The Impact of Economic Forces on Market Position Essay Sample
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- Word count: 2,361
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- Category: market
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Introduction of TOPIC
The company in consideration is British Petroleum alternative energy which was incorporated in the united kingdom in the yare 2005. The company is operating in the energy industry and is listed in various stock exchanges in the world. It was started by a company which was incorporated in the year 1901 for the purpose of dealing with oil exploration and refinery. After it was incorporated, the old company, British petroleum sold off it’s derivative businesses so that they can run the current business. The company has over 500 subsidiaries based in various parts of the world and they record revenue of over 250 billion annually and currently talks as a company which records the highest sales in terms of petroleum products and exploration income.
The companies products include ARCO, Castro which is a lubricant, Amoco, Aral, LPG this a gas, Asphalt, Bitumen, LNG, Solar renewable, EGAS, Aviation Fuel, Petrochemicals and many others not mentioned. Companies operating in the same industry with BP include Exxon Mobil, Royal Dutch/Shell, Chevron Texaco and Mobil. (Rocsearch (2006)
The main objectives or activities of this company are to explore and produce of crude oil, natural gas, refining the crude oil, marketing oil and related products, supply and transportation; and the manufacture and marketing of petrochemicals with a growing presence in gas and power and in solar power generation. Vision: “Our aim is to be successful in everything we do by delivering outstanding performance. The test of success will be our ability to generate strongly competitive returns in a sustainable manner that aligns us with society.” (Company website)
There are many factors that affect the operations of this company in the energy industry. The factors that affect the operation of this company include technological change, change of prices of raw materials, change of prices of alternative products, the government policy, performance over other industries, activities and political stability in the Middle East and many others. In normal circumstances, the price of a commodity is determined by forces of demand and supply and the price at which supply is equals to demand it is called equilibrium. However, the equilibrium price at times falls or rises beyond the equilibrium when the demand of the product increases. At such a situation, a short fall is recorded and the suppliers respond by increasing the price of the commodity until the equilibrium price is reached. The converse is true. If the price gets beyond equilibrium point, suppliers will supply more of the product thus the price will tend to come down until it reaches equilibrium point. Therefore equilibrium price is the price in which the buyer and the seller are willing to buy or sell at different market prices.. The equilibrium price is determined as shown by the graph below:
Factors affecting the performance of the company.
As mentioned earlier there are a number of factors that affect the performance of this company and their market position of the company. I will be with the porters’ five forces of Porter’s Five
- Buyer Power
The purchasing power of customers affects the market position and their performance. If the customers of company shifts their loyalty to other rival companies then the market position and financial performance will be affected. The best way to deal with this through (i) Cost leadership: – It has reduced the price of some its products including the cost of offering services such as oil refining. (ii) Differentiation strategy: – The Company has come up with alternative products that are differentiated from the rival firms.
- Supplier Power: – BP Alternative is faced with the threat of the suppliers being able to control the price of some of the materials they supply. The oil producing countries have formed curtails and have come up with stringent price control measures. The labor laws are also stringent and the workers are so unionized that treating of employees in a fair and equitable manner is inevitable. If the oil producing countries decide to unite and increase price of crude or the employees union demands high salaries then the cost of supply or unit cost of production goes up. This increases the price of their products. Even with increase in the prices of raw materials for its products, the demand for the oil remains perfectly inelastic as shown in graph one.
GRAPH ONE: Showing that demand for BP products is perfectly inelastic.
Q= Quantity demanded
The generic strategies adopted by the company against supplier power are by increasing the price of their products. In essence, the extra prices charged for the raw materials are borne by the customers. This is the differentiation strategy. Another
strategy to insulate itself from this force is that of focus. Because of the higher material prices,
- Barriers to Entry:-The other force challenging the industry is entry of new companies with similar products or even more products like oil from sugar cane and many others. This would pose the threat of neutralizing the company’s profits as well as its market share. The generic position that the company has taken has been cost leadership. Through lowering its production costs and increasing operational efficiencies, the company has been able to lower its products prices while maintaining its profitability. This has deterred potential investors/ entrants into the industry.
The company has also produced special lubricants for special industries such as manufacturing industry.
Lastly, the company is faced with the threat of rival companies accessing its premises and imitating their production methods. However, the company has made its headquarters, inaccessible to foreigners in order to safeguard its patents and copyrights. In addition, their employees are well compensated therefore; they do not have thoughts of leaving for rival companies.
- Rivalry:- This force emanates from other companies within the same industry like Exxon Mobil, Royal Dutch Shell and Chevron Texaco. The threat here is that these companies capturing the market. However, the company’s framework/ strategy have been reducing prices whenever faced with such a threat. Prices are then reverted to normal after the exit of that company the specific market segment.
Consequently, new BP products have been adopted to reduce rivalry. Focus has also been used as the generic strategy to solve these problems- rival companies cannot effectively meet differentiated as well as focused needs of the customers. Still, so long as Energy products are not 100% substitutes of one another, the problem of switching costs arises.
- Threat of Substitutes:- From the economist point of view, threat of substitutes arises when the demand of that good is likely to be affected when the price of the substitute changes. This elasticity of price has formed a real force that the company has to fight if it has to be sustained in the near future. Energy products from other companies like the Exxon Mobil, Royal Dutch Shell and Chevron Texaco may be an alternative purchase option to the customers, if BP increases the price of its products. This bars the company from effectively increasing the price of its products whenever need arises.
To reduce the strength and danger of this force, the company has strengthened its differentiation generic strategy as its framework. Customers would then be loyal to the uniqueness of their products even when BP’s increase in price.
Pricing – BP makes all the prices of their goods to match the prices of their competitors but will have an hedge because they are unique. This pricing of their products is divided into two. One is purchase of the crude oil that that is refined, fixed price per litre oil and on the other hand, we have the price depending on the manufacture of other products. This varies according to the production thus the unit cost and this pricing is rather psychological because it encourages the customers to use more product, this type of pricing tends to reward loyalty of customers to the products. The price discounts are also used as promotional methods to encourage the customers to join in the purchases of the products. This is corporate pricing (Winer, R.S. ,2007)
In order to have good penetration to the world market, they have properly priced their products and has had good deals to both the buyer and the company. Price is the major determinant of buyer choice and price factors play a major role inn consumer behavior. Price is the major element in any product that produces revenue. In the case of BP products where there are two elements of price, one where the customer buys the refined and other which is for manufactured products. The company considers several factors such as quality. Pricing of a product is done at the time when the product is manufactured or refined and introduced into the distribution channel or geographical area.
The financial performance is affected by the economic factors as analyzed above.(00000)
a) Gross profit
= Gross profit
|b) Net Profit
= Net Profit
|c) Return on Owner’s Equity
= Net Profit
|d) Return on Total Assets
= Net Profit after tax
On profitability/ performance, it can be noted that the profitability of the BP is fluctuating from time over time. This is shown by the Gross profit margin, Return on Assets (ROA), Return on Equity (ROE) and the operating profit margin. In 2000, the ROE increased to 12.6% from 11% in 1999 before declining further to 1.1% in 2001 again it went up to 8.2% in 2002 and year 2003 it settled at 17.8%. The net profit margin also increased to 8.2% in 2000 from 6% in 1999. In 2001, it declined to -0.8% and then went up to 5.9% in 2002 before settling at 12.8% in year 2003. In 2000, the ROA inclined to 10% from 8.1% in 1999 before declining further to 0.8% in 2001 before going down to 6% in 2002 and settled at 13.4% in year 2003.
The Gross profit margin also inclined to 49.9% in 2000 from 48.4% in 2004. In 2001, it declined to 49.7% and before going up to 52.8% in 2002 and settling on 56.8% in 2003. Even though profitability of the company has been fluctuating, it is still positive results but if the management does not take care, the operating costs will affect the company’s profitability. this because although there are fluctuations they are associated with operating costs as the gross profit seems to be stable.
This can be plotted as follows
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