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Letter of Authorization
August 22, 2010
Dear Reader:
Being a student of Strategic Management course, our course facilitator Dr. Fasihul Karim Siddiqui has authorized us to prepare a report pertaining to Strategic Plan of Pakistan State Oil Company (PSO) for Summer Semester 2010.
Sincerely,
Rabia Jamal (ID # 2008-3-38-8319) Maqsood Ahmed (ID # 2008-3-39-8326)
Letter of Transmittal
Dr. Fasihul Karim Siddiqui Faculty of Strategic Management Institute of Business Management Karachi. Dear Sir:
The term report of Strategic Management on “Strategic Plan of Pakistan State Oil Company (PSO)” is enclosed for your kind perusal.
This report is being prepared by applying strategic principles and conducting detailed analysis on the findings keeping in view the internal & external environment of the company.
Through this letter we would like to thank our instructor for giving us the opportunity to prepare Strategic Plan for the largest Oil Marketing Company of Pakistan.
Sincerely, Rabia Jamal (ID # 2008-3-38-8319) Maqsood Ahmed (ID # 2008-3-39-8326)
Table of Contents Executive Summary ....................................................................................................................................... v
1. Business Balanced Scorecard ................................................................................................................ 1
2. Company Profile .................................................................................................................................... 2
2.1. History ........................................................................................................................................... 2
2.2. Equity Shares ................................................................................................................................. 2
2.3. Products ........................................................................................................................................ 3
2.4. Market & Customers ..................................................................................................................... 3
3. Vision, Mission & Corporate Objectives ............................................................................................... 5
3.1. Vision ............................................................................................................................................. 5
3.2. Mission Statement ........................................................................................................................ 5
Analysis of Mission Statement .............................................................................................................. 5
Improved Mission Statement ............................................................................................................... 6
3.3. Strategic Objectives ...................................................................................................................... 6
4. Internal Assessment .............................................................................................................................. 7
4.1. Management ................................................................................................................................. 7
Board Audit Committee ........................................................................................................................ 7
Board Finance and Operation Committee ............................................................................................ 7
Board Human Resource Committee ..................................................................................................... 7
Management Committee ...................................................................................................................... 7
Core Leadership Team .......................................................................................................................... 7
Employee Leadership Team .................................................................................................................. 8
Executive Committee ............................................................................................................................ 8
4.2. Marketing ...................................................................................................................................... 8
4.3. Finances ........................................................................................................................................ 9
4.4. Operations .................................................................................................................................. 10
4.5. Management Information Systems ............................................................................................ 11
4.6. Internal Factor Evaluation Matrix (IFEM) .................................................................................... 12
5. External Assessment ........................................................................................................................... 13
5.1. Consumer Markets ...................................................................................................................... 13
5.2. Competitors ................................................................................................................................ 13
5.3. Suppliers ...................................................................................................................................... 15
5.4. Economic Condition .................................................................................................................... 15
5.5. Regulatory Environment ............................................................................................................. 16
5.6. External Factor Evaluation Matrix (EFEM) .................................................................................. 16
5.7. Competitive Profile Matrix .......................................................................................................... 16
6. Strategy Formulation .......................................................................................................................... 18
6.1. TOWS Analysis Matrix ................................................................................................................. 18
5.2. Basket of Available Strategies ..................................................................................................... 19
5.3. SPACE Matrix ............................................................................................................................... 21
5.4. Grand Strategy Matrix................................................................................................................. 22
5.5. BCG Matrix .................................................................................................................................. 23
5.6. Internal-External (IE) Matrix ....................................................................................................... 23
5.7. Decision Matrix ........................................................................................................................... 24
5.8. Qualitative Strategic Planning Matrix ......................................................................................... 26
5.9. Strategy Selection ....................................................................................................................... 27
6. Strategy & Long Term Objectives........................................................................................................ 28
6.1. Strategy ....................................................................................................................................... 28
6.2. Long Term Objectives ................................................................................................................. 28
6.3. Comparison of Long Term Objectives ......................................................................................... 28
7. Strategy Implementation .................................................................................................................... 29
7.1. Recommendations ...................................................................................................................... 29
8. Specific Objectives .............................................................................................................................. 30
Appendix 1 - Finances ................................................................................................................................. 31
Balance Sheet .......................................................................................................................................... 31
Income Statement .................................................................................................................................. 32
Appendix 2 – Organization Chart ................................................................................................................ 33
v
Executive Summary
The purpose of this report is to develop strategic plan of Pakistan’s largest Oil Marketing Company,
Pakistan State Oil (PSO) by applying basic principles of Strategic Management. This report covers
Internal & External assessment of the company, Strategy Formulation, Selection, Evaluation and Long
Term Objectives for the period of 7 years (FY 2011 – FY 2017) and its Implementation. A Balanced
Business Scorecard has also been developed for the company.
Findings in this report indicate that the huge circular debt in the economy, unreliable source of supply
from Oil Refining Companies and decreasing profit margins are the major challenges that PSO is
currently facing. Another challenge faced by the company is the forward integration by the various Oil
Refining Companies.
Pakistan State Oil has strong Research and Development department. Using their internal strength of
research and development along with increasing energy demand and requirement of alternate energy
fuel they can make use of their available resources to improve their position in the market.
We have suggested following strategies to Pakistan State Oil:
Research and improve alternate energy products such as Bio-Diesel and E10
Research and develop new products as White Oil substitute
Work out a formula and convince government to facilitate PSO’s debtors to pay off their
liabilities to PSO
1
1. Business Balanced Scorecard
Innovation & Learning Perspective
Objective Target Initiative
Increased Employee Satisfaction
Turnover rate < 10% - Employee
Development Program - Employee benefits and promotions
Enhanced Employee Competence
2 trainings per year for each key employee
Financial Perspective Objective Target Initiative
Profitability
yr 1: 2% yr 2: 3% yr 3: 4% yr 4: 5% yr 5: 6%
- Decrease in production cost - Work with Government to eliminate economic constraints like circular debt
Revenue Growth 7% per anum
Decrease in Trade Debts and Payables
40% of existing Debts & Payables after 5 years
Customer Perspective Objective Target Initiative
Customer Satisfaction and Retention
95% Satisfaction
- Cost effective and efficient alternate fuel - Customer Loyalty Programs - Corporate Social Responsibility
Market Share 70% of Retail consumers
Internal Business Perspective
Objective Target Initiative
Utilize Storage Capacity
90% capacity - Improved distribution - Certified Equipments - Building Certified IT infrastructure
Use of IT and E-Commerce
Order confirmation with in 24 hours
Ensure Health and safety of workers
0% accidents
Vision &
Strategy
2
2. Company Profile Pakistan State Oil, the largest oil marketing company in the country is currently engaged in the
marketing and distribution of various POL products, including Motor Gasoline, High Speed Diesel,
Furnace Oil, Jet Fuel, Kerosene, LPG, CNG, Petrochemicals and Lubricants. In addition to this we also
import different products according to their demand pattern and possess the biggest storage facilities
representing 80% of the country’s total storage capacity.
2.1. History The creation of Pakistan State Oil (PSO) can be traced back to the year 1974, when on January 1st; the
government took over and merged Pakistan National Oil (PNO) and Dawood Petroleum Limited (DPL) as
Premiere Oil Company Limited (POCL).
Soon after that, on 3rd June 1974, Petroleum Storage Development Corporation (PSDC) came into
existence. PSDC was then renamed as State Oil Company Limited (SOCL) on August 23rd 1976. Following
that, the ESSO undertakings were purchased on 15th September 1976 and control was vested in SOCL.
The end of that year (30th December 1976) saw the merger of the Premier Oil Company Limited and
State Oil Company Limited, giving way to Pakistan State Oil (PSO).It is considered as one of the most
successful mergers in the history of Pakistan.
After PSO’s inception, the corporate culture underwent a comprehensive renewal program which was
fully implemented in 2004. This program over the years included the revamping of the organizational
architecture, rationalization of staff, employee empowerment and transparency in decision making
through cross functional teams. This new corporate renewal program has divided the company’s major
operations into independent activities supported by legal, financial, informative and other services.
Inorder to reinforce and monitor this structural change, related check and balances have been
established by incorporating monitoring and control systems.Human Resource Development became
one of the main priorities on the company’s agenda under this corporate reform.
2.2. Equity Shares PSO has 200 million shares authorized for
public offering and it has currently
171,518,901 shares floating in Karachi Stock
Exchange. The stock price on August 02,
2010 was Rs. 282.54 making the total
market capitalization of the company at Rs.
48.43 billion. Apart from the public offering
of the equity shares, Government of
Pakistan holds 54% majority stakes in the
company, including both direct holdings of
the Federal Government and indirect
holdings through GOP owned institutions.
54 28
18 GOP
Institutions
Individuals &Others
Figure 1 - Shareholding Structure of Pakistan State Oil
3
According to the Privatization Commission of Pakistan, Government of Pakistan is in the advanced
stages of divesting 51% of its stakes in PSO to a strategic investor.
2.3. Products Pakistan State Oil deals in both White Oil and Black Oil markets. White Oil consists of High Speed Diesel
(HSD), Gasoline (which includes the Retail Fuel and Gaseous Fuels), JP-1 (Jet Fuel) and Superior Kerosene
Oil (SKO). Black Oil consists of Furnace Oil and Light Diesel Oil (LDO).
Besides selling Gasoline, Furnace Oil, Jet Fuel and HSD, Pakistan State Oil also caters to the vast
customer base of lubricants in the country. PSO sells two types of lubricants; Automotive Oils and
Industrial Oils, catering both types of customers in this area as well.
Pakistan State Oil also exports JP-8 Jet Fuel to Afghanistan. It is being used by the DESC and NATO
forces.
2.4. Market & Customers PSO caters to POL (Petroleum, Oil and Lubricants) requirements of a wide spectrum of customers
comprising the retail consumer, various industrial units, government, power projects, aviation and
marine sectors of Pakistan.
PSO industrial consumer dominance in the government sector can be judged by the fact that all the
major government entities like OGDC, Pakistan Army, Pakistan railways, Navy, NLC and PAF Wah have
entrusted PSO to meet their POL needs. Besides supplying fuel to national power utilities like WAPDA
and KESC, PSO is the sole furnace oil supplier to all Independent Power Projects (IPPs) in Pakistan.
PSO also supplies fuel to industrial units like textile, cement, agriculture, transport etc. Its industrial
consumer base includes prestigious entities like the Presidency and the Prime Minister Secretariat,
where PSO has developed consumer outlets for timely refueling of their fleets.
Furthermore, PSO also serves the fuel needs of both national & international air carriers. It also provides
jet fuel into-plane refueling facilities at 9 airports of Pakistan i.e. Karachi, Lahore, Islamabad, Peshawar,
Multan, Faisalabad, Turbat, Pasni and Sialkot.
PSO also supplies fuel to ships at Karachi Port, Korangi Fish Harbor & Port Qasim. Moreover, we cater to
the fuel requirements of Pakistan Navy, Maritime Security Agency, Karachi Port Trust, PNSC, Faisal
Marine Oil Services (Pvt) Ltd.
Pakistan State Oil also has strategic investments in related projects such as:
Joint Installation of Marketing Companies (JIMCo) – PSO holds 62% stakes of the facility which is
operated by PSO itself. It has maximum daily throughput of 17,000 kilo tons.
Asia Petroleum Limited – PSO holds 49% stakes in the company which operates 82 kilometer
pipeline as well. It has a capacity of 3.6 million tons per annum.
4
Pak Grease Manufacturing Company –PSO holds 22% stakes in the manufacturer of the
specialized grease catering to the requirements of many the customers including Pakistan Steel
and Armed Forces
Pakistan Refinery Limited – PSO holds 18% stakes in Pakistan’s third largest oil refining company.
The annual capacity of this refinery is 2.2 million tons per annum
White Oil Pipeline Project – PSO holds 12% stakes in this project which is a joint venture of PSO,
Shell Pakistan (26%), Caltex Pakistan (11%) and PARCO (51%). It is a 817 kilometer, 26 inch
diameter pipeline dedicated to transfer refined products from PARCO to the other regions of the
country.
5
3. Vision, Mission & Corporate Objectives
3.1. Vision The Vision of Pakistan State Oil is as follows:
To excel in delivering value to customers as an innovative and dynamic energy company that gets to the
future first.
3.2. Mission Statement The existing Mission of the company is:
We are committed to leadership in the energy market through a competitive advantage in providing the
highest quality petroleum products and services to our customers based on:
A professionally trained, high-quality, motivated workforce that works as a team in an
environment which recognizes and rewards performance, innovation and creativity, and provides
for personal growth and development.
The lowest-cost operations and assured access to long-term and cost-effective supply sources.
Sustained growth in earnings in real terms.
Highly ethical, safe, environment-friendly and socially responsible business practices.
Analysis of Mission Statement
There are nine essential components of Mission Statement of any organization. We will be analyzing the
mission statement of the Pakistan State Oil to see if it has these components.
Mission Statement Component PSO
Customers “… our customers based on ...”. The term is quite vague and it does not identify the target customers of the company.
Products or Services “… providing the high quality petroleum products and services to ...”. This component is correctly defined in the mission statement
Markets The geographic market is not specified in the mission statement.
Technology This component is not specified in the mission statement of PSO.
Concern for Survival, growth and profitability
“Sustained growth in earnings in real terms”. This component is specified in the mission statement.
Philosophy This component is not specified in the mission statement.
Self-Concept “We are committed to leadership in the energy market through a competitive advantage in providing…” This component is defined in the mission statement.
Concern for Employees “A professionally trained, highly qualified…. For personal growth and development”. This
6
Mission Statement Component PSO
component is specified in the mission statement.
Concern for Public Image “Highly ethical, safe, environment-friendly and socially responsible business practices.”.This component is specified in the mission statement.
Improved Mission Statement
We are committed to leadership in the energy market of Pakistan through a competitive advantage in
providing the highest quality petroleum products and services to our retail and industrial customers
based on:
A professionally trained, high-quality, motivated workforce that works as a team in an
environment which recognizes and rewards performance, innovation and creativity, and provides
for personal growth and development.
Excellence in our core activities and a passion for satisfying our customers’ needs in terms of
total quality management.
Innovative and technologically advanced systems and procedures.
The lowest-cost operations and assured access to long-term and cost-effective supply sources.
Sustained growth in earnings in real terms.
Achieving higher collective and individual goals through teamwork
Highly ethical, safe, environment-friendly and socially responsible business practices.
3.3. Strategic Objectives The existing strategic objectives of Pakistan State Oil are as follows:
Maximize profitability in the Lubricants business through segmented marketing and brand
promotion.
Explore potential markets for the export of fuels and lubricants.
Expand the PSO Cards Business by enhancing the customer base, efficient distribution and brand
partnership.
Enhance our reach and add to our network of New Vision Retail Outlets (NVROs).
Develop bio-fuels and expand the gaseous fuels business.
Revamp the C-store network; introduce Quick Service Restaurants and develop strategic
alliances with local and international franchises.
Revamp organizational structure and various functions in line with the best corporate practices.
Streamline systems and procedures in accordance with the changing business environment.
Ensure full HSE compliance in all our operations and try to meet a zero accident objective
through effective system development, training, inspections and audit.
Reinforce quality assurance by acquiring the ISO 9000 quality management certification of
various departments, and expansion of MQTU network.
7
4. Internal Assessment Internal environment is essential for any organization as it helps the company to formulate and adapt to
the new strategies. Pakistan State Oil also needs to assess its internal environment before the
formulation and implementation of any strategy. The internal environment consists of the way of
management at the organization, marketing and advertising, financial situation, operational processes
and the information management. In this section, we will first discuss the internal factors affecting
Pakistan State Oil. Later, we will present an evaluation of PSO’s response to the key internal factors
using the strategic management tool called Internal Factor Evaluation Matrix (IFEM).
4.1. Management Pakistan State Oil is managed by a Board of Directors called Board of Management in PSO, headed by
Mr. Syed Naveed Qamar, Minister for Petroleum. Mr. Irfan K. Qureshi is the Managing Director of the
organization and the Board of Management also have 8 directors. Apart from the Board of
Management, there are seven other committees headed by different directors.
Board Audit Committee
Board Audit Committee is responsible for recommending to the Board of Management the appointment
of external auditors by the company’s shareholders and it considers any questions of resignation or
removal of external auditors, audit fees and provision by external auditors of any service to the
company inaddition to the audit of its financial statements. The Board of Management is bound to act
according to the recommendations of this committee unless there are strong reasons to do otherwise.
Board Finance and Operation Committee
The Board Finance and Operation Committee primarily review the financial and operating plans of the
company and all matters relating to them. It reviews the existing and proposed annual business plans,
analyzes the profit margins and approves major operating expenses and suggests appropriate measures
and remedies to improve company's performance by analyzing the economic conditions of the country.
Board Human Resource Committee
The Board Human Resource Committee is responsible for making recommendations to the Board of
Management to maintain a sound plan of organization of the company, effective employees’
development program and sound compensation and benefits plans.
Management Committee
The Management Committee, or Man-Com, is a business strategy committee that meets on a weekly
basis primarily to steer and review all key projects from conceptualization to implementation. Man-Com
also reviews budgetary proposals and weeds out non-essential ones. Upon its approval, a final business
plan is prepared and sent for Board approval. It also reviews major business issues and takes decisions
accordingly.
Core Leadership Team
The Core Leadership Team comprises of the Executive Directors and General Managers of the company.
It is chaired by the Managing Director. In this meeting various company initiatives and progress on
different assignments are discussed.
8
Employee Leadership Team
The employee leadership team meets on a regular basis and reviews all matters pertaining to human
resources including recruitment, transfers, disciplinary actions, promotions and employee benefits. The
committee also reviews succession plans and organizational developments.
Executive Committee
The Executive Committee is another high level committee which meets once in a month to review day-
to-day company affairs. The committee members share their problems as well as key accomplishments
with other committee members. It is chaired by the Managing Director and it comprises of EDs / GMs /
DGMs / Departmental Heads of the company.
An important thing to note is that Pakistan State Oil is a semi-government institute while government is
having the majority stake of 54% in the company, therefore one of the directors is the Joint Secretary
(EF&P) and financial advisor on petroleum and natural resources to the Ministry of Finance. This is one
of the reasons that the company has been under influence of various financial matters such as the issue
of the circular debt.
4.2. Marketing Pakistan State Oil has introduced various new ways to market the POL (Petroleum, Oil and Lubricants)
products. They were the pioneers of introducing the cards business in the OMC industry. The customer
loyalty cards product is a way to pre-pay for the future fuel consumption. This product proved beneficial
also for the Fleet and Corporate Card customers. The corporate customer base has increased to more
than 10,000 corporate accounts serving more than 100,000 customers.
Pakistan State Oil has also joined hands with United Bank Limited as a corporate partner. UBL is the third
largest bank in Pakistan having a good customer base in credit card business. UBL has issued Pakistan’s
first Auto Credit Card named; UBL PSO Auto Credit Card. UBL and PSO are offering high value incentives
and discounts on fuel and other automobile related products on the usage of the Auto Credit Card.
PSO had also successfully introduced yet another technology-driven initiative for large corporate fleet
accounts, namely the Vehicle Identification System (VIS) that confines the delivery of fuel to authorized
vehicles only.
Pakistan State Oil also puts greater emphasis on the Non-Fuel Retail (NFR) Business in order to diversify
and strengthen the bond with its customers in a bid to provide convenience and services that distinguish
it from the competition.
Providing a diversified range of services at strategically selected locations, NFR aims to enhance PSO’s
brand image and generate supplementary revenue for the Company by utilizing the capacity of PSO’s
valued retail space and by leveraging the advantage of a captive target market.
Collaborating with renowned local and international banks, PSO has launched financial facilities such as
ATMs and Banking Centers that provide the ease of 24-hour banking services in a secure environment.
9
Customers can also find Pizza Hut and Dunkin Donuts outlets available at selected PSO retail outlets in
Lahore and Karachi.
As an additional revenue stream, NFR has also introduced advertising platforms at the retail forecourt
and provides opportunities for distinguished brands to establish in-store alliances for PSO’s Shop Stops.
PSO is lagging behind in marketing its Lubricants to the automobile and industrial customers which is
proving to be a minor weakness. Despite being a market leader in the fuel sector, PSO is lagging behind
its competitors in the sales of lubricants.
4.3. Finances Pakistan State Oil has a very strong balance sheet if we only go by numbers as it has Rs. 182.5 billion
assets. In reality, the balance sheet has a huge amount of receivables and payables. Various government
institutions and autonomous bodies owe more than Rs. 41 billion to PSO. Power companies like HUBCO
and KAPCO also owe about Rs. 60.4 billion to PSO.
On the other hand, Pakistan State Oil is under a heavy debt of Rs. 136 billion to various domestic and
foreign suppliers. The weak economic condition of Pakistan is clearly shown on Pakistan State Oil’s
balance sheet. The heavy debt incurred by PSO has made the company a very risky prospect for the
investors and it has to pay higher financial charges due to the increased risk of defaults despite of strong
revenue stream.
The 3-years Balance Sheet and Income Statement of Pakistan State Oil can be found in Appendix 1.
Table 1 - Financial Ratio Analysis of Pakistan State Oil
Financial Ratios 2010 2009 2008
Liquidity Ratios Current Ratio 1.1183 1.0666 1.2362 Quick Ratio 0.8338 0.7536 0.5709
Activity Ratios Receivables Turnover 8.1011 8.9341 17.2016 Average Collection Period 45 41 21 Inventory Turnover 20.3132 17.6736 9.3523 Total Asset Turnover 4.8068 4.6882 4.5883 Fixed Asset Turnover 67.8153 48.4168 51.9274
Leverage Ratios Debt-to-Asset Ratio 84.65% 86.40% 75.64% Long Term Debt-to-Asset Ratio 1.61% 1.65% 1.90% Debt-to-Equity Ratio 5.5164 6.3510 3.1050 Times Interest Earned 2.7655 - 16.4128
Profitability Ratios Gross Profit Margin 3.33% 0.42% 5.15% Operating Profit Margin 3.11% (0.77)% 3.85% Net Profit Margin 1.03% (0.93)% 2.41%
10
Financial Ratios 2010 2009 2008
Return on Asset 4.96% (4.36)% 11.06% Return on Equity 31.20% (32.09)% 45.38% Earnings Per Share 52.76 (39.05) 81.94 Price-Earnings Ratio 4.9317 - 5.1434
Growth Ratios Sales 21.92% 23.33% 41.88% Net Income 235.10% (147.66)% 199.67% Earnings Per Share 235.10% (147.66)% 199.70%
The revenues of Pakistan State Oil increase to Rs. 877 billion. The chairman of Pakistan State Oil has set
his sight on the sales target of Rs. 1 Trillion by the end of 2012. The cost of goods sold is generally high
and about 96% revenues earned go to the sales Tax, IFEM and the cost of goods sold. The net profit
margin is merely 1% in 2010 as the financial charges have increased due to the increase of riskiness of
Pakistan State Oil.
Pakistan State Oil incurred heavy inventory losses during 2008-09 due to the fuel prices crashed by 75%
from US$ 141/barrel to US$ 33/barrel. We can also observe that Pakistan State Oil have started to
maintain lesser inventory as the fuel price fluctuation increased. The inventory levels have come down
from Rs. 62.36 billion in 2008 to Rs. 43.18 billion in 2010. The decreased inventory levels have helped
Pakistan State Oil to increase the inventory turnover ratio; but the ever increasing Accounts Receivables
have not helped them and the Average Collection Period has doubled to 45 days in 2010, which was 21
days in 2008. The liquidity ratios for the company do not have any impact because the major portion of
current assets and current liabilities consists of the receivables and payables respectively.
Pakistan State Oil has devised a strategy of matching the maturities of the current assets and current
liabilities in order to maintain the liquidity ratios. The little mismatch is covered by short-term borrowing
by the financial institutions.
An important point to note here is that Pakistan State Oil reported a growth in Sales Revenue over the
past 3 years.
4.4. Operations Pakistan State Oil is currently engaged in the marketing and distribution of various POL products. In
addition to this, it also imports different products according to their demand pattern and possess the
biggest storage facilities representing 80% of the country’s total storage capacity.
The company has the largest distribution network comprising of 3,620 outlets out of which 3,384 serve
retail customers, 53 outlets cater to the agriculture sector and 183 outlets serve the bulk customers. Out
of a total number of 3620 outlets, 1,735 have been upgraded as per the New Vision Retail Program with
the most modern facilities.
Moreover, there are 37 company owned and company operated (Co-Co) sites to serve PSO’s retail
customers. The idea of setting up Co-Co sites is to make these stations flagships under maximum
11
supervision and intense scrutiny to maintain the highest level of efficiency, service and customer care. In
addition to retail customers, more than 2,000 industrial units & business houses, power plants and
airlines are being catered to by PSO's different departments.
PSO possesses huge infrastructure facilities from Karachi to Gilgit. This entails 9 installations and 12+1
depots with a storage capacity exceeding 1 million metric tons, representing over 80% of the total
storage capacity owned by all oil marketing companies. To optimize storage utilization, the company has
recently also provided hospitality to refineries and other oil marketing companies that include Chevron,
Total PARCO and Hascombe.
The modes used for the product movement of POL products by PSO include tank lorries, tank wagons
and pipeline. PSO has a fleet of around 6,000 tank lorries. Around 1,200 tank lorries, equipped with
tracking and pilfer proof systems, have been upgraded as per international standards which are engaged
in delivering quality fuels across the country.
With the inception of the White Oil Pipeline Project (WOPP) from Karachi to MehmoodKot via
Shikarpur& the MFM (MehmoodKot / Faisalabad / Machikey) pipeline, the pattern of supplies from
Karachi has drastically changed as the entire white oil movement from Karachi has been switched over
from tank lorries to pipeline. PSO has an equity partnership in this project with a 12% shareholding.
PSO has set up a state-of-the-art Lubricants Manufacturing Terminal (LMT) at the Korangi Industrial Area
in Karachi to cater to all kinds of lubricant customers including automotive, hi-street and industrial
consumers by meeting the national demand through products of international standards.
PSO is working at a fast pace for the commercial launch of Ethanol Blended Petrol ‘E10 Gasoline’ in
major cities of the country. The new fuel ‘E10 Gasoline’ formulated by blending ten percent ethanol with
petrol has been introduced as part of the government’s strategy to promote alternate energy resources.
PSO initiated research and development work on bio diesel in 2008. Tests have been conducted on
vehicles and generators. PSO is now in consultation with the Government of Sindh, the Government of
Balochistan, the Ministry of Petroleum & Natural Resources, the Ministry of Food Agriculture & Live
Stock, the Alternate Energy Development Board, the Pakistan Agriculture Research Council, and the
Small and Medium Enterprise Development Authority to make further inroads in this important area
which has the potential to save precious foreign exchange for the country
4.5. Management Information Systems A state-of-the-art Computerized Maintenance Management System (CMMS) has been deployed to
integrate all maintenance activities for retail outlets. This system has been implemented to ensure
complete traceability of complaints regarding all breakdown issues at retail outlets. It also provides real-
time data regarding all pending complaints along with any repetitive defects in any equipment. The
system also serves as an information hub and helps in quick and accurate decision-making.
During 2009, PSO was also awarded the ISO/IEC 27001: 2005 – Information Security Management
System certification in recognition of its secure multi-site provision of IT Services to PSO offices and
Departments. PSO is the first Company in the Oil & Gas Industry in Pakistan that achieved this milestone.
12
ISO 27001:2005 reflects the quality certification as per the latest internationally recognized standards
that should be implemented by the Information Systems departments of any organization. The objective
of ISO 27001 is to provide organizations with a common basis for maintaining information security and
assurance for the confidentiality, integrity and timely availability of information assets. In Pakistan, only
11 organizations including IT companies/software houses mostly affiliates of foreign companies, are
ISMS certified.
4.6. Internal Factor Evaluation Matrix (IFEM) Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or evaluating major
strengths and weaknesses in functional areas of a business. IFE matrix also provides a basis for
identifying and evaluating relationships among those areas.
Table 2 - IFE Matrix for Pakistan State Oil
Key Internal Factor Weight Rating WS
Strengths
Highly managed company with set strategic objectives 0.05 4 0.20 Highly trained and motivated workforce 0.05 4 0.20 Storage capacity of 80% of the total country storage 0.10 4 0.40 Largest retail outlets network in the country 0.06 4 0.24 Market leader in all types of fuel products 0.10 4 0.40 Increasing sales revenue over the past 3 years 0.06 3 0.18 Sole provider of Furnace Oil to Power Companies 0.05 3 0.15 ISO certified Information Management System 0.05 3 0.15 Strong Research and Development 0.10 4 0.40 Largest market share in aviation business 0.05 4 0.20 Weaknesses
Low profit margins 0.10 1 0.10 Government interventions due to semi-government structure 0.05 2 0.10 Declining market share to small competitors 0.10 2 0.20 Not a market leader in Lubricants sector 0.03 2 0.06 High financial charges incurred due to riskiness 0.05 1 0.05 Total 1.00 3.03
The Internal Factor Evaluation Matrix score for Pakistan State Oil is 3.03. It represents that PSO’s
response to the internal key factors is above average.
13
5. External Assessment The external environment is always important for a company’s performance; as it also helps in setting
the tone for any organization’s future strategies. Pakistan State Oil is no different than other
organizations. It has always been affected and influenced by the external environment that consists of
Consumer Markets, Competitors, Technology, Suppliers, Labor Market, Economic condition and
Regulatory Environment. In this section, we will first discuss a few of the external factors which are
affecting Pakistan State Oil. Later, we will present an evaluation of PSO’s response to the external
environment using the strategic management tool called External Factor Evaluation Matrix (EFEM).
5.1. Consumer Markets Pakistan’s retail consumer market is much diversified. Customers are not loyal to any OMC product and
they use any available fuel or lubricant. There is also perceived low product quality among the retail
customers. Retail customers have started to prefer Gaseous fuel over White Fuel which has helped
Pakistan in becoming the largest Gaseous fuel market.
The power companies are the major consumers of the industrial fuel in Pakistan. Apart from these
companies other industries like textile also use industrial fuel such as furnace oil and Light diesel oil.
Aviation and Marine sector is also one of the major fuel consuming sectors of Pakistan.
5.2. Competitors Pakistan State Oil is the largest Oil Marketing Company in Pakistan, currently engaged in storage,
marketing and distribution of various POL (Petroleum, Oil and Lubricants) products. It possesses market
share of 50.5% in White Oil and 85.9% in Black Oil markets. Pakistan State Oil has 68.6% of total market
share of the country.
Pakistan State Oil is facing fierce challenges from its competitors in the White Oil market. The market
share of PSO is declining constantly from 61% in 2008 to almost 50% in 2010. PSO, however, is being
able to maintain and increase its market share in Black Oil market over the years. PSO’s Industry market
share had decreased from 71% in 2008 to 68.6% in 2010.
The loss of market share in While Oil industry is sighted as the major cause of decline in the industry
market share over the years. PSO lost its market share to AttockPatroleum, TOTAL/PEARL and Bosicor
(Now Byco Petroleum).
14
Figure 2 - Industry Market Share of OMCs as of June 2010
Bosicor has rebranded itself as Byco Petroleum earlier in 2008. It was an oil refining company which has
also started marketing the petroleum products. It has carried out a major marketing campaign within
the major cities. It is posing a major threat to PSO’s White Oil retail customer business. Considering that
PSO has been in the market for more than 35 years and has the biggest storage, distribution and selling
network in the country, Byco Petroleum will have to work hard for capturing their share of market from
PSO.
Figure 3 - Product-wise Market Share of OMCs
On the other hand, TOTAL/PEARL is an OMC of Pak-Arab Oil Refinery (PARCO), which is a major supplier
of the petroleum products to various OMCs in Pakistan. A similar trend of Forward Integration by the
other oil refining companies might also emerge as a threat to Pakistan State Oil.
68.60%
11.60%
6.40%
4.20% 4.10%
3.20% 0.70%
0.60%
0.50% 0.30%
Industry Market Share
PSO
Shell
Attock Patroleum
TOTAL
Caltex
Bosicor
Hascombe
OOT Company Ltd
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
MotorGas
HSD SKO JP1 LDO FO
PSO
Shell
Caltex
Attock Patroleum
TOTAL
Hascombe
Askar Oil
OOT Company Ltd
Bosicor
15
Chevron Pakistan has recently decided to divest its aviation business in Pakistan and they are seeking
bids from the existing OMCs in Pakistan. It can become an opportunity for PSO to increase the market
share of Jet Fuel supply to its aviation customers.
5.3. Suppliers Pakistan State Oil gets the POL products from many of the major Oil Refining companies in Pakistan. The
major suppliers are Pakistan Refinery Limited, National Refinery Limited, Attock Refinery Limited, Pak-
Arab Refinery and Byco Petroleum. PSO holds 18% stakes of the Pakistan Refinery Limited, so are the
other OMCs.
The three suppliers, in Attock Refinery Limited, Byco Petroleum and Pak-Arab Refinery Limited, have
their own OMCs as well. Therefore the reliability on these suppliers has been reduced and they pose a
major threat to PSO.
5.4. Economic Condition Pakistan’s macroeconomic environment faced massive challenges of the war on terror, the deepening of
the financial crisis which pierced into the domestic economy through a substantial decline in the
country’s exports, the return of expatriates due to layoffs in international markets, a visible slowdown in
foreign direct inflows and the devaluation of the Pakistani Rupee.
The oil prices remained stable between US$ 60 to 80 per barrel, but there was an increase in domestic
fuel prices. This increase leads to a decrease in the consumption of the White Oil throughout the
country and an upward trend of using CNG (Compressed Natural Gas) in the domestic vehicles. Pakistan
has become the world’s largest CNG consuming country with around 2.5 million CNG vehicles on the
road.
The circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF
and the US officials in their recent meetings with Pakistan government have described the circular debt
as a significant threat to the country’s economy. Former finance minister Saukat Tarin quoted that in
real terms the circular debt has swelled to Rs. 108 billion which mainly includes non-payment of Rs. 42
billion by KESC, Rs. 21 billion by the government of Sindh and Rs. 15-16 billion from commercial
consumers to the Pakistan Electric Power Company (Pepco).
Unless the government deals with the economics of power generation by boldly tackling the issue of
growing circular debt quickly, it will be almost impossible to get the IPPs to fully utilize existing installed
capacity, much less attract new investments in the power sector.
The economic condition of the country has also slowed down the automobile industry in the country.
There are still enough vehicles on the road because the easier automobile financing facility before the
global financial meltdown. The trend of purchasing old cars is increasing as well and the energy
demands will increase in Pakistan.
The industrial sector is worst affected by the existing economic condition, many industries have closed
down which is a reason of decline to HSD sales in Metric Tons terms. The demand of Fuel Oil, also
16
known as Furnace Oil, has increased due to its use in energy sector companies such as WAPDA, KESC
and IPPs.
5.5. Regulatory Environment The fuel prices in Pakistan are regulated by the Oil and Gas Regulatory Authority (OGRA). It reviews the
fuel price fortnightly and adjusts the domestic prices according to the international prices. The Ministry
of Petroleum has decided to deregulate this mechanism earlier this year. Government is planning to
transfer the rights of setting the fuel prices to the Oil Refining companies. It might become a threat for
PSO because many of its competitors are the forward integration of some of Oil Refining companies.
5.6. External Factor Evaluation Matrix (EFEM) External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for
assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the
opportunities and threats that a business is facing.
Table 3 - EFE Matrix for Pakistan State Oil
Key External Factor Weight Rating WS
Opportunities
Operating in largest CNG consuming country in the world 0.10 4 0.40 Increase in the energy demands in the country 0.10 3 0.30 Deregulation of Oil Industry 0.08 2 0.16 Chevron is liquidating its aviation business 0.02 2 0.04 Search for alternate energy sources 0.05 3 0.15 Threats
Constantly growing circular debt 0.15 2 0.30 Unreliable sources of supply (Refineries) 0.05 2 0.10 Devaluation of Pakistani Rupee 0.05 3 0.15 Decline in consumption of White Oil Products 0.10 3 0.30 Fluctuation of oil prices in international markets 0.05 2 0.10 New alternatives to the industrial energy requirements such as solar energy
0.05 3 0.15
Deregulation of the mechanism of setting fuel prices in Pakistan 0.05 3 0.15 Scarcity of CNG in the country 0.05 2 0.10 Forward integration of oil refining companies (suppliers) 0.10 2 0.20 Total 1.00 2.60
The External Factor Evaluation Matrix score for Pakistan State Oil is 2.60. It represents that PSO’s
response to the external environment is above average.
5.7. Competitive Profile Matrix Competitive profile matrix is an essential strategic management tool to compare a firm with the major
players of the industry. Competitive profile matrix shows the clear picture about a firm’s strong and
weak points relative to its competitors. The Competitive profile matrix for PSO will compare the firm
with three important competitors Shell Pakistan, Chevron (Caltex) Pakistan and BycoPetroleum.
17
Table 4 - Competitive Profile Matrix for OMC Industry
PSO Shell Chevron Byco
Critical Success Factors W Rating WS Rating WS Rating WS Rating WS
Market Share 0.20 4 0.80 3 0.60 2 0.40 1 0.20 Product Quality 0.10 3 0.30 4 0.40 4 0.40 3 0.30 Customer Service 0.10 3 0.30 4 0.40 3 0.30 2 0.20 Customer Loyalty 0.10 2 0.20 3 0.30 3 0.30 1 0.10 Storage Capacity 0.10 4 0.40 2 0.20 2 0.20 3 0.30 Social Responsibility 0.10 3 0.30 3 0.30 3 0.30 1 0.10 Environmental Issues 0.05 4 0.20 3 0.15 3 0.15 1 0.05 Marketing & Advertisement 0.05 3 0.15 3 0.15 3 0.15 4 0.20 Profit Margins 0.12 2 0.24 2 0.24 1 0.12 1 0.12 Number of Outlets 0.08 4 0.32 3 0.24 2 0.16 1 0.08 Total 1.00 3.21 2.98 2.48 1.65
Pakistan State Oil certainly has a competitive edge over its competitors. Shell is the closest competitor
of Pakistan State Oil. Byco Petroleum has recently started its campaign to acquire the retail customers’
market share. It will take a lot of hard work to Byco to beat the already established OMCs in the industry
such as PSO and Shell Pakistan. Chevron/Caltex Pakistan also poses minor competition to Pakistan State
Oil.
18
6. Strategy Formulation
6.1. TOWS Analysis Matrix Strengths Weaknesses
1. Highly managed company with set strategic objectives
2. Highly trained and motivated workforce
3. Storage capacity of 80% of the total country storage
4. Largest retail outlets network in the country
5. Market leader in all types of fuel product
6. Increasing sales revenue over the past 3 years
7. Sole provider of Furnace Oil to Power Companies
8. ISO certified Information Management System
9. Strong Research and Development
10. Largest market share in aviation business
1. Low profit margins 2. Government interventions due to
semi-government structure 3. Declining market share to small
competitors
4. Not a market leader in Lubricants sector
5. High financial charges incurred due to riskiness
Opportunities SO Strategies WO Strategies
1. Operating in largest CNG consuming country in the world
2. Increase in the energy demands in the country
3. Deregulation of Oil Industry
4. Chevron is liquidating its aviation business
5. Search for alternate energy sources
Increase CNG retail outlets in major cities and towns of the country (S4,S5,O1,O2)
Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (S1,S3,S5,O2,O3)
Build a new Oil Refinery (S1,S3,S5,O2,O3)
Invest in Chevron Pakistan’s liquidating business (S1,S5,S10,O4)
Research and improve alternate energy products such as Bio-Diesel and E10 (S1,S5,S9,O2,O5)
Diversify in alternate sources of energy such as Solar and Wind Energy (S1,S9,O5)
Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (W1,W2,W3,W5,O2,O3)
Build a new Oil Refinery (W1,W2,W3,W5,O2,O3)
Research and improve alternate energy products such as Bio-Diesel and E10 (W3,O2,O5)
Threats ST Strategies WT Strategies
1. Constantly growing circular debt 2. Unreliable sources of supply
(Refineries) 3. Devaluation of Pakistani Rupee 4. Decline in consumption of White
Oil Products 5. Fluctuation of oil prices in
international markets 6. New alternatives to the industrial
energy needs such as solar energy 7. Deregulation of mechanism of
setting fuel prices in Pakistan 8. Scarcity of CNG in Pakistan 9. Forward integration of oil refining
companies (suppliers)
Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery Limited (S1,S3,S5,T1,T2,T3,T4,T7,T9)
Build a new OilRefinery (S1,S3,S5,T1,T2,T3,T4,T7,T9)
Research and develop new products as White Oil substitute (S5,S9,T4,T8)
Diversify in alternate sources of energy such as Solar and Wind Energy (S1,S9,T6)
Work out a formula and convince government to facilitate PSO’s debtors to payoff their liabilities to PSO (W2,W5,T1)
Diversify in alternate sources of energy such as Solar and Wind Energy (W3,T6,T8)
19
5.2. Basket of Available Strategies The following strategies can be formulated form the TOWS Matrix. We will discuss each strategy and its
rationale in this section.
Strategy 1: Acquire majority share in one of the existing Oil Refining Companies such as Pakistan
Refinery Limited (Generic Strategy: Backward Integration)
This strategy will be useful for PSO in many ways. There is an increase in the energy requirement in the
country especially for the furnace oil. Pakistan State Oil imports the furnace oil at higher cost and
supplies it to the various industrial consumers such as Independent Power Projects (IPPs) and other
industries. This strategy will help in reducing this cost of goods sold since the refinery will be producing
the furnace oil and other petroleum products from the crude oil; and crude oil prices are considerably
low in the international market. The freight charges on the imports will also be cut when furnace oil will
be produced in the country. It will also help in increasing the profit margins of the company and improve
the credit risk profile of the company. It will also help in averting the circular debt problem between the
domestic oil refining companies and Pakistan State Oil to some extent.
Government of Pakistan is also deregulating the oil industry and the rights to setting the POL products
are going to be set by the Oil Refining Companies rather than the Oil and Gas Regulatory Authority
(OGRA). It will prove beneficial to have majority share in an oil refining company as it will give Pakistan
State Oil some control in setting the POL products prices.
Pakistan State Oil is also facing unreliable supply of petroleum products from their existing oil refining
companies. Most of Pakistan State Oil’s competitors are forward integration of these oil refining
companies which prefer their own distribution more than Pakistan State Oil. Pakistan State Oil has been
surviving the challenge because of the Government majority share in the company.
Strategy 2: Build a new Oil Refinery (Generic Strategy: Backward Integration)
This strategy is an alternate to strategy 1. It has all the benefits similar to strategy 1 but it is more of a
longer term solution since developing an oil refinery takes 5 to 7 years, depending on its size and
capacity.
Strategy 3: Increase CNG retail outlets in major cities and towns of the country (Generic Strategy:
Market Penetration)
There is a huge potential of increasing Revenues by selling more CNG. Pakistan has now become the
largest consumer of CNG and it has more than 20 million CGN vehicles on the roads. This strategy might
not be as effective as should be because of the scarcity of natural gas in the country and Government’s
inability to acquire new sources of natural gas.
Strategy 4: Invest in Chevron Pakistan’s liquidating business (Generic Strategy: Horizontal Integration)
Pakistan State Oil is the largest supplier to JP-1 Jet fuel to the domestic and international airlines but the
sales have decreased in Metric Tons terms during the FY 2009-10. Shell Pakistan’s market share had
marginally increased with Chevron’s market share decreased to 1.5% from 3.0% in previous year.
Investing/acquiring this business will increase Pakistan State Oil Jet Fuel market share marginally.
20
Strategy 5: Research and improve alternate energy products such as Bio-Diesel and E10 (Generic
Strategy: Product& Market Development)
There is an increase in the energy requirement in Pakistan for both industrial and retail customers.
Pakistan is the largest CNG consuming country but natural gas is scarce. Alternate fuel solutions are
extremely necessary. Pakistan State Oil can bank upon its strong research and development facility to
improve its two alternate fuel products names Bio-Diesel and E10 retail fuel.
This strategy will help Pakistan State Oil in two ways. One, it will help them in catering to the increasing
energy requirements and two, it will help them in consolidating the White Oil market share which they
have been losing to small competitors. Pakistan State Oil can use their market leadership characteristic
in developing new markets as well as in penetrating the existing markets for these new products.
Strategy 6: Diversify in alternate sources of energy such as Solar and Wind Energy (Generic Strategy:
Concentric Diversification)
The strong research and development department can also help Pakistan State Oil to diversify the
business to other related energy products such has Solar and Wind energy. It will help in catering to the
increasing energy requirements in Pakistan.
Strategy 7: Research and develop new products as White Oil substitute (Generic Strategy: Product
Development)
The scarcity of natural gas in the country and declining trend of White Oil brings out another
opportunity to develop a new substitute for the white oil. Pakistan State Oil has the research and
development team which have been developing new fuel products.
Strategy 8: Work out a formula and convince government to facilitate PSO’s debtors to pay off their
liabilities to PSO (Generic Strategy: No Specific Strategy)
The circular debt has caused the major problems for the whole Pakistan economy. Pakistan State Oil is
worst affected by the circular debt as many debtors owe around Rs. 108 billion to PSO. On the other
hand, PSO also owes around Rs. 136 billion to various creditors such as domestic and international oil
refineries and various financial institutions.
Pakistan State Oil needs to work out a formula so that they can convince government to facilitate their
debtors to pay off liabilities they owe to PSO. It will not be an easy task but mid-term strategy of 3 to 4
years can be devised where Government can pay off its on debt to PSO which is about Rs. 41 billion.
They can also facilitate the entities like KAPCO and PEPCO to pay off their bills of around Rs. 60 billion
over a certain period of time. Pakistan State Oil can use this cash stream to pay their debts to various
other ORCs and financial institutions to bring debt-related ratios of their books down.
Other Strategies
There are some other strategies which Pakistan State Oil can adopt, which were not present in TOWS
analysis matrix.
Increase marketing of lubricant products to capture more market share in lubricants sector
(Generic Strategy: Market Penetration)
21
5.3. SPACE Matrix The SPACE matrix is a management tool used to analyze a company. It is used to determine what type of
a strategy a company should undertake. The Strategic Position &ACtion Evaluation matrix or short a
SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related
to the competitive position of an organization.
Table 5 - SPACE Matrix Components Calculation
Financial Strength Rating
Return on Asset Leverage/Debt Management Net Income Earnings Per Share Inventory Turnover
3.0 2.0 3.0 4.0 2.0
14.0 Industry Strength
Growth Potential Financial Stability Ease of Entry in the industry Resource Utilization Profitability
3.0 3.0 3.0 5.0 2.0
16.0 Environmental Stability
Rate of Inflation Technological Changes Competitive Pressure Barriers of Entry
-4.0 -3.0 -4.0 -2.0
-13.0 Competitive Advantage
Market Share Quality Customer Loyalty Technological Knowledge Control over suppliers and distributors
-1.0 -2.0 -4.0 -2.0 -4.0
-13.0 Conclusion
Industry Strength Average is: 16.0/5 = 3.10 Competitive Advantage Average is: -13.0/5 = -2.60 Financial Strength Average is: 14.0/5 = 2.80 Environmental Stability Average is: -13.0/4 = -3.25 Directional Vector Coordinates: x-axis = IS + CA = 3.10 – 2.60 = 0.50 y-axis = FS + ES = 2.80 – 3.25 = -0.45
22
Rapid Market Growth
Slow Market Growth
Strong Competitive
Position
Weak Competitive
Position
PSO
Figure 4 - SPACE Matrix for Pakistan State Oil
The graph falls in 4th Quadrant of the SPACE Matrix which suggests that Pakistan State Oil need to adopt
competitive strategies. The competitive strategies include all the integrative and the intensive
strategies.
The SPACE Matrix also suggests that the company should bank upon the industry strength rather than
on the environmental stability while making its strategies.
5.4. Grand Strategy Matrix Grand Strategy Matrix has become a popular tool for formulating alternative strategies. Any
organization can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants. The Grand
Strategy Matrix is based on two evaluative dimensions: competitive position and market growth.
Pakistan State Oil operates in a rapid growth industry, since the annual sales revenue grow by more than
5%. The company has a very strong competitive position as it is the market leader in almost all the areas
of operation in the industry.
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
Figure 5 - Grand Strategy Matrix for Pakistan State Oil
23
Pakistan State Oil is located in the 1st Quadrant of the Grand Strategy Matrix. PSO is in the excellent
position according to the GSM. Continued concentration of the markets as well as products (intensive
strategies) is an appropriate strategy for Pakistan State Oil. Pakistan State Oil can also adopt integrative
and related diversification strategies.
5.5. BCG Matrix The BCG matrix is a chart that helps corporations with analyzing their business units or product lines.
This helps the company allocate resources and is used as an analytical tool in brand marketing, product
management, strategic management, and portfolio analysis. While analyzing an industry, this Matrix can
also be used to place various companies according to their relative market share with respect to the
industry leader and the company’s growth in the industry.
Pakistan State Oil is the overall industry leader among all Oil Marketing Companies. Its growth has also
been good over the past 4 years.
Figure 6 - BCG Matrix for Pakistan State Oil
According to the BCG Matrix, Pakistan State Oil is a Star company which higher growth and highest
market share. Considering the fact that it is a market leader, any slowness in growth may only push it
down to become a ‘Cash Cow’.
Currently, BCG matrix suggests integrative and intensive strategies for Pakistan State Oil.
5.6. Internal-External (IE) Matrix The Internal-External (IE) matrix is another strategic management tool used to analyze working
conditions and strategic position of a business. The Internal External Matrix is based on an analysis of
internal and external business factors which are combined into one suggestive model.
Relative Market Share
1 0.5 0
Market G
row
th R
ate
20
0
-20
PSO
STARS QUESTION
MARKS
CASH COWS DOGS
24
Figure 7 - IE Matrix for Pakistan State Oil
Pakistan State Oil is located in 4th Quadrant of IE Matrix. The company should adapt grow and build
strategies which include integrative and intensive strategies.
5.7. Decision Matrix The decision matrix method is a quantitative technique used to rank the multi-dimensional options of an
option set. It is frequently used in engineering for making design decisions but can also be used to rank
investments options, vendor options, product options or any other set of multidimensional entities such
as strategic options from a basket of strategies.
Table 6 - Decision Matrix for Pakistan State Oil
Generic Strategies SPACE Matrix Grand Strategy Matrix BCG Matrix IE Matrix Total
Forward Integration Y Y Y Y 4
Backward Integration Y Y Y Y 4
Horizontal Integration Y Y Y Y 4
Market Penetration Y Y Y Y 4
Market Development Y Y Y Y 4
Product Development Y Y Y Y 4
Concentric Diversification N Y N N 1
Conglomerate Diversification
N N N N 0
Horizontal Diversification N N N N 0
Joint Venture N N N N 0
Retrenchment N N N N 0
Divestiture N N N N 0
Liquidation N N N N 0
According to the decision matrix, Pakistan State Oil must adopt integration and intensive strategies.
Concentric diversification strategy is not recommended by the decision matrix at the moment. The
following sets of strategies may then be considered as the one strategic option for the company in next
5 years to 7 years.
IFE Matrix Total Weighted Score
EFE Matrix To
tal Weigh
ted
Score
4.0 3.0 2.0 1.0
1.0
2.0
3.0 PSO
25
Strategy A
This strategic option will consist of the backward integration strategies along with the strategy to
overcome the debt problem of the company. The following strategies will be a part of this strategic
option.
Acquire majority share in one of the existing Oil Refining Companies such as Pakistan Refinery
Limited
Build a new Oil Refinery for the long term competitive advantage
Work out a formula and convince government to facilitate PSO’s debtors to pay off their
liabilities to PSO
Strategy B
This strategic option will consist of the market penetration strategies along with the strategy to
overcome the debt problem of the company. The following strategies will be a part of this strategic
option.
Increase CNG retail outlets in major cities and towns of the country
Increase marketing of lubricant products to capture more market share in lubricants sector
Strategy C
This strategic option will consist of the productand market development strategies along with the
strategy to overcome the debt problem of the company. The following strategies will be a part of this
strategic option.
Research and improve alternate energy products such as Bio-Diesel and E10
Research and develop new products as White Oil substitute
Work out a formula and convince government to facilitate PSO’s debtors to pay off their
liabilities to PSO
Now we will evaluate these three strategic options using the Qualitative Strategic Planning Matrix
(QSPM).
26
5.8. Qualitative Strategic Planning Matrix Key Factors Strategy A Strategy B Strategy C
W AS TAS AS TAS AS TAS
Opportunities Operating in largest CNG consuming country in the world 0.10 2 0.20 4 0.40 1 0.10 Increase in the energy demands in the country 0.10 4 0.40 2 0.20 3 0.30 Deregulation of Oil Industry 0.08 4 0.32 1 0.08 3 0.24 Chevron is liquidating its aviation business 0.02 - - - - - - Search for alternate energy sources 0.05 1 0.05 2 0.10 4 0.20 Threats
Constantly growing circular debt 0.15 3 0.45 1 0.15 2 0.30 Unreliable sources of supply (Refineries) 0.05 4 0.20 1 0.05 3 0.15 Devaluation of Pakistani Rupee 0.05 3 0.15 1 0.05 2 0.10 Decline in consumption of White Oil Products 0.10 2 0.20 3 0.30 4 0.40 Fluctuation of oil prices in international markets 0.05 2 0.10 1 0.05 3 0.15 New alternatives to the industrial energy requirements such as solar energy 0.05 - - - - - - Deregulation of the mechanism of setting fuel prices in Pakistan 0.05 4 0.20 1 0.05 3 0.15 Scarcity of CNG in the country 0.05 2 0.10 1 0.05 4 0.20 Forward integration of oil refining companies (suppliers) 0.10 4 0.40 1 0.10 3 0.30 Strengths
Highly managed company with set strategic objectives 0.05 4 0.20 1 0.05 2 0.10 Highly trained and motivated workforce 0.05 - - - - - - Storage capacity of 80% of the total country storage 0.10 4 0.40 1 0.10 3 0.30 Largest retail outlets network in the country 0.06 2 0.12 4 0.24 3 0.18 Market leader in all types of fuel products 0.10 3 0.30 2 0.20 4 0.40 Increasing sales revenue over the past 3 years 0.06 2 0.12 4 0.24 3 0.18 Sole provider of Furnace Oil to Power Companies 0.05 4 0.20 1 0.05 2 0.10 ISO certified Information Management System 0.05 - - - - - - Strong Research and Development 0.10 2 0.20 1 0.10 4 0.40 Largest market share in aviation business 0.05 - - - - - - Weaknesses
Low profit margins 0.10 2 0.20 1 0.10 4 0.40 Government interventions due to semi-government structure 0.05 4 0.20 2 0.10 3 0.15 Declining market share to small competitors 0.10 4 0.40 2 0.20 3 0.30 Not a market leader in Lubricants sector 0.03 - - - - - - High financial charges incurred due to riskiness 0.05 4 0.20 2 0.10 3 0.15
Total 2.00 5.31 3.06 5.25
27
5.9. Strategy Selection The strategic option A turns out to be more favorable for Pakistan State Oil as it has the highest QSPM
score of 5.31, however, we recommend strategic option C to Pakistan State Oil which stands second in
QSPM with the score of 5.25.
Strategic option C consists of Market Development and Product Development strategies of alternate
fuel products of Pakistan State Oil. The company has already been working on the two new products
namely, E10 which is blended fuel targeting the efficient performance of the retail customers’ vehicles
and Bio-Diesel which is produced using the natural seed oil. It will also enable PSO to price these
products accordingly after the deregulation of oil industry since they will be producing these products.
The company may still be facing the threat from its suppliers for unreliable supply of POL products and it
may also not have an upper hand in setting the fuel price despite being an industry leader, but the
strategic option C provides the company a unique competitive advantage of introducing efficient and
environmental-friendly fuel in the market.
Strategic option A gives a competitive advantage to the company and more control on setting the fuel
prices, but it cannot be adopted for various reasons.
Pakistan State Oil has very high debt ratios and very low net income margins we do not recommend
strategic option A to the company because this option is more capital intensive. PSO will already be
working with the Government of Pakistan to convince them to facilitate its debtors to pay off their
liabilities to PSO; therefore they cannot expect the Government to rise funding for any new acquisition
or construction of the Oil Refining Company. The financial costs incurred by the company are also very
high and more borrowing will be more costly and only add to the risk of the company.
The company may, however, adopt this strategy after resolving the debt issues and bringing down its
financial costs; by that time the company must focus on acquire more market share in the alternate fuel
business.
28
6. Strategy & Long Term Objectives
6.1. Strategy Pakistan State Oil needs to adopt the combination of following Low-cost Leadership, Market and
Product development strategies.
Research and improve alternate energy products such as Bio-Diesel and E10
Research and develop new products as White Oil substitute
Work out a formula and convince government to facilitate PSO’s debtors to pay off their
liabilities to PSO
6.2. Long Term Objectives Here are the long term objectives for Pakistan State Oil.
To work with Government of Pakistan to reduce company’s portion of circular debt by 60% by
FY 2017.
To increase profitability to at least 6% by end of FY 2015
To have at least 25% revenue in FY 2016 from the alternate fuel products
To have revenue growth of at least 7% per annum till FY 2017
To enhance the E-10 blending facility at 60% storage facilities by FY 2013.
To improve and launch Bio-Diesel as a substitute of White Oil by FY 2014.
To train employees to adapt to technology advancements in alternate fuel by FY 2015.
6.3. Comparison of Long Term Objectives The existing strategic objectives of the company, given in section 2.3, are also related to the intensive
strategies of Market Development, Market Penetration and Product Development. The proposed Long
Term objectives back the strategies adopted by the company at the moment of increasing its market
share by using Intensive strategies.
29
7. Strategy Implementation
7.1. Recommendations
Board of Management must purse with the Government of Pakistan on a formula to reduce the
company’s portion in the circular debt of the country. The Ministry of Petroleum, Ministry of
Finance, the Finance Department of Pakistan State Oil and the related finance departments of
the debtors and creditors of the PSO need to sit together to reach on an agreement to discharge
their liabilities to each other. A 5-year plan must be devised in this regard before the end of FY
2012 and the implementation of this plan need to start from FY 2013 till FY 2017. The decreased
debts and receivables will help stabilize the company and the economy in general. This stability
will translate into higher net profit margin.
Increase the supply of alternate fuel, especially E-10 blended fuel, to all the retail outlets of the
country by FY 2014. It can be achieved by installing Fuel Blending facility at 20 out of 30 storage
facility of the country by the end of FY 2013. The E-10 fuel can be carried in the existing modes
of transport of fuel such as tank lorries, therefore its availability at all the retail outlets is
possible. The increased availability of alternate fuel at the retail outlets will in turn increase its
portion in the total revenues. The lower production cost will help in increasing the gross profit
margin.
Research, in collaboration with Singaporean and Malaysia OMCs, on Jatropha fruit (edible) oil to
produce more cost-efficient, environment-friendly fuel as a substitute of White Oil and CNG.
Pipri Marshall Yard is being used as the research facility at the moment. Plantation of Jatropha
seed is recommended on large scale in order to produce sufficient Bio-Diesel for launching the
product and maintain uninterrupted supplies.
Arrange for trainings in Singapore and Malaysia for having the basic knowledge and innovative
ways of extracting fuel-oil from the non-edible seeds. It will help to produce alternate fuels
more efficiently.
30
8. Specific Objectives Table 7 - Specific Objectives for Pakistan State Oil Departments
Operations
2011-12 Install fuel blending facility at the 8 major storage facilities in large cities of the country (4 in Punjab, 2 in Sindh, 1 in Khayber Pukhtunkha and 1 in Balochistan).
2012-13 Install fuel blending facility at the 12 storage facilities in the country. (4 in Punjab, 4 in Sindh, 2 in Khayber Pukhtunkha and 2 in Balochistan)
Logistics
2011-12 Arrange for stand-by tank lorries in the country, 70 in Punjab, 50 in Sindh, 15 in Khayber Pukhtunkha and 15 in Balochistan.
2012-13 Arrange for additional stand-by tank lorries in the country, 100 in Punjab, 75 in Sindh, 30 in Khayber Pukhtunkha and 20 in Balochistan
Supply
2011-12 Ensure the import of 15,000 metric tons extra HSD for E-10 fuel 2012-13 Ensure the import of 40,000 metric tons extra HSD for E-10 fuel 2013-14 Ensure the import of 70,000 metric tons extra HSD for E-10 fuel 2014-15 Ensure the import of 100,000 metric tons extra HSD for E-10 fuel 2015-16 Ensure the import of 140,000 metric tons extra HSD for E-10 fuel Construction & Retail Facility
2011-12 Ensure the availability of storage tanks for E-10 at 800 retail outlets in the country. 2012-13 Ensure the availability of storage tanks for E-10 at addition 1200 outlets (2000 in total) 2013-14 Ensure the availability of storage tanks for E-10 at addition 1600 outlets (3600 in total) Each Year Ensure that any new retail outlet has storage tank for E-10 fuel Procurement
2011-12 Ensure the procurement for the dispensing units for E-10 fuel for 800 retail outlets 2012-13 Ensure the procurement for the dispensing units for E-10 fuel for additional 1200 retail outlets 2013-14 Ensure the procurement for the dispensing units for E-10 fuel for addition 1600 retail outlets Each Year Ensure that there are dispensing units available in inventory for new retail outlets Retail Fuel
2011-12 Achieve alternate fuel sales equal to 2% of total annual sales 2012-13 Achieve alternate fuel sales equal to 5% of total annual sales 2013-14 Achieve alternate fuel sales equal to 11% of total annual sales 2014-15 Achieve alternate fuel sales equal to 18% of total annual sales 2015-16 Achieve alternate fuel sales equal to 25% of total annual sales Legal
2012-13 Get the patent for E-10 fuel for the next 15 years 2014-15 Get the patent for Bio-Diesel for the next 15 years Finance
2011-12 Ensure to have an agreed plan for circular debt removal in collaboration with the Government ministries and related parties such as debtors and creditors
2012-2017 Ensure that the agreed plan is being carried out 2012-2017 Ensure that the Net Profit Margin is increased by 1% each year.
31
Appendix 1 - Finances
Balance Sheet as of March 2010 June 2009 June 2008
ASSETS (Rupees in ‘000) Non-Current Assets
Property, Plant and Equipment 6,312,778 6,987,025 7,460,549 Intangibles 40,324 68,872 105,502 Long Term Investments 2,390,408 2,153,514 2,701,097 Long Term Loans, Advances and Receivables 289,979 405,870 477,745 Long Term Deposits and Prepayments 90,721 83,655 79,098 Deferred Tax 3,819,539 5,033,273 407,337
12,934,749 14,732,119 11,231,328 Current Assets
Stores, Spare Parts and Loose Tools 109,182 112,143 115,814 Stock in-trade 43,182,366 40,698,209 62,360,067 Trade Debts 108,277,693 80,509,830 33,904,728 Loans and Advances 756,822 418,015 396,220 Deposits and Short Term Payments 320,341 551,803 401,433 Other Receivables 13,630,913 12,806,779 15,681,790 Taxation Net - 709,627 - Cash and Bank Balance 3,263,488 2,883,118 3,018,640
169,540,805 138,689,524 115,878,692 Net Assets in Bangladesh - - -
182,484,554 153,421,643 127,110,020
EQUITY AND LIABILITIES
Share Capital 1,715,190 1,715,190 1,715,190 Reserves 26,288,793 19,155,595 29,249,864
28,003,983 20,870,785 30,965,054 Non-Current Liabilities
Long Term Deposits 931,837 854,718 834,598 Retirement and Other Service Benefits 2,002,363 1,673,020 1,574,148
2,934,200 2,527,738 2,408,746 Current Liabilities
Trade and Other Payables 136,532,117 110,123,702 81,067,565 Provisions 688,512 688,512 726,116 Accrued Interest/Markup 391,404 556,380 217,928 Short Term Borrowing 12,918,724 18,654,526 10,997,908 Taxes Payable 1,015,614 - 726,703
151,546,371 130,023,120 93,736,220
182,484,554 153,421,643 127,110,020
32
Income Statement Jul’09 to
Jun ‘10 Jul’08 to
Jun ‘09 Jul ’07 to
Jun ‘08
(Rupees in ‘000) Gross Sales 877,173,254 719,282,176 583,213,959 Sales Tax and IFEM* (134,415,303) (106,586,587) 87,935,426
Net Sale 742,757,951 612,695,589 495,278,533 Cost of Products Sold (713,591,707) (609,685,478) (465,254,907)
Gross Profit 29,199,244 3,010,111 30,023,626 Other Operating Income 1,479,054 1,451,666 1,396,527
30,645,298 4,461,777 31,420,153
Operating Expense (8,080,568) (10,815,121) (9,283,021) WPPF & WWF (1,331,317) - -
(9,411,885) (10,815,121) (9,283,021) Other Income 6,095,348 776,686 313,860
Profit/(Loss) from Operations (EBIT) 27,328,761 (5,576,658) 22,450,992 Financial Costs (9,882,010) (6,232,056) (1,367,898)
17,446,751 (11,808,714) 21,083,094 Share of Profit of Associates 516,401 451,850 294,318
Profit/(Loss) before Tax 17,963,152 (11,356,864) 21,377,412 Taxation (8,913,556) 4,658,329 (7,323,617)
Profit/(Loss) after Tax (Net Income 9,049,596 (6,698,535) 14,053,795
*IFEM = In-Land Freight Equalization Margin
33
Appendix 2 – Organization Chart
Managing Director
Executive Director (Finance & IT)
GM Information System
GM Finance
Executive Director Supply
GM Operations
GM Logistics
GM Supply
GM Construction and
Retail Facilities
Executive Director Marketing
GM Retail Fuel
GM Industrial Customers
GM Aviation, Marine &
Export
GM Lubricants
DGM CNG & LPG
DGM Non-Fuel Retail
DGM Cards
GM Alternate Energy & New Business Dev.
GM Quality Assurance
GM Procurement
DGM Health Safety &
Environment
GM Human Resource
GM Legal
GM Security Services
and Administration
