Case Study Analysis of Saudi Basic Industries Corporation

Executive Summary

Saudi Basic Industries Corporation is a global petrochemical company that is headquartered in Riyadh, Saudi Arabia. The company produces various chemical products that are sold to clients all over the world. The company began its operations in 1976 when, and since then, it has gradually expanded its operation throughout the world. The company is largely owned by the Saudi Arabian government and few private investors in Saudi Arabia.

The company’s business strategy has adopted a strategic business unit model; as such, it has divided its businesses into strategic branches that comprise of chemicals, polymers, performance chemicals, metals and fertilizers units. The company targets local and international businesses, companies, agencies and states. Also, it has expanded its operations in order to accommodate a wider market with the aim of becoming a market leader and providing quality products. Though the company is not immune to global economic challenges, it has continued to grow its sales and profits while penetrating into newer markets. It is evident that the company’s strategy to focus on product innovation, diversification and quality assurance has enabled it to become a leader in the petrochemicals market.

History and Objectives

Saudi Basic Industries Corporation (SABIC) is a multinational company that was formed in 1976 by the Saudi Arabian government with the aim of utilizing the hydrocarbon gases that are produced in the processes of its oil productions. The company’s core products included chemicals, fertilizers and polymers. The company had formed a significant number of companies that were under SABIC group of companies. The establishment of the company in Saudi Arabia led to significant infrastructural development and spawned the growth of the local fishing villages into flourishing industrial hubs and cities.

The company’s initial operations involved steel production in 1982. Subsequently, the company relocated its headquarters to Riyadh. In addition, SABIC founded two of its subsidiaries, SABIC marketing and SABIC services. In the same year, the company made its first shipment of chemicals to Japan. Subsequently, the company continued to grow and expanded its operations to countries such as Germany, the United States, the Netherlands and the United Kingdom. The company’s objectives of becoming a world leader in chemical manufacturing and supply were being realized gradually. The company has succeeded in penetrating markets in Asia, Europe, Middle East and America. As a result, the company’s success has made it possible for it to supply “up to six percent of globally traded petrochemical products” at any given time.

SABIC became a publicly traded company in 1984; however, the Saudi Arabia government retained a controlling interest with 70% shareholding. Though the company was publicly traded, the government restricted shareholding only to its citizens and individuals from GCC countries. The company continued to grow in pursuit of its objectives and recorded significant success in global markets. Since the raw materials were obtained from its oil production, the company’s production costs did not increase significantly; therefore, it was able to maximize revenues and expand its operations in various countries.

The company had a significant competitive advantage over its competitors as a result of low production costs given that the Saudi Arabian government’s oil production was the primary source of raw materials. The cost of production and operational efficiencies made the company highly competitive making other players in the market experience a tough time. As such, the company managed to push its competitors out of the market or make it difficult to for competitors to operate.

Background and Position

When SABIC was founded, it had free access to raw materials; therefore, it swept the market and expanded its operations. The company’s portfolio began to grow when it launched its two subsidiaries in 1983. The launch of the two subsidiaries, SABIC marketing and SABIC services, indicated the company’s upward trajectory and growth. In addition, the company’s first international business venture, the export of “33000 metric tons of chemicals” through an affiliate company known as AR-RAZI to Japan, marked the company’s entry in the international arena. SABIC’s global strategy involved the acquisitions of plants, factories and other assets in countries such as the United States and the United Kingdom. For instance, in 2007, SABIC acquired GE plastics, restructured the new acquisition and renamed it as SABIC innovative plastics. The new acquisition was added to an existing portfolio comprising thirty-eight new facilities.

SABIC had a significant competitive advantage since it entered the petrochemicals market when there was global slump in the petrochemical market. In addition, the fact that the company had access to the country’s numerous gas reserves gave the company the ability to remain profitable due to the low products costs. Hence, it had the “lowest feedstock in the market.” Though the company reported overall production at 6.5 metric tons in 1985, its production increased in the next five years to 13 million tons; production was raised to 42 million and 56 million metric tons in 2003 and 2008 respectively. In light of the gradual and favorable increase in production, the company intends to keep the upward trend. As such, it is expected to boost production up to 130 million metric tons in 2020.

Though the company faced similar economic challenges that other companies faced in 2009 as a result of the global economic recession, it managed to make some profits. However, these were significantly reduced compared to the previous year’s profitability and production statistics. SABIC’s financial position has been higher in contrast to that of other companies, which is a factor that is attributable to the company’s access to the government’s oil reserves thus making the cost of raw materials low. In spite of the 2009 economic crisis, the company still managed to report the highest profits in the industry even though they faced a sharp decline in the company’s expected profits.

 

The fact that SABIC’s operating margin reduced from 28.71% in 2005 to 18.25% in 2009 indicates the negative impacts that the economic crisis of 2009 had on the company’s profitability. However, the company remained profitable at these challenging times because of its unique position to access raw materials at a lower cost and pricing strategy that could not be matched by competitors. The recession had significant impacts on performance; however, the company was able to recover and revert to its profitable course.

 In 2010, a year after the recession, the company reported a considerable increase in profit of SR11.85 billion in the second quarter. In the same period, the company made a profit of SR6.22 billion. The increase in profits indicates the significant recovery that the company was able to make. It is evident that SABIC’s financial position is unmatched by other companies in the industry; hence, it is a market leader not only in product and service deployment but also in financial position and performance. However, the company’s position can be attributed to its access to raw materials and government support in its various projects given that the state owns at least 70% stake in the company.

Industry Life Cycle and Strategy

The fact that SABIC has reached a maturity phase in its life cycle illustrates that it has undergone the preceding stages successfully. The initial phase saw the company being established and starting to develop its products in the local market before expanding to international markets. The initial phase was characterized by an emerging growth, entry into a market that had established competitors, which was the struggle for remaining operational. However, the company entered its innovation phase and continued to develop innovative and differentiated products that appealed to a wider section of the market. The innovation in product development saw the company establish its various product lines including chemicals, polymers, plastics, fertilizers, metals and innovative plastics.

Through its research and development initiatives, SABIC was able to develop a product line that was qualitative and preferred in the petrochemical industry. The fact that SABIC was able to make quality products at significantly lower costs gave the company an advantage. As such, it enabled SABIC to push other players out of the market, which, consequently, helped it to take control of the market.

The current stage in the company’s life cycle can be characterized as a maturity stage. Since the company has succeeded in establishing operations in most parts of the world it has shifted its focus towards increasing revenues. SABIC has strategically positioned itself in the petrochemicals industry so that it has monopolistic characteristics, especially in Saudi Arabia. The reported financial performance indicates that that the company’s expansion and diversification strategy has enabled it to increase revenues and profitability. Thus, at the current stage of SABIC’s lifecycle, the company is focused on increasing revenues and profits.

Market Entry Strategies

SABIC’s marketing strategy is geared towards providing its customers with qualitative products at competitive prices. In essence, the company has integrated a marketing mix that balances the 4Ps of marketing in an effective and comprehensive marketing strategy.

Product: SABIC has developed a product strategy that has enabled it to produce innovative and unique petrochemical products. The company’s products range includes polymers, innovative plastics, fertilizers, metals and chemicals that are used as raw materials in the production of other industrial products. The company’s unique and differentiated products lines have enabled it to take control of the market. In turn, the takeover in the market attributable to the company provides customers with products that are qualitative and capable of meeting their needs effectively.

Price: The unique aspect of SABIC’s marketing strategy is the competitive pricing of its products, which enables the company to take control of the market. SABIC’s pricing strategy is a factor of the relatively low production costs that the company incurs as a result of readily available raw materials. Since the company is largely owned by the Saudi Arabia government, it can access numerous resources at lower costs. Hence, the company’s overall production costs are low compared to those of competing companies in the market, which gives the company the opportunity to establish lower prices for its products.

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Place: Among the effective marketing strategies that the company has implemented, there is the company’s early decision to become a leader in developing and deployment of petrochemicals in the world. As such, SABIC made significant investments and acquisition in various countries with the aim of entering global markets. The emphasis on establishing its operations in diverse geographical locations has enabled the company to enter various markets through its local establishments. It is through its subsidiaries and affiliates in various countries that SABIC can provide customers with products in their local markets. In the event that products have to be shipped from Saudi Arabia, the export is established through its affiliate companies, which makes it easier for the company to serve diverse markets on a global scale.

Promotion: Though the company has established itself on a global scale, it still requires promoting its products through advertisement and lucrative offers to its customers. However, while advertising is one of the established forms of promotion, the company opts to promote its activities through the corporate social responsibility and environmental preservation initiatives. The petrochemical industry has been affected by statistical evidence that describes the industry as destructive to local communities, environment and climate. 

Therefore, in response to these assertions and as a promotional strategy for the company, it has engaged in corporate social responsibility and invested in environment preservation programs. These strategies aim at showing that the company is sensitive to critical issues that impact its customers and the local communities, which is an effective marketing strategy. Meanwhile, the company still uses the global media to advertise its products and appeal to customers.

Non-Pricing Competitive Strategy

SABIC recognizes that while the pricing strategy is effective, productivity requires pooling resources to create a harmonious and functional organizational system. Therefore, the critical resources that the company has identified as critical include human resources. Employee development and motivation are key factors in ensuring the company continues to remain a market leader through improved product innovation and increased productivity. Since the company’s mission is “to become the world’s preferred leader” in the petrochemical industry, it has invested in developing employee talents and motivation as key drivers of productivity.

Among the key strategic developments that the company must integrate, there are advancements in technology and innovation. Technology emphasizes on improved methods of production that reduce costs while increasing efficiency of the production processes. The company’s management realizes that product development and diversification are essential. Therefore, it has dedicated significant resources towards innovations with the aim of producing safer, cleaner and sustainable products that are environmentally friendly. Since the company needs the input of various stakeholders, it has emphasized on innovation as a key strategy to ensure that all stakeholders in the company are satisfied with the outcomes of its operations.

In addition, the integration of strategic business units in its production strategy has enabled the company to enhance its competitive strategy. The creation of the various business segments has empowered each strategic business unit to focus on the development of the unit’s product line. As such, the company can effectively control the various functions of production through the management of each SBU independently. As such, each business unit has its product line, customers and revenues that contribute towards the organization’s overall revenues. These units include chemicals, polymers, enhanced plastics, fertilizers, and metals. Through these strategic business units, the company has managed to maximize its output and control of the market since each unit serves a unique section of the petrochemicals market.

New Markets

Evidently, SABIC has established its operations in various markets including Middle East, Europe, America and Asia. However, new emerging markets, such as African countries and India, have significant potential have been neglected causing competitors to take control of these markets. These markets are characterized by developing economics that require numerous resources including petrochemicals in their development projects and programs. Since SABIC offers competitive pricing given its unique access to raw materials, it has a higher probability of succeeding in these markets and taking control of them. In addition, Africa has been described as the new economic frontier that will have a significant impact on global economies.

Therefore, multinational companies such as SABIC have made significant investments in the development of various projects including infrastructure and other governmental projects. Since a significant percent of the African market needs petrochemicals in the production of various materials and commodities, SABIC should take advantage of its global presence and pricing strategy to enter the African market. Meanwhile, India is considered is among the world’s top industrial hubs where most companies have established their facilities on the basis of the readily available cheap labor and lower production costs.

Hence, this is a ripe market for SABIC that the company should consider entering. In addition, the fact that India is associated with lower operational costs for multinational companies is another reason for SABIC to consider establishing operations in this market. The operations should have an emphasis on production facilities that are labor intensive; hence, there is the need for cheaper labor. This will significantly reduce the company’s operational costs thus improving the company’s pricing strategy. Since SABIC already enjoys cheaper and ready access to raw materials, additional access to cheaper labor would enable SABIC to take control of the market on a global scale.

Recommendations

SABIC has established its presence in various markets globally; however, SABIC has not entered emerging markets that could increase its revenues significantly. Therefore, SABIC is recommended to take initiatives and implement strategies for entering emerging markets that were not considered before since they have potential for incremental revenues.

SABIC’s access to raw materials has placed the company at a unique monopolistic position to control the Saudi Arabian petrochemical market. As such, the company has been significantly successful in its expansion strategies. In light of this, the company should consider diversifying its product portfolio through acquisition or establishment of other product lines that do not include petrochemicals. In essence, the company should acquire interests in diverse industries with the aim of maximizing revenues. Although the company has control over the petrochemicals market in Saudi Arabia, it should not limit its operations to only those products. It is recommended that SABIC should diversify investments in various industries with the aim of maximizing shareholder’s wealth and accessing wider markets for various products. In addition, its established presence in global markets will enable the company to enter new products lines in the existing markets easily.

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Mar 6, 2019 in Economics
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