Sustainability Analysis on PETRONAS

Executive Summary

PETRONAS is a fully-integrated oil and gas multinational corporation fully owned by the Malaysian Government. The nature of its business itself is causing sustainability issues because while oil is a key resource to generate power, it is also a great environment polluter and is not renewable natural resource. Although there are various stakeholders for PETRONAS, the Malaysian government and local governments where PETRONAS operates have the greatest impact on its strategies and actions. Whenever there is a conflict between governments and local community/environment, the viewpoints and expectation of the governments seem to be given priority, much to the detriment of the local community and environment. PETRONAS’s corporate social responsibility (CSR) activities such as in education and biofuel research are great but certainly not enough and sustainable. PETRONAS must take ownership of its direction to be a sustaining corporation. There are 4 main recommendations outlined for PETRONAS to help it be a “sustaining corporation”. First, PETRONAS must take environment stewardship by taking a three-pronged approach of “finding out where and how it damages the environment”, “mitigate and reduce the damage” and “reverse the damage”. Second, it must begin to sincerely respect human rights especially in places it has its operations. Third, it should work to find renewable and sustainable energy sources and technology; and economical way to them to consumers. Fourth, it should leverage its partnership with its education institutes to research, share and promote renewable energy technology and management processes. The key driver to all this change will be to place the Environment to where it really belongs – as a definite stakeholder in the Stakeholder Salience model of PETRONAS.

1 Introduction

PETRONAS (Petroliam Nasional Berhad) which is based in Kuala Lumpur, Malaysia is a fully-integrated oil and gas corporation and is ranked among FORTUNE Global 500's largest corporations in the world with a workforce of more than 30,000 and operating in more than 30 countries the world over. It is wholly-owned by the Malaysian government and is vested with the entire ownership and control of the petroleum resources in Malaysia through the Petroleum Development Act 1974. PETRONAS is the largest single revenue contributor to Malaysian government. This report will delve into PETRONAS’s various stakeholders and their impact on its strategies; its corporate social responsibility programs; and the criticisms level against it to understand where it stands in terms of a sustaining corporation. This report will also recommend further actions for PETRONAS to take it closer to be a sustaining organization.

2 Stakeholder Analysis
2.1 Stakeholders
There are 5 major stakeholder groups for PETRONAS:-
i. Governments - comprises the Malaysian Government and the various local governments where PETRONAS has its operations.
ii. Customers – consists of retailers/dealers and end-users of its products and services.
iii. Employees
iv. Local community - people living in countries/places where PETRONAS runs its operations
v. Environment



2.2 Impact on Strategy

Each of the various stakeholders of PETRONAS has their own claims and different degree of impact on PETRONAS’s strategies.

Based on stakeholder salience model for PETRONAS, the definite stakeholders for PETRONAS are the Malaysian government which fully owns the corporation and the various local governments which grant PETRONAS rights to explore and extract oil and gas in their countries.

The strategies that can be linked specially to the Malaysian government are:-
i. Enhance shareholder’s value (in this case it’s the Malaysian Government)
ii. Ensure continued future supply of petroleum for Malaysia by seeking opportunities overseas to explore, secure and develop new reserves

These are in addition to its vision to be a good corporate citizen. These two stakeholders are the most important for PETRONAS and this can be seen in its strategies and actions that usually favor the governments, sometimes to the detriment of the local community or environment as described in the 2 sustainability issues that follow.

Human Rights Violations

PETRONAS was listed in the “Dirty List” in 2003. “Dirty List” is an effort by The Burma Campaign UK, a human rights organization, to expose companies whose operations are directly or indirectly helping to finance the military dictatorship in Myanmar (formerly known as Burma). PETRONAS has also been linked to human rights violations in Sudan.

Environment/Ecological Destruction

According to Culture Change (2008) (which compiled findings from “Rainforest Action Network”), pollution from offshore rigs causes ecological imbalances such health and reproductive problems for surrounding marine life, destroys kelp beds, reefs and coastal wetlands, and exposes the wildlife to threats of oil spills. Since PETRONAS’s key activities are off-shore oil exploration and drilling, its activities do contribute to those environmental issues.

The examples above clearly shows that, in the eyes of PETRONAS management, the local community and the environment may be seen just as the dependent stakeholders and are less important than governments. Although there are mentions (listed below) on the well-being of society and environment in its strategies, it seems to take a back stage especially when there is a conflict between Local community & environment versus Governments.

However, all is not bad for PETRONAS. There are many corporate social responsibility (CSR) programs actively run by PETRONAS. The key ones are:-

Biodiversity

PETRONAS supports, funds and work towards conserving “nature parks” in Malaysia and other countries where it operates. It also encourages its employees to volunteer for nature conservation works.

Community Programs

Over the years, PETRONAS has organized, sponsored or actively involved in community based activities such as sports, drug prevention, classical music appreciation, arts and science exhibitions, and environment conservation understanding. Most of them are in conjunction with
associations owned by or linked with the Malaysian government. In the international forefront, PETRONAS’s contribution are mostly centered around education and health programs such as sponsoring students, funding for vocational facilities, clean water supply and mobile clinic
operations.

Renewable energy research

PETRONAS is repositioning its research and development activities to identify alternative energy sources such as bio-fuel. It utilizes renewable feedstock such as palm oil, the high yielding vegetable oil available (Palm Oil Truth Foundation, 2006). Additionally, PETRONAS is
working with car manufacturers such as Proton to develop “green engines” such as E01 engine which runs on natural gas . In 2007, it signed an agreement with Battelle Memorial Institute of the US, Battelle-Japan Corp and Mitsubishi Corp to set up a renewable energy laboratory in Bangi, Malaysia (Daily Express, 2007) which also has an Engine Vehicle Testing (EVT) facility.

Customers can be considered as the dominant stakeholder for PETRONAS. Two key PETRONAS strategies are “customer focused” and “ensure the products it manufactures and services it provides are in accordance with appropriate industry standards and best practices”. Truly enough, its products and services can be considered satisfactory especially to Malaysian consumers.

From strategic point of view, employees are seen as a great asset by PETRONAS and one of its key strategies is to “enhance the capability of its employees”. One major program by PETRONAS is its education and human resources training and development. PETRONAS’s involvement in education and training began in 1978 as part of the corporate initiative to develop its workforce to meet its human resources needs especially in the petroleum sector.

Last year, PETRONAS Education Division, which was setup in 1998, won the 2007 Prime Minister’s CSR Award for the education category awarded by the Malaysian government (The Prime Minister’s CSR Awards, 2007).

3 Current Issues

Apart from the issues described in the preceding section, there are another two key sustainability issues facing PETRONAS. There are:-

3.1 Sustainability Reporting

In a 2006 annual survey titled “World’s Most Sustainable and Ethical Companies” conducted by Management & Excellence among 15 major oil companies, PETRONAS was ranked last. The annual survey, conducted by Management & Excellence (M&E), evaluates and compares the compliance of each company with over 280 internationally recognized standards in transparency, corporate governance, social responsibility and ethics. The survey concluded that PETRONAS is ranked the world’s least transparent corporation (Malaysiakini, 2006). However, over the years, there seems to be some improvement on the part of PETRONAS to be more transparent in its reporting (TheEdgeDaily.com, 2008).

3.2 Renewable Energy

Biofuel is renewable but may not sustainable according to a web article. Quote below from Suite101.com (2007) summarizes the sustainability issues of biofuel industry.

" Suleiman Jasir al-Herbish, Director-General of the OPEC Fund for International Development noted that: "...biofuels had negative side effects such as reducing food production, distorting food market prices and exacerbating water shortages..."(UN Press Release, May 10, 2007)"

In short, biofuel benefits may be offset by serious environmental issues such as water shortage and soil erosions and ecological problems because of rapid deforestation for plantation to produce ingredients for biofuel and increased food prices in general caused by the shortage. It is also considered an ethical issue to burn food for fueling cars. (CNN.com, 2008).

4 Recommendation to achieve Sustaining phase

From the discussion above, PETRONAS can be categorized to be in the COMPLIANCE-STRATEGIC PROACTIVITY phases of the Sustainability Phase Model. There is still great opportunity for PETRONAS to bring itself nearer to sustaining phase. Few recommendations to achieve it are as follows:-

4.1 Environment Stewardship

To reduce environmental destructions and ecological imbalances caused by its activities, PETRONAS must be proactive and transparent in dealing with these issues. Recommendations for PETRONAS to be a “Sustaining Corporation”:- First, it must conduct an Environmental Impact Assessment (EIA) for all its current and future explorations and oil rigs. Second, it must conduct continuous audit on all its operations (off-shore and in-shore). Third, it should report out the findings (EIA and audit) to all interested stakeholders to get valuable feedback from them. Fourth, it is important for PETRONAS to continuously be innovative to find ways to mitigate and possibly reverse any environmental risks or damage caused by its activities. Better still, PETRONAS should also work closely with environmentalist experts to actively rehabilitate and nurture the many areas that have been damaged (“imbalanced”) by its operations. The benefits for PETRONAS is that its battered image can be improved in the eyes of the public especially environmentalists and governments. If successful, PETRONAS will have a competitive advantage over other oil and gas companies. It may also be a preferred company, especially in countries where there is high concern of environmentalism, to be offered exploration and drilling opportunities.

4.2 Respect Human Rights

Generally PETRONAS complies with the Malaysian government’s or whichever local governments’ (where it has its operations) rules and regulations in terms of social welfare including employee benefits or environmental concerns. However, in countries such as Myanmar, the human rights law itself is very low in standard, so complying with them may not be an issue at all for PETRONAS but certainly not sufficient from sustainable point of view. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should look beyond just
compliance to the governments’ rules and regulation. PETRONAS management should actively pursue social equity and human welfare issues while continue to be in operations in countries where the local government is condemned for human rights violations such as Myanmar. PETRONAS should use its influence to pressure the local governments to improve their human rights records. PETRONAS also must report out any improvements it has managed to bring out directly and indirectly. The benefits for PETRONAS are its corporate image will be tremendously improved and not be condemned by human rights groups while being able to continue operations in those countries. However, PETRONAS must also be prepared not to continue its business if it doesn’t succeed in improving human rights situation. Note: This may be difficult considering PETRONAS is fully owned by the Malaysian government and the Malaysian government’s position on Myanmar is to work with the present government in Myanmar to reduce its human rights violations and not to isolate it.

4.3 Promoting Renewable Energy

PETRONAS’s active research and development of renewable energy especially bio-fuel is important for its long term sustainability. It is worth to note here that biofuel (using palm oil) is in Malaysia’s “agenda” of renewable energy. Malaysian government is looking for alternate uses for its palm oil which is priced commodity and key revenue generator for the country. However, there are sustainability concerns as mentioned in section 3.3 above. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should look beyond just fuels (fossil-fuel or bio-fuel) as its revenue generator. PETRONAS should invest part of its research or fuel exploration budget into research of other more natural and sustainable energy sources and technology such as wind farms and solar. PETRONAS should form strategic partnerships with electricity producers in Malaysia and abroad to use PETRONAS’s new technology to generate electricity. The benefits for PETRONAS is by forming early partnerships with electricity producers and tie them with its technology, PETRONAS can ensure it has a great competitive advantage over other “energy sellers” and ensure it can continually be profitable while being a sustaining corporation.

4.4 Sharing of Expertise and Funding

PETRONAS’s involvement and contributions on education and human resource development are exemplary. PETRONAS, being a fully owned government entity, is actually expected by the Malaysian community in general, to contribute back to society. What is being done, however, is not enough. Recommendations for PETRONAS to be a “Sustaining Corporation”:- it should openly share its research findings on sustainable technology and best practices such as alternative energy sources and management & leadership techniques to promote sustainability with the institutes it is running which include Universiti Teknologi PETRONAS (UTP), Institut Teknologi Petroleum PETRONAS (INSTEP) and PETRONAS Management Training. It should also provide financial funding and expertise help for these institutions to conduct their own independent research on “alternative energy” technology. The benefits for PETRONAS (and Malaysia) is that this will help the institutions to achieve academic and research excellence and this will help the Malaysian government’s aspirations to make Malaysian an educational hub in this region. This will in turn help PETRONAS and its institution to attract world class talents into its fold.

5 Conclusion

In terms of Corporate Social Responsibility activities, PETRONAS is doing well. But it focuses more on non-direct activities. In order to become a sustaining corporation, PETRONAS should start practicing “real” corporate social responsibility by reducing and stopping environmental damage caused by its operations and actively seeks renewable and sustainable energy sources. In order to move into sustaining phase, PETRONAS must first treat the Environment as its definite stakeholder.

SWOT Analysis for AirAsia

Strengths, Weaknesses, Opportunities and Threats Analysis for AirAsia

1.0 Strengths

Ø Air Asia has a very strong management team with strong links with governments and airline industry leaders. This is partly contributed by the diverse background of the executive management teams which consists of industry experts and ex-top government officials. For example, Shin Corp (formerly owned by the family of former Thai Prime Minister - Thaksin Shinawatra) holds a 50% stake in Thai AirAsia. This has helped AirAsia to open up and capture a sizeable market in Thailand. With their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines

Ø The management team is also very good in strategy formulation and execution. The strategy that they have formulated at the beginnings was a clever blend of proven strategies by other low cost airlines is US and Europe. They are Ryanair’s operational strategy (no frills, landing in secondary airport), Southwest’s people strategy (employee comes first) and Easyjet’s branding strategy (linking with other service providers like hotels, car rental).

Ø AirAsia’s brand name is well established in Asia Pacific. Besides the normal print media advertising & promotions, AirAsia’s top management also capitalised on promotions through news by being very “media friendly” and freely sharing the latest information on Air Asia as well as the airline industry. Their partnership with other service providers such as hotels and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has created a very unique image among travellers. Alliance with Galileo GDS (Global Distribution System) that enables travel agents from around the world to check flight details and make bookings have also contributed to their string brand name. Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) have successfully “elevated” the brand to become a regional brand beyond just Malaysia. The links with Manchaster United (one of the world’s most famous football teams) and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just the this region

Ø AirAsia is the low cost leader in Asia. With the help of AirAsia Academy, AirAsia has successfully created a “low-cost airline mentality” among their workforce. The workforce is very flexible and high committed and very critical in making AirAsia the lowest cost airline in Asia.

Ø The excellent utilization of IT have directly contributed to their promotional activities (email alerts and desktop widget which was jointly developed with Microsoft for new promotions), brand building exercise (with over 3 million hits per month and on the most widely surfed booking engines in the world) as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees

2.0 Weaknesses

Ø Air Asia does not have its own maintenance, repair and overhaul (MRO) facility. It may be a good strategy when they first started with only Malaysia as the hub and few planes to maintain. But now, with few hubs (Malaysia, Thailand and Indonesia) and over 100 planes currently owned and about another 100 planes to be received in the next few years, AirAsia have to ensure proper and continuous maintenance of the planes which will also help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO facility

Ø AirAsia receives a lot complaints from customers on their service. Examples of complaints are around flight delays, being charged for a lot of things and not able to change flight or get a refund if customers could not make it. Good customer service and management is critical especially when competition is getting intense.

3.0 Opportunities

Ø There are 2 major events that are taking place now or going to take place in less than 6 months from now. First, is the ever increasing oil price. Second, is the “ASEAN Open Skies” agreement that has been reached.

Ø The increasing oil price at the first glance may appear like a threat for AirAsia. But being a low cost leader, AirAsia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, AirAsia has a great opportunity to capture some of the existing customers of full service and other low cost airline’s customers. However, there will be also some reduction in overall travel especially by casual or budget travellers.

Ø The “ASEAN Open Skies” allows unlimited flights among ASEAN’s regional air carriers beginning December 2008. This will definitely increase the competition among the regional airlines. However, with the “first mover” advantage as well as its strengths in management, strategy formulation, strategy execution, strong brand and “low-cost” culture among its workforce, this agreement can be seen as more of an opportunity.

Ø There is also some opportunity to partner with other low cost airlines as Virgin to tap into their existing strengths or competitive advantages such as brand name, landing rights and landing slots (time to land).

Ø The population of Asian middle class will be reaching almost 700 million by 2010. This creates a larger market and a huge opportunity for all low cost airlines in this region including AirAsia.

4.0 Threats

Ø Certain rates like airport departure, security charges and landing charges are beyond the control of airline operators and this is a threat to all airlines especially low cost airlines which tries to keep their cost as low as possible. For example, Changi airport in Singapore charges SGD21 for every person who departs from Singapore.

Ø AirAsia’s profit margin is about 30% and this has already attracted many competitors. Most of the full service airlines have or planning to create a low cost subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low cost carrier Tiger Airways.

Ø Users’ perception that budget airlines may compromise safety to keep costs low.

Nucor Analysis

Executive Summary

This report primarily discusses the challenges that Nucor is facing or going to face in the wake of steel industry evolution and general social and economic climate changes. Industry standard analysis tools and methods have been used to basically understand what is happening at the macro economy and industry level, where Nucor's strengths and weaknesses are, and how they can continue to strive in this challenging environment.

The financial analysis shows that Nucor has been doing very well in the past 5 years by developing the right strategy and executing them well. However, in the face of economic boom in emerging countries, globalization, scarcity of raw materials, increasing concerns for environmental well being and worsening energy crisis, Nucor is presented with new threats and opportunities. It should capitalize on its key strengths especially the people, manufacturing excellence and lean organizational structure to face these threats and capitalize on the opportunities.

Introduction

Nucor’s goal is to “Take Care of Our Customers.” - by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world while at the same time being cultural and environmental stewards in our communities where it exists.

External Analysis

PEST Analysis

Government(s) plays a very important role in steel industry by two ways. First, it imposes tariffs and trade barriers when local manufacturers need protection. However, with Free Trade Agreements signed, this role is reduced. Government(s) also provides tax breaks (and subsidies in some countries) to support industry growth. Second, it enforces international and local environmental laws to reduce pollution and protect the environment.

High population or economic growth especially in India, China, Brazil and Russia has increased demand for new buildings, vehicles and other infrastructures which in turn increases the overall demand for steel and steel based products.

Steel industries are intensive energy users and the ever increasing fuel price is pushing the manufacturers to keep on finding for and adopting a more efficient steel manufacturing technology and process. Technology is also used to produce higher quality steel products.

Mergers and acquisitions are taking place especially in the past few years as a growth strategy as well as to capitalize on economics of scale during purchasing and production thus becoming more cost competitive in this industry where there is not much differentiation and competition is basically based on price.

Recycling plays an important part in this industry and with scrap metals prices increasing manufacturers are working on joint ventures to source for cheaper sources.

Porter's Five Forces Analysis

The bargaining power of buyers is high due to various factors. First, there is low level of product differentiation thus low switching cost for buyers. Competition is basically on price. Second, there are many manufacturers in the market thus buyers have many choices. Third, due to cyclical demand for steel, there tend to be (sometimes) oversupply and this gives additional bargaining power to buyers. Bargaining power of suppliers is also high due to scarcity of raw materials especially scrap metals whereby suppliers are raising the price.

There are a number of substitutes for steel. Some buyers are sourcing for lighter materials to replace the “heavy” steel. This is due to, as an example, end-users demand to have a more fuel efficient automobiles and train wagons. One way is to build smaller and lighter automobiles. However, these substitutes are still costlier. So their threat can be considered medium for now.

The threat of new entrant is low as it is capital intensive to start and run the business as well as environmental laws and enforcement are getting stricter.

In summary, the rivalry is high in the steel industry. However, government(s) through its laws plays an important part in increasing or lowering the rivalry.

Internal Analysis
Value Chain Analysis

Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis

Nucor’s key strength is our people. The lean organization structure has created strong leadership at all levels by being able to make quick decisions and be accountable for it as well as share their success and failures with each other. The egalitarian approach towards employee benefit and welfare, compensation based on group performance and production quality, training and job rotation to ensure all employees know all areas of work and an approachable management which practices open communication as well as top to bottom risk taking and innovative culture complemented each other to have created a highly motivated, productive, flexible and innovative workforce. Close relationship with major customers who have co-located with them results in lower shipping cost and lower price for customers. By practicing risk-taking and being innovative Nucor is able to provide superior quality products. Nucor’s superior financial performance is the best in the industry in United States. It is also North America’s largest recycler.

There are weaknesses as well. Almost all of Nucor’s plants are in US making it difficult to compete with Asian manufacturers with lower production costs. Production is energy intensive (20% of total cost). Nucor is dependent on scrap metal (getting scarce and costlier as well as volatile). No internal R&D performed makes it dependent on suppliers or partners to bring in new technology. Being a decentralized organization, there is no coordination between divisions during purchasing or sales which results in duplication of sales and marketing effort and not capitalizing on economies of scale for purchasing.

There are a lot of opportunities for Nucor to expand through mergers and acquisitions, to perform market research to understand existing customers’ product or business roadmaps, to perform R&D to find new steel products, better manufacturing technology and improved process as well as to capture and process waste energy & products into electricity or some useful product for another industry. There is also further opportunity to improve inbound and outbound logistics with the recent purchase of DJJ and also to export steel to emerging markets such as India, China, Brazil and Russia where the demand is growing.

The major threats that Nucor are facing are increased competition due to globalization, scarcity & rising raw material and energy costs, tougher environmental laws and free trade agreements which allows foreign players who have cheaper labor force, reduced regulation and unfair subsidies to have the cost advantage, being bought over by larger competitor and cyclical demand for steel products. Additionally, substitutes which are lighter but stronger are slowly getting more prominence.

Strategy Formulation
TOWS Strategic Alternatives Matrix

Four Actions Framework of Blue Ocean Strategy

Recommendation

The following strategies are recommended in order to address challenges and to continue achieving high growth and profitability.

1. To continue with current human resource strategy of egalitarian, performance based compensation and risk-taking oriented culture building to maintain the strong leadership at all level and the highly motivated, productive, flexible and innovative workforce. This becomes more critical now with globalization and mergers & acquisitions which are making steel industry more competitive.

2. To continue with lean and decentralized organization but streamline/coordinate purchasing, sales and marketing activities. This is to reduce duplication of efforts, overall costs and benefit from economies of scale and be more consistent to customers.

3. To build long term relationship with customers by understanding their product and business roadmaps. This will help to :-

a. Reduce the impact of cyclical demand and reduce the chances of customers switching to other suppliers (manufacturers).

b. Determine products to be eliminated from our offering.

c. Tailor our pre- and after sales services based on customers’ need and expectation

4. To start and grow internal research and development (R&D) capability in order to continuously :-

a. Streamline manufacturing technology and process to be more environmental friendly, productive and cost effective.

b. To find ways to turn waste or by-products into energy that can be re-used by Nucor or into something valuable that can be sold to other industries. This is to reduce energy costs or generate supplementary income for Nucor.

c. Identify new products (that matches customer future and current needs). Offering what customer wants at a cheaper cost, higher quality and timely manner will make them stay with Nucor. For example, pre-fabricated building and lighter automotive components.

d. Identify alternative raw materials. This is to reduce dependability on scrap metal.

5. To expand internationally especially to emerging regions which includes India, China, Brazil and Russia through mergers & acquisitions and joint-ventures with local partners. This is to take advantage of low production cost and at the same time be closer to growing markets.

6. To fully utilize newly acquired inbound and outbound logistics capability (JCC) to further reduce shipping costs to customers.

Key Success Factors

The key success factors for these strategies are:-

1. Successful proliferation and implementation of current human resource strategy (and policies) to newer plants especially those outside of US. Different regions have their own history, work culture and political agendas that may hinder the implementation exact Nucor’s human resource strategy.

2. Sufficient allocation of financial and human resources for expansion and also for research and development activities. Formal R&D will bring Nucor’s existing risk-and innovation taking culture to a new level. Nucor must be willing to spend considerable amount of money and resources to make this effort successful.

3. Involvement or willingness of customers to share their product or business roadmap with Nucor. Product or business roadmap may be a strategic advantage that customers will choose not to divulge to others. Nucor must convince our customers to share their roadmap to create a win-win situation for both parties.