T4 Case study - TOPCIMA. Strategic Analysis. YJ Oil and Gas. Nick Best

Transcription

1 T4 Case study - TOPCIMA Strategic Analysis YJ Oil and Gas Nick Best with

2 Welcome Welcome to Nick Best s T4 Case Study strategic analysis For those of you who don t know me, I ve tutored TOPCIMA for BPP, Kaplan, First Intuition and Reed Business School, am the author of the official CIMA T4 learning system, on which I worked together with one of the TOPCIMA examiners, and now work for Astranti Financial Training on their TOPCIMA Courses. For Mock Exams on the latest case, and a range of other TOPCIMA information visit

3 Introduction to the case The oil and gas industry is the focus for the latest T4 Case Study. It s a tough industry as for many as it is something most people know little about. On the plus side is a well known global industry which should make finding industry examples (necessary for the diversity marks) relatively easy to find. The case company YJ is relatively young Oil and Gas exploration and production company which has had a successful start to its life with 3 successful fields which are now generating strong revenues and profits. Investors are understandably very happy with the share price having risen from $6 per share at listing 6 years ago to $27 now. The key twist this time around is the new CEO, and he is demanding a development of new fields which will require significant investment, which may be hard to find. He may bring a culture change which could also have wider ramifications for both directors and staff.

4 Strategic analysis the rational model This analysis uses the rational planning model of strategic analysis, summarised in the following diagram Business Environment PEST 5 Forces Internal analysis S W NOW O T Product analysis -Product life cycle -BCG matrix Business Strategy Generic strategies Ansoff s matrix Method of growth FUTURE Mission & Objectives Governance & Ethics Stakeholder Mapping

5 Strategic analysis the rational model The first stage of analysis is to ensure we fully understand where the organisation is heading, along with its approach to meeting stakeholder needs. FUTURE Mission & Objectives Governance & Ethics Stakeholder Mapping

6 Mission The mission statement sets the direction and tone of the organisation, and guides strategic decision making. As is the case with most T4 Case Study exams, we are not given the company s mission statement. If it were to have one, we could perhaps conclude that it might focus on: Development of new oil and gas fields Delivering returns for investors Technological development in exploration and drilling Health, Safety and environmental issues/csr Being well capitalised to facilitate development of new fields

7 Objectives and performance measurement The objectives provide a focused target to move towards to direct planning, motivate staff and enable accurate performance measurement We are given few specific targets in the case study! This is the first case in many sittings where this is the case. Previous cases have included a 5 year plan! We should probably assume they have forecasts and a clear strategic plan, but that they are simply not mentioned in the case. If they don t have these that would be a weakness.

8 Astranti TOPCIMA Courses Detailed video exam guides Full video debrief of the preseen 2 day long live master-classes covering: The exam and marking criteria Prioritisation of Issues Preseen analysis and discussion Keys to passing the exam Industry example knowledge share 5 full mock exams (7 for May sitting) Marking and personal feedback on 3 mock exams 60 industry examples to use on exam day 3 mini-mock exams Personal feedback on 2 mini-mock exams Detailed course notes Calculations e-book to practise vital calculations Ethics e-book perfect your ethics sections Issues e-book to master issues structure and timings Private forum: debate the case with others focused tutor support Ongoing support Progress reviews Keeping you on track for a pass Hi Nick, I passed with 62% - huge relief. Thanks again for your support I m relieved I stumbled across you before signing up with one of the mainstream training providers. Kind Regards, Marc Marc Thomas Passed September 2011 I could not recommend this service strong enough and honestly feel this was the reason for my successful pass Paula Roberts Passed November 2009

9 Governance YJ have a Non-executive Chairman and 5 Non-executive Directors good, and aligned with good practise under the combined code Health, Safety and Environmental issues are well managed and controlled important for risk management There is a CSR policy Most key directors are shareholders (new CEO also seeking to buy shares) aligning interests with shareholders Little evidence in the case of other key governance issues. They are only listed on the AIM market and so do not have to abide by the UK s combined code. However as a guide to good practise it might be good to look out for weaknesses in the unseen in areas such as: Committees of Non-execs Audit, remuneration, nomination Disclosures of directors and pay Financial reporting and control Information for directors All directors involved in decision making Regular meetings with institutional shareholders Good use of the AGM

10 Ethics and CSR Ethics is 10 marks in the exam and hence is a very important area Key ethics issues mentioned in the preseen are: Bribery This is particularly relevant in the African and Asian markets they operate within which it is the cultural norm. In the exam you must recommend that bribery is NOT undertaken even though in the real world it might be tacitly accepted Environmental issues Health and safety Other issues could include: Staff issues (possibly related to new CEO) Disclosure issues (E.g of reserves)

11 Critical Success Factors The case states that company must prove themselves to win licences in the following areas: Technical ability to bring oil and gas field into production Awareness and track record in relation to environmental record Financial capacity to bring the oil and gas fields into production Other critical success factors could include: Innovation keeping ahead of competitors in a fast changing industry (e.g. fracking technology) Good project management Supplier/outsourcer relations and management Government relations and management (re licences)

12 Stakeholder mapping Doing a stakeholder map as an appendix in the exam is almost always something which is useful to do. An appendix and done well will usually gain 2 marks possibly more. You must update the map for changes in the unseen, and add all new stakeholders which are in your top 4 issues Refer to your map in the main body of your text, adding a comment to say what the position of that stakeholder on the map means in relation to this specific issue (e.g. a key player should be involved fully through regular meetings, and incorporating their views into the final decision)

13 Stakeholder Analysis Mendelow s Matrix Minimal interest Low Interest Keep informed High Interest Low Power Employees of suppliers Occasional customers (sales primarily on market only to a range of customers) Keep satisfied Smaller Suppliers/outsourcers Most employees and minor directors Communities around Oil Fields Regular customers (if any!) Key Players (Keep close) High Power Most institutional shareholders Banks Governments with licences Industry regulators Position could vary. Look for interest levels expressed in unseen to decide CEO and Chairman Major outsourcers (e.g. drilling companies)

14 Strategic analysis the rational model Business Environment PEST 5 Forces Internal analysis S W NOW O T Product analysis -Product life cycle -BCG matrix Next we need to analyse the current position of the business This helps us ensure the strategies we decide upon are appropriate to the business current position and issues they face in the industry and more broadly This position is summed up in a SWOT analysis

15 SWOT On the following page you ll find my SWOT analysis. Remember that you MUST do a SWOT analysis as Appendix 1 in your answer. You will score 1 mark in the technical section for this, and up to 3 further marks in the application section - if done well. You must update this SWOT for unseen issues (underline or bold these in your exam script), and should aim to include ALL your top 5 issues in your SWOT. A CIMA student script review I read, also made it clear that 2-3 word points in the SWOT will not score as well as points made in more depth, so it is worth writing 5-6 words for each point in your SWOT AND aim for 4-5 points per heading.

16 SWOT Strengths 1. Profitable, cash generating and AIM listed (good for investors and future funding) 2. Current strategy and approach have successfully grown business no need to change unless necessary 3. Excellent staff Surveying team and board of directors non-execs proven success 4. Strong HSE risk management and control 5. Good use of outsourcers (E.g. drilling) to leverage their expertise and keep number of employed staff numbers down potential new sites under investigation, and 4 license applications made should provide for future growth if successful Opportunities 1. New technologies (E.g. Fracking) 2. Develop oil and gas fields currently under investigation 3. Farming in 4. Farming out Weaknesses 1. Lack of funds for future developments (per CEO) 2. Possible uncertainty that could be caused by the new CEO making changes 3. Small in relation to some competitors may be difficult to compete for new licenses against larger companies (although no problems so far) 4. Some IT systems may be out of date (they are 8-9 years old). Being off-the-shelf they are not tailored to specific business needs. Threats 1. Political uncertainty in existing and new markets 2. Market prices for Oil and Gas fall (they are hugely variable which will make a big impact on revenues) 3. Environmental disaster 4. Outsourcer issues e.g. business failure, poor service, cause environmental issue

17 Astranti TOPCIMA Mock Exams and mini-mocks The biggest criteria for success in my opinion is practising mock exams. These are key since: They help you with Time Management, the critical problem for most students They enable you to practise a range of issues that you may see in the real exam The Astranti Mock exams on this Case can be purchased at Hi Nick, I passed my CIMA T4 Part B with 26 credits. To say that I am extremely happy is a gross understatement! I would like to thank you for helping me cross that bridge (not an easy one) and achieve another milestone in my life. Your mocks made a big difference and really helped me - this was my 3rd attempt. There is something very right in what you are doing. Keep up the good work! Kind Regards, Edmore Chinhakwe Passed November 2011

18 PEST analysis On the following page you ll find my PEST analysis. The PEST analysis is always an optional appendix in this exam, although this is one of the best case studies for a long time for this model as there are so many relevant points. Do aim to add one or two additional issues from the unseen into your PEST if you do one in the exam You MUST cross reference your PEST in your script however, and many students do not do this well. Aim to do this 2-3 times in your script

19 PEST analysis Political/ Legal Economic Social (inc sustainabil ity) Technologi cal Political issues e.g. political power of governments, uncertainty in some Oil rich nations (e.g. Iran, Iraq, Libya). Gaining licences from governments New laws - particularly Health and Safety and environmental protection Worldwide economic position affecting oil and gas prices Exchange rate impacts for overseas operations Changing market prices for oil and gas out of control of YJ Increasing awareness and focus on sustainability and safety Consumption levels (current forecasts are for rising consumption) Natural gas considered cleanest fossil fuels (per preseen) New technologies will be key to continued efficiencies and maximising outputs (e.g. Fracking)

20 5 Forces Analysis The 5 forces analysis enables the analysis of the industry according to a range of key factors affecting that industry Each force can be given a strength (e.g. High, Medium, Low). Where all the forces are high, the profitability of the industry is low, and divestment may be a good strategy. The lower the forces the more attractive the industry is. Companies may look at the areas where forces are high and develop strategies which may lower these. The 5 forces analysis for this industry is on the next page In this case the average of the forces is medium so the industry would be deemed averagely profitable.

21 5 forces analysis Buyer Power Neutral Supplier Power High Competitors High New Entrants Low Substitutes Low Factors increasing Force There is a market price, YJ can not use customers lack of power to increase prices Governments have significant power over licensing costs and deals as they are in a monopoly position May be limited number of skilled outsource companies (e.g. drilling companies) Lots of very large powerful competitors with significant funding available Many smaller companies competing over similar oil fields there is competition on the 4 potential new sites Oil companies tend to be wealthy which may attract new entrants (like YJ were a few years earlier) Alternative forms of energy (e.g. solar power, nuclear power) Factors lowering force Little power to individual customers there is a market price that they simply have to take so even large purchasers can not demand price reductions Powerful companies may been seeking larger oil fields to exploit Difficulty raising significant funds in current funding markets makes market entry harder than when YJ entered in 2007 Skills and technologies needed are a significant barrier to entry Petrol/Diesel still the predominant fuel for transport which will not change for many years, while gas is still the key fuel for existing and new power stations customers can not switch short term.

22 Strategic analysis the rational model Next we need to analyse the strategic options, and make a conclusion on the way forward for the business S W NOW O T Business Strategy Generic strategies Ansoff s matrix Method of growth FUTURE Mission & Objectives The usual approach to defining a business strategy is to begin with a definition of the generic strategies, followed by analysing options in Ansoff s matrix, looking at how these might be implemented with the Methods of Growth and then deciding upon a final strategy

23 Opportunities and Threats Products/Generic Strategy Products Generic Strategies Overall this model is difficult to apply to this industry and is not recommended in this exam. BCG/ Oil and gas still in maturity phase of PLC and appear to be stable in that phase for at least the next 40 years. Not YJ s strategy Product Life Cost leadership Cycle Neither of these models are likely to be applicable to this exam for this reason. (Noten new production technologies (e.g. Fracking) are not new products but just different methods of production. ) Strengths Three existing oil fields generating strong revenues Differentiate Very hard to differentiate the end product (Oil and gas is the same) Weaknesses It will be some years before new fields will be generating new revenues and development costs will be required in the intervening period Focus Focus on off-short exploration and drilling in Africa and Asia.

24 Industry analysis For your 5 Diversity marks in the exam it is vital you learn industry examples you can quote. For a free sample of industry examples visit and visit our T4 area. There you can also buy our pack of 60 industry examples to take some of the pressure off you doing your own research.

25 Ansoff s Matrix and methods of growth Ansoff s matrix enables the generation of strategic options. Those you ll find in my analysis over the page are just options, not my recommendations. You might like to add your own options (1) Based on your own ideas to take the business forward (2) Based on those in practise exams you undertake The final stage is then to decide on the methods which the organisation can use to take the options (as generated in Ansoff s matrix) again these are just possibilities at this stage

26 Ansoff s Matrix and Methods of Growth Existing Market New Market Existing Product New licences and further exploration for new fields Farming in Farming out Greater efficiencies in production Upgraded IT systems Longer term relationships with specific customers/customer groups (e.g. Gas companies) New Product Most existing customers will be focused on Oil and Gas possibly some other forms of energy production would fall into this box, but most would probably be in new market/new product Other upstream related industries -Drilling companies -Major contractors (e.g. maintenance of oil rigs) - Floating production storage and offloading vessels (FPSOs) - Service companies (e.g.catering) Midstream (oil transportation, oil refining) Downstream (selling refined oil and gas e.g. diesel, petrol)

27 Methods of Growth Internal Development Continue to survey and develop own fields Farming in Acquisition Diversification strategies quick way into this market Joint Venture With other oil companies e.g. developing larger fields, or to gain funding for production Divest Farming out

28 What should you do on weekday evenings for T4? Knowing how to prepare for the T4 exam is a key difficulty. The most important thing you can do is doing as many mock exams as possible to master time management, report structuring and dealing with key issues. BUT that takes over 3 hours, and is impractical on evenings. Our solution our ethics, calculations and issues e- books These enable you to practise one off exercises in time slots from 20 minutes to up to an hour to practise your time management and report structuring. They also include detailed guidelines for each of those sections. Why not try them before you buy by downloading the samples at

29 Defining a business strategy On the following page you will find my recommended strategy for the company. Remember that this is my view and is not a definitive answer Also remember that in the exam, you are NOT expected to define a way forward like this you MUST deal with the unseen issues and only those issues However, dealing with those issues in light of a strong logical approach to how the business should be taken forward can help you make a strong argument in your recommendations.

30 Nick s Strategies going forward Continue with the successful areas of the business Oil production in three developed fields Research new oil and gas fields Production licenses for new fields Risk management/health and safety Clear financial strategy To develop funds for more fields Mix of equity and debt To ensure funds available to pay back medium term debt Upgrade any outdated IT systems Take relevant new farming-in opportunities

31 Please Like the site So that s what I would do. I m sure you ll have your own views. Just remember not to hold onto these too tightly in the exam you must primarily deal with the unseen issues! If you ve found this useful, I would be most grateful if you could like our TOPCIMA page at This helps to raise our profile on search engines, which helps us reach as many people as we can. We provide exam tips on every 2-3 days on our facebook page, so do check these out, and Like our facebook page to get these posted to your facebook account as they are released