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OBJECTIVE
The objective of this report is to find out the practical application of strategic management concepts at Pakistan State Oil Co. Ltd. (PSOCL). To analyze the integration of the various functional departments, we have examined the internal environment of the company by conducting an in-depth value chain analysis. We have also conducted an external analysis to find out how the external environment affects the company whether it anticipates changes in the external environment and responds to it accordingly. As a result of these analyses, we have generated alternative strategies, and have chosen the most appropriate one that the company should follow. Based on the above findings, we will write a live case on the company.
ANALYSIS OF VISION
Company's vision statement emphasizes more on long-term marketing objectives rather than addressing the company in a broad manner. It addresses about the company in a confined and limited manner touching only the product and the market share position in the future. It does not highlight as to how the organization would like to be perceived by all its stakeholders, and how it will be received by the world. The statement does not identify standards set by the organization for itself. However, the vision statement clearly reflects creation of an environment through the induction of professionally trained, committed and highly motivated work force leading to reward performance, innovation, creativity and congruence of personal and corporate goals.
The organization as such does not have a mission statement. However, several departments have their own mission statements, addressing specifically their own departmental objectives and challenges. This lack of organizational mission statement is hampering the organization a great deal; the sense of shared values is no longer present in the employees. The need for a proper mission statement becomes double important for the PSO. At present, it is passing
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PSO has enjoyed a significant stable financial position over the last five years and this is evident from its Ratios and after tax profits. The company earned accumulated after tax profits of Rs. 12.187 Billion, in the financial year 20012002.1 For the fiscal year ended June 30, 2002 despite the revenue drop and a record provision of Rs. 2 Billion made for taxes, PSO earned an all time record before tax profit of Rs. 5.1 B (up by 49%) while after tax profit rose to Rs. 3.2 B (growth of 42% over prior period). 1 In addition the company absorbed the balance financial impact of Rs. 408 M on account of Voluntary Separation Scheme offered in April 2001 1. The Operating profit of the company grew by an impressive 32% over the prior year. 1. Liquidity Ratios
During the last five years there has been no major movement in the position of Current Assets and Current Liabilities. However on account of individual items Stock in Trade (i.e. Inventories) showed an upward trend of 107%, Loans, Advances and other receivable went up by 136%, Dividend payable rose by 114%, while Current portion of Leased Assets increased by 483% in the year 2002 as against the base year 1998. On the other hand Trade Debts (Receivables) have shown a decrease of 55% and Current portion of Long Term Loan fell by 82% in the year 2002 as compared to the base year 1998. The movement of Current Ratio is in the range of 1.16 to 11.31; Quick Ratio is between 0.79 and 1.03, Working Capital to Assets is between 0.12 and 0.20. This analysis shows that the company has favorable liquidity position and can easily meet it short-term cash obligations. This is also evident through companys cash flow and Dividend Policy. (Appendix # IV) 2. Asset Management Ratios/Activity Ratio
The average collection period of the company improved over the last five years, which fell from approximately 81 days in 1998 to 21 days in 2002, whereas the inventory turnover ratio relatively stable between 20 to 24 days over the same period. Hence the Operating Cycle of the company fell from 101 days in 1998 to 45 days in 2002, which shows that the company has taken steps in improving its collection procedures. Likewise the average payment period has also improved from approximately 95 days in 1998 to 44 days in 2002.
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The Debt to Asset ratio and the Debt to Equity ratio have declined from 76 to 64 and 336 to 186 respectively, which shows that the increase in the proportion of financing supplied by creditors is less than the increase in the proportion of financing provided by shareholders and increase in Total Assets. On the other hand, Long- term Debt to Assets, Long-term Debt Equity and Times Interest Earned showed insignificant movements over the five years period. (Appendix # IV) 4. Profitability Ratios
The Net Profit Margin, Gross Profit Margin and Operating Profit Margin ratios of PSO shows insignificant movements during the five-year period, thereby indicating that no measures have been taken to reduce expenditures. Earnings per Share and Dividend per Share have increased from Rs.18.6 in 1998 to 22.3 in 2002 and Rs.8 in 1998 to Rs.13 in 2002 respectively making investment attractive in PSO. (Appendix # IV)
EXTERNAL AUDIT
1. Economic Forces PSO as well as Oil marketing industry is heavily import dependent. PSO imports refined and finished POL products through term contract from Kuwait Petroleum Company on biannual or annual basis, however spot contracts are made, sometime on quarterly or monthly basis to cater seasonal demand. Government has linked the prices of refined local petroleum to the mean Singapore FOB 2 prices. Thus higher international prices mean higher local prices Government has formed Oil Companies Advisory Committee to review POL prices on a fortnightly basis. The oil prices in the country are automatically hedged against any devaluation. If the Pak Rupee were to devaluate, then the Government will revise oil prices upward to counter the loss in PKR value. This may not be very relevant in the short term since the PKR is gradually becoming stable after the September 11 attacks.
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2.
Until recently, the oil marketing companies were functioning under a strict regulated environment so much so that for establishing new retail outlets, they have had to seek Government approval. These restrictions have been removed so as to deregulate the market completely. The lubricant industry is very much deregulated and the Oil marketing companies set the margins themselves. However, the strict licensing requirements required for setting up an oil marketing company remains effective, for some reasons. However, with their policy of deregulation, the Government is encouraging new entrants into the oil-marketing sector. The oil prices in the country are still regulated to some extent and there used to be a fixed margin that both the dealer and the distributor (the OMC) receive. Now, the average margin of Oil Marketing companies as well as dealer has been raised. The regulated environment favors PSO, as their management is still able to reap in profits but the professional management of Shell Pakistan Ltd. prefers a de-regulated environment where they can cut down on costs to increase profitability. As major portion of the POL product distribution is through Road Network, and complexities associated with this mode of transportation poses a potential threat for PSO to accept Unnecessary Demands of Oil Tankers Associations (APOTOA) and compelling to convert mode of transportation from road network to Pipeline network. Technological forces As most of the independent power plants are turning towards gas from furnace oil, this is directly affecting PSO furnace oil sales. As the car manufacturing companies are inclined towards fuel-efficient cars, this is a direct threat to PSOs retail fuel sales.
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PSO is the largest Oil Marketing Company in the country. It caters to almost 65.9 % of the total POL needs in Pakistan. Its main rivals in Oil Marketing Business are SHELL, CALTEX, PARCO/TOTAL and ARL 4. In the field of Lubricant, Mobil is also a major competitor to PSO. PSO has enjoyed a major edge over its competitor, simply because of the fact that it has got the largest infrastructure to receive store and dispatch POL product all over the country. This fact that PSO enjoys the edge because of infrastructure becomes more evident, when we find that PSO has got only 39 % share in the field of lubricants as compared to 44 % of SHELL and 20 % of CALTEX. In the early 1990, CALTEX and SHELL embarked upon their international retail visual image projects by improving their retail outlets (Petrol Pumps) to increase their market share in retail fuels. But PSO all along neither did not upgrade their retail network nor improve the product and services. It was in 1999 when PSO first realized the need for improvement in their image and services and tried to counter by building their own retail outlets. Despite being of the fact that company has gone on to build 539 new vision outlets 5, it has not been able to change the brand perception and public image significantly. 2. Potential Entry Of New Competitors
Total market requirement of POL product in Pakistan is approximately 9000 M. Tones 1. Because of the favorable government policies for new entrants in Oil Marketing business, several companies have showed their intentions to enter into the field. Just recently in the last two years, TOTAL/PARCO and ARL have emerged as new entrants. But, to pose a real threat to PSOs share, a company requires strong infrastructure all over the country. 3. Potential Development of Substitute Products
Natural gas has been developed in recent years as a substitute for furnace oil in power generation and it has affected the furnace oil sales of company. Similarly, CNG has also been developed as a substitute for petrol but the company itself is also marketing CNG.
4.
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The Oil Company Advisory Committee (OCAC) sets prices of POL product and retail consumers have no bargaining power over prices, which are same through out the country. However, this factor puts a challenge for the company in industrial consumer market where industrial consumers does enjoy bargaining power due to the rebates, concessions, credit limits and discounts offered by other Oil marketing companies. PSO also conveted the bargaining power of importers by raising tenders and entering into short term & spot contracts on fixed price formula basis.
INTERNAL AUDIT
1. PRIMARY ACTIVITIES a) INBOUND LOGISTICS: Product supply department is responsible to cater the requirement of necessary POL product by making arrangements through either Refineries or Product Imports. Product supply departments responsibilities include planning of product from refineries, imports through tankers as well as International Bidding & contract management for product imports. The department has to plan product receipt arrangement, in co-ordination with distribution department (out bound logistics), in such a manner to maximize inventory turn over. Government obligation to maintain 28 days 6 reserves of POL product, however, makes it difficult to enhance inventory turn over ratio. Maximum Inventory turn over is essential to assimilate the price fluctuation effect in International Market accordingly. Use of information technology can help the planning process of department, but still manual processes are in usual practice.
b) OPERATIONS: 1.
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Operations Department
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2.
PSO has four Blending plants, among which three are in Karachi and one is located in Lahore. Despite rigorous efforts, PSOs share in Lubricant market has declined drastically, ultimately, responsible for closure of three of its blending plants. PSOs Korangi Blending plant is currently in operation to cater the requirement of lubricants. Core function of the department includes imports of blending components, mainly Base Oils and additives, packaging, labeling and warehousing. Lubricant & Chemical Division has recently started on the spot mobile quality testing units and laboratories to assure right quality and quantity of the product. Since the inception of Lubricant marketing, PSO remained dependant on franchised lubricant (Castrol Brand) and ignored the product development need, hence, responsible for continuous decline in market share in Lube & Chemical Business. c) OUTBOUND LOGISTICS Logistics department is responsible for outbound logistics of POL Products. Road network, rails transport and pipelines network are three modes of logistics. Core functions of department include utilization of available logistics system, transport fleet management and co-ordination with Supply (Inbound logisitcs), Operations and marketing departments accordingly. Road logistics is carried out through registered cartage contractors, rail transport through Pakistan railway Wagons and through pipeline network in Karachi and upcountry. PSO plans to reduce POL Logistic through Road movement from 55 % to 31 % in order to avoid complexity associated with the mechanism. White Oil Pipeline Project (WOPP) will enable the all Oil marketing companies to convert their road network logistics to pipeline logistics, being the safest and cost effective mode of transport.
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3. Services (Customer Service Department) PSO, being a service oriented organization, has identified the need to address customer related issues and recently formed a customer service department. Core function of the department are to improve response time to customers,
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SUPPORT ACTIVITIES
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FIRM INFRASTRUCTURE
1.
Industrial relations departments core objective includes handling labor unions, compliance with labor laws and company protection from legislations. Due to illiterate labor force it is difficult to communicate procedures and problems rising out of their own irregularity and non-compliance with laws. Department is trying to overcome these problems to improve over all efficiency of labor force. 2. Finance & Accounting The department is involved in maintaining books of accounts, reporting variances, managing taxation and providing timely management information. It figures out ways to record and disseminate information in a manner that will
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The functional structure is horizontally expanded into various activities within a division. This disaggregating of activities is resulting in cost accumulation and spread-out of overhead cost allocation. Theres no philosophy of job enrichment, fulfillment of higher order needs and emphasis on core and relevant activities. This is also resulting in long inefficient coordination time among various departments. There is a great room for more strategic fit in the companys structure, as managers at functional level are now directly analogous to tasks facing business level managers as well as availability of fewer positions for top management in a flatter organization.
4.
Corporate Governance
The top management includes experienced people, but general management personnel have not been in the organization for long. The decision-making and strategy formulation is centralized and is the prime responsibility of the top management consisting of Board of Director. The middle and lower level management can only look up to them for passing of order and have no say in it, therefore, no empowerment space for general management. Management has initiated a procedure for employee feedback and suggestions, but due to bureaucratic style of management prevailing in the organization, employees are reluctant to share their views. Each department has their own vision & mission statements specifying their own objectives and goals, which sometimes are not quite in line with corporate objective.
5.
The culture and environment prevailing in PSO is largely dominated by the thought of top management and based on old norms. Theres a high degree of complacency, cognitive dissonance and laid-back attitude. Management approach is job-centered, instead of Employee-centered, which is imperative to increase productivity. Top
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6.
Information technology
IT department is primarily engaged in the computer systems implementation and maintenance, computer operations, data control and business analysis & procedure development. IT department has started to implement industry standards system solutions to meet internal & external challenges. This department has made 16 computerized applications/soft wares in-house as per requirement of concerned department. Future plans include completion of WAN system set up, business process re-engineering and implementation of Enterprise Resource Planning (ERP, SAP) solution. It is worth mentioning that department requires dedicated leadership, instead of co-headed by General Manager Finance.
7.
Core functions of Audit department are conducting departmental and control systems reviews, station examinations, corrective actions on audit findings, reviewing contracts and other agreements with outside firms and preparation of annual audit plans. Previously, audit department had been involved in few of the routine activities i.e. procurement appraisals and review of construction activities mainly, thus, neglecting the core function and responsibilities of the department. Though, the department has recently been strengthened by Induction of new personnel, but it will not serve the purpose of achieving organization goal and objective unless there is good working relationship among employees.
SWOT ANALYSIS
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MAJOR PROBLEM
The major problem being faced by the company is its bureaucratic style of management. The strategic planning process is centralized and carried out by the top-level authorities. The decisions are then communicated downward
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MINOR PROBLEMS Improper utilization of human resources has led to inefficiencies at functional and operational level. Employees are also de-motivated due to lack of involvement and empowerment thus lacking cohesiveness in striving for the common goal. This has also led to a stiff problem in the retention of professional employees. Although the salary structures have just recently been revised but this has not achieved its desired results.
1. The bad debts of the company against single major industrial customer KESC amounts to Rs. 4,414 Million.1
Top management is facing difficulties in recovering this enormous amount, which is hinging upon the liquidity of the company.
2. Despite extensive marketing efforts to enhance the image of the company, the results are not up to the mark.
Basically most of these marketing efforts are in response to their competitors activities and secondly some of them are misdirected as well. One prime example in this regard is that of the companys sponsorship of Cricket Tournament in Tangier in 200210. The slackness of marketing efforts can be recognized by the fact that CASTROL considered to be the number one lubricant oil in World market has failed to achieve the same position in Pakistan, marketed by PSO in the country. 3. Although the overall environment has tilted towards the use of Information Technology at Terminals and Depots in other Oil marketing companies for better productivity PSO did not come up with an effort until recently. Though the management has now realized its weaknesses in this area, yet the efforts put up by the company in this regard do not show its true concern towards the issue. A prime example in this regard is the dispatch of Furnace Oil from Pakistan Refinery where all three major oil-marketing companies have their
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Annual Report 2002. Case against PSO has been filed in Federal Ombudsman court.
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STRATEGIC ALTERNATIVES 1. Privatization: Privatization can be regarded as one of two options directed towards overcoming the problems at PSO. The new management might take more strategic steps and initiatives to improve motivation and inspiration of employees. As their intentions would be involved with the company, they would consider present human resources as an asset to them and would take steps to empower them more, which often results in synergy and improved efficiency. On the other hand, fear of layoff can not be written off, associated with privatization. If the new management does not take steps towards strategic planning & management. The situation may result in further demotivation and demoralization for the employees. 2. Retrenchment & reorganization: Another strategy to counter the present situation is retrenchment of employees and reorganization. If the top management is not in view of Old employees, and also it does not want to change its attitude towards them then, there is no point in hanging along with them for too long. Voluntary separation scheme may be a fruitful idea in this regard. As most of the older employees have openly expressed their willingness to accept Voluntary Separation Scheme (VSS), in case it is offered. Major removal in the hierarchical layer i.e. senior manager and senior executives will result in flatter, productive and cost effective organization. To overcome the loss of experienced employees, fresh persons can be hired to take up the
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The third strategy would be to adopt strategic management measures at all level of organization, allowing more empowerment to the employment so that they could develop a sense of ownership with the organization. Also, some concrete steps must be taken to enhance the sense of belongingness of old employees. No organization can prosper for a longer period of time and it keeps two different groups in its ranks, having conflict of attitude, vision and behavior. Even if the management feels some slackness in older management, it should devise plans to develop the required skills in the employees through frequent and proper training progress. Management should take measures to take both old and new management people along with it rather than creating sense of isolation in one faction of employees.
RECOMMENDED STRATEGY After discussion and taking into consideration the results of IFE, EFE, QSPM and TOWS matrix analysis, we recommend strategic management / empowerment strategy for PSO. There are also various other reasons for our recommendation. Detaching people from organization never helps in building the employees morale. People are the real asset of an organization and they should not be considered as an expense. Also, we have not seen privatization, resulting in a good shape at many organizations. Third strategic alternative is the best choice for PSO.
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