Sinopec is a Chinese company working in the oil and gas sector based in Beijing, China. The company has an objective to grow and expand continuously over the coming decades. To achieve this objective, it is important for Sinopec to understand the industry dynamics by giving attention to details. Porter’s five forces analysis is a tool describing the attractiveness of an industry by analyzing it from five different aspects. Porter’s five forces analysis of the oil & gas sector is described in detail below
Competitive Rivalry
The competition in the industry is on the higher side due to the presence of multinationals and state-owned enterprises. The interest of governments intensifies the competition in the market for private as well as state-owned enterprises. Companies from the US, UK, France, and China are coming up with technologies and innovations to take competitive advantage for sustained growth. The competition is the industry is intense which can be analyzed by the revenue collection of major competitors of Sinopec in the industry. Royal Dutch Shell and British Petroleum from the UK are one of the major market shareholders of the oil & gas sector with a revenue collection of USD 322.7 billion and USD 252.6 billion respectively in the year 2017. Exxon Mobile collected revenue of USD 241.5 billion with the fifth rank in terms of the highest revenue in 2017. Sinopec has collected revenue of USD 377.3 billion in 2017 beating its rivals in terms of revenue collection (Statista, 2019). The market share of all these operating companies in the oil & gas sector is evidence of intense competition in the industry.
Threat of Substitutes
Companies from all around the world are researching for alternative sources of energy due to technological advancement and scarcity of oil & gas reserves. TOTAL has joined hands with Gevo in 2009 to focus on the product of bio-fuel and chemicals to develop a substitute and take competitive advantage. The Sinopec is also aiming to substitute transportation fuel consumption by 15 % in China with bio-fuels (Goh & Lee, 2010). The companies are investing efforts and investment which makes bio-fuel a potential substitute for current oil & gas products. Currently, the progress in biofuels is not threatening for oil & gas products which keeps the threat of substitutes moderate
The Threat of New Entrants
The setup of the oil & gas sector requires massive investment and there is no easy exit to industry due to expensive fixed assets. The interest of governments due to state-owned enterprises makes it even more complex for smaller companies or investors to set up an oil & gas company. The major barriers to entry in the oil & gas sector are legislations, differentiation, and innovation in product, the behavior of cartels, massive capital needs, and patents. The technology involved in the refining process has patents like Exxon Mobile introduced a technology to refine oil with low cost and more productivity (Hokroh, 2014). These barriers to entry in the oil & gas industry decrease the threat of new entrants. Therefore, the threat of new entrants for Sinopec in the oil & gas sector is low.
Bargaining Power of Suppliers
The oil & gas are the scared resources and the suppliers of the resources understand their worth and power. Mostly, these resources are owned by countries and they have high bargaining power for setting prices and terms with the companies. Gulf countries are considered as the major suppliers of oil reserves. An example of supplier power is found in 1970’s when the government restricted the counties for the trading of oil reserves that resulted in high increases in prices from $2.7 per barrel to $11.2 per barrel (Library of Congress, 2010). Therefore, the bargaining power of supplier is high in oil & gas industry.
Bargaining Power of Buyers
The end consumers or buyers of the oil & gas products are generally the citizens or common people with least control over the pricing and production policies of the sector. The buyers of the oil & gas sector have minimal influence over the decisions of companies (Hokroh, 2014). This little influence is the evidence of low bargaining power of buyers in the oil & gas industry. The overall analysis of the oil & gas sector from Porter’s five forces makes it an attractive industry for Sinopec to sustain its business and continuously invest in the industry
References
Goh, C. S., & Lee, K. T. (2010). Palm-based bio-fuel refinery (PBR) to substitute petroleum refinery: an energy and energy assessment. Renewable and Sustainable Energy Reviews, 14(9), 2986-2995.
Hokroh, M. A. (2014). An analysis of the oil and gas industry’s competitiveness using Porter’s five forces framework. Global Journal of Commerce and Management Perspective, 3(2), 76-82.
Library of Congress . (2010) ‘The oil and gas industry’. Available online at http://www.loc.gov/rr/business/BERA/issue5/issue5_main.html.
Statista. (2019). Ranking of the global top 10 oil and gas companies in 2018, based on revenue (in billion U.S. dollars). Available at:https://www.statista.com/statistics/272710/top-10-oil-and-gas-companies-worldwide-based-on-revenue/