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Long-term hydrocarbon sector strategy
- 1. Juggling Hypercubes: long- term EPC Business Strategy for Hydrocarbon Sector Team: ShootingStars L&T OutThink 2017 (Finals) November 10th, 2017 Image source: L&T annual report This case is developed by L&T Institute of Project Management, Vadodara. Case solution is given by the team ShootingStars of IIM Rohtak All the recommendations related to the business problems, as mentioned in the case, are based on the assumption that DGHE is similar to LTHE of L&T Group Anupreet | Neha | Utkarsh
- 2. 1 10 Year Road-Map for DGHE1 1 In our analysis we have assumed that DGHE business is very much similar to LTHE business of L&T Group Year 1 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10Year 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 A B Long Range Planning A BIdentification of Corporate Strategy and initial fund allocation C D Focus on intensive growth Focus on integration of the functional areas Focus on diversification Use present capabilities to gain a competitive advantage C Integrate various areas and create a design chain where everything is popularly communicated New Services & Product Development Market Penetration Create Design Chain Outsource Activities Integrate Different Functions After Construction Services Renewable Businesses Leveraging on core competency Diversify in other potential areas such as renewable energy sector D Integration & creating Design Chain Diversify across Businesses
- 3. 2Source: Case study, Team analysis. Internal and External Analysis explains the risks and uncertainties. It suggest to adopt internal strategies to achieve future outlook Climate change concerns - - - - - - Uncertainty energy policyWorsening fiscal terms Access to reserves: political constraints & competition for proven reserves Competition from new technologies Cost containment Health risks Human Capital deficit New Operational challenges Price Volatility Predicted Risk level -More Same Less 51% 48% 58% 48% Automation Enhanced oil recovery High Pressure Drilling Sub-sea & Deep- water Equipment Before 2020 Around 2025 Beyond 2025 Fiscal Policy Shifts in Middle East Distribution of risk, becoming less favourable to EPC Contractors The abundance of assets, might lead to fierce pricing competition Explore New Markets Undertake efforts in North Africa and CIS Strategize roll out of Government Plans Operational Excellence Alliances Cost optimizations Improved Customer Intimacy Compliance with Standards Uncertainties Internal Control Strategies Future Outlook
- 4. 3Source: Case study; Team analysis; Total energy investments over the next 5 years will reach $900 billion. Largest Player plans to spend $334bn across the value chain by 2025. Pipeline to transport to China has been constructed. Proportion of crude oil to Asia has significantly increased Mexico to boost its internal gas pipeline, expected to grow more than 90%. Highly integrated energy market, attract investments and lower capital costs. Gas production is expected to climb rapidly from most offshore area. The region is net exporter of Gas, mostly to North Asia as LNG. -1000 0 1000 2000 3000 4000 5000 6000 7000 8000 1990 2000 2005 2010 2011 2012 2018 Production (kb/d) Demand (kb/d) Net Imports (kb/d) 0 1 2 3 4 Political Economical Social Technological Legal Environmental 0 10 20 30 40 50 60 70 KSA Iran Egypt UAE Iraq Algeria EPC FEED Study Global Persspective Along with internal strategies and brief analysis of the conditions of different regions, we recommend extensive focus on Middle East and North Africa
- 5. 4Source: Case study, Team analysis. Intensive & Integrated growth are short term options, whereas Diversification in the long term leads to quantum leap of revenue and profits margin 0 5000 10000 15000 20000 25000 30000 35000 0 5000 10000 15000 20000 25000 2014 2015 2016 2020 2025 2028 Natural Gas Production (bcm) Natural Gas Consumption (bcm) Oil Products Production (bcm) Oil Products Consumption (bcm) Global Energy Investment (in USD trillion) Revenue EXPECTED GROWTH DUE TO DIVERSIFICAITION EXPECTED GROWTH DUE TO INTEGRATION EXPECTED GROWTH DUE TO INTENSIVE GROWTH BASE CASE STRATEGIC GAP ValueofGrowthDrivers RevenueinRs.Crore Growth Forecast for different cases
- 6. 5Source: Case study; Team analysis; In order to reduce strategic planning gap, DGHE should focus on existing market penetration and new product development 1 Based on the regression model with various driving factors Strategy in a case of super-abundant capital age 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 2016 2020 2025 2028 Base Case Intensive Integrate Diversification B Intensive Growth Strategy Integration Diversification D B C Base CaseA Strategy Planning Gap Exhibit 1: Financial Projections for Various Strategies1 DGHE can use 3 growth strategies to achieve long-term goal Intensive Growth Strategy Current Value Propositions? • Hydrocarbon Offshore • Hydrocarbon Onshore • Hydrocarbon Construction Services • Hydrocarbon Modular Fabrication Services • Hydrocarbon Engineering Services Market Penetration Product Development Market Development Product Proliferation Products Existing MarketingSegments New NewExisting But How? BY DEVELOPING NEW PRODUCTS & SERVICES BY UNDERSTANDING CLIENT’S REQUIREMENT C D A • Long term agreement with client like Saudi Aramco • Associating with more companies like ONGC for piloting the products • Explore new markets with good long term business potential • Strengthen support to international clients other than L&T Offshore Projects • A percentage of Engineering Man Hours can be invested on EPCM in Middle East • End-to-end solutions for Onshore and Offshore Construction RevenueinRs.Crore
- 7. 6Source: Case study, Team analysis; Strategies for minimizing information asymmetries in construction projects, Anita Ceric Integration growth strategy reduces risk and delay in the value chain of EPC based business by outsourcing and integrating functional areas Integration The value chain for EPC based contract exists only for the duration of the project1 Integrate various aspects of value chain to make a “design chain”, in which all value chain members are engaged in collaborative design problem solving PO PM PM C Hires Performs Monitors Informs Hires Performs Hires Performs Self Interest Self Interest Self Interest Self Interest po c Procurement Design Finance RISK DELAY Value Management Design Management Financial risk Timely Review Over aggressiveness Pressure from Client 1 Create Design Chain 2 Outsource Activities A firm may specialize, based on strength and weakness, in one or more value chain activities and outsource the rest. 3 Integrate Functional Areas Effective integration of all the functional systems. Primarily a conducive environment needs to be created within all divisions and subsidiaries of the company. 4 After Construction Services Provide ancillary construction and maintenance services and create knowledge resource 1 PO = Project Owner, PM(po) = Project Owner’s Project Manager, PM(c) = Contractor’s Project Manager, C = Contractor. Relationship between PM(po) & PM(c) is the key to success
- 8. 7Source: Case study, Team analysis; Wardley Maps; based on John Boyd’s OODA framework & Sun Tzu’s book – “Art of War” For long term, DGHE should focus on diversification, moving towards renewable sources like Solar and Wind Diversification Market Penetration Product Development Market Development Diversification Products Existing MarketingSegments New NewExisting DGHE should diversify, in solar & wind, in order to survive in the long How to implement the strategy? Purpose Landscape Climate Doctrine Leadership Observe Orient Decide Act Vision, Mission & Goals Mission is to provide integrated solutions for Oil and Gas Industry to build end-to-end solutions including all services Professional management, focus on customer satisfaction Business-Environment The oil & Gas industry is maturing . There’s a shift from non-renewable energy to renewable energy Macro-Environment Macro-Environment factors are good enough to give EPC business a growth of 7%-8% CAGR Competency DGHE’s huge experience in setting processes, methodologies, technologies can be used for competitive advantage Leadership DGHE project managers should embark Strategic Thinking as a skill to take project decisions. The strategy should be properly communicated to the lowest levels 0 20 40 60 80 100 120 140 2012-13 2014-15 2016 Wind Solar Linear (Wind) Linear (Solar) Expected Annual Power Generation (in Twh)
- 9. 8Source: Case study; Team analysis; Balance Score Card – Robert . D. Kaplan, David P. Norton Note: Based on Balanced Score Card Methodology Primary strategy which should be pursued by DGHE and management teams is Communication, Business Planning and Strategic Learning POTENTIAL AND GROWTH CHALLENGES INTERNAL PROCESSES CHALLENGES CUSTOMER CHALLENGES ACHIEVE MARKET SHARE GROWTH ACHIEVE SUSTAINABLE AND POSITIVE FINANCIAL RESULTS SATISFY THE CUSTOMER’S EXPECTATIONS IMPROVE COMPANY’S IMAGE DEVELOP EFFICIENT PROCUREMENT MANAGEMENT GAURANTEE CUSTOMER ORIENTED INNOVATION MANAGEMENT INCREASE DIRECT PROCESSES EFFICIENCY CREATE AND MANAGE A ROBUST PROJECT MANAGEMENT STRATEGY TO ADAPT TO RISKS AND DELAYS GAURANTEE DECREASED COSTS AND NO DELAYS DEPLOY PROJECT MAMANGEMENT TECHNIQUES ACHIEVE HIGH PERFORMANCE CULTURE BECOME SECTORIAL REFERENCE FOR AUTHORITIES DEVELOP SUSTAINABILITY AS MANAGEMENT PRINCIPLE INCREASE INDIRECT PROCESSES EFFICIENCY STRATEGY MAP Translating Vision Communication & Linking Business Planning Strategic Feedback & Learning Use high quality employees to provide services that surpass customer needs Communicating & Linking through various channels. Linking reward program with performance and setting goals Setting Targets, Aligning strategic initiatives, allocating resources, Establishing Milestones Learning that produces a change in people’s assumptions and theories about cause-and-effect relationships
- 10. 9Source: Case study, Team analysis; Making Flowing Stream Strategy Work – Sushil, IIT Delhi DGHE should extend its services for new customer by following shift and divert strategy channels. It should also diversify its business in different sectors Continuity Forces Change Forces 0 1 2 3 4 5 Core competence Customer base Infrastructure TechnologyLabour Brand Culture 0 1 2 3 4 5 Globalization New Opportunity Competition New Technology Government Policies Global Standards 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 LOW HIGH HIGH DGHE CHANGE MASTER (Wind) QUICK ENHANCER (Mushroom) SYNTHESIZERS (Flowing Stream) STABALIZERS (Tree) CONTINUITY FORCES CHANGEFORCES Vital: Customer Base Desirable: Culture Burden: Low skilled labor High Impact: New Opportunity Mid Impact: Government Policy Low Impact: Competition 0 1 2 3 4 Cost Reduction Improvement in Process Market Penetration Market Share in Renewable Sources End to End Solutions As-is To-be Strategy Landscape – Before & Aspirations VDB analysis of Continuity forces VDB analysis of Continuity forces Strategy Channels Divert Partition Shift Extend services and penetrate the market Shift some of the activities to other business verticals or create new verticals Diversify in renewable sources
- 11. 10Source: Case study, Team analysis; Characteristics of a project friendly enterprise, Vittal Anantatmula; Strategic thinking: can it be taught?, J M Liedtka; Considering the key competencies of DGHE, project friendly organization can be achieved by competent and productive teams DGHE project teams should encourage lower levels to practice intelligent opportunism in order to avoid strategic dissonance Strategic Thinking Systems Perspective Intent Focused Thinking in Time Hypothesis Driven Intelligent opportunism DGHE project teams should see vertical & horizontal linkages within the system from multiple perspective DGHE project teams should marshal and leverage their energy, to focus attention, to resist distraction, and to concentrate for as long as it takes to achieve a goal. DGHE project teams should think on what to keep from past, what to lose from past & what to create in present to reach the desired goal DGHE project teams should accommodate both creative and analytical thinking sequentially in its use of iterative cycles of hypothesis testing. Increases Project Productivity DGHE project teams should embark Strategic Thinking as a skill to take project decisions Competent Practices & Professionals Productive Teams Project Friendly Organization Rank value of proposal & project Rank desirability of Contractor Manage project facets like cost, duration, risk using planning, fine tuning, Change management& tradeoff analysis Measure the attributes Divide into teams – proposal team, proposal portfolio team, project team, project portfolio team Make a team charter – specify personal behavior & professional performance Guidelines Procedure & Models for Managing attributes Project Proposals Portfolios Consistency in Performance Success Team Norms for Performance Deliverables Reporting Punctuality Behavior & Attitude Trust Conflict management Harmony Ideal Competencies for DGHE Making DGHE a project friendly organization