BUSINESS STRATEGY OF CASTROL BP PETCO UNTIL 2015

LIST OF ABBREVIATIONS CBP Castrol BP Petco., Ltd ASEAN Association of South East Asian Nations WTO World Trade Organization VIP Very Important Person MES Minimum Efficient Scale GDP Gro

TRUONG DAI HOC MO TP.HCM UNIVERSITEÙ LIBRE DE BRUXELLES

HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL

MBAVB4 _

ACKNOWLEGEMENT

It is said that “when drinking water, remember its source” I owe so many

people for their kind support to my thesis and for all knowledges, experiences that

I have gained from the MBA course

In the first place, I would like to record my gratitude to Prof Dr Nguyen Minh Kieu for his supervision, advices and guidance from the very early stage of this thesis

He has given me an unflinching encouragement and support in various ways I am indebted to him more than he knows

The thesis would not be written without knowledge that I have gained from the MBA course especially from strategy subject I would like to take this opportunity to say thank you to Prof Georges Wanet who taught me valuable knowledge of strategy subject and thank you to all other professors from MBA course I also would like to say thank you to Prof Tuan, Mr Serge, Ms Tran, Ms Ha and Ms Hien for their enthusiasm in giving us the best guidelines, support and arrangement from the course beginning till the accomplishment time

I gratefully acknowledge Mr Ta Dinh Quang – Technical Manager of CBP, my mentor, my colleague for his enthusiasm in providing me useful knowledge about lubricant technology, sharing me his valuable experiences and giving me good consultations for my thesis Thank you all my other good colleagues at CBP and friends who spent time being interviewed by me and providing me all necessary information serving my thesis

Last but not least, I would like to express my great gratefulness to my family and

my beloved relatives for their great encouragement and endless love so that I can well complete the MBA course today

DECLARATION

This is to confirm that this thesis for MBA program is my original work All data and information come from my survey and study I am confident to submit this thesis to the professors of the MBA program The work was done under the guidance of Prof Dr Nguyen Minh Kieu, under the framework of the Master Program in Business Management – The Joined Master Program between Ho Chi Minh City Open University (Vietnam) and Solvay Brussels School (Belgium)

The work was completed in Nov 2011, in Ho Chi Minh City, Viet Nam

(Student’s name and signature)

Chu Thi Minh Hue

Tutor’s confirmation:

In my capacity as supervisor of the candidate’s thesis, I certify that the above statements are true to the best of my knowledge and this thesis is well completed and satisfied with the requirements of MBA thesis

(Tutor’s name and signature)

Prof Dr Nguyen Minh Kieu

TABLE OF CONTENTS Acknowledgement i

Declaration ii

Table of contents iii

List of tables vii

List of figures viii

List of abbreviations x

Abstract xi

Chapter 1: INTRODUCTION TO THE STUDY 1

1.1 Rationale of the study 1

1.2 Problem statement 2

1.3 Research objectives and questions 2

1.3.1 Research objectives 2

1.3.2 Research questions 3

1.4 Scope and Limitations 3

1.5 Research method 3

1.6 Structure of the study 4

1.7 Framework of the research study 5

Chapter 2: LITERATURE REVIEW 7

2.1 Strategy definition and its components 7

2.1.1 Strategy definition 7

2.1.2 Strategy components 9

2.2 The strategy hierarchy 10

2.2.1 Corporate strategy 10

2.2.2 Business strategy 10

2.2.3 Functional strategy 11

2.3 Strategy planning process 11

2.3.1 Mission and vision 12

2.3.2 Environmental analysis 13

2.3.3 Strategy formulation 13

2.3.4 Strategy implementation 14

2.3.5 Strategy evaluation and control 14

2.4 PEST framework 15

2.5 Porter’s five forces model 17

2.5.1 Rivalry among competing firms 18

2.5.2 Threat Of Substitutes 20

2.5.3 Buyer Power 21

2.5.4 Supplier Power 22

2.5.5 Barriers to Entry / Threat of Entry 22

2.6 SWOT framework 25

2.6.1 SWOT Analysis Framework 25

2.6.1.1 Strengths 25

2.6.1.2 Weaknesses 26

2.6.1.3 Opportunities 26

2.6.1.4 Threats 27

2.6.2 The SWOT Matrix 27

2.6.3 SWOT / TOWS Matrix 27

Chapter 3: ANALYSIS OF EXTERNAL ENVIROMENT 29

3.1 Introduction on lubricant industry in Vietnam 29

3.1.1 Lubricant market overview 29

3.1.2 Supply and demand balance 31

3.1.3 Recent trend 31

3.1.4 Transport segment 34

3.1.5 Competitive environment 36

3.2 Environment analysis (Macro analysis) 36

3.2.1 Political (including legal) factors 37

3.2.1.1 Political stability 37

3.2.1.2 Tax policies 37

3.2.1.3 Environmental regulation 38

3.2.2 Economic factors 39

3.2.2.1 Economic growth 39

3.2.2.2 Inflation 40

3.2.2.3 Exchange rate 41

3.2.3 Social factors 43

3.2.3.1 Demography 43

3.2.3.2 Health consciousness 43

3.2.4 Technology 43

3.2.5 Global trend 43

3.3 Industry competitiveness and competitor’s analysis 44

3.3.1 Barrier to entry 44

3.3.2 Power of buyer 45

3.3.3 Threat of substitutes 45

3.3.4 Power of suppliers 46

3.3.5 Rivalry & competitor analysis 47

3.4 Summary of context / external analysis 55

Chapter 4: ANALYSIS OF CBP INTERNAL ENVIRONMENT 58

4.1 Company’s profile 58

4.1.1 Introduction of BP Global Group 58

4.1.2 Introduction of Castrol BP Petco Co., Ltd 59

4.2 Organization structures 61

4.2.1 Organization chart 61

4.2.2 Organization management and HR policies 62

4.3 Business operation 65

4.3.1 Market segmentation and customers 65

4.3.2 Products 67

4.3.3 Distribution channels 68

4.3.4 Business performance analysis 68

4.3.4.1 Annual sales records 68

4.3.4.2 Castrol BP Petco capability and core competencies 71

4.4 Castrol BP Petco strengths and weakness 75

4.5 SWOT analysis 77

Chapter 5: PROPOSED BUSINESS STRATEGY OF CBP UNTIL 2015 80

5.1 Castrol BP Petco’s vision and mission 80

5.2 Objectives of CBP strategy until 2015 80

5.3 Strategy in actions 81

5.3.1 Business strategy alternatives initiatives base on SWOT analysis 81

5.3.1.1 S-O strategy 81

5.3.1.2 S-T strategy 82

5.3.1.3 W-O strategy 82

5.3.1.4 W-T strategy 83

5.3.2 Business strategy choice 83

5.4 Strategy implementation 85

5.5 Sales forecast by market space until 2015 88

CONCLUSIONS AND RECOMMENDATION 90

References I List of support and interview persons III Some interview questions V LIST OF TABLES Table name

Page Table 2.1 PEST analysis factors .16

Table 2.2 Buyer Power 21

Table 2.3 Supplier Power 22

Table 2.4 Entry and Exit Barriers 24

Table 2.5 SWOT Analysis Framework 25

Table 2.6 SWOT / TOWS Matrix .27

Table 3.1 Selected major lubricant blending plants in Viet Nam 30

Table 3.2 Evolution of lubricant demand .33

Table 3.3 Demand for transport Oil – Vietnam .34

Table 3.4 Demand for Non- transport Lubricants – Vietnam 35

Table 3.5 Estimated lubricant Sales and Market Shares – Vietnam 48

Table 3.6 Profiles of all lubricant operators in Viet Nam 51

Table 4.1 Some main Castrol, BP products 67

Table 5.1 SWOT analysis 77

LIST OF FIGURES Figure name

Page Figure 1.1 Framework of the research study 5

Figure 2.1 Critical dimensions of strategy 8

Figure 2.2 The strategic planning process 12

Figure 2.3 Porter’s Five Forces Model 17

Figure 3.1 Lubricant demand by category 32

Figure 3.2 Evolution of lubricant demand 32

Figure 3.3 Motor Oil Intensity Factor 34

Figure 3.4 Industrial Oil Intensity Factor 34

Figure 3.5 Transport segment Demand 35

Figure 3.6 Demand Growth – Transportation Oil vs Motor Fuels 35

Figure 3.7 Demand for Non- transport Lubricants Vietnam 36

Figure 3.8 Real GDP Growth & per Capital 40

Figure 3.9 Unemployment & inflation 40

Figure 3.10 Exchange rate UD Dollars (D/$) 41

Figure 3.11 Main lubricant CBP suppliers 46

Figure 3.12 Lubricant Market Shares in Vietnam (2009) 47

Figure 3.13 Transport and Non-Transport segment market shares 49

Figure 4.1 BP global picture 58

Figure 4.2 Nha Be Plant picture 60

Figure 4.3 Organization chart of Castrol BP Petco 61

Figure 4.4 CBP Code of conduct 62

Figure 4.5 CBP leadership 63

Figure 4.6 CBP Employee’s benefits 64

Figure 4.7 MCO, PCO, CT Market segmentation and customers 65

Figure 4.8 HD Market segmentation and customers 66

Figure 4.9 OEM Market segmentation and customers 66

Figure 4.10 CBP products 67

Figure 4.11 CBP Sales volume by brand 2006 – 1011 69

Figure 4.12 CBP Sales volume by market space 2006 – 1011 70

Figure 4.13 CBP Sales volume by channel 2006 – 1011 70

Figure 4.14 CBP Sales volume, Gross Turnover, Gross Margin 2006 - 2011 71 Figure 4.15 CBP Key success factors of CBP 74

Figure 5.1 CBP forecast of sales volume by market space until 2015 89

LIST OF ABBREVIATIONS

CBP Castrol BP Petco., Ltd

ASEAN Association of South East Asian Nations

WTO World Trade Organization

VIP Very Important Person

MES Minimum Efficient Scale

GDP Gross Domestic Product

TOWS Threats Opportunities Weaknesses Strengths

SWOT Strength – Weakness – Opportunities - Threats

PEST Political, Economic, Social, and Technological analysis LEP Law on the Protection of the Environment

MOSTE Ministry of Science, Technology and the Environment DPI Department of Planning and Investment

PCO Passenger Car Oil

MPI Ministry of Planning and Investment

ISO International Organization for Standardization

OHSAS Occupational Health And Safety Assessment System KPI Key Performance Index

VPP Variable Pay Plans

OMS Operating Management System

WCSC World Class Sales Call

WCCM World Class Customer Management

Kt/y Kilo ton / year

ABSTRACT

Vietnam, Southeast Asia’s fourth-largest lubricants market, saw its total inland demand for lubricants in these recent years Promising to become a potential economic industry, lubricant business has many good opportunities and strengths

to be developed thanks to the advantages of the economic context, the development of transportation and other industries in which lubricant plays an important role There are more and more lubricant operators including local enterprises and foreign companies have entered this field making lubricant market become a fierce competition than ever

Among lubricant players in Viet Nam, Castrol BP Petco (CBP) , a join-venture company between British Petroleum (BP) and Petrolimex, is the market Leader operating the country’s largest blending plant with the capacity of 70 kt/year CBP has a wide distribution network with hundreds Distributors and Dealers and thousands customers on the nationwide With strong heritage of the two global leading brands and premium products and with valuable experience in lubricant business, CBP proves its success through great business results in continuous years Nevertheless, besides the success, still there are some issues on the investment policies and business orientation that limited CBP development in the last few years Therefore, how to solve these issues as well as to build an appropriate strategy for CBP in order to keep its number 1 position in the market and to develop business is the big questions for CBP strategists

It’s is said that “If we know where we are and something about how we got there, we might see where we are trending and if the outcomes which lie naturally in our course are unacceptable, to make timely change” – by

Abraham Lincoln By analyzing thoroughly external environment with macro and

micro factors on the lubricant market as well as assessing internal factors of CBP,

an appropriate strategy until 2015 has been formed with details plan of implementation base on the opportunities and strengths after considering the threats and company’s weakness By gaining competitive advantages, differentiating and strengthening Castrol & BP brands, focusing on the high quality

Chapter 1 INTRODUCTION TO THE STUDY

1.1 RATIONALE OF THE STUDY:

Lubricant market has been developing strongly in these recent years together with the development of transportations and other industries The vehicle fleet in Vietnam continues to expand, growing by some 11.3% in 2009, to a total of some 24.4 million units at year-end; the passenger car equipment rate remains among the lowest in the world, with motorcycles accounting for 93% of the country’s total fleet Assuming continued robust growth in the country’s vehicle fleet, its broader economy, and its industrial production, Vietnam’s lubricants demand is projected

to rise at some 4.1% per year on average through 2014, to 378 kt With all of these advantages, there is a promise of an optimistic picture for all lubricant operators in Viet Nam

Castrol BP Petco Co., Ltd (CBP) is a 65:35 joint venture between BP and Petrolimex, operating Vietnam’s largest blending plant with semi-automated filling lines and a testing laboratory Base on the merge and acquisition between the two leading lubricant companies: BP Petco Ltd (since 1992) and Castrol Viet Nam Ltd (since 1991), CBP is now is now the leading lubricant marketer in Vietnam inheriting the two global famous brands of Castrol and BP with the highest market share of 27%

Beside certain success in continuous years, CBP in Viet Nam still have to face some issues that limit the development of the company As a multinational company, managed and directed by the region, every activity made by CBP should have approval from and sometimes has been imposed by the region Following this, some policies and decision imposed by the region are not appropriate with Viet Nam country On one side, CBP Board of Directors are trying

to comply with but on the other hand, they are trying to harmonize business strategy to be appropriate with Vietnam environment base on the external and internal context in order to compete with other competitors

Building an appropriate strategy for CBP from now to 2015 with clear objectives and vision is our purpose and the rational of the study in order to help CBP Management Board to have a right business direction to keep number 1 position

in the market as expected

1.2 PROBLEM STATEMENT:

Having significant success in the continuous years with average volume growth rate of 10% and 20% growth in gross margin versus previous year, CBP has proved strong and leading position in the lubricant market Nevertheless, as a multinational company under direct management from the region, CBP in Viet Nam is now facing some problems in term of strategy management imposed by the region that is not appropriate with Viet Nam As the consequence, there is still some limitation for CBP in developing the market If these problems are not solved, CBP might have difficulties in the fierce competition with many young and strong competitors

By analyzing thoroughly external environment with macro and micro factors on the lubricant market as well as assessing internal factors of CBP, an appropriate strategy for CBP in Viet Nam until 2015 has been formed with details plan of implementation base on the opportunities and strengths after considering the threat and company’s weakness By gaining competitive advantages, differentiating and strengthening Castrol & BP brands, focusing on the high quality product and enhancing long term customer loyalty through innovative offers, the strategy of CBP is very feasible and optimistic to be successful

1.3 RESEARCH OBJECTIVES AND QUESTIONS:

1.3.1 Research objectives:

This thesis objective is to build up an appropriate business strategy for CBP Vietnam to implement during the period 2012 to 2015 The study will apply theories of strategy management, external and internal environment analysis, SWOT analysis, competitive strategy by Michael Porter and use secondary data

to develop the business strategy for CBP Viet Nam until 2015

1.3.2 Research questions:

There are 3 big questions for this study, those are:

• What are the issues of CBP in term of business management and orientation?

• What are the external and internal factors influencing CBP business?

• How to build an appropriate business strategy for CBP in Vietnam until 2015?

1.4 SCOPE AND LIMITATIONS

The study focuses on analyzing internal factors of CBP and assessing external context environment and lubricant market in Viet Nam All the internal factors are coming from overall aspects of the company in term of sales, marketing, finance, distribution and customer services with SWOT analysis method For external factors, the study used PETS theory to analyze the politics, economy, technology and society The study also applied strategic management theories and its literature review combining with the use of secondary data, desk interview and other information from reliable resources to write this thesis The thesis, therefore,

is about how to build an appropriate business strategy for CBP in Viet Nam for the near future from 2012 to 2015 base on the situational analysis

1.5 RESEARCH METHOD:

The study has been made by applying some research methods such as using secondary data from CBP internal sources and other reliable reference books, magazines, articles from internets Besides, in order to reflect the honesty as well

as the quality of the study, a qualitative method has been used by having an interview with some VIP of CBP and others with many open questions for them

By doing this way, many good and interesting ideas, points of view have been shared by CBP mentor, colleagues and others contributing to the success of this thesis

The study is also applied the theories and frameworks of SWOT, Porter Five Forces model, PEST from many famous authors in the world

1.6 STRUCTURE OF THE STUDY:

The study is organized into 6 chapters as follows:

Chapter 1: Introduction to the study

This is the preliminary chapter, which provides the rational of the study, problem statement, research objectives and questions, scope and limitations, research method and structure of the study

Chapter 2: Literature Review:

This chapter covers literature referring to this study including theory about strategy management: strategy and its components, strategy hierarchy, strategy planning process with external and internal analysis, strategy in action and choice The study also applies theory of PEST framework, Porter’s five forces model and SWOT framework in order to achieve the objectives of the study

Chapter 3: Analysis of external environment

This chapter focuses on analyzing the external factors influencing the business of CBP The context analysis is made with macro factors about political, economic, social, technological issues and global trend Lubricant industry environment and market are also reviewed and assessed to find out what are the opportunities and threats to the company

Chapter 4: Analysis of external environment

This chapter focuses on analyzing all internal factors of Castrol BP Petco itself to define what are the strengths and weaknesses of the company preparing for the next steps of building the strategy for Castrol BP Petco

Chapter 5: Proposed business strategy of CBP until 2015 and strategy

implementation

Base on the analysis mentioned in Chapter 3, Chapter 4 comes up with several strategic alternatives after defining the business vision and mission as well as long term objectives of the companies An appropriate strategy until 2015 is recommended for Castrol BP Petco

Objectives and strategy will not be achieved without specific actions and implementation This Chapter also helps to bring theory into reality by building specific action plans for implementation of the proposed business strategy

Conclusions

This section summarizes the previous chapters and evaluates the proposed

business strategy and its action plan

1.7 FRAMEWORK OF THE RESEARCH STUDY:

Figure 1.1 - Framework of the research study

The above Figure 1.1 illustrated the framework of this study This study will begin with the review of literature which concerns the strategic management process, particularly the process of strategy formulation It also mentions to the concepts and principles of Porter’s model to analyze the competitive environment of the industry

Chapter 2 LITERATURE REVIEW

2.1 STRATEGY DEFINITION AND ITS COMPONENTS:

2.1.1 Strategy definition:

Havard’s Chandler (1962) defined strategy as “the determination of the basic long term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out the goals” Implicit in Chandler’s definition is the idea that strategy involves a rational planning process The organization is depicted as choosing its goals, identifying the courses of action (or strategy” that best enable it to fulfill its goals, and allocating resources accordingly (Hill/Jones, 1989) Similarly, B.Quinn of Darthmouth College (1980) has defined strategy as “the pattern or plan that integrates an organization’s major goals, policies and action sequences into cohesive whole” And along the same line, F.Glueck defined strategy as “a unified, comprehensive and integrated plan designed to ensure that the basic objectives of the enterprise are achieved”

However, planning-based definitions of strategy have evoked criticism for all their appeal As pointed out by Mintzberg, the planning approach incorrectly assumes that an organization’s strategy is always the outcome of rational planning, while it ignores the fact that strategies can emerge from within an organization without any formal plan Mintzberg defined strategy as “a pattern in a stream of decision

or actions” The pattern being a product of whatever intended strategies (planned) are actually realized and of any emergent (unplanned) strategies Based on that, a summary of the definition offered by many authors “a strategy is a fundamental pattern of present and planned objective resources deployments and interactions

of an organization with market, competitors and other environmental factors” gives the sufficient definition of strategy Strategy is not only to do with the marketing of the activities of an organization to the environment in which it operates and to its resource capability, but also will be effected by the values and expectations of those who have power in the organization

Overall, if a definition of strategy is required, these characteristics can provide a

basis for one Strategy is the direction and scope of an organization over the long

term, which achieves advantage for the organization through its configuration of resources within a changing environment, to meet the needs of markets and fulfill stakeholder expectations

In short, reviewing some of the most important work in the field of strategy, the critical dimensions that contribute to the unified definition of the concept of

strategy have been identified by Hax and Majluf (1991) as following (Figure 2.1)

Figure 2.1 - Critical dimensions of strategy

Source: Hax and Mailuf, 1991

2.1.2 Strategy components:

In concrete, there are five components or sets of issues in a well developed strategy:

- Goals and objectives: Strategies should specify desired levels of

accomplishment on one or more dimensions of performance such as volume

growth, profit contribution or return on investment over specified time periods

for each of the firm’s businesses and product-markets and for the organization

as a whole

- Scope: The scope of an organization refers to the breadth of its strategic

domain: The number and types of industries, product lines and market

segments it completes in or plans to enter Decisions about an organization’s

strategic scope should reflect management’s view of the firm’s mission or

strategic intent Resource deployments: Every organization has limited financial and human

resources Therefore, a strategy should specify how such resources are to be

obtained and allocated across business, product-markets, functional

departments or management teams and activities within each business or

product market

- Identification of a sustainable competitive advantage: Perhaps the most

important part of any strategy is a specification of how the organization will

complete in each business and product-market within its domain How can it

position itself to develop and sustain a differential advantage over current and

potential competitors? To answer such questions, managers must examine the

market opportunities in each business and product-market and the company’s

core competencies or strengths relative to it competitors

- Synergy: Synergy exists when the firm’s businesses, product-markets,

resource deployments and competencies complement and reinforce one

another Synergy enables the total performance of related business to be

greater than it would otherwise be: The whole become greater than the sum of

its part Consequently, strategies should be designed to exploit potential

sources of synergy across the firm’s businesses and product markets as a

means of improving the organization’s overall efficiency and effectiveness

2.2 THE STRATEGY HIERARCHY:

Instead of a single comprehensive strategy, most organizations pursue a hierarchy of interrelated strategies, each formulated at a different level of the firm The three major levels of strategy in most large, multi-product organizations are

as below:

2.2.1 Corporate strategy:

At the corporate level, managers must coordinate the activities of multiple business units Thus, decisions about the organization’s scope and appropriate resource deployments across its various divisions or businesses are the primary focus of corporate strategy:

Attempts to develop and maintain distinctive competencies at the corporate level tend to focus on generating superior financial, capital and human resources; designing effective organization structures and processes; and seeking synergy among the firm’s various businesses Synergy can become a major competitive advantage in firms where related businesses reinforce one another by sharing corporate staff, R&D, financial resources, production technologies, distribution channel or marketing programs

- Low cost strategy, strategy to design, produce and market a comparable

product more efficiently and thus cheaper than its competitors do Cost leadership strategy aims at the mass market and require aggressive construction of how cost structure including efficient scale facilities, vigorous pursuit of cost reduction, tight control of overhead cost and cost minimization

in areas like R&D, service, sales fore, advertising and so on Low cost

structure allows company to charge lower price and thus allow company to compete when fierce competition exist with a quite reasonable good profit

- Differentiation strategy refers to strategy to deliver uniqueness and superior

value to buyers in term of product quality, special feature, or after sales services Differentiation focus also at the broad market and involves the creation of a product or service that is perceived through the industry as unique Unique product enables firms to charge higher price for its product The specialty can come from brand image, technology, features or dealer network Differentiation is viable for above-average profit The research of Caves and Ghemawat shows that differentiation generates high profit than low cost strategy because it creates higher entry barrier

- Focus strategy can be cost focus or differentiation focus This strategy

focuses to serve only specific needs of market segment Usually, this strategy

is pursuit by small company to a market niche while mass market has been well dominated by other large companies

2.2.3 Functional strategy

It is a plan of actions to strengthen an organization’s functional and organizational resources as well as its coordination abilities in order to create core competence

2.3 STRATEGY PLANNING PROCESS:

In the current fierce competitive environment, budget-orientated planning or forecasted-based planning methods are insufficient for a large firm to survive and

to be wealthy A strategy planning process is necessary for the firm from the first step of defining objectives, assessing both internal and external situation in order

to formulate strategy, implement the strategy, evaluate the progress and make a necessary adjustment to stay on track

2.3.1 Mission and vision

Defining by Janmes C Collins and Jerry I Porras (2000), the mission statement describes the company’s business vision, including the unchanging values and purpose of the firm and forward-looking visionary goals that guide the pursuit of future opportunities

Instructed by the business vision, the firm’s leaders can define measurable financial and strategic objectives Financial objectives involve measures such as sales targets and earning growth Strategic objectives are related to the firm’s business position and may include measures such as market share and reputation

Figure 2.2 :The strategic planning process

2.3.2 Environmental analysis:

According to David A.Aaker (1995), the environmental analysis includes three components such as External analysis, Industry environment analysis and internal analysis of the firm

The internal analysis helps to identify the firm’s strengths and weaknesses Those are organization’s controllable activities arising in management, marketing, finance/ accounting, production/operations, research and development and management information system activities of a business Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategies management activity Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses

Meanwhile, the external analysis reveals opportunities and threats with a overview evaluation on economic, social, cultural, demographic, environmental, political, legal, governmental, technological (PEST framework) and competitive trends and events that could significantly benefit or harm an organization in the future Opportunities and threats area largely beyond the control of a single organization, thus the word external

A profile of the strengths, weaknesses, opportunities and threats is generated by SWOT analysis

An industry analysis can be performed using a framework developed by Michael Porter known as Porter’s five forces This framework evaluates entry barriers, suppliers, customers, substitute products and industry rivalry

2.3.3 Strategy formulation:

Strategy formulation includes developing vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, alternating strategies and choosing particular strategies to pursue Strategy formulation issues include deciding what new business to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, to merge of form

business and how to a hostile takeover Strategists must decide which alternative strategies will benefit the firm most Strategy formulation decisions commit an organization to specific products, markets, resources and technologies over an extended period of time Strategies determine long-term competitive advantages Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions and they have the authority to commit the resources necessary for implementation

2.3.4 Strategy implementation:

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees and allocate resources so that formulated strategies can be executed Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information system and liking employee compensation to organizational performance

The success of the company much depends on the way in which the strategy is implemented Usually in a large company, the persons who implement the strategy likely will be different from the persons who formulated it Following this, care must be taken from the beginning stage to the end in order to avoid making wrong direction of the strategy

Source: www.quickmba.com/strategy/strategy-planning , (1999-2000) Internet Center for Management and Business Administration, Inc

2.3.5 Strategy evaluation and control:

Strategy evaluation is the final stage in strategic management All strategies are subject to future modification because all external and internal factors are constantly changing Three fundamental strategy evaluation activities are reviewing external and internal factors that are the bases for current strategies, measuring performance and taking corrective action with the following steps:

a Define parameters to be measured

b Define target values for those parameters

c Perform measurements

d Compare measured results to the pre-defined standard

e Make necessary changes

2.4 PEST FRAMEWORK

The PEST analysis is a framework used in the assessment of external environment in which a company operates or intends to operate, it thus provides a satellite view But unlike Porter’s Five Forces model it addresses the external environment in as detached way, i.e without directly touching the industry in which a company operates and therefore is intended as an assessment tool

macro-The PEST model is based on the assumption that certain external and indirect circumstances that characterize an industry are able to influence its capacity to produce value Consequently companies and/or competitiveness are indirectly affected The four factors contemplated in the PEST model are: Political, Economic, Social and Technological They may be included at different levels of analysis of an organization e.g strategic, marketing, product development, etc but they can not be manipulated or changed in anyway by the company The only thing that a firm can do is to assess the factors and possibly prevent or react to them in the most appropriate way (David Ward, Elena Rivani, An overview of strategy development models and Ward-Rivani model, copyright Ward-Rivani) A scan of the external macro environment in which the firm operates can be expressed in term of the following factors:

monetary policies

Demographics, population growth rates, age distribution

Industry focus on technological effort

International trade

regulations and

restriction

Government spending

Labor / social mobility

New invention and development

Lifestyle changes Rate of

technology transfer

Employment laws Taxation Work/Career and

leisure attitudes

Entrepreneurial spirit

Life cycle and speed of technological

obsolescence Government

organization /

attitude

Exchange rates Education Energy use and

costs Competition

regulation

Inflation rates Fashion, hypes (Change in)

Information Technology Political stability Stage of business

cycle

Heath consciousness &

welfare, feelings on safety

(Change in) Internet

Safety regulation Consumer

confidence

Living conditions (Change in)

Mobile technology

Source: David ward – Elena Rivani

The PEST factors combined with external micro-environmental factors can be

classified as opportunities and threats in a SWOT analysis

2.5 PORTER’S FIVE FORCES MODEL:

Figure 2.3 - Porter’s Five Forces Model

Porter’s five forces model of competitive analysis is a widely used approach for developing strategies in many industries The intensity of competition among firms

Source: www.quickmba.com/strategy/porter.shtml - (1999-2000) Internet Center for Management and Business Administration, Inc

varies widely across industries Intensity of competition is highest in lower return industries The collective impact of competitive forces is so brutal in some industries that the market is clearly “Unattractive” from a profit-making standpoint Rivalry among existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers and customers can exercise considerable bargaining leverage According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces such as “Rivalry among existing firms”, “Threat of substitutes”, “Bargaining power of buyers”, “Bargaining power of suppliers”, “Threat of new entrants”

2.5.1 Rivalry among competing firms:

In the traditional economic model, competition among rival firms drives profits to zero But competition is not perfect and firms are not unsophisticated passive price takers Rather, firms strive for a competitive advantage over their rivals The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences

The intensity of rivalry is influenced by the following industry characteristics:

1 A larger number of firms increases rivalry because more firms must compete for the same customers and resources The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership

2 Slow market growth causes firms to fight for market share In a growing market, firms are able to improve revenues simply because of the expanding market

3 High fixed costs result in an economy of scale effect that increases rivalry When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry

4 High storage costs or highly perishable products cause a producer to sell goods

as soon as possible If other producers are attempting to unload at the same time, competition for customers intensifies

9 A diversity of rivals with different cultures, histories, and philosophies make an industry unstable There is greater possibility for mavericks and for misjudging rival's moves Rivalry is volatile and can be intense The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services At other times, local hospitals are highly cooperative with one another on issues such as community disaster planning

10 Industry Shakeout A growing market and the potential for high profits induce new firms to enter a market and incumbent firms to increase production A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers A shakeout ensues, with intense competition, price wars, and company

failures

Source: www.quickmba.com/strategy/porter.shtml - (1999-2000) Internet Center for Management and Business Administration, Inc

2.5.2 Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives A close substitute product constrains the ability of firms in an industry to raise prices

The competition engendered by a Threat of Substitute comes from products outside the industry The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers These containers are substitutes, yet they are not rivals in the aluminum can industry To the manufacturer of automobile tires, tire retreads are a substitute Today, new tires are not so expensive that car owners give much consideration to retreading old tires But in the trucking industry new tires are expensive and tires must be replaced often In the truck tire market, retreading remains a viable substitute industry In the disposable diaper industry, cloth diapers are a substitute and their prices constrain the price of disposables

While the threat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable, satellite, and telephone lines The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer

many suppliers and one buyer Under such market conditions, the buyer sets the price In reality few pure monopolies exist, but frequently there is some asymmetry between a producing industry and buyers The following tables outline some factors that determine buyer power

Table 2.2 - Buyer Power

Buyers are concentrated - there are a

few buyers with significant market

share

DOD purchases from defense contractors

Buyers purchase a significant

proportion of output - distribution of

purchases or if the product is

standardized

Circuit City and Sears' large retail market provides power over appliance manufacturers

Buyers possess a credible backward

integration threat - can threaten to buy

producing firm or rival

Large auto manufacturers' purchases

of tires

Producers threaten forward

integration - producer can take over

own distribution/retailing

Movie-producing companies have integrated forward to acquire theaters Significant buyer switching costs -

products not standardized and buyer

cannot easily switch to another

product

IBM's 360 system strategy in the 1960's

Buyers are fragmented (many,

different) - no buyer has any particular

influence on product or price

Most consumer products

Producers supply critical portions of

buyers' input - distribution of

Table 2.3 - Supplier Power

- Credible forward integration threat by

suppliers

- Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor

- Suppliers concentrated - Drug industry's relationship to

hospitals

- Significant cost to switch suppliers - Microsoft's relationship with PC

manufacturers

- Customers Powerful - Boycott of grocery stores selling

non-union picked grapes

- Many competitive suppliers - product

is standardized

- Tire industry relationship to automobile manufacturers

- Purchase commodity products - Grocery store brand label products

- Credible backward integration threat

by purchasers

- Timber producers relationship to paper companies

- Concentrated purchasers - Garment industry relationship to

major department stores

- Customers Weak - Travel agents' relationship to airlines

2.5.5 Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and

inhibit additional rivals from entering the market These are barriers to entry

Barriers to entry are more than the normal equilibrium adjustments that markets typically make If firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering

the market, such entry-deterring pricing establishes a barrier

Barriers to entry are unique industry characteristics that define the industry Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry From a strategic perspective, barriers can be

created or exploited to enhance a firm's competitive advantage Barriers to entry arise from several sources:

1 Government creates barriers Although the principal role of the

government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation To restrain utilities from exploiting this advantage, government permits a monopoly, but regulates the industry

2 Patents and proprietary knowledge serve to restrict entry into an industry Ideas and knowledge that provide competitive advantages are

treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry

3 Asset specificity inhibits entry into an industry Asset specificity is the

extent to which the firm's assets can be utilized to produce a different product When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails Asset specificity provides a barrier to entry for two reasons: First, when firms already hold specialized assets they fiercely resist efforts by others from taking their market share New entrants can anticipate aggressive rivalry The second reason is that potential entrants are reluctant

to make investments in highly specialized assets

4 Organizational (Internal) Economies of Scale The most cost efficient level of production is termed Minimum Efficient Scale (MES) This is the

point at which unit costs for production are at minimum - i.e., the most cost efficient level of production If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals The greater the difference between industry MES and entry unit costs, the greater the barrier to entry So industries with high MES deter entry of small, start-up businesses To operate at less than MES there must be a consideration that permits the firm to sell at a premium price - such

as product differentiation or local monopoly

Table 2.4 – Entry and Exit Barriers

Easy to Enter if there is: Difficult to Enter if there is:

- Common technology - Patented or proprietary

know-how

- Little brand franchise - Difficulty in brand switching

- Access to distribution

channels

- Restricted distribution channels

- Low scale threshold - High scale threshold

Easy to Exit if there are: Difficult to Exit if there are:

- Salable assets - Specialized assets

- Low exit costs - High exit costs

- Independent businesses - Interrelated businesses

The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates As such, it is instrumental in strategy formulation and selection The following

diagram shows how a SWOT analysis fits into an environmental scan:

2.6.1 SWOT Analysis Framework:

Table 2.5 – SWOT Analysis Framework

2.6.1.1 Strengths:

A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage Examples of such strengths include:

• patents

• strong brand names

• good reputation among customers

• cost advantages from proprietary know-how

• exclusive access to high grade natural resources

• favorable access to distribution networks

2.6.1.2 Weaknesses:

The absence of certain strengths may be viewed as a weakness For example, each of the following may be considered weaknesses:

• lack of patent protection

• a weak brand name

• poor reputation among customers

• high cost structure

• lack of access to the best natural resources

• lack of access to key distribution channels

In some cases, a weakness may be the flip side of strength Take the case in which a firm has a large amount of manufacturing capacity While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment

2.6.1.3 Opportunities:

The external environmental analysis may reveal certain new opportunities for profit and growth Some examples of such opportunities include:

• an unfulfilled customer need

• arrival of new technologies

• shifts in consumer tastes away from the firm's products

• emergence of substitute products

• new regulations

• increased trade barriers

2.6.2 The SWOT Matrix:

A firm should not necessarily pursue the more lucrative opportunities Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity

To develop strategies that take into account the SWOT profile, a matrix of these

factors can be constructed The SWOT matrix (also known as a TOWS Matrix) is

shown below:

2.6.3 SWOT / TOWS Matrix

Table 2.6 – SWOT / TOWS Matrix

• S-O strategies pursue opportunities that are a good fit to the company's

strengths

• W-O strategies overcome weaknesses to pursue opportunities

• S-T strategies identify ways that the firm can use its strengths to reduce its

vulnerability to external threats

• W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats

Source: www.quickmba.com/strategy/SWOT - (1999-2000) Internet Center for Management and Business Administration, Inc

In summary, this chapter contains all the theories applied for the study of this thesis The chapter mentioned about the theories, concepts of strategic management with all its process from the beginning formulation stage with external and internal environment analysis, through implementation stage as well

as the review, evaluation action plan

Base on the literature review provided in this chapter, the following chapters will

be developed following the concepts, frameworks and models of this chapter in order to build, develop a competitive and feasible strategy for CBP that can help the company to solve all current problems and to keep its number 1 position in the market

Chapter 3 ANALYSIS OF EXTERNAL ENVIROMENT

“The opportunities and threats existing in any situation always exceed the

resources needed to exploit the opportunities or avoid the threats Thus strategy is essentially a problem of allocating resources If strategy is to be successful, it must allocate superior resources against a decisive opportunity” A famous saying of William Cohen has pointed out the reason why

we need to do an analysis of external environment This chapter will provide a full picture of micro environment with all economic, politic, social and technological factors of that influence CBP business Besides, the reader also can have an overview on the lubricant market trend and competitive situations between lubricant operators in Vietnam The external analysis is a very important step when formulating the strategy in order to bring the strategists the right directions

to have a good strategy

3.1 INTRODUCTION TO LUBRICANT INDUSTRY IN VIETNAM:

3.1.1 Lubricant market overview:

The Vietnamese lubricants industry is largely deregulated, with no restrictions to marketing lubricants in the country Foreign and domestic companies are permitted to own and operate local lubricant blending plants, but are required to obtain the appropriate investment license from the Department of Planning and Investment (DPI)

By the end-2009, Viet Nam had 16 major lubricants blending sites with a combined capacity of some 345 kt/y The BP-Petco joint venture’s 70 kt/y plant in Nha Be, is the largest blending site in the country Other major plants include Shell’s 25 kt/y plant at Go Dau and AP Saigon Petro’s 25 kt/y plant at Cat Lai (formerly owned by Castrol) Most of the country’s blending facilities are clustered either in the north, around the important port city of Hai Phong, or in the south, around Ho Chi Minh City