This is the detailed Porter’s Five Forces of Saudi Electricity for analyzing the competitive forces that shape an industry. The model identifies five key forces that shape the competitive environment of an industry. These forces are:
- The Threats of New Entrants
- The Bargaining Power of Suppliers
- The Bargaining Power of Substitutes
- The Threat of substitutes
- The intensity of Competitive Rivalry
Saudi Electricity is a state-owned electric utility company founded in 2020. It’s headquarter is in Riyadh, Saudi Arabia. The company is listed on Saudi Exchange. It produces, transmits, and distributes electricity in Kingdom. It generates electricity from its 45 power plants in the Kingdom. It operates through its subsidiaries, including National Grid, Saudi Power Procurement Company (SPPC), Dawiyat Integrated Telecommunications and Information Technology Company (Saudi Electric, 2021). National Grid is responsible for electricity transmission, maintenance, and control of grids.
Saudi Power Procurement Company (SPPC) for building the capacity and trading of power, development, and establishment of new partnerships, renewable energy projects, independent production. Porter’s five forces model is used to analyze the operational risks it faced and threats it is exposed.
Competitive Rivalry in the Market
The electric utility production and distribution business assure good returns. Energy utilities fall under the category of commodities. The demands for commodities are usually steady, and it is something that is constantly required. The growing economy of Saudi Arabia means increasing demand for energy. Saudi Electricity is the sole electric utility company in the country. The state backs the company.
Saudi Electricity act as the industry leader and controls the market. It enjoys the monopoly of power generation, transmission, and distribution in the country. Saudi Electric has earned SAR 68.708 billion and a profit of SAR 3.026 billion (Argaam, 2021). Due to the leading producer and distributor in the country and backed by the state, no other company is competing in any capacity against Saudi Electricity. There isn’t any competition against it.
Threat of Substitutes
There isn’t any significant threat to Saudi Electric as of now. It is the only electric utility company in the Kingdom. However, the activist is discouraging to generate electricity from fossil fuel. It is one of the primary causes of global greenhouse gases. The advancement of technology is evolving the utility energy industry. The increase in the worldwide population is the driving force behind the growth of the sector. Saudi Electric depends on fossil fuel to generate the majority of its electricity.
According to (EIA, 2019) Saudi Electricity used direct crude oil 0.5 Million barrels per day from June to August in 2018, which is less than the previous three years. Power generation industries are exploring renewable energy sources. Innovative electric systems are being developed for transmission projects. Saudi electricity needs to invest in renewable energy resources. The overall threat level is low against Saudi Electricity.
Threat of New Entrants
The governments strictly monitor the power generation industry. It is due to the involvement of the public. The industry is highly regulated, and manufacture tends to follow strict compliance guidance. Higher capital investment is required to enter the industry. The main barriers to entry in any industry are capital requirements, product differentiation, regulatory requirements, and economies of scale (Grant, 2010). Regulatory bodies determined the price for the consumer, which affects the profitability of the company.
The companies cannot set their desired profit margins. Due to the sole power generation company in the Kingdom, restriction on pricing of utility with stringent compliance requirements makes it impossible to set up a new company. Thus the threat of new entrants remains low.
Bargaining Power of Buyers
The buyer’s power depends on the availability of the products, their quality, and purchasing power. The buyer power is high if the buyer has many alternatives and they act as a unit. The buyer power is low if they operate independently (Porter, 1979). The buyers can’t exert any influence because they don’t have anything to bargain for. The buyers of the energy utility company are commercial entities and domestic users. The state-provided subsidy is the only leverage buyer gets, either in tax relief or bill reduction.
Commercial users get grants from the state. In this case, there isn’t another option available for the users. Saudi Electricity is the sole power generation company. They need to depend on their products. There aren’t any other options available. Considering the known facts, buyers have no or low bargaining power.
Bargaining Power of Suppliers
The power generation industry has two leading suppliers that are distributors and raw material providers. Raw material includes fossil fuel, machinery, and its part. The distributors bring the consumer to them. The supplier can exert its power if there aren’t many suppliers in the market or its product is better than the available market. (Luenendonk, 2019). It can put them in a better position for negotiations on behalf of their client. If the distribution company has a vertically integrated supply chain, it will help them a great deal.
Saudi Electricity is a vertically integrated company that controls the production, transmission, and distribution of electricity in the Kingdom. It provides unreachable control over the supplier. Usually, suppliers have high bargaining power due to their unique position, but in this case, they don’t hold any power against it.
References
- Argaam. (2021). Saudi Electricity posts net profit of SAR 3.026 bln in 2020. Available at: https://www.argaam.com/en/financial-reports/company-report/32
- EIA. (2021). Today in Energy. Available at: https://www.eia.gov/todayinenergy/detail.php?id=39693#:~:text=Saudi%20Arabia%20relies%20on%20crude,demand%20for%20air%20conditioning%20rises.&text=Natural%20gas%20processing%20capacity%20is%20also%20increasing.
- Grant, R. M. (2010). Contemporary Strategy Analysis. 7th Edition.
- Luenendonk., M (2019) Porter’s Five Forces Model – Strategy framework. Available at: https://www.cleverism.com/porters-five-forces-model-strategy-framework/
- Porter., E. M (1979) How Competitive Forces Shape Strategy. Available at: https://hbr.org/1979/03/how-competitive-forces-shape-strategy
Saudi Electric. (2021). Our Subsidiary Companies. Available at: https://www.se.com.sa/en-us/Pages/OurCompanies.aspx