by vertical integration to counter market deregulation (Ruster & Neumann 2006, p.3). The industry is also subject to price increase, high production cost, and the economic effect of fluctuating exchange rates. According to Vlady & Huang (2009), analysis of the economic effects of exchange rates fluctuation in the oil and gas industry is more associated with losses than increase in value (p.3). Aside from foreign exchange rate risks, market return, interest rate, and prices of oil in the world market also determines the returns to oil and gas companies. Moreover, internal factors such as cash flows, production volume, and proven reserves have positive and negative effects on the industry (Ratti & Hasan 2010, p. 4). 3. Analysis of Origin Energy Origin Energy is recognised as the largest owner and developer of gas-fired power generation in Australia. It has interest in natural gas, coal, and steam such as the coal seam gas fields at Spring Gully and Bowen Basin in central Queensland. It is also the operator of the Bass Gas Project delivering gas and LPG to the Victorian market since 2006. Along with Santos Limited, Origin Energy holds over around 50% of Australia 2P gas reserves as CSG (Baker & Slater 2008, p.379). In terms of upstream, midstream, and downstream activities, Origin Energy can be considered a fully integrated company because it is has interest and operating in all three sectors. It is also ‘independent’ in the sense that it operates in specific areas of the world –Australia. Figure 3.1 – Natural Gas share in Australia’s energy production Source: Department of Resources, Energy, and Tourism Figure 3.2 – Origin’s Electricity Generation and Energy Retail Portfolio (Source: Origin Energy) A company committed to growth and profitability, Origin Energy’s business policy comes with codes of conduct, human rights, risk management policy, continuous market disclosure, communication with shareholders, and staff share trading. The code of conduct is based on the company’s purpose, values, and commitments. These include diversity and inclusion, health and safety, environmental concern, acceptable trade practices, and so on (Origin 2011a, p.1-5). The purpose of the Risk Management System according to Origin (2010a) is to easily identify important risks that may negative impact its business activities. These risks include those associated with people, financial performance, clients, properties, environment, and company reputation. The risk management system is directly under the company’s Board which is primarily responsible for overseeing its implementation and effectiveness (p.1-2). Transparency drives Origin’s Continuous Disclosure Policy which is primarily intended for achieving best practice in complying with its obligation under Australia’s Corporations Act and ASX Listing Rules. Origin shareholders are given equal access to important information about the company and its prospects (Origin 2011b, p.1-10). In relation to disclosure policies, Origin ensures shareholders access to objective, understandable, and balance information about the company through it shareholders communication policy. These include periodic reports, announcement of matters affecting Origin’s business activities, yearly meetings with shareholders, and a website containing comprehensive information for shareholders such as share price history, dividend information, financial reports, and so on. The website can also handle shareholder and investor queries and provide timely reports and announcement by email (Origin 2011c, p.1-5). To prevent insider trading or create any perception of personnel dealing in shares and other securities, Origin listed key accountabilities and responsibilities of its people in dealing with securities. The policy generally protects that company’s reputation against breaches of the law and existing trading restrictions (Origin 2010b, p.1-9). Effective strategic management often begins with clear vision and the ends that an organisation wishes to pursue. The above policies therefore reflect Origin Energy’s strategic intent which is primarily to protect its business objectives and ensure growth and profitability in the future. By analysis, Origin’s business policy is based on its business objectives, perceived uncertainties in the future, conformity with government rules, compliance with ethics and social responsibility, ensuring an environment of joy, learning and fulfilment, achieving and sustaining its competitive advantage. As far as Origin Energy is concern, strategic management is all about safeguarding its business interest and sources of competitive advantage. For instance, the code of conduct is generally to protect its reputation while the risk management system is to maintain a defensive position against internal and external forces that might negatively affect its business activities. However based on the nature of its widely held business policy components, Origin strategic direction can be characterised by political and enforced choice which is external. External forces seems highly prioritized than internal as evidenced by its wider concerns on business environment, legislation, and governmental pressures. According to Bailey & Johnson (1996), most external influence operates in conjunction with political processes of the organisation (p.16). For instance, access to sensitive information is seen to increase influence and decision making power in Origin. They seem to give more importance to external influences such as shareholders in order to ensure adoption of their strategic options and agendas. In externally dependent strategic management organisations are mostly undertaking means to reduce uncertainties and interdependence from environmental contingencies through political mechanisms in order to create a business environment conducive to its interest (Hillman et al. 2009, p.1411). The oil and gas industry as mentioned earlier is not a simple business since it involves environmental and community concerns such as land sustainability, waste management, fresh water, and impact of the industry in social change and cultural values. Therefore, Origin’s externally dependent strategy is not surprising but should be expected in an organisation where external forces can do more harm. 4. Chosen Strategy for Origin Energy One noticeable aspects of Origin Energy’s business strategy is the lack of provision for building dynamic capabilities as additional source of competitive advantage. Considering today’s increasingly demanding business environment, it is surprising that one large company like Origin Energy did not consider development of management capabilities, functional and technological skills, technology transfer, and organisational learning (Garud & Nayyar 1994, p.366-383). For instance, its risk management system does not contain any specific provision for continuous employee development which is essential to continuous growth and profitability. The reason probably is the fact that these fields are often viewed as external to traditional boundaries of strategy. According to Teece et al. (1997), efficiency-based approach is often neglected in economic approaches to strategy since most organisations are often leaning towards managing external influences to safeguard their structural, institutional, reputational assets (p.510) which is evident with Origin Energy’s current strategy. Building dynamic capabilities along with externally oriented business strategy can help Origin Energy achieved more in the future. This is because organisations have to build and reconfigure internal and external competencies to cope with the rapidly changing environment. Dynamic capabilities can provide Origin Energy the ability to achieve new and innovative forms of competitive advantage which is much better than just building reputation and complying with institutional terms and conditions. For instance, competencies that are obsolete and no longer matters in the marketplace will lose their value. Similarly, competencies that are already imitated or replicated by competitors are no longer useful (Teece et al. 1997, p.524). By analysis, if Origin Energy is indeed interested in its maintaining its reputation then it must be ready to sustain its market position. Similarly, the irregularities between what is known externally and the true state of affairs inside the organisation can greatly impact this reputation. More importantly, since Origin Energy’s interest covers three sectors of the industry (upstream, middle stream, and downstream) the more it has to consider technological opportunities that are often fed by innovative activities. For one thing, an organisation concentrating on one or two strategic approach while neglecting others can lead to strategic blind spots (Teece et al., 1997, p.526). The recommended strategy is to combine dynamic capability building with existing business strategy to ensure growth and sustainable competitive advantage in the face of innovation-based competition and very dynamic markets. Unlike valuable resources that enable sustainable competitive advantage, such capabilities can be easily developed through multiple learning paths. Dynamic capabilities are inimitable in the sense that they accumulate and must be built by individual organisation. Origin Energy’s strategic management should therefore compete on capabilities which is renewable rather than product market position or investing on traditional resources that cannot achieve congruence with the rapidly changing environment. 5. Summary and Conclusions As large organisation in the oil and gas industry, Origin Energy is greatly influenced by its business environment. Its strategic direction is typical of those in similar industry that are leaning on reputation, specific regulations, and other external factors to sustain competitive advantage. Analysis reveals Origin’s lack of dynamic capabilities to cope with the rapidly changing environment thus recommended strategy is to add dynamic capability building to existing strategic approaches to ensure sustainable competitive advantage. 6. Self Reflection (PLEASE PUT THIS PART IN APPENDIX SECTION TO AVOID EXCEEDING THE 2500 WORDS MARK). Analysis of Origin Energy and the oil and gas industry provide me with additional knowledge about business strategy in the real world. Moreover, the amount of research and reading strengthen my ability to take full advantage of limited resources. Understanding Origin’s strategic approach help me realize that there are better options aside from traditional strategic management and reputation building. It is now clear that attaining sustainable competitive advantage is not merely a matter of transparency, compliance with regulations, and maintaining the company image but ability to develop renewable and inimitable competencies. 7. 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