SK Innovation is a South Korean intermediate holding company of the SK Group. The company established as Korea Oil Corporation in 1962. In 2007 Split into a holdings company (SK Holdings) and an SK energy company (SK Innovation, 2021). It is part of the world’s largest conglomerate. The company has six significant subsidiaries: SK Energy, SK Global Chemical, SK Lubricants, SK ie Technology, SK Trading International, and SK Incheon Petrochem (SK Innovation, 2021). SK Innovation employs more than 2000 people all over the world. Porter’s five forces model is a helpful tool to identify threats and opportunities faced by SK Innovation in the business world.
Competitive Rivalry in The Market
SK Innovation is the part of SK Group, which is in the list of top 3 South Korean conglomerates listed in Fortune 500 based on Revenue (Statista, 2021). SK Group’s major competitors are Samsung Electronics and Hyundai Motors. The company major business is downstream operations. South Korea consumes 2.6 M barrels per day, around 2.7% of the world’s oil consumption (Worldometers, 2021).
SK Innovation operates two major plants in South Korea with a combined capacity of 1.115 million barrels per day. It is the industry leader in the local market. As of Dec 2020, it posted annual revenue of $28.9 B (Nikkei Asia, 2021). There is intense competition between global conglomerates in the downstream oil and gas industry, but locally company faces no serious threat to its business.
Threat of Substitutes
The oil and gas industry is evolving all over the world countries are trying to reduce their dependence on oil and gas. The primary concern is Greenhouse Gas (GHG) emissions. Its account of around 9% of total direct GHG emission is linked with the industry’s operations (Beck Et.al., 2020). Oil act as major backbone of the economy, transportation to power generation everything depends upon it. Renewable power generation and electric vehicles are the things of the decade.
The downstream industry is exploring ways to reduce emissions by innovating new processes. SK innovation is partnering with Ford to start producing EV batteries in the US (Hawkins, 2021). The company has an advantage due to multiple diversified portfolios, and it is exploring new avenues for business. The threat of substitution is low to medium level in the near future.
The Threat of New Entrants
The scale of economy SK Innovation operates is unmatchable for the startups. Its principal business is a downstream business that is highly regulated. Governing bodies govern the industry, and the higher initial investment is a significant hiccup in starting a business. More increased initial capital investment and the trained staff are a big hurdle for the new entrants. The firms to enter into this industry need to have a solid ability to raise funds, which becomes rather complicated in the presence of substantial sunk costs and high assets (Worthington, 1995). SK innovations are the leading oil refining company locally (Statista, 2020).
The investor will not get the return he should because of the availability of other resources and a decrease in demand for fossil fuels. The industry is already concentrated, and competition is high. Considering the facts mentioned earlier, the threat of new entrants remains low.
Bargaining Power of Buyers
Buyers can significantly impact a company’s product and selling decisions. The buyers’ buying capacity, availability of the alternative product, and quality are the deciding factors in negotiating better deals. Strong buyers can be the reason for the price war and competition within the industry. The most substantial power buyers can exert lower prices, affecting the profit potential (Luenendonk, 2019). Oil and gas energy has a complex supply chain, bringing a lot of different companies together.
The significant buyers of downstream companies are the state oil companies and oil trading and distribution companies. Downstream activities include the storage, processing, and transportation of oil and gas products. There isn’t any available option for it, and the world depends on the processed products provided by the refineries. All these factors result in minimum leverage to the client. The buyer’s only power is getting a better quality of the product.
Bargaining Power of Suppliers
According to Porter (1979), the oil production equipment directly links with the quality of the product, and malfunction in it can cost millions of Dollars. The primary supplier of the industry is equipment suppliers, human resources supplier, upstream and distribution companies. The equipment is a keystone, and industry depends on its quality. The market is concentrated, and there are not many suppliers who can deliver sophisticated products. The end product of the downstream is the backbone of the global economy.
The consumers are also limited, so in this case, both depend upon each other. Industry plays a crucial role in refining crude oil, and there isn’t any other solution. Its byproduct is marketed separately, so it is a wide range of product range. Suppliers are linked with all the industry, which provides its financial security in the longer run. The supplier holds low to moderate bargaining power in the downstream industry.
References
Back. C., Rashidbeigi. S., Roelofsen. O., and Speelman. E. (2020). The future is now: How oil and gas companies can decarbonize. Available at: https://www.mckinsey.com/industries/oil-and-gas/our-insights/the-future-is-now-how-oil-and-gas-companies-can-decarbonize
Hawkins. A. J. (2021) Ford teams up with South Korea’s SK Innovation to build EV batteries in the US. Available at: https://www.theverge.com/2021/5/20/22445688/ford-sk-innovation-ev-battery-production-joint-venture
Luenendonk. M. (2019). Bargaining Power Of Buyers – Porter’s Five Forces Model. Available at: https://www.cleverism.com/bargaining-power-of-buyers-porters-five-forces-model/
Nikkei Asia (2021). SK Innovation Co., Ltd. Available at: https://asia.nikkei.com/Companies/SK-Innovation-Co.-Ltd
Porter., E. M (1979). How Competitive Forces Shape Strategy. Available at: https://hbr.org/1979/03/how-competitive-forces-shape-strategy
SK Innovation. (2021). History. Available at: http://eng.skinnovation.com/company/history.asp
SK Innovation. (2021). SK innovation aims to become a top global energy and chemical company with its six subsidiaries. Available at: http://eng.skinnovation.com/ir/affiliate.asp
Statista (2021). Leading South Korean companies on the Fortune Global 500 ranking in 2020, by revenue. Available at: https://www.statista.com/statistics/944811/south-korea-fortune-500-leading-companies/
Statista (2021). Refining capacity in South Korea in 2018, by oil refinery. Available at: https://www.statista.com/statistics/990679/south-korea-refining-capacity-by-oil-refinery/
Worldometers (2021). Oil Consumption by Country. Available at: https://www.worldometers.info/oil/oil-consumption-by-country/
Worthington, P. (1995). Investment, Cash Flow, and Sunk Costs. Available at: The Journal of Industrial Economics 43(1) PP 49-61.