This paper is about the energy industry in the United States (US). It is divided into two parts namely part one (I) and part two (II). Part I explores the topic by looking at the US’ energy industry structure, and how the industry may be structured in future. It also discusses the contribution of the energy industry to the economy of the US. In addition, it looks at the effects of the US’ energy sustainability target on Conocophillips’ business plan. It is argued that the US energy industry has a multiproduct structure, which is majorly shaped by economies of scope. These economies of scope have persistently featured petroleum, coal, and natural gas. It is also argued that the energy industry plays a key role in boosting the economy of the US.
Part II is a personal reflection on the topics which have been covered in the course that far. Examples of the topics include competitiveness, strategic planning, and stakeholder analysis. The paper uses various academic sources and incorporates some data to support the arguments.
Part I: Industry Report
Background of the Energy Industry in the US
When the US attained independence in 1789, it had plenty of indigenous forests, which were cleared for agricultural activities. At that time, the main source of energy was firewood. The reason is that there were no alternative forms of energy in that part of the world. The country’s economy by then was very small compared to other economies. The economy was also characterised by slow growth, especially due to the dependence on firewood as the main source of energy.
The US’ economy was therefore a purely subsistence economy. However, in 1835, the wave of industrialisation reached the US and transformed its economy from subsistence to industrial economy. As a result, firewood energy was rendered irrelevant due to its inability to support various industrial activities. Instead of using firewood, the US started using coal as its primary source of energy. The use of coal resulted to increased urbanisation and improved transport infrastructure in the US. For instance, there was introduction of trains, which entirely depended on coal energy. Due to the dependence on coal, the economy of the US started to grow in an exponential manner up to today.
Since the country had abundant coal deposits, it started exporting some coal to other countries. The abundance of coal deposits and lack of alternative sources of energy made coal the primary source of energy for the US for many decades. However, during the 1950 decade, the US adopted petroleum and natural gas as the primary sources of energy. The adoption of petroleum as one of the primary sources of energy was triggered by the emergence of automobiles, many of which could not use coal energy. Petroleum also had the capacity to produce other products such as kerosene, which was used for domestic purposes such as cooking and lighting. Petroleum and natural gas were also widely used in various industries, which had earlier relied on coal.
Currently, the US relies on several types of energy namely oil, natural gas, coal, hydroelectric power, nuclear energy, and other renewable types of energy such as geothermal, wind, solar, and waste energy. As mentioned earlier, the economy of the US has grown in an exponential manner for many years. Currently, the US is the world’s largest economy in terms of Gross Domestic Product (GDP). It is also the 2nd largest consumer of world’s energy, since it consumes 26% of worlds’ energy, but produces 5% of world’s energy. This imbalance between production and consumption has attracted criticism from economic analysts, who have argued that since the US is among the leading consumers of world’s energy, it should play a leading role in the management of greenhouse gases which lead to global warming.
This criticism has made international law to be widened in scope to include environmental protection. Consequently, several treaties have been signed to address the issue of climate change. Examples of such treaties include the United Nations Convention on Biological Diversity (CBD), the Kyoto protocol on climate change, the United Nations convention to combat desertification, and the Copenhagen treaty (Deke 2008).
However, critics of the US have argued that there are double standards in honouring the agreements in the treaties on climate change. The reason is that the US has refused to cut its emission of greenhouse gases as agreed in the treaties. It has also refused to increase its contribution towards climate change mitigation measures (Deke 2008). However, according to Bill Gates, who is a member of the American energy innovation council, the US is committed to cutting the emission of greenhouse gases by 80% over the next few decades (Schwartz 2015).
Over the past few decades, the US has been affected by energy crises, which have also affected other countries. The main challenge which has faced the US’ energy industry is that of diminishing coal deposits. As a result, the US has been importing energy from other countries, especially Saudi Arabia. However, the US’ government is not happy with the situation because the reliance on imported energy is likely to reduce the competitiveness of the US at the global level (Department of Homeland Security: energy sector 2014).
Identification and Description of the Structure of the Industry
As mentioned earlier, the US has a multiproduct energy industry structure. This structure is characterised by the production of several and similar products by a few large firms (Allanson & Montagna 2005). The table below shows how the industry was structured in terms of energy products in 2012
|Type of energy||Percentage||Consumption by sector||Percentage|
|Coal||23||Commercial and residential||11|
|Renewable energy||7||Generation of electric power||40|
From the table, it is clear that the US has a variety of energy sources. These have diversified the industry and made it possible for people and firms to choose their preferred type of energy, depending on availability, cost, and sustainability (Solomon & Luzadis 2008).
Reasons for the Structure
As shown in the table above, the US has many types of energy sources. It therefore means that the firms in the industry engage in the production of more than one type of energy at the same time. The multiproduct structure is based on the economic theory of economies of scope. The theory is based on the economic principle which states that the cost of production varies inversely with the varieties of products produced. In other words, when a firm produces more than one product, the cost of production is lower than when it produces only one product (The economist: economies of scale and scope 2015).
In economics, the multiproduct structure is synonymous to oligopoly. Oligopoly is a market structure in which a particular market is dominated by a few large firms. The firms usually know each other well and they share the market by percentages. Another characteristic of oligopoly is a cut throat competition. It means that the firms in an oligopoly industry usually compete for the customers in unique ways. One way in which the firms compete is through what is referred to as differentiation and positioning.
In the field of strategic management, the concept of differentiation refers to the process of making a product or a service popular among customers. It is achieved through description of the unique characteristics of the product or service being differentiated. The whole idea behind differentiation is to create a market niche for that particular product or service. When customers are made to understand the unique characteristics of different products and services, they are able to make informed decisions regarding different products and services. If done well, differentiation enables customers to purchase specific products or services in a market flooded with many varieties of products and services (Thompson & Martin 2010).
Positioning entails using various strategies like promotion, distribution of products or services, and production of unique products with low prices to build an identity of a particular Company in the minds of consumers (Armstrong & Kotler 2009). Positioning seeks to stabilise and retain the positions of the differentiated products for a particular Company so as to retain the competitive advantage of the Company in regard to those products (Ferrell & Hartline 2010).
In some cases, oligopoly leads to formation of business cartels. The cartels are formed when the firms agree to increase the prices of their products beyond the reach of many consumers. The firms may also decide to reduce the supply of some products so that the demand of those products may go up, which consequently makes the prices to go up.
How the Structure Affects Strategic Decisions
The multiproduct structure of the energy industry in the US has compelled many firms in the industry to diversify their businesses. As a result, it is hard to find firms which deal with one type of energy product due to the fear of losing competitiveness. Many firms have diversified their assets and have also established operations in other countries. Some have developed other unique strategies. For example, instead of dealing with different energy products in one country, some firms have decided to deal with one energy product in one country, depending on the demand of that energy product in that country.
Discussion of the Possible Future Structure of the Industry
The structure of the energy industry is likely to change from an oligopoly to a monopoly. Monopoly refers to a situation in which a particular market is dominated by a single firm. The firm with monopoly usually dictates the price of goods and services by manipulating their supply (Vashisht 2005). In many cases, monopolies are associated with exploitation of consumers due to lack of alternatives for the consumers. However, monopolies may not always exploit the consumers because governments may intervene and compel them to reduce the prices of goods and services (McEachern 2011).
The pricing strategy in a monopoly is not depended on business rivals. The firm which dominates the market sets the price indiscriminately, and is usually at liberty to charge different prices for the same good or service to different customers, depending on their ability and willingness to pay (McEachern 2011).
In an industry with a monopolistic structure, other small businesses are referred to as price takers. The reason is that they are not able to influence the price of goods and services because of the dominant player. As a result, they set their prices depending on the price set by the dominant player in the market. Those who deviate from the price set by the dominant player are forced to quit their businesses (Charyulu 2011).
Many monopolies are characterised by barriers to entry (Blythe 2006). Such barriers include things like pricing, marketing, and branding. It therefore means for new entrants to enter a monopolistic industry, they must have huge capital. They also need to invest immensely in marketing their businesses so as to gain a portion of the customers. The reason is that the firms which enjoy monopoly usually invest immensely in branding, which makes it difficult for new entrants to get customers for their goods and services (McEachern 2011).
It is important to mention that the coal deposits in the US are drastically diminishing while those of natural gas are yet to be exhausted. It therefore means that over the next few decades, the firms which specialise in production of energy from coal would be out of business (Electricity markets and policy group: Current size and remaining market potential of the U.S. energy service company industry 2013).
On the other hand, the firms which specialise in exploration and production of natural gas would dominate the energy industry in the US. Further to that, the US government is engaged in a global campaign to boost the utilisation of natural gas as the main source of energy. The reason is that there are few countries which use natural gas as their main source of energy in the world. The US aims at creating a market for its natural gas, which would boost its economy since it has huge deposits of natural gas. If the US would succeed in creating a global market for natural gas, the firms which specialise in the production and selling of natural gas would extend their monopolies in other markets outside the US (Electricity markets and policy group: Current size and remaining market potential of the U.S. energy service company industry 2013).
Contribution of the Energy Industry to the Economy of the US
The US has the world’s largest economy measured by nominal GDP. In 2012, it had a nominal GDP of $17 trillion, which accounted for 22% of global GDP. Its currency, the US dollar is the world’s most used currency and as a result, its value greatly determines the cost of imports and exports. The US is also a major player in international trade. Its major trade partners include Japan, Germany, China, Canada, Mexico, and South Korea (U.S department of commerce: top trading partners 2013). It is also the global leader in the production of natural gas and oil. In terms of manufacturing, the US is the 2nd largest manufacturer in the world. According to Lerbinger, the headquarters of the world’s largest companies such as Wal-Mart, Exxon Mobil, ConocoPhillips, Chevron, and General Motors are in the US (Lerbinger 2013).
The US is also a preferred choice of investment by many multinational corporations. In 2013, the investment by foreign companies in the US was valued at $2.3 trillion while the US’ foreign direct investment was valued at $3 trillion (U.S department of commerce: Archive for the ‘direct investment’ category 2013). The US also forms the world’s largest consumer market due to new consumerism.
As outlined by Juliet, consumerism has undergone radical changes which have culminated into a new form of consumerism which is characterised by irrational desires to spend instead of meeting basic needs. She argues that the average Americans today are more extravagant than Americans of 1950s and 60s. During those days, consumerism was characterised by peer influence at the neighborhood level, that is, people used to compare themselves with their peers at their immediate neighborhoods and as a result, consumption was largely based on basic needs not on luxuries. During those days also, it was hard to find people living beyond their means because they only desired those social statuses which were in line with their income.
However, the emergence of the new media, globalisation, cultural diversity, and the modern workplace has brought a new dimension of consumerism. As Juliet points out, the media has played a big role in fueling the new consumerism which is characterised by the desire by Americans to spend beyond their income. The reason is that many media advertisements tent to promote the culture of spending without providing alternatives to luxurious lifestyles. In most cases, the new media promotes affluent lifestyles which are affordable to the middle class but beyond the reach of low income earners. Americans have also detached themselves from their immediate neighborhoods and chosen the media as their agent of socialisation and as a result, both middle class and low income earners live beyond their means for the fear of being isolated by their peers.
As mentioned earlier, the US is the 2nd largest consumer of world’s energy. Its energy sector therefore plays a significant role in its economy. The reason is that the US is among the leading countries in manufacturing and industrial production. Further to that, the US has established manufacturing plants in low-cost countries in an effort to cut the cost of production (Gaffigan 2009).
According to a study done by IHS in 2012, the energy industry in the US has had significant positive impacts on household income, trade, and the economy of the US and that of the world at large (IHS press room: U.S. unconventional oil and gas revolution to increase disposable income by more than $2,700 per household and boost U.S. trade position by more than $164 billion in 2020, new IHS study says 2013).
For instance, the unconventional oil and gas production has reduced the cost of energy by big margins. As a result, many households have been able to save a lot of money due to affordable energy for domestic consumption. For example, the levels of income increased by over $1200 in each household in 2012. It means that the savings made as a result of cheap energy were channeled to other uses, thus increasing the purchasing power of many US citizens.
The increased purchasing power had a positive impact on the GDP of the US. The lowered cost of energy also reduced the cost of production of many goods and services and as a result, the prices of goods and services were lowered. The reduction of the prices of goods and services further contributed to increased purchasing power and economic growth. The study projected that the levels of income at household level would continue increasing until 2025 (IHS press room: U.S. unconventional oil and gas revolution to increase disposable income by more than $2,700 per household and boost U.S. trade position by more than $164 billion in 2020, new IHS study says 2013).
According to the study, the unconventional oil and gas revolution is expected to significantly lower the amount of energy imported from other countries. This reduction is expected to increase US’ competitiveness in international trade by reducing its trade deficit by over $160 billion over the next decade. The revolution is also expected to lower the cost of production for US based firms, which would enable them to increase their exports due to lowered cost of production (IHS press room: U.S. unconventional oil and gas revolution to increase disposable income by more than $2,700 per household and boost U.S. trade position by more than $164 billion in 2020, new IHS study says 2013).
In terms of employment, the value chain of the unconventional oil and gas revolution has led to the creation of 2 million jobs, and this figure is expected to rise to about 4 million in 2025. The down stream and upstream energy related chemical activity has also led to the creation of a further 377,000 jobs. These jobs have a direct positive impact on the economy of the US (IHS press room: U.S. unconventional oil and gas revolution to increase disposable income by more than $2,700 per household and boost U.S. trade position by more than $164 billion in 2020, new IHS study says 2013).
According to Mr. Daniel Yergin, the author of ‘the quest: energy, security and the remaking of the modern world’, the unconventional oil and gas revolution is a success story for the US as far as energy and cost of living are concerned. He argues that the unconventional oil and gas revolution is likely to provide a solution to the energy related challenges which the US has faced in the past. The unconventional production of energy is also a crucial incentive to various industries such as food, glass, petroleum refining, aluminum, and cement industries (IHS press room: U.S. unconventional oil and gas revolution to increase disposable income by more than $2,700 per household and boost U.S. trade position by more than $164 billion in 2020, new IHS study says 2013).
The reason is that these industries are the first direct beneficiaries of the unconventional production of energy. The benefits from the unconventional production of energy are transferred from these industries to the consumers and the economy at large.
The unconventional production has also boosted the manufacturing sector in the US. For instance, due to unconventional production of energy, the chemical manufacturing industry in the US attained an output of $198 billion in 2012, up from $ 152 billion in 2007. According to the study, many industries are expected to increase the volumes of their exports due to low-cost energy. The increased volumes of exports are expected to boost the industries’ growth and the economy of the US.
Energy Sustainability Target For the US
The oil crises of 1970s and 1980s had severe effects on the economy of the US. The crises prompted the US government to come up with strategies of ensuring that the country had sustainable supply of energy (Plunkett 2008). As a result, it shifted from the reactive approach of responding to the crises to a proactive approach of averting the crises. Since the beginning of the 2000 decade, the US has increased the deployment of resources in the exploration of natural gas and oil. These efforts have born fruits because as of 2013, the US was the leading producer of oil and natural gas (Plunkett 2008).
It has also invested heavily in diversification of the energy industry and as a result, it has boosted its energy production by big margins. The diversification of the energy industry has led to a reduction in oil imports. The reduction is an indication that the diversification is helping the US based firms to lower their cost of production. According to Berthelsen and Cook, the deployment of resources in exploration of oil and diversification of the energy industry are expected to make the US a net exporter of energy, something which has not happened for a period of 60 years (Berthelsen & Cook 2014). The US’ energy sustainability target is therefore to become a net exporter of energy. It plans to achieve this target not only though diversification and intensive exploration of oil but also through providing incentives to firms which deal with oil exploration and production.
Effects of the Sustainability Target on Conocophillips’ Business Plan
As indicated earlier, ConocoPhillips is one of the biggest corporations in the US. It is the 3rd largest corporation in the energy industry, coming after Exxon Mobil and Chevron. Its business strategy is based on positioning and differentiation (Verbeke 2013).
Even though ConocoPhillips is not the leading corporation in the energy industry in the US, it plays a crucial role in the exploration and production of energy. Initially, the corporation had diversified its business by venturing into refining and midstream investments. After granting autonomy to its subsidiaries, the corporation has concentrated in exploration of the best oil and gas. To this effect, it has put in place an excellent team to spearhead it to achieve its goal. Through differentiation and positioning, the corporation has established its major investments in strategic areas such as Bakken shale, the Permian Basin, and Eagle Ford. These areas not only have plenty of natural gas and oil, but they are also strategically positioned in terms of accessibility.
The corporation also has conventional and unconventional oil exploration programs in the US and in other countries. These programs are part of the US’ energy sustainability target aimed at making the country a net exporter of energy by 2020 (The motley fool: why Conocophillips will pump out lots of oil, gas, and dividends in 2014 and beyond 2014). Through these programs, the corporation plans to attain a growth of between 3% and 5% in energy production over the next 5 years. It also plans to reduce its prices and improve the quality of its products. By so doing, it expects to become the global leader in the energy industry.
Canada is one of ConocoPhillips’ key strategic countries of investment. The corporation has operations in areas such as Narrows Lake, Christina Lake, Foster Creek, and Surmont. In these areas, it operates oil sand projects, which would contribute to a 20% compound growth over the next 5 years (ConocoPhillips: Growth plan 2015).
In an effort to maximise oil production in Canada, the corporation is applying sophisticated technologies such as hydraulic fracturing and horizontal wells to re-visit old oil production fields, which have potential of generating tight oil plays and liquids-rich gas. Other countries where the corporation has operations include Australia, Malaysia, and the European Union (ConocoPhillips: Growth plan 2015). All these operations are in line with the US’ energy sustainability target.
Part II: Individual Reflection
At this stage of learning, I have learned several key concepts which are important in the field of management and business administration. In this section, I have reflected on the concepts of competitiveness, management and sustainability of organisations, strategic planning, and stakeholder analysis. The reason is that these concepts are related to the discussion in part I.
This concept refers to the ability of a business enterprise to supply or sale its goods or services in a given market within a given period of time, and under certain rules and regulations governing the supply of such goods or services. The nature of this definition implies that competitiveness is occasioned by the presence of few or many suppliers of certain goods or services in a given market. Since all businesses are established with an overriding objective of making profits, each business tries as much as possible to overcome all barriers which prevent it from selling or supplying its goods and services in a given market.
Management and Sustainability of Organisations
The management functions include planning, organising, staffing, directing, controlling, recruitment, budgeting, and reporting. For the managers, planning means the determination of human resource programs that may contribute to attainment of the goals established by organisations. The managers must focus on the economic, social, and political environments in which their organisations operate. They must also set aside the resources needed to make their plans work.
The organising function of management entails implementing organisational changes which may be occasioned by internal or external forces to organisations. In organising, a manager decides on a position to be filled and the duties and responsibilities attached to the position. The manager also makes decisions about how work is done on a day-to-day basis. The directing aspect of management entails looking for appropriate ways of motivating employees to work willingly and effectively. The manager must give directives to employees for them to know what is expected of them. After directing, the manager should evaluate how jobs are done and what progress is made towards attaining organisational goals. The manager is also supposed to plan how to meet current objectives of the organisation and come up with ways of meeting future organisational goals and objectives.
One of the factors to consider when formulating a strategic plan is engagement of all stakeholders. In organisational context, employees are important stakeholders because they are the ones who make things to work or not to work depending on their levels of commitment, understanding, motivation, and loyalty to their organisations. When employees are involved during the development of a strategic plan, they not only embrace the strategic plan but they also own it and as a result, it is implemented without any resistance.
The other factor to consider is effective communication which has to do with using friendly and correct language during communication between employers and their employees. Managers should desist from treating their employees with contempt or ridicule. The managers should also ensure that organisations have in place very clear communication strategies so that there is no misunderstanding and confusion in the organisations. For effective communication to be realised, managers should avoid discrimination of employees based on employees’ positions, age, gender, level of education, race, and religion. Organisations must therefore put up an elaborate communication infrastructure to ensure that there is smooth flow of information at all levels of organisations for the strategic plan to be successful.
Also to be considered when formulating a strategic plan is the culture of innovation in organisations. Organisations must ensure that they have a culture which stimulates employees to be innovative. Without an innovative culture, a strategic plan is hard to implement because it is usually flexible and sometimes requires creativity for it to be successful.
There is also the need to consider the culture of organisations when formulating a strategic plan. Organisations must strive to have a cohesive organisational culture where all members have similar beliefs and values. The sharing of beliefs and values by employees renders the structures of organisations irrelevant because what is of interest to the employees is their commitment to those beliefs and values.
Organisations which have a cohesive culture have the ability to motivate their employees, which in turn renders supervision irrelevant. When employees do their work without supervision, their productivity is enhanced because to them, what matters most is the welfare of the organisations but not their personal welfare. Cohesive organisational culture also enables organisations to align their procedures, functions, and policies with their objectives, mission, and vision without challenges. The alignment is made possible by the internalisation of the aspirations of the organisations by the employees.
The Ansoff’s matrix helps organisations to manage their strategic decisions by providing insights on market penetration, product design and development, market development, and diversification of their products. These help the organisations to remain competitive in their respective industries. For instance, through the use of Ansoff’s matrix, many organisations have been able start operations in many countries across the globe.
Effectiveness of Strategic Planning Techniques
When developing a strategic business plan, organisations apply two main techniques namely the development of a business strategy model and development of a business transformation plan. The business strategy model helps organisations to identify their desired future while the business transformation plan helps them to come up with the key activities which must be implemented to attain the desired future results. These techniques are effective to the extent which the organisations are committed to ensuring that everything is done on time. If there is no commitment to comply with the timelines, then the techniques are only good in writing.
Stakeholder analysis refers to the critical evaluation of all stakeholders of an organisation and their relationships with the organisation. It plays a crucial role in helping an organisation to identify partners who are essential for its success. Once an organisation identifies such partners, it invests in building good rapport and creates a symbiotic relationship which enables both the organisation and the partners to gain from the relationship.
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