Strategic planning for business development of mekong Petroleum joint-stock company (PETROMEKONG) during 2011 - 2015 vision to 2020

Simultaneously, the author group analyzed the Matrices of Internal Factor Evaluation IFE, External Factor Evaluation EFE, Competitive Profile Matrix CPM to evaluate PetroMekong’s strengt

CAPSTONE PROJECT REPORT

STRATEGIC PLANNING FOR BUSINESS

DEVELOPMENT OF MEKONG PETROLEUM

JOINT-STOCK COMPANY (PETROMEKONG)

CLASS: GaMBA01.C0110

Ho Chi Minh City, 2011

ACKNOWLEDGEMENTS

The members of Group 5, Class C0110 are deeply indebted to our teachers, teaching assistants and staffs of ETC under the National University of Hanoi who have created favorable conditions for us to approach the most advanced knowledge foundations of business management, and helped us complete well the entire training program of Master of Business Administration organized by the Center

In addition, the Group 5 also would like to thank brothers, sisters in charge

of the affiliate programs of ETC in Ho Chi Minh (Gasa), our classmates of GaMBA01.C0110 for your concern, encouragement and suggestions for our group

to complete this Capstone

We would like to express our sincere appreciation to the Leaders of Mekong Petroleum Joint Stock Company (PetroMekong) for supporting, providing us with the Company’s important data to complete this Report

CONTENT

LIST OF FIGURES 7

LIST OF TABLES 8

PREFACE 10

CHAPTER I 12

LITERATURE REVIEW 12

1.1 Defining Strategy and Strategic Management: 12

1.2 Planning concept 12

1.3 Business strategic planning concept 13

1.4 Roles of business strategic planning 13

1.5 Strategy classification 14

1.5.1 Corporate level strategies 14

1.5.2 Business level strategies 14

1.5.3 Functional level strategies 14

1.6 Stage of Strategic Management 15

1.6.1 Determining strategic objectives 16

1.6.2 External environment research for determination of opportunities and major threats 16

1.6.3 Internal evaluation on an enterprise for identification of strengths and weaknesses 17

1.7 Building and choosing strategy 19

1.8 Theories related to strategic planning 20

1.8.1 Michael Porter’s Five’s - Forces Model 20

1.8.2 Marketing Theory 22

1.8.3 Distribution channel theory 23

1.9 Tools and methods for building and selecting strategies 24

1.9.1 Matrix of Internal Factor Evaluation (IFE) 24

1.9.2 Matrix of External Factor Evaluation (EFE) 25

1.9.3 Competitive Profile Matrix (CPM) 26

1.9.4 Matrix of Strengths - Weaknesses - Opportunities – Threats (SWOT) 27

1.9.5 Grand strategy matrix (GSM) 28

1.9.6 Quantitative Strategic Planning Matrix (QSPM) 30

CHAPTER 2 31

BUSINESS OPERATION OF PETROMEKONG 31

2.1 Overview of the field of petroleum production and business 31

2.1.1 Petroleum and the wholesalers participating in petroleum business 32

2.1.2 Petroleum market situation in the Mekong Delta (MD) 33

2.1.3 Forecast on development trend of the petroleum industry 35

2.1.3.1 Development prospects of petroleum business 35

2.1.3.2 Forecast of PetroMekong’s petroleum yield: 36

2.2 Company introduction 37

2.2.1 PetroMekong’s establishment history 37

2.2.2 PetroMekong’s functions and duties 38

2.2.2.1 Functions 38

2.2.2.2 Duties 38

2.2.3 Organizational structure and operating scale 38

2.2.3.1 Organizational structure 38

2.2.3.2 Operating scale 40

2.2.4 Business field: 40

2.3 Analysis of the current status of PetroMekong’s production and business activity 40

2.3.1 Petroleum distribution system 40

2.3.2 Warehouse system 41

2.3.3 Transportation system 43

2.3.4 Capability of producing and blending 44

2.3.5 Current business products 44

2.3.6 Sales methods and customers of the Company 44

2.4 PetroMekong’s strategic planning for business development 45

2.4.1 Company Mission 45

2.4.2 Strategic objective: 45

2.4.3 Internal environment analysis 46

2.4.3.1 Finance situation: 46

2.4.3.2 Marketing activities 52

2.4.3.3 Company petroleum distribution channel: 54

2.4.3.4 Promotion 55

2.4.3.5 Human resources 56

2.4.3.6 Research and Development (R&D) 57

2.4.3.7 Information activity: 57

2.4.3.8 Management situation and quality control: 58

2.4.4 External environment analysis: 58

2.4.4.1 Macro environment analysis: 58

2.4.4.2 Micro-environment analysis 66

2.4.5 Analysis of the Matrices for choosing a strategy 70

2.4.5.1 Matrix of Internal Factor Evaluation (IFE): 70

2.4.5.2 Matrix of External Factor Evaluation (EFE): 72

2.4.5.3 Competitive profile matrix: 74

2.4.5.4 Matrix of Strengths - Weaknesses - Opportunities – Threats (SWOT): 76

2.4.5.5 Grand Strategy Matrix: 77

CHAPTER III 80

SOLUTIONS TO TRATEGIC PLANNING AND BUILDING FOR PETROMEKONG’S DEVELOPMENT DURING 2011-2015,VISION TO 2020 80

3.1 Strategy choice: 80

3.1.1 Bases for strategy choice: 80

3.1.2 Quantitative strategic planning Matrix (QSPM): 80

3.1.2.1 S-O strategy group: 80

3.1.2.2 S-T strategy group: 84

3.1.2.3 W-O strategy group 89

3.1.2.4 W-T strategy group 94

3.1.3 Selected strategies 98

3.1.4 Strength of chosen strategies 99

3.2 Measures to implement selected strategies 101

3.2.1 Solution to financial autonomy strategy 101

3.2.2 Solutions for implementation of governance restructure strategy 104

3.2.3 Solutions to implement new product development strategy 105

3.2.4 Solutions to implement market development strategy 105

3.2.5 Solutions to implement market penetration strategy and forward integration strategy: 106

3.3 Specific actions to manage risks of exchange rate and interest rate 109

3.3.1 Exchange rate risk management 109

3.3.2 Interest rate risk management 109

3.4 Conclusion 109

3.5 Recommendation: 110

3.5.1 For the State: 110

3.5.2 For PetroMekong Company 111

REFERENCES ERROR! BOOKMARK NOT DEFINED APPENDIX ERROR! BOOKMARK NOT DEFINED

LIST OF FIGURES

Figure 1-1: Comprehensive strategic management model 15

Figure 1-2: General diagram of the micro environment 177

Figure 1-3: Michael Porter’s Five - Forces Model 20

Figure 1-4: Grand strategy matrix 29

Figure 2-1: Vietnam petroleum business system at present 32

Figure 2-2: Chart of Mekong Delta Petroleum Market Share 34

Figure 2-3:Chart of forecast of demand for petroleum in Vietnam until 2020 36 Figure 2-4: PetroMekong’s organizational chart 39

Figure 2-5: Diagram of Company distribution channel system at present 55

LIST OF TABLES

Table 1-1: Matrix of Internal Factor Evaluation (IFE) 25

Table 1- 2: Matrix of External Factor Evaluation (EFE) 26

Table 1- 3: Competitive Profile Matrix 27

Table 1- 4 : SWOT matrix 28

Table 1- 5: QSPM matrix 31

Table 2-1: The petroleum market share in the MD in 2010 34

Table 2-2: Amount of PetroMekong’s petroleum consumption 37

Table 2-3: PetroMekong’s petroleum distribution system 41

Table 2-4: PetroMekong’s storage system 42

Table 2-5: PetroMekong’s transportation capacity 43

Table 2-6: Gasoline blending products in recent years 44

Table 2-7: Results of PetroMekong’s business operations during 2007-2010 46

Table 2-8: Balance Sheet 46

Table 2-9: Short-term ratio 48

Table 2-10: Quick ratio 49

Table 2-11: Debt -to -total -assets ratio 49

Table 2-12: Inventory turnover 50

Table 2-13: Average collection period 50

Table 2-14: Payables turnover 50

Table 2-15: Average retail price during 2007-2010 53

Table 2-16: Petromekong’s distribution system 53

Table 2-17: Discount rate (pay rate including transportation costs) Error! Bookmark not defined Table 2-18: Qualification of employees of PetroMekong 56

Table 2-19: Vietnam economic factors during 2007- 2010 59

Table 2-20: Base price on August 30, 2010 as per Decree No 84/2009/ND-CP 63 Table 2-21: Budget revenues from petroleum 64

Table 2-22: PetroMekong’s IFE Matrix 71

Table 2-23: PetroMekong’s EFE Matrix 72

Table 2-24: Competitive Profile Matrix 75

Table 2-25: PetroMekong’s SWOT matrix 76

Table 2-26: Grand Strategy Matrix 78

Table 3-1: QSPM of PetroMekong Company: S-O Group 81

Table 3-2: QSPM of PetroMekong Company: S-T Group 85

Table 3-3: QSPM of PetroMekong Company: W-O group 90

Table 3-4: QSPM of PetroMekong Company: W-T Group 94

Table 3-5: Shareholder structure after share issuance 103

PREFACE

In any countries, petroleum always plays an important role in econo-political life, is the input of lots of production industries, is the essential item in social spending and ensures security and defence Petroleum is the extremely sensitive item which is affected by political, economic, and social factors of the country, the region and the world

Petroleum business in Vietnam has been strongly influenced by the executive policy of the Government Therefore, any changes in the policy have a direct and profound impact on the business environment of petroleum enterprises Thus, the State’s transition from the subsidy mechanism to the market mechanism from September 16, 2008 had a huge impact on the business-operating environment of petroleum enterprises Due to the great change of the business-operating environment the enterprises are obliged to research, reevaluate and come up with a business strategy to suit the new situation

Over the years, the business activities of Mekong Petroleum Joint Stock Company (PetroMekong) have been constantly developing and growing However, the business in the new period, especially in the current period and subsequent years will face many difficulties and challenges

The problem is that the company wants to survive and remain stable and long-term development in the current period, the Company is required to promptly adapt to all problems arising in the fiercely competitive and sensible business environment Therefore, in order to ensure the stable, sustainable and healthy development of the Company, the strategic planning and business development in the new situation is extremely urgent

The overall target of the research is strategic planning for business development and proposal of implementation solutions to suit the specific condition basing on research, analysis, evaluation of the current status and the business-operating environment of PetroMekong Company in the past

To resolve the above target, the research uses the quantitative and qualitative methods of synthesis, analysis and comparison for review and evaluation of the current status of PetroMekong’s business-operating situation Simultaneously, the author group analyzed the Matrices of Internal Factor Evaluation (IFE), External Factor Evaluation (EFE), Competitive Profile Matrix (CPM) to evaluate PetroMekong’s strengths and weaknesses and identify its opportunities and challenges that the business environment created as well as its position and competitive level in the area From the above research results, the author group synthesizes, analyzes and uses the SWOT matrix to build business strategies and simultaneously uses the QSPM Matrix to evaluate and select a strategy and propose practical solutions

After analysis, evaluation, comparison and quantification; the research proposes business development strategies and solutions to PetroMekong during 2010-2015, vision to 2020

Finally, the author group of the research also advances their ideas with state agencies to orient the petroleum market operation in accordance with law of market Due to objective and subjective conditions, within the research’s scope, the author group just goes into analysis of some key factors affecting the business-operating environment of PetroMekong In addition, the research only focuses on the analysis and detailed research for the Company’s major business item that are petroleum products (gas and oil)

Strategic planning and business development is a field of economic science which is relatively new in our country In fact, today, few Vietnam petroleum companies build a development strategy seriously and scientifically This research

is expected to contribute further practical experience in applying the strategic planning for the petroleum business, which contributes to create strategic management experience in different fields

CHAPTER I LITERATURE REVIEW

1.1 Defining Strategy and Strategic Management:

There are many different concepts of strategy:

Strategy is a unified, comprehensive and integrated plan that is designed to ensure that the basic objectives of the enterprise are achieved.1

Strategy is a wide range of complex actions in order to mobilize all the resources of the organization to achieve a certain goal

According to Alfred Chandler of Harvard University, Strategic management

is the process of the determination of long-term goals of an enterprise, the adoption

of courses of action; the allocation of resources necessary for carrying out these goals

According Fred R.David, Strategic management can be defined as the art and science of formulating, implementing and evaluation cross-functional decisions that enable an organization to achieve its objectives

In short, Strategy is an overall plan of actions to determine the basic term goals of an enterprise, select operating guidelines and executive policies on collection, use and allocation of the resources to achieve the particular objectives to strengthen most effectively and to achieve the sustainable advantage compared with other rivals

long-1.2 Planning concept

Planning can be understood as following concepts:

Planning is a preparation process for a commitment of resources by the most economic way and this preparation allows these commitments to be carried out faster

1

Source: J Glueck, 1980, Business Policy and Strategic Management, McGraw Hill

Planning or scheduling is the most basic function of an administrator Planning is to set goals and the best method (the optimal method) to perform that goal

Planning is to research the past to decide the present on what to do in the future in order to do well the objectives fixed by an administration organization

In general, we can understand, planning is an implementation process to the last with the goals set forth Planning is related to the future but not like a forecast Planning can be stated as a process of decision on the allocation of all resources of an enterprise to perform the goals as scheduled in the future

1.3 Business strategic planning concept

Business strategic planning is to determine business situations in the future related specifically to a state of product - market, profitability, scale and innovation rate, relationships with leaders, employees and business

Business strategic planning is a process of decisions on the goals of an enterprise, changes in the goals, use of resources to achieve these goals, policies to manage the current achievements, use and arrangement for resources

1.4 Roles of business strategic planning

In business-manufacturing operations, the roles of strategic planning are:

- Planning: business strategy helps the enterprise to realize clearly opportunities

and advantages in business, take advantage of them to bring forth strategies,

appropriate development policies to achieve the objectives set forth

- Forecasting: business strategy helps managers forecast uncertainties, risks

occurring in the present and the future Since then, basing on the potentiality it

is easy for the enterprise to proactively deal with these unforeseen situations

- Controlling: business strategy helps managers use efficiently the available

resources of the enterprise and allocate them appropriately In addition, business strategy combines the functions of an organization in the best way to reach the overall goals of the organization

1.5 Strategy classification

There are many ways to weight strategies In view of the strategy level, an enterprise has a minimum of three levels of strategies: corporate level, business level and functional level

1.5.1 Corporate level strategies

Corporate level strategies aim at the purpose and the overall scope of the organization This strategy often aims at the basic long-term goal so there are many corporate level strategies with different names According to Fred R David, there are 14 kinds of basic corporate level strategies that are weighed into four following groups:

+ Integrated strategy group: forward integration, backward integration, horizontal integration

+ Intensive strategy group: market penetration strategy, market development, product development, related diversification, unrelated diversification

+ Other strategy group: joint venture, retrenchment, divestiture, liquidation, combination

1.5.2 Business level strategies

Business level strategies are concerned with the successful competition method on the specific market According to Michael E Porter, the business level has three overall competitive strategies: cost leadership, product differentiation and focus

1.5.3 Functional level strategies

Functional level strategies are the strategies of functional areas such as marketing, finance, human resources, operation/production, technique/technology and information resources

1.6 Stage of Strategic Management2

The process of strategic management consists of three stages: strategy formulation, strategy implementation and strategy evaluation Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, use the matrices (IFE, EFE, SWOT, CPM, GTM, QSPM) to evaluate, generating alternative strategies, and selecting particular strategies to pursue

Figure 1-1: Comprehensive strategic management model

Strategy execution

Strategy evaluation

Distribution information

Performance of environment research for determination of opportunities and major threats

Long-term goal formulation

Short-term goal formulation

Internal analysis for identification of strengths and weaknesses

Establishment, choosing performance strategy

Setting out policies

Measurement and evaluation

of results

The focus of the research is the strategic planning for an enterprise, therefore the author group will go into research on the stage of strategy formulation.

1.6.1 Determining strategic objectives

Determining strategic objectives, also known as vision - mission of an enterprise, we must point out what mission in our business is What we need to achieve in the future

1.6.2 External environment research for determination of opportunities and major threats

The evaluation of external factors has indicated opportunities and major threats that an organization encountered so that the manager can draft strategies to capture opportunities and avoid or lessen influences of threats

The operating environment of an enterprise is divided into two categories: macro-environment and micro-environment

 Macro-environment of an enterprise: The huge impacts of the

 Micro-environment of an enterprise includes internal factors of the industry

and is external factors of an enterprise, which decides the nature and the competitive level of the business-manufacturing industry There are 5 basic factors: competitors, customers, suppliers, new entrants and alternative products

Figure 1-2 : General diagram of the micro environment

1.6.3 Internal evaluation on an enterprise for identification of strengths and weaknesses

The internal circumstances of an enterprise including 7 key factors such as management, marketing, finance-accounting, production, research and development, human resources and information systems.3

Management: including 4 contents: (1) Planning: consists of all the

managerial activities related to preparing for the future such as forecasting, establishing objectives, devising strategies, developing policies, setting goals; (2)

Organizing: includes all those managerial activities that result in a structure of task

and authority relationships The specific areas include organizational design, job specialization, job descriptions, job specifications, span of control, unity of

command, coordination, arrangement, job design, and job analysis; (3) Motivating:

involves efforts directed towards shaping human behavior, namely leadership,

Substitutes

Rivals of internal competion Rivalry of the existing enterprises in the industry

communication, work groups, behavior modification, delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee morale and managerial morale; (4) Controlling: refers to all those managerial

activities directed toward ensuring that actual results are consistent with planned results, namely quality control, financial control, sales control, inventory control, and expense control, analysis of variances, rewards, and sanctions

Marketing: can be described as the process of defining, anticipating, creating,

and fulfilling customers' needs and wants for products and services Marketing includes 04 basic functions: (1) Marketability analysis; (2) Choosing a target market; (3) Drafting marketing mix (including basic components: product, price, place and promotion) and (4) Conducting marketing activities.4

Finance-Accounting: Financial condition is often considered the single best

measure of an enterprise's competitive position and overall attractiveness to investors The main functions of Finance-Accounting includes investment decision,

financing decision and dividend decision Analysis ofbalancesheetof an enterprise

Production-Operations: consists of all those activities that transform inputs

into goods and services Production/operations management deals with inputs, transformations, and outputs that vary across industries and markets The process of production-operations comprises 3 decisions (functions) related to inventory (managing the level of raw materials, work in process, and finished goods), workforce (managing the skilled, unskilled, managerial employees), quality (ensuring that high-quality goods is produced)

Research and Development (R&D): is aimed at development of new products

before rivals do, improving product quality, good cost control, improving manufacturing processes to reduce costs Quality of R&D efforts can help an enterprise take a leading position or lag behind compared to top rivals in the industry

4

Source: Philips Kotler, 1997, Marketing Management

Human resources: plays a major role in an enterprise’s success However

right the strategy is, it cannot bring efficiency if there are no employees working effectively The enterprise must prepare human resources so as to achieve the objectives as set forth The main functions of personnel management include recruiting, interviewing, testing, selecting, orienting, training, developing, caring for, evaluating, rewarding, disciplining, promoting, transferring, demoting, and dismissing employees

Information system: is a major strategic resource because it receives raw

material from both the external and internal environments of an organization; helps monitor environment changes, identify competitive threats and assist in the implementation, evaluation, and control of strategy In addition, an effective information system allows enterprises to have special capability in other fields such

as low costs and services satisfying consumers

1.7 Building and choosing strategy 5

The process offormation and choice of a strategy includes threestages:

(1) Input stage: This stage summarizes the basic input information necessary

for strategy formation of Here, we will build the Internal Factor Evaluation (IFE) Matrix, the External Factor Evaluation (EFE) Matrix, and Competitive Profile Matrix (CPM)

(2) Matching stage: The techniques used in stage 2 include the

Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix and the Grand Strategy Matrix (GSM) The matrices use the input information from stage 1 to match the external opportunities and threats with internal strengths and weaknesses, thereby to form selected feasible strategies

(3) Decision stage: only includes one technique, the Quantitative Strategic

1 to objectively evaluate the selected feasible strategies in stage 2 This matrix

5

Source: : Nguyen Thi Lien Diep, 2003, Business Stratergy and Policy

representsthe relativeattractivenessofthe selected possible strategies, thus provides

an objectivebasisforselection ofparticularstrategies

Because the resources of the enterprise are always limited, we cannot implement all selected feasible strategies but select some best strategies for implementation

1.8 Theories related to strategic planning

1.8.1 Michael Porter’s Five’s - Forces Model:

According to Michael Porter, competitive forces in the market of any enterprises are affected by 5 competitive forces as follows:

Figure 1-3: Michael Porter’s Five - Forces Model

Supplier Power: A production enterprise requires materials, labor,

components and other supplies This requirement leads to buyer-supplier relationships between production industries and the firms providing the raw materials used to create products The supplier power shows the ability to decide

Rivalry among competing firms

Rivalry of the existing enterprises in the industry

Customers

Substitutes product

The threat of new entrants

Threat of substitute products or services

Potential entry

Supplier

Bargaining Power

Bargaining Power

their business conditions for an enterprise Weak suppliers probably have to accept the terms requested by the enterprise, so the enterprise can reduce costs and increase profits in production, on the contrary, powerful suppliers can pressurize on the producing industry in many ways, e.g selling raw materials at a high price to share

profits in the industry

Threat of Substitutes: In Porter's model, the term "substitute products" refers

to products in other production industries enabling to change consumption selection According to economists, 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 the price changes of substitute products Therefore, the existence of

alternative products limits the ability to raise prices in a particular industry

Buyer Power: The power of buyers is the impact that buyers have on a

producing industry In general, when buyer power is strong, buyer-supplier relationship is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer In such the market condition, buyers are able to impose price Buyers, if powerful, can exert their influences to drop the product’s price, causing a price decrease in the profit rate of the industry In reality few monopsonies exist, but frequently there is some asymmetry between a

producing industry and buyers

Barriers to Entry: It is not only incumbent rivals that pose a threat to

enterprises in an industry; the possibility that new enterprises may enter the industry also affects competition In theory, any enterprise should be able to enter or exit a market, and if “free entry and exit” exists, then profits always should be nominal In reality, however, industries possess their own ways to protect the high profit levels

of enterprises in the market and inhibit additional rivals from entering the market

These are barriers to entry

Competitive pressures in the industry: Enterprises in the industry shall

compete directly with each other to exert back pressure on the industry leading to a

competitive strength In an industry, the following factors will increase the

competitive pressure on rivals

1.8.2 Marketing Theory

Marketing can be described as a process of identifying, anticipating, setting and satisfying demands of the customer for products or services Joel Evans and Barry Berman suggest that there are 9 basic functions of marketing: customer analysis, buying, selling, product and service planning, pricing, distribution; marketing research; opportunity analysis; social responsibility

Customer analysis is examination and evaluation of customer needs, desires;

which involves administering consumer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies

product or service Buying consists of evaluating alternative suppliers, choosing the best supplier, arranging acceptable terms with suppliers, and procurement

Selling: the success of strategy performance depends on the ability to sell

products or certain service Selling includes many marketing activities such as

advertising, sales promotion, publicity, customer relations etc These activities are

particularly important when market penetration strategies are being pursued

Product and service planning includes marketing survey, product and brand

positioning, warranties, packaging, alternative products, product features, product style, product quality, and customer service Product and service planning is particularly important when product development or diversification is being pursued Planning products and services is especially important when enterprises are pursuing strategies to develop or diversify products

Pricing: 4 major factors affect pricing decisions: consumers, governments,

suppliers, and rivals Sometimes an enterprise will pursue forward integration strategy to gain better control over prices charged to consumers

Distribution: most producers today do not sell their goods directly to

consumers but often through intermediaries Distribution includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing Distribution becomes especially important when an enterprise is striving to implement a market development or forward integration strategy

Marketing research is the systematic gathering, recording, and analyzing of

data about problems relating to goods or service selling Through the marketing research, critical strengths and weaknesses can be uncovered, so marketing research activities support all of the major business functions of an organization Organizations that possess excellent marketing research skills have a definite strength in pursuing generic strategies

Opportunity analysis includes an appraisal of the costs, profits, and risks

associated with marketing-related decisions

Social responsibility is the best decision to meet obligations to an

enterprise’s society Social responsibility may include an enterprise’s obligation to offer products and services that are safe and reasonably priced

1.8.3 Distribution channel theory

Distribution channel can be defined as the flow of goods and the ownership

of goods from the raw-material supplier to the producer and to the final consumer It includes all intermediary organizations contributing to bring products to the consumer

Many producers lack financial resources to carry out direct marketing In some cases, the direct marketing is unable to be performed The producers who do not establish their own distribution channels often achieve higher revenue than investment increase in their core business

Distribution functions: information, promotion, products, orders, capital supply, risk bearing, delivery, settlement, monitoring the ownership change of products

The distribution channel in marketing includes strategic and tactical decisions The strategic decision consists of selection of a distribution channel and

an intermediary partner All distribution strategies must be based on three criteria: level of market coverage, distribution channel management and costs

There are three types of distribution channels:

- Intensive distribution provides saturation coverage of the market to help approach customers most

- Selective distribution limits the number of outlets in an area This distribution is often used for specialized products, characterized by its high brand awareness and loyalty

- Exclusive distribution: Each area has only one distributor in charge This extreme form of selective distribution helps the producer keep a close eye on the market This strategy is used for specialized products that the producer wants to ensure an appropriate brand image

Selection of members for the distribution channel: members must be carefully selected Not that all distributors have the ability or will do their job well Therefore, entrepreneurs must use specific decision criteria in their section

1.9 Tools and methods for building and selecting strategies

1.9.1 Matrix of Internal Factor Evaluation (IFE)

Tool for formation of this strategy is summarizing and evaluating major strengths and weaknesses of functional business departments, also providing a basis

for identifying and evaluating relationships among these departments The IFE matrix is developed in 5 steps:

Step 1: List the critical success factors as determined during the internal

evaluation This list consists of from 10 to 20 factors including the strengths and weaknesses

Step 2: Assign a weight that ranges from 0.0 (not important) to 1.0 (very

important) to each factor This weight indicates the relative importance of the factor

to being successful in the enterprise’s industry The sum of all weights must equal 1.0

Step 3: Assign a 1-4 rating to each factor, in which rating 1 represents a

major weakness, 2 a minor weakness, 3 a minor strength, 4 a major strength Thus, ratings are company based

Step 4: Multiply each factor’s weight by its rating (= Step 2 x Step 3) to

determine a weighted score

Step 5: Sum the weighted scores for each factor to determine the total

weighted score for the organization

No matter how many factors the IFE matrix has, the sum of all highest weighted score that an enterprise can get is 4.0, the lowest 1.0 and average 2.5 The company total weighted score of above 2.5 is considered as strong in position, and below 2.5 considered as weak

Table 1-1: Matrix of Internal Factor Evaluation (IFE)

score

List major internal strengths and weaknesses of

the enterprise

1.9.2 Matrix of External Factor Evaluation (EFE)

Strategists will summarize and evaluate the information of economic, social, cultural, demographic, geographic, political, governmental, legal, technological and competitive factors There are 5 steps in developing a Matrix of external factor evaluation:

Step 1: List the factors playing a decisive role to the success as identified

during the assessment of macro-environment This list consists of from 10 to 20 factors including opportunities and threats affecting the enterprise and his business field

Step 2: Assign a weight that ranges from 0.0 (not important) to 1.0 (very

important) to each factor This weight indicates the relative importance of the factor

to being successful in the enterprise’s industry Appropriate weights can be determined by comparing successful business enterprises with unsuccessful ones in the industry or discussing and reaching consensus of the group building strategy The sum of all weights must equal 1.0

Step 3: Assign a 1-4 rating to each success factor to indicate how effectively

the enterprise’s current strategies respond to the factor, in which rating 4 is good, 3 above average, 2 average and 1 weak These ratings are the enterprise’s strategy effectiveness based

Step 4: Multiply each variable’s weight by its rating (= Step 2 x Step 3) to

determine a weighted score

Step 5: Sum the weighted scores for each variable to determine the total

weighted score for the organization

Regardless of the number of opportunities and threats in the matrix, the sum

of all highest weighted score that an enterprise can get is 4.0, the lowest 1.0 and average 2.5 The total weighted score of 4.0 indicates that the enterprise’s strategy takes advantage of external opportunities and minimizes the negative impact of external environment on the enterprise

Table 1-2: Matrix of External Factor Evaluation (EFE)

score

List major external opportunities and threats

affecting the enterprise

1.9.3 Competitive Profile Matrix (CPM)

A CPM helps the strategist identify major rivals with how their particular strengths and weaknesses are This matrix is an extension of EFE, because it

integrates both external and internal factors that its importance decides the success

of an enterprise Moreover, in the CPM, rivals will be also reviewed and calculated total weighted score The total evaluated score of competitive enterprises is compared with the researched enterprise The comparison in the same scale provides us with lots of important strategy information

Table 1- 3: Competitive Profile Matrix

List major competitive factors of

the enterprise compared to

rivals

1.9.4 Matrix of Strengths - Weaknesses - Opportunities – Threats (SWOT)

SWOT matrix is an important combination tool enabling managers to develop four following types of strategies:

 SO strategies: use an enterprise’s internal strengths to take advantage of

external opportunities

 WO strategies: are aimed at improving an enterprise’s internal weaknesses to take advantage of external opportunities

 ST strategies: use strengths to avoid or reduce the impact of external threats

 WT strategies: are aimed at improving internal weaknesses to avoid or reduce the impact of external threats

In order to build SWOT matrix, there are 8 following steps:

Step 1: List the enterprise’s internal strengths

Step 2: List the enterprise’s internal weaknesses

Step 3: List major external opportunities of the enterprise

Step 4: List major external threats of the enterprise

Step 5: Combine strengths with opportunities to form SO strategy and record

the result in the appropriate box

Step 6: Combine weaknesses with opportunities to form WO strategy and

record the result in the appropriate box

Step 7: Combine strengths with threats to form ST strategy and record the

result in the appropriate box

Step 8: Combine weaknesses with threats to form WT strategy and record the

result in the appropriate box

Table 1- 4 : SWOT matrix

1.9.5 Grand strategy matrix

Besides the SWOT Matrix, the Grand Strategy Matrix is also a common tool

to form competitive strategies for selection All organizations can be arranged in one of the four quadrants of the Grand Strategy Matrix This Matrix evaluates the position of enterprises based on two aspects of competitive position and market growth Appropriate strategies of the organizations are listed in an attractive order

in each quadrant of the matrix

Figure 1-4: Grand strategy matrix

The enterprises at quadrant I of the Grand strategy matrix have a great strategy position For these enterprise, to continue to focus on the current market and the most appropriate product When the enterprise at quadrant I has abundant resources; the backward, forward and horizontal integrations are likely to be the effective strategies This enterprise is able to take advantage of external opportunities in various industries and they can risk if necessary

The enterprises at quadrant II need evaluate carefully their current method to the market Although the industry is growing fast but they cannot compete effectively and they need to determine their current inefficient method and how appropriately the enterprises change to improve their competitive activities well If

Quadrant II

Quadrant III

Quadrant I

Quadrant IV RAPID MARKET GROWTH

SLOW MARKET GROWTH

Strong competive position

the enterprises do not have special abilities or competitive advantages, the horizontal integration strategy is often replaced for the related strategy Finally, divestiture or liquidation strategy is applied for providing capital to buy back another enterprise or shares

The organizations at quadrant III compete in the industries growing slowly and holding weak competitive position These units should change considerably and quickly to prevent from serious failures and the possibility of bankruptcy The first concern is to retrench capital and expensive costs, next transfer resources to other fields Finally, the units can apply divestiture or liquidation

The enterprises at quadrant IV has competitive position, however their industries have low growth rates These companies are qualified to diversify into higher growth industries The enterprises are able to pursue the related, horizontal

or link diversifications or joint venture

1.9.6 Quantitative Strategic Planning Matrix (QSPM)

The QSPM Matrix is formulated based on the Matrices of EFE and IFE, CPM, GSM and SWOT The QSPM Matrix is a tool enabling strategists to evaluate alternative strategies objectively, firstly based on major success factors inside and outside as determined Like other strategy-formulation analytical tools, the QSPM matrix requires good intuitive judgment

Through the strategies of SO, ST, WO, WT generated from the SWOT matrix, an appropriate and feasible strategy will be chosen for the enterprise There are 6 steps in developing the QSPM matrix:

Step 1: List the enterprise’s key external opportunities/threats and internal

strengths/weaknesses The information should be taken directly from the matrices of EFE and IFE A minimum of 10 internal critical success factors and 10 external critical success factors should be included in QSPM matrix

Step 2: Assign weights to each external and internal critical success factor

These weights are identical to those in the matrices of EFE and IFE

Step 3: Identify alternative strategies that the enterprise should consider

implementing Group the strategies into exclusive sets if possible

Step 4: Determine the Attractiveness Scores (AS), which indicate the relative

attractiveness of each strategy compared to other strategies Only the strategies in the same group were comparedwith each other Attractiveness Scores are assigned

to each strategy as followings: 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive If the critical success factor has no effect upon the specific choice being made, then do not assign Attractiveness Scores

to the strategies in this set

Step 5: Compute the Total Attractiveness Scores Total Attractiveness Scores

are defined as the product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4) in each row

the addition of Total Attractiveness Scores in the strategy column Higher scores indicate more attractive strategies

Table 1 - 5: QSPM matrix

Selected possible strategies Strategy 1 Strategy 2

* List internal factors:

* List external factors:

Total attractiveness score

After that, the strategy with the highest Total Attractiveness Scores (TAS) is chosen as the enterprise’s strategy, the remaining strategies shall be alternative ones for the chosen strategy according to a higher TAS priority

CHAPTER 2 BUSINESS OPERATION OF PETROMEKONG

2.1 Overview of the field of petroleum production and business

2.1.1 Petroleum and the wholesalers participating in petroleum business

Petroleum is a strategic item in each country The petroleum market in Vietnam currently is the great interest of both the State and consumers The rate of retail petroleum accounts for 50-60% of Vietnam, compared with 10% of the years before 2000, therefore fluctuations in petroleum prices have become a major concern of the public

Figure 2-1: Vietnam petroleum business system at present

Currently, there are 12 wholesalers (including 9 State-owned enterprises) who have the right to import and export petroleum then give them to the hands of consumers through general agents or directly through the distribution system including nearly 10,000 petroleum agents and outlets nationwide; of which about 7,500 outlets directly under the enterprises of different economic sectors, and nearly 2,500 outlets of the import wholesalers The wholesalers distribute petroleum through general agents, agents and affiliated outlets Petrolimex has about 1,800 affiliated outlets, holds 57% of the market share and more than 4,000 outlets under agents and general agents The other wholesalers share the remaining 43%

In 2007, with the advent of Decree 55, petroleum business is said to be a breakthrough: business following the market mechanism, however according to the

12 wholesalers Wholesaler

Approx 300 General agents General agent

Approx

10.000

Agent

Retail outlet

judgment of many experts, this Decree has not really operated, especially for the price mechanism Since petroleum is a strategic commodity, has strong influence on all aspects of the economy, the State has still intervened quite deeply in the business, mainly in price This situation led to the same retail prices of nearly 10,000 outlets retailing petroleum in Vietnam, although the costs of wholesalers are different; the distance from the wholesale pool and transit warehouse of fuel outlets

is very different leading to different transportation costs of these outlets, therefore the profits and losses of each enterprise are also different Petrolimex with the advantage of the system of petroleum distribution pipeline has reduced fuel transportation costs and losses, created competitive advantage

The State sets too many goals in one liter of petroleum while applying the only measure of subsidy, which made the domestic prices have not kept pace the world prices The proof is that when the world prices fall deeply, the domestic prices fall drop by drop; when the world prices increase strongly, the domestic prices remain the same or increase disproportionately due to inflation containment Therefore, the enterprises still do not have the real power to decide the selling prices However, from February 15, 2009, Decree 84 specified that the enterprise have the right to adjust the selling prices when the component factors of price change – that means, the State ignores the price fixing mechanism

2.1.2 Petroleum market situation in the Mekong Delta (MD)

Table 2-1: the petroleum market share in the MD in 2010

(Source: Actual self-survey, 2010)

Figure 2-2: Chart of Mekong Delta Petroleum Market Share

The above data table showed clearly that PetroMekong’s market share accounts for around 17%, ranked 3rd in the MD The top rank is still Petrolimex of 35%, next Petimex of 20% and Saigon Petro of 13%, Pvoil of 10%

No Unit joining the market

Mekong Delta petroleum amount (liter)

Market share (%)

2.1.3 Forecast on development trend of the petroleum industry

2.1.3.1 Development prospects of petroleum business

Petroleum is a strategic commodity, meets the demand for most sectors of the economy such as industry, agriculture, forestry and fisheries and transport Up

to now, no fuel can substitute this energy resource efficiently; therefore, the amount

of products sold is not fluctuated much, although the prices are affected by the factors involved The petroleum business development has close relation with the economic growth rate A development economy will inevitably lead to increasing demand for petroleum consumption

The amount of monthly average petroleum consumption over the country is 1,000,000 m3 equivalent to approximately 3.3 million liters/day Demand for petroleum in the country keeps growing, from 7,640 tons in 2000 to 13.2 million tons in 2008, 14.3 million tons in 2009 and 15.4 million tons in 2010 Vietnam is a developing country, so demand for petroleum product consumption will increase rapidly in coming years The master plan project of petroleum industry development during 2006-2010 also showed that the demand in Vietnam is about 80-10%/year during this period, 6-7%/year during 2011-2020 and about 4-4.5%/year during 2021-2050

According to the market forecast result of the project “development plan of petroleum depot system nationwide until 2015 and orientation to 2020” by Institute for Development Strategy - Ministry of Planning and Investment, the demand for fuel consumption in Vietnam as showed in Figure 2-3:

Unit: 1,000 tons

Figure 2-3: Chart of forecast of demand for petroleum in Vietnam until 2020

(Source: Ministry of Planning and Investment)

Demand forecast for petroleum consumption is calculated based on the average economic growth index of the area, of which it is expected to grow by around 10%/year during 2008-2015 For categories of items, gasoline of various types will consume rapidly due to road traffic development together with the living standards of the people's increasing, an increasingly common demand for purchase

of automobiles, motorcycles as means of transport In addition, the oil items of Diesel, Mazut will also increase because means of waterway transport grow at high level; the industrial customers and food processing plants use more fuel

2.1.3.2 Forecast of PetroMekong’s petroleum yield:

According to the actual survey of Department of Business under PetroMekong, petroleum consumption yield during 2010-2015 as forecasted by PetroMekong in table 2-2 is as below:

Table 2-2: Amount of PetroMekong’s petroleum consumption

during 2010-2015 forecast period

Year YF1: Petroleum amount ( liter)

The amount of PetroMekong’s petroleum consumption during

2010-2015 increases the annual average rate of about 7%, which is favorable for strategic planning and business development of the Company

2.2 Company introduction

2.2.1 PetroMekong’s establishment history

On 26 April 1997, PetroVietnam Oil Processing and Distribution Company (PDC under Petrovietnam), General Gymnastics & Sports Service Company under People's Committee (PC) of Can Tho Province (now Can Tho City), and trading companies under People's Committees of Mekong Delta (MD) provinces signed and established a joint venture company to build and operate petroleum base depot to import and deal petroleum products in the MD The joint venture will engage with partners to set up distribution systems of wholesale and retail in MD provinces as per Prime Minister’s Decision No 345/QD dated April 20, 1998 approved for Can Tho petroleum base depot project On 15 May 1998, PC of Can Tho province issued establishment license No 007083 GP/TLDN-02, marking the establishment and official operation of Mekong Petroleum Joint Venture Company – PetroMekong

The chairman of the Board of Directors issued Decision No 128/QD-HDTV dated December 31, 2008, renaming Mekong Petroleum Co., Ltd into Mekong

Petroleum Joint Stock Company (PetroMekong) with its chartered capital of VND113 billion including the founding members: Petrovietnam Oil Corporation accounts for 56% of the chartered capital, Can Tho Agricultural Exports Company 20%, Vinh Long Trading Company 4%, Tra Vinh Trading Company 4%, My Thoi Port Company 4%, Soc Trang high quality rice Company 4%, Bac Lieu Tourism and Trading Company 4%, Ca Mau Tourism and Trading Company 4%

2.2.2 PetroMekong’s functions and duties

2.2.2.1 Functions

The main operating areas of the Company are in 11 MD provinces The Company’s main functions consist of importing petroleum from abroad or Dung Quat Oil Refinery (PetroMekong is one of the nine wholesalers importing petroleum), processing, blending and trading petroleum products Besides, the Company also strengthens the establishment of petroleum distribution system in order to expand gradually the market share to bring the highest efficiency, contribute the supplying source stability and price stabilization in the area, and promote the economic development and social stability in the region

2.2.2.2 Duties

Based on the functions and capabilities of the Company, and also the policies

of the State, locality, and the industry as well as the direct guidance of a higher authorities; the Company's main duties are to build himself a petroleum distribution system according to the law, directly import petroleum to ensure the supplying source for the system under the Company’s management, and be responsible for the business-operating result In addition, the Company also has several other duties as prescribed by the law

2.2.3 Organizational structure and operating scale

2.2.3.1 Organizational structure

Currently, the Company’s management is implemented in the organizational model of online - functions as following:

Figure 2-4: PetroMekong’s organizational chart

General Director Board of Directors General Meeting of Shareholders

Deputy General Director 1 Deputy General Director 2

Dept

of

Business

Dept of administrat ion manageme

Dept

of Investment Managemen

t

Chemical Laboratory Dept of

import/exp ort

planning-Local branches

Affiliated outlets

Cambodia branch

Affiliated transit warehouse

Can Tho Petroleum base depot Sales groups

Dept

of internation

al business

Dept

of Safety Engineering

Dept

of Logistics

Dept

of Finance- Accounting

2.2.3.2 Operating scale

Besides the Company's headquarter located in central Can Tho City, the Company currently has established a petrol distribution system throughout MD localities The Company has 13 branches located in the provinces of Long An, Tien Giang, Ben Tre, Tra Vinh, Vinh Long, Dong Thap, An Giang, Kien Giang, Soc Trang, Bac Lieu, Ca Mau, Hau Giang and 1 branch in Phnom Penh Capital - Cambodia

2.2.4 Business field:

With the function as one of the wholesalers importing petroleum directly over the whole country, the Company’s major business field is petroleum, investment and trade Details are as follows:

- Direct Import and Export of petroleum products;

- Producing and processing of oil products;

- Trading kinds of petroleum, lubricants etc.;

- Trading chemicals and fertilizers for industries and agriculture;

- Financial investment;

- Real estate and infrastructure;

- Growing, processing and exporting aquatic and seafood products;

- Transporting petroleum inside and outside the country

2.3 Analysis of the current status of PetroMekong’s production and business activity

2.3.1 Petroleum distribution system

Up to April 2011, there have been more than 900 retail sites of the petroleum distribution system in the whole Company, including agents, sub-agents, and outlets