Introduction to Strategy

 

 

 

 

 

 

 

21510- Introduction to Strategy

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Executive Summary

This report depicts an extensive evaluation and analysis of the strategic issues prevalent in Hong Kong and recommendations on its suitability as a prospective for business relocation. The report achieves this by employing numerous techniques and frameworks of strategic evaluation to analyze the potential profitability of the decision to relocate, such as the PESTEL analysis, Porter’s Five Forces, Industry analysis, Internal Resources and Capability analysis of the host country, the VRIO model, the SWOT matrix, and key strategic issues in the host country. These analytical frameworks will provide clarity on the macro business environment prevalent in Hong Kong, China, a huge determinant of the degree of organizational success following relocation measures.

Additionally, relevant recommendations are provided in the report to aid the smooth relocation and transition of Origin (O) Company into a new, foreign host country. These include a differentiation strategy to counter industry rivalry, CSR measures to mitigate growing ecological concerns, and exploring additional sources of renewable energy to counter the mild inadequacy of resources. The report concludes by stating the viability of Origin’s decision to relocate with appropriate considerations in place.

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction

Origin Energy is an Australian energy-providing firm based in Sydney, Australia. Origin deals in the supply of natural gas, electricity, solar energy, and LPG. The company is publicly listed in the Australian Stock Exchange market and employs an average of 5,000 employees as of 2019. Frank Calabria is the acting CEO of the company which generated approximately 14.7 AUD in revenue in the year 2019. Origin Energy has two subsidiaries; Country Energy and Integral Energy, both of which supply products that are similar to their parent organization. Origin serves to provide affordable, better, smarter, and more sustainable energy sources for Australia (Originenergy.com, n.d.) and propel the growth of renewable energy.

In its Annual Financial Reports and Presentations ((Originenergy.com.au, 2020), Origin announced legit profits amounting to $83 million for the year ending June 2020. The firm experienced increased growth in its performance, which further propelled a reduction in overall company debt and an increase in value creation for company stakeholders (Originenergy.com.au, 2020).

Half-year company financial reports published in 2020 depict a significant decrease in company statutory profits from 2019. Following the half-year (HY) report released around February 2020 for the year ending December 2019, Origin reported a $197 million fall in statutory profits compared to the prior HY reporting period. Besides, underlying profits and EBITDA reduced by 11% and 8% respectively for the same HY financial reporting periods as captured by the table in Figure 1 (Originenergy.com.au, 2020) shown below;

Performance Summary	HY 2020	HY 2019
Statutory Profit/ (Loss)	$ 599 million	$ 796 million
Statutory EPS	34.00 cps	45.3 cps
Underlying Profit	$528 million	$592 million
Underlying EBITDA	$1.590 bn	$1.727 bn
Free Cash Flow (FCF)	$680 million	$556 million
Underlying ROCE (1 Year)	8.3%	8.6%
Interim Dividend Rate	15 cps	10 cps
Underlying EPS	30.00 cps	33.7 cps

Figure 1: Origin’s Performance Summary Comparison, Source: Originenergy.com

Company FCF (Free Cash Flow) increased by 11%, which CEO Frank Calabria attributed to “a robust operational performance” (Originenergy.com.au, 2020). Origin’s interim dividend rate also increased from 10 cents /share for the HY 2019 to 15 cents/share for the HY 2020.

A firm’s decision to relocate its HQ can arise from many significant factors, for instance, cost reduction and market proximity as in the case of Origin Energy. Conversely, a variety of determinants come into play when considering business relocation. These include the costs of relocation and overhead assimilation in the host country, potential impact on company employees, customers, and other key stakeholders, taxation policy and rates in the host location, potential for future business growth, and corporate social responsibility. To evaluate the viability of a relocation strategy, a clear analysis of the firm’s macro-environment and the industry is crucial in gauging the potential profitability of the new market. In this case, this report will present an extensive macro evaluation of Hong Kong and China at large as potential host locations for Origin Energy HQ, by employing various business strategic frameworks of analysis. In addition, industry analysis and Internal Resources and Capability evaluation will follow the macro-environmental evaluation to design a strategy for an effective relocation.

1. Macro-Environment Analysis

The core objective of a macro-environment analysis is to reveal potential opportunities and threats that could impact a firm’s industry or market of operation. A good macro-environment analysis provides a firm with relevant techniques vital for devising a strategy for business success. Macro environment analyses aid transnational firms in understanding and planning for a given business operational environment (Bush, 2020). They encompass various aspects of the PESTEL analytical framework which are legal, economic, political, ecological, and legal factors. Outcomes of the PESTEL analysis are employed in the evaluation of the strengths and weaknesses of the SWOT matrix.

PESTEL Analysis

The PESTEL analysis is a commonly employed strategy of evaluation of the macro-economic variants that affect active current and future operations (Vazquez et al., 2018). The PESTEL analytical framework evaluates existing and potential opportunities and threats emanating from Political, Economic, Social, Technological, Ecological, and Legal sources or forces. A PESTEL analysis is conducted by identifying the PESTEL (Political, Economic, Social, Technological, Ecological) factors in the given business environment and the significance of their impact on business operations. Hong Kong’s PESTEL Analysis will reveal the opportunities and risks presented to the area concerning China’s political, economic, social, technological, ecological, and legal climate.

Political Factors

Political factors define the extent of government involvement in the national economy evident through ways such as the degree of political stability or instability in a country, government policy and laws on international trade, labor, and environmental laws, and taxation mandates. Company policies ought to be flexible enough to accommodate current and expected future alterations in a country’s legislation.

China is one of the most influential nations in the world (Rahman, 2020). It is also the fourth largest in terms of land area, occupying an estimated 9388210 sq. Km. The capital of China is Beijing. China is a member of numerous international organizations such as the G20, WTO, and APEC. It also maintains good diplomatic relationships with other powerful and sovereign nations such as the USA in global trade and political matters. The People’s Republic of China is governed by the Communist Party of China (Rahman, 2020).

Although politically stable, business in China may be constricted by the restrictive degrees of political freedom that dominate the nation.  Also, the recent political protests in Hong Kong following the extradition bill pose a climate of uncertainty which is ambiguous and perhaps even detrimental for effective business operations. Despite this, however, China avails relatively cheaper labor resources and quality infrastructure, all of which position the nation highly in terms of attracting foreign direct investment in the country (Rahman, 2020).

Economic Factors

Economic aspects like interest rates, economic growth rate, foreign exchange rates, and consumer discretionary income levels also impact the effectiveness and profitability of firm operations. Economic factors can be sub-divided into macro and micro factors. Macro-economic factors denote determinants of demand in a particular economy. These include government techniques such as tax and interest rate policies and government expenditure within the economy. Micro-economic factors are determinants of consumer behavior, spending habits, and patterns.

China’s economy is the second-largest in the world by a measure of nominal GDP (Rahman, 2020). The purchasing power of the Chinese economy is the most dominant in the world. GDP growth in the country has increased tremendously in the recent past, precisely following the country’s shift to a market-based economy. Besides, China’s competitive advantage in international trade as a supplier of cheaper labor resources may have contributed to the spike in economic growth levels, averaging at 10% p.a. (World Bank, 2020).

Corporate income taxes in China average at 25%, with individual tax levels ranging between 3% to 45% (Rahman, 2020). These impressive milestones in national economic development have however led to the emergence of certain issues in the country such as environmental pollution, and growing urbanization levels (Rahman, 2020).  Despite these challenges, China remains a dominant “overseas investor” (Rahman, n.d.) with countries like Australia, the UK, the USA, Venezuela, Pakistan, and UAE.

Social Factors

Social factors also referred to as socio-cultural factors relate to cultural communal beliefs, values, and attitudes. Social factors play a direct, significant role in understanding consumer behavior and drive off customers. They include; work and career, health concerns, population growth, and age distribution (Rahman, 2020).

China has the largest population in the world., which avails an extensive market for consumer goods and services. Class and status symbols are highly prevalent in China and relate directly to consumer spending power. China has a literacy level rate of 96.4%, which is a massive improvement that has conversely triggered a reduction in poverty levels in the country. The country aims at attaining poverty rates of 0% by the end of 2020. A core social challenge facing China is its high population of aging individuals that may fail to meets the growing demands for labor locally and internationally.

Technological Factors

The impact of technological factors on business operations can be understood in three ways;

• In the production of goods and services
• In the distribution of goods and services
• In establishing communication channels with product target markets.

The technology landscape in China is well developed. China is home to approximately 829 million internet users (Rahman, 2020). Besides, the country hosts giant tech companies such as Alibaba and Tencent which threaten entry of new firms into the tech industry. One of China’s objective is to shift its economy into a more tech and innovative-driven market as opposed to being a labor-intensive economy (Rahman, 2020). In addition, the country began a Science and Innovation Program in 2015 meant to steer the country towards a leading scientific and innovative future.

Ecological Factors

Ecological factors are environmental factors that have risen in importance in the past two decades following deprivations in raw materials for production, environmental pollution from business activities and operations, carbon footprint targets for companies, and business ethics and sustainability (Rahman, 2020). There has been a growing demand for products from ethical and sustainable firms.

The rapid economic growth rates in China have affected its environmental system adversely (Rahman, 2020). Environmental issues such as air and water pollution, waste dumping and disposal, climate change, and deforestation are highly present in the country. However, the Government of China has recently adopted measures to mitigate these adverse environmental effects, for instance, through the formulation of policies and initiatives that encourage public participation in environmental conservation, as well as decentralization of power and duties to local state levels (Rahman, 2020).

Legal Factors

Legal factors denote the legal environment which represents the laws and regulations that govern business, trade, and employment in a given country. These include but are not limited to labor laws, employee pay and benefits, and employment relationship guidelines. Foreign Direct Investment in the country is governed by the Catalogue of Industries for Guiding Foreign Investment (Rahman, 2020).

The Government of China encourages foreign direct investment in some industries termed ‘encouraged’ or ‘permitted’ under the Catalogue such as Agricultural production, and constricts FDI in others termed ‘restricted’ or ‘prohibited’. Such industries include; banking, security, and the construction and operation of power grids (Rahman, 2020).

2. Industry Analysis

An analysis of a particular industry of interest is vital in determining the dynamics of operations within the industry as well as the prospects and potential for profitability. Industry analysis provides a clear understanding of a given industry in terms of existing threats and competition, strengths, weaknesses, and opportunities of a company. There exist five criteria for industrial analysis contained in Porter’s Five Forces Framework. These five forces depict the intensity of competition within and industry and allow for an assessment of potential profitability.

Porter’s Five Forces Framework

Porter’s Five Forces Framework was developed by Michael Porter as a tool for analyzing the competition and thus attractiveness and profitability of a particular industry. It stretches beyond strategies employed by business rivals to encompass additional external factors that play a significant role in determining firm success within a specific industry. Understanding competitive forces in China’s industries is essential in maximizing profitability for Origin Energy. These forces are; supplier power, the purchasing power of consumers or buyers, competition and rivalry, threats to new entrants into the industry, and the threat of substitution.

Supplier Power

This is also referred to as the bargaining power of suppliers (Porter, 2008). It denotes the ease at which suppliers increase prices in the market or industry. The higher the number of potential suppliers within an industry, the lower their bargaining power. This is due to the numerous alternatives that provide a choice for the cheaper option. A lower supplier power allows firms to develop techniques that allow profit maximization on their part.

Supplier power is determined by the number and size of existing and potential suppliers, service uniqueness, and the cost of switching between alternatives (Porter, 2008). The energy industry in China operates in a supply shortage (Aruvian Research, 2016), implying fewer energy power suppliers and thus a higher supplier bargaining power which favors Origin’s (O)’s odds of maximizing profitability. The country requires more alternative forms of renewable energy to cover the growing demand (Aruvian Research, 2016).

Bargaining Power of Buyers

Buyers or consumers determine the demand for a certain product. Price is a huge determinant of product demand. Bargaining power in China’s Energy Industry tends to be high given the population size of energy consumers in the country. A higher consumer bargaining power implies a greater influence over price level, an aspect that may prove unfavorable for Origin (O).

Competition and Rivalry

Extreme levels of competition and rivalry within an industry could severely affect profitability for a firm. China’s Oil and Gas industry is highly competitive (Aruvian Research, 2016), a factor that could drive down potential profits for Origin Energy as well as threaten the firm’s entry into the industry.

Threats to New Entry

New entrants to an industry bring about newer forms of innovation, lowered price levels due to competition, reduced costs, and increased value creation for customers (Aruvian Research, 2016). China’s energy industry is yet to develop entry barriers to new firms in a bid to safeguard profitability for existing companies. Leniency to new entrants is favorable for Origin Energy Company.

The Threat of Substitution

The threat of product or service substitution is prevalent in most industries. In China’s energy industry, the numerous alternative sources of renewable energy are employed to service the population through the provision of power. Therefore, the threat of substitution in the industry can be understood to be relatively high. High chances of product substitutions may drive down potential profitability for organizations seeking to enter new markets.

3. Internal Resources and Capability Analysis

An Internal Resource Analysis depicts available resources and capabilities in an organization (or country, in this case) that reveal possible strategies of establishing company strengths, mitigating weaknesses and threats while striving to explore opportunities for potential growth. An internal resource and capability analysis are essential in aiding an organization to identify areas of value creation for its customers. The VRIO model can be applied as a framework for identifying these internal resources and capabilities for a competitive advantage.

The VRIO Model

The VRIO model is a framework for sustained competitive advantage that encompasses different aspects of value, rarity, imitability, and organization (Min et al., 2016), about a given company resource or capability. It is an essential tool for the process of decision making. Information revealed in a VRIO analysis is used to develop competitive advantages for a business (Min et al., 2016) following the internal resource or capability in question.

The Value aspect of the framework evaluates how valuable the company’s internal resource or capability is. ‘Rarity’ denotes the uniqueness of the resource, ‘Imitability’ indicates the ease of replication or duplication, whereas ‘Organization’ denotes the degree to which the specific internal resources or capabilities appear organized to capture value.

A VRIO Framework aids companies in formulating strategies that sustain its resources and capabilities needed for the long-term growth of the organization.  To successfully establish its operations in the host country, Origin’s organizational resources and capabilities ought to be highly valuable, rare, hard to imitate or replicate, and highly organized to properly capture value within the firm.

SWOT Analysis of Origin Energy

 

The SWOT Matrix is an analytical framework depicting the strengths, weaknesses, opportunities, and threats of a given business or resource (Gurel & Tat, 2017). It is a tool of competition analysis that shows the secure areas that a business can capitalize on, the weaknesses that demand dire attention, opportunities that stand to be exploited for practical purposes, as well as the threats that could harm the existence of a given business resource (Phadermrod, Crowder & Wills, 2019).

 

STRENGTHS · A strong market share position in Australia · Rapid company growth since inception · A strong customer-centered approach	WEAKNESSES · Poor organizational infrastructure · Limited market share position in some regions
OPPORTUNITIES · Market expansion in new regions · Technological developments e.g. Smart Meters for power efficiency	THREATS · Growing ecological concerns · Intense rivalry in the industry · Unexpected changes in oil price levels · Uncertainty on resource availability

 

Figure 2: Competitive Analysis (SWOT) Matrix for Origin Energy

 

4. Key Strategic Issues

 

Identifying core strategic issues is a crucial first step in strategic planning. From the analyses conducted above, certain key strategic issues can be identified, for instance;

• The intense competition within the Energy (Oil & Gas) industry that may threaten new entrants
• Growing ecological concerns following increased environmental pollution that has seen an emerging preference for firms encompassing social responsibility and sustainability in their endeavors.
• Unexpected alterations in the macroeconomic environment such as unexpected changes in oil prices that may increase Origin’s cost of production
• Uncertainty of resource availability

5. Recommendations

 

• To counter intense competition within the industry, Origin could for a differentiation strategy or co-operate with rival firms to increase the market size
• For growing ecological concerns, the company should employ environmentally conservative and sustainable measures by adopting corporate social responsibility in the firm.
• Unexpected changes in the macro environment of the host country can be countered by investments in derivatives to secure the exposure to risk.
• Origin ought to develop strategies of adding to their resource availability, for example through exploring additional alternative renewable sources of energy.

 

6. Conclusion

 

China avails a potentially profitable market for Origin’s venture. With the appropriate strategies in place, a consideration of the potential threats and weaknesses, and tactical exploitation of company strengths and opportunities could see the successful assimilation of Origin in their new location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Aruvian Research, (2020). China Energy Industry – Porter’s Five Forces Strategy Analysis. Retrieved September 25, 2020, from https://www.researchandmarkets.com/reports/c83264

Phadermrod, B., Crowder, R. M., & Wills, G. B. (2019). Importance-performance analysis based SWOT analysis. International Journal of Information Management, 44, 194-203.

Gürel, E., & Tat, M. (2017). SWOT analysis: a theoretical review. Journal of International Social Research, 10(51).

Min, B. S., Min, J. H., Jang, W., Han, S. H., & Kang, S. Y. (2016). VRIO Model-Based Enterprise Capability Assessment Framework for Plant Project. Korean Journal of Construction Engineering and Management, 17(3), 61-70.

HowandWhat.net. (2020, January 11). PESTEL analysis of China. Retrieved September 25, 2020, from https://howandwhat.net/pestel-analysis-china/

Bush, T. (2020, September 13). What Is Macro Environment? 2 New Examples You Can’t-Miss. Retrieved September 25, 2020, from https://pestleanalysis.com/macro-environment/

Reports & Presentations – Origin Energy. (n.d.). Retrieved September 25, 2020, from https://www.originenergy.com.au/about/investors-media/reports-and-results.html?page=1

Sustainability and renewables. (n.d.). Retrieved September 25, 2020, from https://www.originenergy.com.au/about/sustainability.html

Half Year Results 2020. (n.d.). Retrieved September 25, 2020, from https://www.originenergy.com.au/about/investors-media/reports-and-results/half-year-results-20190220.html

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix