T4 Case study - TOPCIMA Strategic Analysis YJ Oil and Gas Nick Best

with www.astranti.com

Welcome

Welcome to Nick Bests T4 Case Study strategic analysis For those of you who dont know me, Ive tutored TOPCIMA for BPP, Kaplan, First Intuition and Reed Business School, am the author of the official CIMA T4 learning system, on which I worked together with one of the TOPCIMA examiners, and now work for Astranti Financial Training on their TOPCIMA Courses. For Mock Exams on the latest case, and a range of other TOPCIMA information visit www.astranti.com

Introduction to the case

The oil and gas industry is the focus for the latest T4 Case Study. Its a tough industry as for many as it is something most people know little about. On the plus side is a well known global industry which should make finding industry examples (necessary for the diversity marks) relatively easy to find. The case company YJ is relatively young Oil and Gas exploration and production company which has had a successful start to its life with 3 successful fields which are now generating strong revenues and profits. Investors are understandably very happy with the share price having risen from $6 per share at listing 6 years ago to $27 now. The key twist this time around is the new CEO, and he is demanding a development of new fields which will require significant investment, which may be hard to find. He may bring a culture change which could also have wider ramifications for both directors and staff.

Strategic analysis the rational model

This analysis uses the rational planning model of strategic analysis, summarised in the following diagram Governance

Business Environment PEST 5 Forces S W NOW O T Internal analysis Business Strategy Generic strategies Ansoffs matrix Method of growth FUTURE Mission & Objectives

& Ethics

Product analysis -Product life cycle -BCG matrix

Stakeholder Mapping

Strategic analysis the rational model Governance & Ethics FUTURE Mission & Objectives

The first stage of analysis is to ensure we fully understand where the organisation is heading, along with its approach to meeting stakeholder needs.

Stakeholder Mapping

Mission
The mission statement sets the direction and tone of the organisation, and guides strategic decision making. As is the case with most T4 Case Study exams, we are not given the companys mission statement. If it were to have one, we could perhaps conclude that it might focus on: Development of new oil and gas fields Delivering returns for investors Technological development in exploration and drilling Health, Safety and environmental issues/CSR Being well capitalised to facilitate development of new fields

Objectives and performance measurement

The objectives provide a focused target to move towards to direct planning, motivate staff and enable accurate performance measurement We are given few specific targets in the case study! This is the first case in many sittings where this is the case. Previous cases have included a 5 year plan! We should probably assume they have forecasts and a clear strategic plan, but that they are simply not mentioned in the case. If they dont have these that would be a weakness.

Astranti TOPCIMA Courses

Detailed video exam guides Full video debrief of the preseen 2 day long live master-classes covering: The exam and marking criteria Prioritisation of Issues Preseen analysis and discussion Keys to passing the exam Industry example knowledge share 5 full mock exams (7 for May sitting) Marking and personal feedback on 3 mock exams 60 industry examples to use on exam day 3 mini-mock exams Personal feedback on 2 mini-mock exams Detailed course notes Calculations e-book to practise vital calculations Ethics e-book perfect your ethics sections Issues e-book to master issues structure and timings Private forum: debate the case with others focused tutor support Ongoing e-mail support Progress reviews Keeping you on track for a pass
Hi Nick, I passed with 62% - huge relief. Thanks again for your support Im relieved I stumbled across you before signing up with one of the mainstream training providers. Kind Regards, Marc Marc Thomas Passed September 2011 I could not recommend this service strong enough and honestly feel this was the reason for my successful pass Paula Roberts Passed November 2009

Governance

YJ have a Non-executive Chairman and 5 Non-executive Directors good, and aligned with good practise under the combined code Health, Safety and Environmental issues are well managed and controlled important for risk management There is a CSR policy Most key directors are shareholders (new CEO also seeking to buy shares) aligning interests with shareholders Little evidence in the case of other key governance issues. They are only listed on the AIM market and so do not have to abide by the UKs combined code. However as a guide to good practise it might be good to look out for weaknesses in the unseen in areas such as: Committees of Non-execs Audit, remuneration, nomination Disclosures of directors and pay Financial reporting and control Information for directors All directors involved in decision making Regular meetings with institutional shareholders Good use of the AGM

Ethics and CSR Ethics is 10 marks in the exam and hence is a very important area Key ethics issues mentioned in the preseen are: Bribery
This is particularly relevant in the African and Asian markets they operate within which it is the cultural norm. In the exam you must recommend that bribery is NOT undertaken even though in the real world it might be tacitly accepted

Environmental issues Health and safety

Other issues could include: Staff issues (possibly related to new CEO) Disclosure issues (E.g of reserves)

Critical Success Factors

The case states that company must prove themselves to win licences in the following areas:

Technical ability to bring oil and gas field into production Awareness and track record in relation to environmental record Financial capacity to bring the oil and gas fields into production
Other critical success factors could include:

Innovation keeping ahead of competitors in a fast changing

industry (e.g. fracking technology) Good project management Supplier/outsourcer relations and management Government relations and management (re licences)

Stakeholder mapping

Doing a stakeholder map as an appendix in the exam is almost always something which is useful to do. An appendix and done well will usually gain 2 marks possibly more. You must update the map for changes in the unseen, and add all new stakeholders which are in your top 4 issues Refer to your map in the main body of your text, adding a comment to say what the position of that stakeholder on the map means in relation to this specific issue (e.g. a key player should be involved fully through regular meetings, and incorporating their views into the final decision)

Stakeholder Analysis Mendelows Matrix

Low Interest Minimal interest Low Employees of suppliers Power Occasional customers
(sales primarily on market only to a range of customers)

High Interest Keep informed Smaller Suppliers/outsourcers Most employees and minor directors Communities around Oil Fields Regular customers (if any!) Key Players (Keep close)
Position could vary. Look for interest levels expressed in unseen to decide

Keep satisfied Most institutional shareholders High Power Banks Governments with licences Industry regulators

CEO and Chairman Major outsourcers (e.g. drilling companies)

Strategic analysis the rational model

Business Environment PEST 5 Forces S W NOW O T Internal analysis Product analysis -Product life cycle -BCG matrix

Next we need to analyse the current position of the business This helps us ensure the strategies we decide upon are appropriate to the business current position and issues they face in the industry and more broadly This position is summed up in a SWOT analysis

SWOT

On the following page youll find my SWOT analysis. Remember that you MUST do a SWOT analysis as Appendix 1 in your answer. You will score 1 mark in the technical section for this, and up to 3 further marks in the application section - if done well. You must update this SWOT for unseen issues (underline or bold these in your exam script), and should aim to include ALL your top 5 issues in your SWOT. A CIMA student script review I read, also made it clear that 2-3 word points in the SWOT will not score as well as points made in more depth, so it is worth writing 5-6 words for each point in your SWOT AND aim for 4-5 points per heading.

SWOT
Strengths Weaknesses

1. 2. 3. 4. 5. 6.

Profitable, cash generating and AIM listed (good for investors and future funding) Current strategy and approach have successfully grown business no need to change unless necessary Excellent staff Surveying team and board of directors non-execs proven success Strong HSE risk management and control Good use of outsourcers (E.g. drilling) to leverage their expertise and keep number of employed staff numbers down 12 potential new sites under investigation, and 4 license applications made should provide for future growth if successful Opportunities

1. 2. 3. 4.

Lack of funds for future developments (per CEO) Possible uncertainty that could be caused by the new CEO making changes Small in relation to some competitors may be difficult to compete for new licenses against larger companies (although no problems so far) Some IT systems may be out of date (they are 8-9 years old). Being off-the-shelf they are not tailored to specific business needs.

Threats

1. 2. 3. 4.

New technologies (E.g. Fracking) Develop oil and gas fields currently under investigation Farming in Farming out

1. 2. 3. 4.

Political uncertainty in existing and new markets Market prices for Oil and Gas fall (they are hugely variable which will make a big impact on revenues) Environmental disaster Outsourcer issues e.g. business failure, poor service, cause environmental issue

Astranti TOPCIMA Mock Exams and mini-mocks

Hi Nick,

The biggest criteria for success in my opinion is practising mock exams. These are key since:

I passed my CIMA T4 Part B with 26 credits. To say that I am extremely happy is a gross understatement! I would like to thank you for helping me cross that bridge (not an easy one) and achieve another milestone in my life. Your mocks made a big difference and really helped me - this was my 3rd attempt. There is something very right in what you are doing. Keep up the good work! Kind Regards, Edmore Chinhakwe Passed November 2011

They help you with Time Management, the

critical problem for most students

They enable you to practise a range of

issues that you may see in the real exam The Astranti Mock exams on this Case can be purchased at www.astranti.com

PEST analysis

On the following page youll find my PEST analysis. The PEST analysis is always an optional appendix in this exam, although this is one of the best case studies for a long time for this model as there are so many relevant points. Do aim to add one or two additional issues from the unseen into your PEST if you do one in the exam You MUST cross reference your PEST in your script however, and many students do not do this well. Aim to do this 2-3 times in your script

PEST analysis
Political issues e.g. political power of governments, uncertainty in some
Political/ Legal Oil rich nations (e.g. Iran, Iraq, Libya). Gaining licences from governments New laws - particularly Health and Safety and environmental protection

Economic

Worldwide economic position affecting oil and gas prices Exchange rate impacts for overseas operations Changing market prices for oil and gas out of control of YJ Increasing awareness and focus on sustainability and safety Consumption levels (current forecasts are for rising consumption) Natural gas considered cleanest fossil fuels (per preseen) New technologies will be key to continued efficiencies and maximising

Social (inc sustainabil ity)

Technologi outputs (e.g. Fracking) cal

5 Forces Analysis

The 5 forces analysis enables the analysis of the industry according to a range of key factors affecting that industry Each force can be given a strength (e.g. High, Medium, Low). Where all the forces are high, the profitability of the industry is low, and divestment may be a good strategy. The lower the forces the more attractive the industry is. Companies may look at the areas where forces are high and develop strategies which may lower these. The 5 forces analysis for this industry is on the next page In this case the average of the forces is medium so the industry would be deemed averagely profitable.

5 forces analysis
Factors increasing Force Factors lowering force

There is a market price, YJ can not use

Buyer Power Neutral customers lack of power to increase prices

Little power to individual customers there is

a market price that they simply have to take so even large purchasers can not demand price reductions

Governments have significant power over

Supplier Power High licensing costs and deals as they are in a monopoly position May be limited number of skilled outsource companies (e.g. drilling companies)

Lots of very large powerful competitors with

Competitors High significant funding available Many smaller companies competing over similar oil fields there is competition on the 4 potential new sites

Powerful companies may been seeking larger

oil fields to exploit

Oil companies tend to be wealthy which

New Entrants Low may attract new entrants (like YJ were a few years earlier)

Difficulty raising significant funds in current funding markets makes market entry harder than when YJ entered in 2007 Skills and technologies needed are a significant barrier to entry

Alternative forms of energy (e.g. solar power,

Substitutes Low nuclear power)

Petrol/Diesel still the predominant fuel for

transport which will not change for many years, while gas is still the key fuel for existing and new power stations customers can not switch short term.

Strategic analysis the rational model

Next we need to analyse the strategic options, and make a conclusion on the way forward for the business

S W NOW O T

Business Strategy Generic strategies Ansoffs matrix Method of growth

FUTURE Mission & Objectives

The usual approach to defining a business strategy is to begin with a definition of the generic strategies, followed by analysing options in Ansoffs matrix, looking at how these might be implemented with the Methods of Growth and then deciding upon a final strategy

Opportunities and Threats Products/Generic Strategy

Generic Strategies Products
Overall this model is difficult to apply to this industry and is not recommended in this exam.

Oil and gas still in maturity phase

BCG/ Product Life Cycle of PLC and appear to be stable in that phase for at least the next 40 years. Cost leadership
Neither of these models are likely to be applicable to this exam for this reason. (Noten new production technologies (e.g. Fracking) are not new products but just different methods of production.)

Not YJs strategy

Three existing oil fields generating

Strengths strong revenues Differentiate

Very hard to differentiate the end

product (Oil and gas is the same)

It will be some years before new

Weaknesses fields will be generating new revenues and development costs will be required in the intervening period Focus

Focus on off-short exploration

and drilling in Africa and Asia.

Industry analysis

For your 5 Diversity marks in the exam it is vital you learn 40-50 industry examples you can quote. For a free sample of industry examples visit www.astranti.com and visit our T4 area. There you can also buy our pack of 60 industry examples to take some of the pressure off you doing your own research.

Ansoffs Matrix and methods of growth

Ansoffs matrix enables the generation of strategic options. Those youll find in my analysis over the page are just options, not my recommendations. You might like to add your own options (1) Based on your own ideas to take the business forward (2) Based on those in practise exams you undertake The final stage is then to decide on the methods which the organisation can use to take the options (as generated in Ansoffs matrix) again these are just possibilities at this stage

Ansoffs Matrix and Methods of Growth

Existing Market New Market

New licences and further exploration for

Existing Product
new fields Farming in Farming out Greater efficiencies in production Upgraded IT systems

Longer term relationships with specific

customers/customer groups (e.g. Gas companies)

Most existing customers will be focused on Oil

and Gas possibly some other forms of energy production would fall into this box, but most would probably be in new market/new product

Other upstream related industries

-Drilling companies -Major contractors (e.g. maintenance of oil rigs) - Floating production storage and offloading
vessels (FPSOs) - Service companies (e.g.catering)

New Product

Midstream (oil transportation, oil

refining) Downstream (selling refined oil and gas e.g. diesel, petrol)

Methods of Growth
Continue to survey and develop own fields Farming in Diversification strategies quick way into this market
Acquisition

Internal Development

With other oil companies e.g. developing larger fields, or to

Joint Venture gain funding for production

Farming out
Divest

What should you do on weekday evenings for T4?

Knowing how to prepare for the T4 exam is a key difficulty. The most important thing you can do is doing as many mock exams as possible to master time management, report structuring and dealing with key issues. BUT that takes over 3 hours, and is impractical on evenings. Our solution our ethics, calculations and issues ebooks These enable you to practise one off exercises in time slots from 20 minutes to up to an hour to practise your time management and report structuring. They also include detailed guidelines for each of those sections. Why not try them before you buy by downloading the samples at www.astranti.com

Defining a business strategy

On the following page you will find my recommended strategy for the company. Remember that this is my view and is not a definitive answer Also remember that in the exam, you are NOT expected to define a way forward like this you MUST deal with the unseen issues and only those issues However, dealing with those issues in light of a strong logical approach to how the business should be taken forward can help you make a strong argument in your recommendations.

Nicks Strategies going forward

Continue with the successful areas of the business

Oil production in three developed fields Research new oil and gas fields Production licenses for new fields Risk management/health and safety

Clear financial strategy

To develop funds for more fields

Mix of equity and debt

To ensure funds available to pay back medium term debt

Upgrade any outdated IT systems Take relevant new farming-in opportunities

Please Like the site

So thats what I would do. Im sure youll have your own views. Just remember not to hold onto these too tightly in the exam you must primarily deal with the unseen issues! If youve found this useful, I would be most grateful if you could like our TOPCIMA page at www.astranti.com/t4topcima.html. This helps to raise our profile on search engines, which helps us reach as many people as we can. We provide exam tips on every 2-3 days on our facebook page, so do check these out, and Like our facebook page to get these posted to your facebook account as they are released