Gasmet business exam case UMB School Of Business and Economics 2013

Case exam BUS305 30.8.2013

We, members of this group, hereby declare that this assignment is written by us and - is a result of our own work - has not been used for another exam at another department/ university/ university college in Norway or another country. - does not refer to/quote works of others without stating it both in the text and in the reference list - does not refer to/quote previous writings of our own without stating it both in the text and in the reference list - mentions explicitly all sources of information in the reference list. We are aware of the fact that violation of these clauses is regarded as cheating and can result in annulment of the examination or paper. Cheating or attempted cheating can result in the expulsion of the examinee, in accordance with the University and College Act Chapter 14-1. We have read and understand UMB’s guidelines as to plagiarism and other dishonest behavior in exams: http://www.umb.no/statisk/sit/forskrifter/norske/forskrifter_internerutiner_regelverk_fusk.pdf Insert here candidate number of the group numbers for the exam (can be found from the Studentweb) 69 80 21 64

Insert here student number of the group members 980722 981963 980725 980724

Exam Candidates: 21, 64, 69 & 80

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Candidate Number Student Number

69 980722

80 981963

21 980725

64 980724

S c h o o l o f B u s i n e s s , N o r w e g i a n U n i v e r s i t y o f L i f e S c i e n c e s

GASMET EXAM CASE – BUS305 August 30, 2013

August Block 13


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Table of Contents 1.0 Methodology 3

External Analyzes – Key findings

2.0 PESTEL Analysis - Key findings 3

3.0 The Methanol Industry: Competitive Environment 4

Internal Analyzes – Key findings

4.0 Value Chain Analysis – Key findings 4

5.0 VRIN Analysis – Key findings 5

Analyze Sum-Up

6.0 TOWS Analysis 6

7.0 Conclusion 6

8.0 References 8

Appendix 1: PESTEL Analysis (Full version) 9

Appendix 2: Five Forces of Competition in The Methanol Industry (Full Version) 11

Appendix 3: Gasmet Value Chain Analysis (Full Version) 13

Appendix 4: VRIN Analysis (Full Version) 16


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1.0 Methodology

The top management of Gasmet is performing a process with both risk management and

review of existing corporate strategy on quarterly basis. To assist the management in

reviewing existing strategy, we´ve chosen the following methodology:

In order to analyze the business strategy, we´ve chosen to start analyzing the company and its

surroundings broadly, and narrow our perspective as the strategy analysis proceed. Initially,

we perform a PESTEL analysis, to get a broad overview of the company´s surroundings. Then

we proceed with an analysis of the Five Forces of Competition (Porter, 1980) in order to

create a picture of the competitive environment within the methanol industry. After analyzing

external factors, we focus on the internal factors, and how Gasmet currently adapts to its

environments. We analyze the internal factors through a value chain analysis and a VRIN-

analysis. Finally we sum up all the previous mentioned analyzes with a TOWS analysis to

define all Threats, Opportunities, Weaknesses and Strengths, both internally and externally.

The TOWS analysis will capture the key findings that will help us decide upon whether or not

Gasmet has sustainable competitive advantages and are able to mitigate risks. The TOWS

analysis will also be helpful in the work of deciding whether or not strategic changes are

necessary. All information regarding Gasmet and it surroundings are taken from case text.

External Analyzes – Key Findings In the sections below, we will present the key findings of our external analyzes. Full version

of the external analyzes can be found in the appendix section.

2.0 PESTEL Analysis - Key Findings The key findings in the PESTEL analysis give us an understanding of the overall picture of

Gasmet´s surroundings. There are for instant several political aspects one needs to be aware

of in Gasmets position. Different governments control over access to natural gas reservoirs,

political instability in existing and in emerging markets, and regulations and restriction within

the industry are key political aspects. In Egypt, for instant, Gasmet met immediate obstacles

because of the political landscape and an unstable scenario. In Chile, the company was forced

to shut down three of its production facilities because of natural gas supply shortages. In New

Zealand Gasmet was forced to shut down two of three plants for a period of two and three

years, and today still one plant is not operational.


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There are also economical factors, which is important to address. There is a global recession,

especially threatening the production in facilities in Egypt and Chile. Methanol prices are

highly fluctuant and prices are controlled by the amount of accepted climate spillage.

New technology trends have open up for new high growth markets within; fuel blending,

biodiesel, MTO and DME. These technologies could also support existing market diffusion,

and/or open up new markets for Gasmet.

3.0 The Methanol Industry: Competitive Environment The lack of cost-effective substitutes to methanol makes the bargaining power of the

methanol buyers relatively low. The industry demand will remain close to unaffected by

changes in spot prices. The industry buyers are though not locked to certain suppliers, and can

choose freely their suppliers based on the supplier´s ability to deliver on time, to offer the

lowest price.

As the industry of methanol is very dependent on natural gas supplies in order to offer on-time

delivery to its customers, and there are, at times, limited availability of natural gas supplies

increase the bargaining power of the methanol industry suppliers.

The different actors in the methanol industry compete primarily on two factors: 1) Price. 2)

Ability to deliver on demand. The industry price level is based on average contract prices

from several suppliers. Being the market leader, Gasmet´s price level are regarded at industry

standard, but the price levels are at times fluctuating because of political and technological

issues. Another aspect of the rivalry among industry actors is positioning of their production

plants. As access to natural gas can be limited, actors in the industry can achieve competitive

advantages by positioning production plants close to reliable natural gas extraction fields.

Internal Analyzes – Key findings In the sections below, we will present the key findings of our internal analyzes. Full version

of the internal analyzes can be found in the appendix section.

4.0 Value Chain Analysis – Key findings

A significant success factor of Gasmet´s inbound logistics, are the company´s ability to

negotiate long-term contracts with natural gas suppliers, to secure continuous access to raw

materials. Gasmet has though little, or no control of inbounds logistics. Various circumstances

(E.g. political or technological) have led to significant shortage of natural gas supplies –


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followed by production downtime. As they operate on long-term contracts with their

suppliers, their options to acquire raw materials from other suppliers are limited. Gasmet, due

to their storage facilities, also purchase already produced methanol from other producers in

favorable times, store it, and then sell it when the market price are favorable.

Gasmet conduct all production activities in-house. This allows full control over the

production, continuously improvement of production efficiency, and keeps the transaction

cost related to production actives low. Gasmet are in full control of outbound logistics of

methanol, through their stand-alone business Shipfront Shipping Company. This, combined

with storage hubs located around the world, allows them to be very flexible in the delivery of

their product. Gasmet´s worldwide establishment of marketing offices enables market

proximity. This also gives the company the opportunity to obtain close relationships with their

customers in order to provide satisfying service. The company operates with different price

levels in different geographical markets.

5.0 VRIN Analysis – Key findings In the following we will discuss some of the more important findings of the conducted VRIN

analysis. We refer to Appendix 4: VRIN Analysis (Full Version), where a matrix summing up

the analysis is presented.

There are several reasons why Gasmet is one of the leading methanol manufacturers in the

world. Their distribution network, with several major distribution hubs around the world,

makes them agile, and can deliver their product all over the world. This also ties up with their

logistical network with their own fleet of trucks, trains and ships, which allows them not to be

depended on outsourcing this part of their value chain. Their own storage facilities makes

them also unique, in that sense that they can stock up when the prices are low, giving a

competitive edge to their competitors. But although they have all of these advantages against

their competitors, we also found evidence of a declining trend within Gasmet and their

competitive advantage.

What we found in the analysis was that Gasmet in fact does not have any significant long-

term sustainable competitive advantage. As the matrix in appendix 4 shows, none of the

resources or capabilities measured fulfilled all the criteria to be considered as long-term


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sustainable competitive advantages. All the major resources/capabilities are all categorized as

a temporary competitive advantage, hence being short-term advantages.

Analyze Sum-Up

6.0 TOWS Analysis Below, a TOWS Matrix shows a sum-up of how the strengths and weaknesses of Gasmet

affect the company´s ability to handle both opportunities and threats. +: Affects opportunity/threat positively, -: Affects opportunity/threat negatively, 0: No affect on opportunity/threat.

Figure 1: Gasmet TOWS Matrix

The TOWS-matrix forms the basis for taking a stand on whether or not Gasmet possess

sustainable competitive advantages, are able to mitigate risks, and whether or not strategic

adjustments are necessary in order to remain a robust competitive company.

7.0 Conclusion Do Gasmet Possess Sustainable Competitive Advantages? In a short-term perspective we believe, after assessing our business analyzes, that Gasmet will

continue to keep their existing strong market leader position in the methanol industry. But in a

long-term perspective, we conclude that Gasmet do not have a sustainable competitive

advantage without making strategic moves with long-term perspective. We believe that the

current competitive advantages will be neutralized within few years, because of their modest

grade of sustainability presented in the VRIN analysis matrix. Gasmet are in need of

continuous strategic entrepreneurship in order to keep their market position and create

favorable conditions for growth (Hitt et al., 2003). McGrath (2013) and Osterwalder &

Pigneur (2010) support our point of view and argue that it is no longer possible to create

sustainable competitive advantage for longer periods (i.e. decades). Industry life cycles


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shrink, while markets and technology change very rapidly. To counteract these trends,

businesses are in need of high-pace innovation. Rather than to be a victim of other companies

disruptive strategies and tactics, we recommend that Gasmet itself speed up their R&D,

creating their own new innovative disruptive; internal processes, production technologies,

products and market.

Are Gasmet Able to Mitigate Risks Related to Core Business?

We conclude that Gasmet are able to mitigate risks related to their core business. As

presented in the TOWS matrix, Gasmet possess a set of strengths that reduce risks related to

the threats presented in the matrix. In general, we want to highlight Gasmet´s, market-

technology- and logistics leader position and it´s worldwide presence as significant factors

making the company able to mitigate risks related to the core business of methanol. These

strengths enable market knowledge to handle political risks and access natural gas,

technology and logistics to handle fluctuations in natural gas costs and supply as well as

financial power to monitor and follow up-and-coming market trends.

Maintain Current Strategy, or diversify?

As implicated earlier in this conclusion, Gasmet are in need of continuous renewal in order to

maintain competitive advantage. As a part of a long-term strategy, we see it necessary to

diversify and expand into new businesses and markets in order to stimulate future company

growth and reduce risks. The Southeast Asian market offer great opportunities:

Diversification of business in a joint venture with XinAn (develop DME), and entering into

the market of MTO. As Gasmet´s knowledge of the Chinese market is limited, we suggest

diversifying to DME in partnership with XinAo as a first step of expanding the business. We

see this as a natural first step because:

-‐ The XinAo Group knows the industry and market à Reduce risk of failure.

-‐ The DME market is already an established market.

-‐ Entering the Chinese market of DME shortens the path to the Chinese MTO market

Performing such diversification enables Gasmet to mitigate risk, no longer be reliant on the

success of one single product – methanol. A strategic option to enable entering new markets,

is to sell in-effective production plants in unfavorable geographic areas, and open new

production facilities to achieve sustainable production. This will most likely also increase the

valuation of Gasmet, that right now are valued to only two-thirds of its asset value.


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References Barney, Jay (1991), Firm Resources and Sustained Competitive Advantage, Journal of

Management, ProQuest Health Management

Grundy, Tony (2006). Rethinking and reinventing Michael Porter’s five forces model, Wiley

InterScience.

Hitt, Michael A., Ireland, R. Duane, Sirmon, David G. and Trahms, Cheryl A. (2012),

Strategic Entrepreneurship: Creating Value for Individuals, Organizations, and Society,

Mays Business School Research Paper No. 2012-19.

McGrath, R.G (2013). Transient Advantage. Harvard Business Review.

Osterwald, Alexander & Pigneur, Yves (2010), Business Model Generation – A Handbook

for Visionaries, Game Changers, and Challengers. US: John Wiley & Son Inc.

Porter, M.E (1985), Competitive Advantage, Free Press, New York

Porter, M.E (1996). What is strategy?, Harvard Business Review.

All information regarding Gasmet and the market surrounding the company are taken from: Exam Case BUS305 (Autumn 2013), GASMET: DEVELOPING STRATEGY IN A COMMODITY INDUSTRY.


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Appendix 1: PESTEL Analysis (Full version)

Introduction to our PESTEL analysis

We have chosen to start our status quo business analysis with a PESTEL audit and

assessment. The definition of the PESTEL model is; Political, Economic, Social,

Technological, Environmental and Legal (Grundy 2006.). PESTEL analysis is a simple and

effective tool used in status quo analysis to identify the key external (the macro environment

level) forces that create impacts for a company. These forces can create both opportunities

and threats for an organization. Therefore, the aim of performing PESTEL analysis is to find

out the current factors affecting a company, what changes are going to happen in the external

environment and to exploit those changes or defend (Risk Management) against them to be

able to keep or create sustainable competitive advantage (Porter, 1985) (Barney, 1991). The

result of our PESTEL analysis is an understanding of the overall picture surrounding Gasmet.

Political Factors

Negative political aspects:

• The different governments politics control the access to natural gas

• Political instability in emerging markets could lead to lower production, and therefor

damage the distribution as well (Unstable countries: i.e.: Chile, Egypt)

• Many new regulations and restrictions around formaldehyde and MTBE

Positive political aspects:

• Environmental, renewable and sustainable energy focused alternative fuel sources

• Non-profit organizations works actively against companies that not work on

renewable energy sources

Economic Factors

Negative economic aspects:

• Global recession, especially threatened production facilities in Egypt and Chile.

• Methanol prices highly fluctuant. Low price level does not increase demand

significantly.

• Prices controlled by the amount of accepted climate spillage


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Positive economic aspects:

• Prices on methanol decided on by industry

Social Factors

• The world is moving towards green energy politics, policy, ethics and consumer

awareness

• Societies wants and anticipate that the gas and methanol industry gives back to local

communities

Technological Factors

• The methanol industry is highly technology driven; smartest technology inventions

and innovations gives better margins

• Efficient plants (Less people used per plant than the industry norm)

• Continual investment in production technology

• High level of computerization – reducing the amount of needed people per production

plant

• High level of mechanization per production plant

• New technology trends; MTO (Methanol-To-Olefin), new plastic production, can

contribute to increase the usage and market demand for methanol

Environmental Factors

• Poor infrastructure in emerging markets

• Methanol production is accepted as a non-pollution industry

• Production is linked to available natural gas fields

Legal Factors

• Production and the industry are regulated both by national authorities and global

political interests

• Long-term and short-term contracts for production, big operational costs

• New products within i.e.: Fuel blending, Biodiesel, DME and MTO should open for

new patents (IPR strategies)


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Appendix 2: Five Forces of Competition in The Methanol Industry (Full Version)

1.0 Porters Five Forces Model – an introduction We will in this section analyze the different factors that create the competitive surroundings

of Gasmet. Our framework for doing this is the well-known Five Forces Model, by Michael

Porter (1980). The purpose of this model is to analyze how five different forces of

competition impact the competitive environment in an industry. The model is presented in

figure 1 below.

By inserting available relevant information from the Gasmet case into this framework, we´ll

be able to create a picture of how the competitive landscape, which Gasmet has to

strategically navigate through, looks like. As we consider that the Five Forces Model as

common knowledge to the reader of this report, there will be no further description of the

Five Forces Model, and we´ll proceed to the analysis.

2.0 The Bargaining Power of The Buyers The bargaining power of the buyers in the methanol industry is relatively low. As there are no

cost-effective substitutes to the traditional use, the demand for methanol will remain

unaffected by changes in spot prices. In addition to this, absence of raw material input to the

production plants, as well as unforeseen plant outages often reduces the available supplies of

methanol – something that will reduce the bargaining power of the buyers further and increase

methanol prices. The fact that methanol is a very standardized product will though contribute

Figure 1: Porter´s Five Forces of Competition Model (1980)


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to increase the buyer´s bargaining power. They´re not locked to certain suppliers, and can

choose their suppliers based on the suppliers ability to deliver on time, to the lowest price.

3.0 The Bargaining Power of The Suppliers The main inputs for producing methanol are energy and natural gas, witch make the methanol

industry ability to deliver to customer very dependent on on-time delivery of these raw

materials. The fact that there at times are limited availability on natural gas, because of e.g.

interruptions to supply lines and international policies and regulations governing imports and

exports, increases the bargaining power of the suppliers dramatically. Such shortage of natural

gas will drive the price level upwards.

4.0 Substitutes There are few cost-effective substitutes to methanol. Because of this, changes in spot price

won´t affect the industry demand.

5.0 Entry Barriers The fact that methanol is a fairly standardized product, reduces the number of customer lock-

in situations in the business. This will increase new entrants opportunities to capture market

shares from existing actors in the industry – as long as the new entrants can offer equal or

lower methanol price than existing industry actors. There are though other barriers for new

entries:

Entering, and surviving in the industry of methanol production require significant resources

invested in e.g. production plants and distribution channels. Even though the industry trend

shows increasing demand for methanol, such investments also represent a fairly large amount

of risks. What if the effect of new entrants leads to lowered spot prices and reduced profit in

the industry? What if the research on more ecofriendly substitutes to methanol reaches a

breakthrough? The access to natural gas needed to produce methanol are already limited –

what will happen if the number of methanol plants increases further?

Finally, the methanol industry is surrounded by international and regional regulations and

policies witch can represent barriers of entry to the industry.


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6.0 Rivalry The different actors in the methanol business compete primarily on two factors: Price, and

ability to deliver on demand. The contract price of methanol is driven by commodity spot

prices based on average contract prices from several global suppliers. The industry market

leader, Gasmet, have great influence on spot price. Gasmet´s price are regarded as industry

standard. The prices are though periodically fluctuating, as a consequence of raw material

fluctuations, unexpected outages of significant production plants and international and

regional policies and regulations.

Another aspect of the rivalry among the competitors in the methanol industry is the aspect of

geographical positioning of production plants. The production of methanol is largely

dependent on the supply of natural gas, and the actors in the industry can increase their access

to raw materials by locating their production plants close to reliable natural gas extraction

fields.

Appendix 3: Gasmet Value Chain Analysis (Full Version)

1.0 Introduction

This section will present a value chain analysis of Gasmet, conducted in order to identify the

strengths and weaknesses of the different parts of Gasmet´s value chain. Such analysis will be

helpful in the work of identifying possible competitive advantages, as well as areas that can

be subject of improvement. Our analysis is based on Michael Porters (1985) Value Chain

Model, presented in his book Competitive Advantage: Creating and Sustaining Superior

Performance. Assuming the reader of this report are familiar with this model, we won´t

describe the details around Porter´s Value Chain Model in this report.

2.0 Primary Activities

Inbound Logistics

Analyzing inbound logistics, we´ve chosen to focus on the supply of natural gas, witch

represents 80 % of the product of methanol, as the Gasmet Exam Case Text do not focus on

the remaining 20% content of the product. We are also assuming that the production plants

grade of flexibility in geographical location are low, as the natural gas has to be transported

from the natural gas production fields through gas pipes.


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A significant success factor of Gasmet´s inbound logistics, are the company´s ability to

negotiate long-term contracts with natural gas suppliers, in order to secure continuous access

to raw materials. Despite this, various circumstances (E.g. political or technological) have led

to significant shortage of natural gas supplies – followed by production downtime. This led to

a situation where Gasmet has little, or no control of inbounds logistics. As they operate on

long-term contracts with their suppliers, their options to acquire raw materials from other

suppliers are limited.

When Gasmet receive supplies of natural gas, the raw material goes straight into the process

of producing methanol. This leads to low, or none significant costs related to inventory.

Gasmet also purchase already produced methanol from competing actors in the industry that,

due to regional and international regulations or lack of storage possibilities are forced to get

rid of their supplies of finished goods to favorable prices for Gasmet. As Gasmet storage

facilities, the company can resell the methanol when market price level are high, in order to

make a profit.

Operations

Gasmet are performing all activities necessary to perform the process of turning raw materials

into methanol in-house. By not outsourcing any part of their production, Gasmet possess full

control over their production, and the company are able to continuous improve production

efficiency. Keeping the processes in-house, also leads to low transaction costs related to

production activities.

Outbound logistics

Gasmet are in full control of their outbound logistics of methanol, through their stand-alone

business Shipfront Shipping Company. This company was created to manage a fleet of 20

(2007) ocean-going vessels, which in addition to transporting methanol to Gasmet´s

customers also generated revenue through transportation services on a contract basis to other

companies when the vessels were not being used to transport methanol. Because of this

horizontal integration, Gasmet´s control over outbound logistics is considered high.

Some of the Gasmet production plant output is stored in storage facilities in The Netherlands,

China, Canada and in the US, in order to be able to absorb market fluctuations, and to be able

to deliver on demand.


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Marketing and Sales

Gasmet has established marketing offices located in the Asia-Pacific region, North America,

South America and Europe. This worldwide establishing of marketing offices enables market

proximity. Only 10% of Gasmet´s revenues can be traced long-term contract customers.

Having 90% of the company´s revenues represents significant transaction costs, but it will

also contribute to selling methanol at a price level that have accordance to general level in the

industry.

Service

The worldwide locations of Gasmet´s marketing offices gives the company the opportunity to

obtain close relationships with their customers in order to provide satisfying service. The

company also publishes reference price lists on a monthly basis, to keep their customers

updated. The company operates with different price levels in different geographical markets.

3.0 Support Activities

Firm Infrastructure

As mentioned earlier, Gasmet has established regional offices worldwide. The case text do

not explicit explain how these offices interact with each other, but it is natural to assume that

each regional office holds capacity to run support activities related to handling to e.g.

financial, legal, managerial and administrative issues on a regional level. Gasmet has their

head quarters located in Vancouver, Canada. It is naturally to assume that support activities

related to worldwide issues are run out from this location, where 200 of the company´s 1000

employees are located.

Human Resource Management

Gasmet are recruiting personnel from the regions close to the production plants, in order to

create employment in local surroundings. The production workers are trained at production

facilities, where they learn how to run high tech processes. The use of high technology

enables Gasmet to use a significant lower amount of human resources in their operations,

compared to other actors in the industry.

Technological Development

As mentioned in the previous section, Gasmet has developed high-tech production plants in

order to reduce the need of human resources in production processes. The company is also

involved in research of future use of methanol, in order to open new markets.


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Purchase

The Gasmet case text gives implications that each production plants (or production plants

geographically closely located to each other), has to negotiate with regional suppliers of

natural gas individually. The contracts that are negotiated are long-term

Appendix 4: VRIN Analysis (Full Version)

Val

uabl

e

Rea

r

In-

imita

ble

Non

-

subs

titut

a

ble

Competitive advantage

offered

Distribution network Yes Yes No Yes Temporary advantage

Logistic network Yes Yes No No Temporary advantage

Long term contracts Yes No No No Potential advantage

Locations Yes Yes No No Temporary advantage

Technology based

production

Yes Yes No Yes Temporary advantage

Storage Yes Yes No Yes Temporary advantage

Human capital Yes No No Yes Minor advantage

Partners Yes No No No No lasting advantage Figure 1: VRIN Matrix showing Gasmet´s competitive advantages

In addition to the previous analysis discussed, we also include an analysis based on the VRIN-

framework. This analysis aims to investigate company´s resources and capabilities, with the

goal of creating an understanding of how these resources and capabilities help the company

establish a sustainable competitive advantage. There are four characteristics within the VRIN-

framework one could measure a specific resource; valuable; rare; inimitable; and non-

substitutable, and all of these measures are important when it comes to creating a sustainable

competitive edge. In the following we will discuss some of the more important findings, and

reefer to appendix # for the whole analysis.

There are several reasons why Gasmet is one of the leading Methanol manufacturers in the

world. Their distribution network, with several major distribution hubs around the world,

makes them agile, and can deliver their product all over the world. This also ties up with their

logistical network with their own fleet of trucks, trains and ships, which allows them not to be

depended on outsourcing this part of the value chain. Owning storage facilities makes them


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also unique, in that sense that they can stock up when the prices are low, giving a competitive

edge to their competitors. But although they have all of these advantages to their competitors

we also found evidence of a declining trend within Gasmet and their competitive advantage.

What we found in the analysis was that Gasmet in fact does not have any significant long-

term sustainable competitive advantage. As the matrix in appendix # shows, none of the

resources or capabilities measured fulfilled all the criteria needed to be seen as a factor for

sustainable competitive advantage. All the major resources/capabilities are all categorized as a

temporary competitive advantage, hence being short-term advantages.