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Environmental or Situational Analysis

Discuss about the Oil and Gas Service Industry for Strategic Management in Halliburton?

Purpose of this report is to discuss management of strategic decisions within the organization. In this, influence of internal and external factors on the objectives and strategies of firm along with the need of flexible strategic management is discussed. Halliburton, a United States of America (USA) based company that offers field services to the oil and gas corporations is selected to access strategic management. The existing position of this company is analysed in this report to suggest possible strategic options. Thus, this report includes environmental analysis of Halliburton with the application of strategic management tools to understand potential changes and to recommend strategic option.

In order to analyse position of a firm for strategic management purpose, it is critical to analyse internal and external environment. An analysis of business environment helps to understand situation of a business in an informed manner (Simerson, 2011). The current state of Halliburton is analysed below with the application of three models namely PESTEL, Porter’s five forces and SWOT:

This model is used to understand the influence of external environment on the strategies and objectives of Halliburton.

Political: The government of USA supports oil field service companies as it contributes in providing jobs to the large population and generating national income. This creates favorable environment for Halliburton to expand business in the other countries and to undertake several oil reserves. But at the same time, government has taken several actions to resolve concern of people related to the pipeline accidents (Hill and Jones, 2014). Environmental sustainability becomes one of the major corporative objectives of Halliburton. In 2014, this has reduced environmental accidents by 10 percent that helped it to make favorable political landscape for conducting business. This also becomes a member of several trade associations to participate in legislation activity (Halliburton, 2014). Political interventions in the operations of oil field services are increasing continuously that may create sustainability issues for Halliburton.

Economic: The economic condition of US shows signs of slow economic growth. GDP of this country is increased by 1.9 percent in 2015 from the previous year. In 2014, GPP growth rate was 2.5 percent that indicates slow rate of economic growth (BEA, 2016). This economic slowdown has an adverse impact on the demand of commodities and goods. It influences demand of oils and gas in this country. Frequent currency fluctuations and taxation also are likely to increase that may affect operations of Halliburton. Net income of this company declined in 2015 than 2014 that also indicates negative effect of economic slowdown on the performance of this company. Halliburton has also taken job cutting strategy by dismissing 6,620 employees in 2015 for managing effects of slowdown on the operations (Helman, 2015). This strategy has affected its ability to attract and retain employees and to manage operational cost.

PESTEL Analysis:

PESTLE Analysis

Social: Social aspect of this country creates operational challenges for this firm. Lack of availability of skilled and proficient workers creates considerable challenges for Halliburton to reduce operational cost. In order to develop required skills and to educate employees for safety concerns, it conducts Code of Business Conduct (COBC) training. In 2014, 63,000 employees completed training that incurred huge cost for this company. Similarly, well-being of employees and their families becomes an important concern (Halliburton, 2014). Due to decline in oil price, Halliburton faced considerable difficulties to maintain job security and to satisfy employees. Several laws and regulations are developed by the government to introduce minimum standards of workplace health and safety (Annual Report, 2014). Halliburton spent invest considerable time and money to fulfill legislation requirements. It also creates issue of high operational cost.  

Technological: The demand of advanced drilling technogies has increased due to strict laws and regulations for oil drilling activities. Due to the oil spill in Gulf of Mexico, oil and gas companies face strict regulations that enhance cost of drilling activities. Oil and gas companies are tended to use more efficient rigs. The demand of innovation and technological advances provides a source of creating competitive advantage (Ronald Berger, 2015). Halliburton invests significant amount of money in the research and dveloplement activities for introducing highly efficient rigs to the firms that also influences operational cost. In order to maintain innovations, Halliburton has acquired Europump Systems Inc. and Neftex Petroleum Consultants Ltd as they allowed this firm to provide more efficient oil field services to the companies (Annual Report, 2014).  Volatility in price of raw material including steel, titanium, copper, etc. has affected this firms’ ability to invent low-cost drilling equipments.

Environmental: Natural disaster and abnormal weather conditions has significant influence on the drilling activities of Halliburton. This affects ability to carry out activities as per the schedule that reduces output and enhances overall project cost. Climate change becomes major global issues due to which this company is accountable to follow environmental laws and regulations (Flaharty and Waheed, 2015). Due to this, Halliburton has initiated several efforts to ensure environmental safety. In 2014, frequency of environmental incidents is reduced by 10 percent at Halliburton. The increase in environmental concerns may create risk of increasing cost and reducing profitability (Halliburton, 2014).

Legal: Halliburton is accountable to follow several local and international laws and regulations. Employment law, environmental safety, corporate governance, etc. related laws influence business activities. In order to follow these laws, Halliburton makes several changes in operational processes and practices that require huge investment (Halliburton, 2014). It may also increase operational cost for the firm.

Porter’s Five Forces Analysis

This model is used to understand influence of competitive forces on the present and future performance of Halliburton    

Threat of New Entrants: In US, high level of entry barriers exists that reduces threat of new entrants in the oil field services. High capital requirements and complex regulatory obligations make this industry inaccessible for the new entrants. In order to offer oil field services, fixed up-front investments are required to acquire drill equipments, skilled labor, energy, materials, etc. that creates entry barriers for new entrants. But at the same time, attractiveness of industry persuades upstream oil and gas companies to acquire oilfield service companies for reducing operational cost (Davila et al., 2013). It may reduce demand of oil field services that can affect Halliburton to manage growth. Access over distribution channel and economies of scales also create entry barriers.

Porter’s Five Forces Analysis

Bargaining Power of Buyers: In the oil field service industry, large buyers have potential to influence the profitability of the companies. Oil and gas companies purchase high volume and due to this they influence firm’s ability to charge high prices for the services. But, the demand of experienced service providers has increased due to increase in safety and health concerns. Increase in demand of fossil oil and high switching cost may allow Halliburton to increase service charges (Doshi et al., 2015). In this way, buyers’ bargaining power is moderate in this industry.

Bargaining Power of Suppliers: Suppliers of the oil field service industry can influence profitability of Halliburton by increasing oil prices or reducing quality of their products and services. In this industry, operations of firm mainly depend on the quality and efficiency of drilling equipments to save cost and to improve customer satisfaction. Increase in prices of raw material such as different metals including copper, steel, titanium, etc. affect ability to plan cost that create significant issues for Halliburton in maintaining profits (Gold, 2014). But at the same time, oil field service firms make bulk purchase that reduces bargaining power of suppliers in significant manner.

Threat of Substitute Products and Services: This affects ability of operating firms to enhance market and to create source of value creation. In the oil field service industry of UK, substitutions’ threats occur indirectly from the different source of energy. Due to decline in oil reserves, oil and gas companies plans to focus on producing energy from the different means including coal, natural gas, nuclear and renewable sources. It may reduce demand of oil field services that could affect consumer base of Halliburton (Davila et al., 2013). Government also supports production of renewable energy due to environmental concerns that could create issues for this company.

Intensity of Rivalry among Competitors in the Industry: In the oil field services, major players include Transocean, Halliburton, Schlumberger, Weatherford, etc. Oil field service industry in UK includes few but large players that create intense competition among operating firms. These firms engage in corporate restructuring activities including merger, acquisition, alliances, etc. to limit influence of competition. Similarly, slow industry growth rate also increases competition among firms that may exert high pressure on Halliburton to reduce prices (Doshi et al., 2015). High exist barrier in this industry also forces firms to operate despite of negative returns. In addition to this, high fixed cost and absence of differentiation also intensify competition in the oil field service industry. In this way, competition level is quite high in this industry (Beyazay, 2015).

In conclusion, competitive situation of this industry shows trend of decline in sustainable profit. Halliburton may face issues in maintaining position and profitability.

This framework is used to analyse current state and future business environment for Halliburton. Below is the SWOT analysis for Halliburton:

Strengths:

Strong reputation and brand value

Higher sales margin 

Field expertise and experience

Market leader

Largest share in the market of North America

Strong R&D

 

Weaknesses:

Low share in international markets such as Middle East, Asia, Africa than the competitors

Increase in operational cost

Negative image due to  environmental controversies

Legal cost

Currency fluctuations

Opportunities

Increase in oil and gas consumption  

Expansion opportunities in international markets

Increase in demand of natural gas

Acquisition of small companies     

Threats

Economic slowdown

Strict and complex regulations

Environmental disasters

Volatility in oil prices


On the basis of above analysis, it can be depicted that Halliburton has immense opportunities to maintain leadership in the market by addressing potential challenges effectively. Halliburton has strong reputation, field expertise, domestic presence and R&D that provides an effective floor to maintain dominate place in the market. For example: Halliburton announced acquisition of rival Baker Hughe, which was the major rival of it. Due to this, it becomes a largest company in terms of market share. This company lacks significant share in the international marks that increases dependency on the revenue of national market (Doshi et al., 2015). It affects Halliburton to manage profitability due to decline in demand of energy in US market. Similarly, pipeline accidents also affect reputation of Halliburton in the market that reduces scope of charging high prices. Loss of reputation allows buyers to bargain for service charges that reduces profitability of Halliburton (Kaiser, 2015).

In addition to this, it is also determined that demand of other energy sources such as natural gas, solar power, wind power, etc. creates opportunities for Halliburton to make effective presence in the international and national market. For example: people in Asia pay huge prices for natural gas. US become a major exporter of natural gas. Halliburton has opportunity to increase market presence in the market and to sustain profitability. Beside this, this firm can face challenges due to strict regulations and to volatile oil prices (Beyazay, 2015). Government of US and other countries of the world are likely to increase strictness in regulations for oil field services industry. It can demand changes in different operational protocols and standards that may increases business cost for Halliburton. Unfavorable economic environment leads delay in drilling activities, which reduces productivity and increases operational cost (Kaiser, 2015). Thus, Halliburton has enough strength to capitalise opportunities and to limit weaknesses and challenges.

An analysis of business environment provides an effective floor to determine existing and potential state of Halliburton. On the basis of this, different strategic options can be suggested for this company (Harrison and John, 2013). Porter’s generic strategies and Ansoff matrix are strategic management tools used to suggest strategies:

This model provides three strategic options such as cost leadership, differentiation and focus for businesses to gain competitive advantage and to increase market share. Cost leadership strategy helps firms to increase competitiveness by reducing cost and offering right quality at the lower prices to the customers. Differentiation strategy includes making offerings different from the competitors and to induce customers to pay more for the similar goods and services. By making innovative and high quality offerings, firm can attract customers more effectively (Ginter, 2013). Focus strategy allows firm to target niche market by reducing offerings’ price or improving quality.

Porter’s Generic Strategies

Differentiation strategy can be used by Halliburton to improve profitability. With the use of strong expertise and R&D, this firm can improve quality and efficiency of drilling equipments. Through this, it can fulfill demand of highly efficient and safe pipelines. By this, it can limit legal issues and financial losses in the significant manner. Differentiation strategy requires huge investment in R&D, but this can be recovered by offering value added drilling equipments to the customers. This strategy could help Halliburton to improve reputation and customer satisfaction (Smith, 2012). It would be effective for enhancing market share and competitiveness of Halliburton in the highly competitive business environment.

This model presents four strategic options for the customers, which depicts in below figure:

The above figure indicates that market penetration, product development, market development and diversification can be used by firms. Halliburton can use product development strategy as it would be more effective to capitalise opportunities from increase in demand of natural gas and oil in the international countries. Halliburton needs to develop machinery and equipments to develop new energy sources including natural gas, wind energy, solar energy, etc (Triantis, 2013).  By using strong reputation and expertise, it can offer more reliable products and services in the field of energy production. This may help Halliburton to increase presence in the international markets. There is a huge demand of natural gas in the Asian market (Bouchentouf, 2011). By establishing plants for natural gas production, it can reduce dependency over the oil products and revenue of national market.

Apart from this, improvements in the operational efficiency can also be useful for Halliburton to improve offerings in the existing market. Through this, it can offer efficient equipments to the companies of Middle East and Africa (Piercy, 2012). This could also be helpful to address concerns of pipeline accidents and to reduce legal cost. By indentifying and acquiring assets with effective net worth, it can enhance profitability (Kaiser, 2015). It can acquire similar firms to enhance offerings and to boost production level.

Conclusion

From the above discussion, it can be concluded that volatile oil price, strict regulations, demand of efficient rig, volatile price of raw material, etc. are some issued faced by Halliburton. It creates difficulties in sustaining profits. This could create major problems for this company. Differentiation and product development strategy can be used by Halliburton to convert existing issues into the opportunities. Through these strategies, it can apply existing sources of strengths in capitalising opportunities and limiting challenges. This would help to generate profits from the operations despite of competitive business environment.

References

Annual Report (2014) Halliburton. [Online]. Available at: https://www.halliburton.com/public/pubsdata/sd/sustainability-report-2014.pdf [Accessed: 19 March 2016].  

Beyazay, B. (2015) The Nature of the Firm in the Oil Industry: International Oil Companies in Global Business. UK: Routledge.

Bouchentouf, A. (2011) Commodities for dummies. USA: John Wiley & Sons.

Bureau of Economic Analysis (2016) National Income and Product Accounts. [Online]. Available at: https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [Accessed: 19 March 2016].  

Davila, T., Epstein, M., Shelton, R., Cagan, J., & Vogel, C. M. (2013) How to Become Innovative. FT Press.

Doshi, V., Corrigan, J., Maxson, S. and Maestro, A. D. (2015) It’s time for oil services to address shortcomings and find strategic solutions. [Online]. Available at: https://www.strategyand.pwc.com/media/file/Surviving-the-worst.pdf [Accessed: 19 March 2016].  

Flaharty, G., and Waheed, N. (2015) Customer-Anchored Supply Chains: An Executive’s Guide to Building Competitive Advantage in the Oil Patch. Archway Publishing.

Ginter, P.M. (2013) The Strategic Management of Health Care Organizations. USA: John Wiley & Sons.

Gold, R. (2014). The boom: How fracking ignited the American energy revolution and changed the world. USA: Simon and Schuster.

Halliburton (2014) Sustainability Report. [Online]. Available at: https://www.halliburton.com/public/pubsdata/sd/sustainability-report-2014.pdf [Accessed: 19 March 2016].  

Harrison, J. and John, C. (2013) Foundations in Strategic Management. 6th ed. USA: Cengage Learning.

Helman, C (2015) Itemizing The Oil Bust: 75,000 Layoffs And Counting. [Online]. Available at: https://www.forbes.com/sites/christopherhelman/2015/03/16/oil-layoffs-itemized-75000-and-counting/#91fd4ae41b89 [Accessed: 19 March 2016].  

Hill, C.W.L. and Jones, G.R. (2012) Strategic Management Theory: An Integrated Approach, 10th ed.: An Integrated Approach. USA: Cengage Learning.

Hitt, M.A., Ireland, R.D. and Hoskisson, R.E. (2012) Strategic Management: Competitiveness and Globalization. 10th ed. USA: Cengage Learning.

Kaiser, M. J. (2015) Offshore Service Industry and Logistics Modeling in the Gulf of Mexico. Germany: Springer.

Piercy, N.F. (2012) Market-Led Strategic Change. UK: Routledge.

Ronald Berger (2015) A new Age Dawns for oilfield services: Halliburton-Baker Hughes and the oil price downturn. [Online]. Available at: https://www.rolandberger.us/media/pdf/Roland_Berger_TAB-Oilfield-Services_20150303.pdf [Accessed: 19 March 2016].  

Simerson, B.K. (2011) Strategic Planning: A Practical Guide to Strategy Formulation and Execution.USA: ABC-CLIO. 

Smith, R.D. (2012) Strategic planning for public relations. UK: Routledge.

Triantis, J. E. (2013) Navigating Strategic Decisions: The Power of Sound Analysis and Forecasting. Australia: CRC Press.

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