The External Environment

External enviroment of a firm will have a direct impact on corporate performance. It takes
skill to identify opportunities and threats that exist in the external environment.
# The external environmental analysis process has four steps: scanning, monitoring,
forecasting, and assessing. Through environmental analyses, the firm identifies
opportunities and threats. The external environment has three major parts
The general environment (elements in the broader society that affect industries
and their firms),
The industry environment (factors that influence a firm, its competitive actions
and responses, and the industrys profit potential),
The competitor environment (in which the firm analyzes each major
competitors future objectives, current strategies, assumptions, and capabilities).
# The general environment has seven segments: demographic, economic, political/legal,
sociocultural, technological, global, and physical. For each segment, the firm wants to
determine the strategic relevance of environmental changes and trends.
# Competitor environment informs the firm about the future objectives, current strategies,
assumptions, and capabilities of the companies with which it competes directly. A
thorough analysis examines complementors that sustain a competitors strategy and major
networks or alliances in which competitors participate. When analyzing competitors, the
firm should also identify and carefully monitor major actions taken by firms with
performance below the industry norm.
Here is an explanation of The General Environment. In this section, there is an explanation
of the petrochemical industry in Saudi Arabia.
# Compared with the general environment, the industry environment has a more direct
effect on the firms strategic actions. Here is an overview of the petrochemical industry
in Saudi Arabia:
Saudi Arabia is well known throughout the world as a leading producer and
exporter of oil. However, in the early 1970s the Saudi Arabian government initiated a
plan to utilise these precious hydrocarbon and mineral resources for the production of
various petrochemicals, fertilisers, iron and steel. Saudi Arabia accounts for a little
more than 5% of the worlds petrochemicals production. However, Saudi Arabia is the
largest producer of MTBE (Methyl Tertiary Butyl Ether) with a global share of around
15%. It has also a big market share in the production of methanol (around 12%) and
ethylene glycol (14%).

SABIC was established in 1976 as a result of the governments plan to utilise

hydrocarbon and minerals resources that were then being wasted from crude oil
production. The first priority of Saudi industrial strategy was to develop industries that
could exploit the countrys abundant hydrocarbon resources, such as petrochemicals
primarily and fertilisers.
Overall SABIC has 16 manufacturing subsidiaries which have been established
since the 1980s, nine produce chemicals or petrochemicals, three produce fertilisers,
two produce iron and steel, one produces polyester and one produces industrial gas.
Most of the petrochemical plants were developed in joint ventures with foreign
companies.
Besides SABIC, the petrochemical industry in Saudi Arabia comprises of a number
of smaller players in the private sector. Alujain Corp.s Acrylonitrile Plant, which is a
joint venture between Alujain Corp. of Saudi Arabia and Indian Petrochemical Corp.
The group also plans to build a major plant to produce the environmentally friendly
gasoline additive MTBE. In addition, there are other small companies. Saudi Urethane
has operated a polyols plant in Jubail since 1986. The Arabian Chemical Co. has been
producing extruded polystyrene in Jeddah since 1986. Saudi Formaldehyde Chemical
Company, which produces formaldehyde and formaldehyde derivatives at its Jubail
plant. Anchem, which is a joint venture with a Finnish company and produces
polyester resin plant in Jubai. The Al-Bilad group, a joint venture with a Kuwaiti and
French Company, which has set up a catalyst servicing plant.

# Here is a model of the five forces of competition in petrochemical industry:

The intensity of rivalry among competitors. In recent times, competition in the
global petrochemical industry has been increasing rapidly due to globalisation.
Mergers and acquisitions between major players have been taking place with a
view to improving their competitive edge and strengthening their position in this
industry. Saudi petrochemical organisations are facing a number of competitors,
such as Exxon Chemicals, Shell Chemicals, BASF Chemical Company, Dow
Chemical, Mitsubishi, among others.
The power of supplier. The suppliers in the petrochemical industry are
dominated by a large number scattered around the globe. SABIC enjoys further
advantages of more strategic options as suppliers from the global arena compete
against each other to enter the Saudi market. Firms in Saudi Arabia have a better
bargain in terms of reasonable price and obtaining greater credit facilities.
The power of buyers. Saudi petrochemical companies, in particular SABIC, have
numerous customers from within the nation as well as around the world, mainly

the Gulf nations, Indian sub-continent, Far East, Middle East, Africa, Europe and
Japan. The cause for concern is that some products, such as high pressure LDPE
and LLDPE are marketed heavily in China. Exports to China are in the region of
more than one million tonnes a year. Such a dependence on a single country gives
more bargaining power to customers, besides becoming vulnerable to the political
and economic situation in China.
The threat of entry. The commercial attraction of the petrochemical industry
arises due to the perception that many petrochemical products sell for significantly
higher prices than the cost of their raw materials. That is, petrochemicals have a
relatively high value addition. But, as is frequently the case with industries that
require large investments, entry into the petrochemical industry can be difficult.
Large firms dominate many sectors of the market and these firms often act as if
they are cooperating in their business interests when they face new competitors.
Cooperation with existing firms might thus be useful for a new firm to enter an
international petrochemical market.
Product substitutes. Number of products ranging from industrial solvent to food
packaging being made from petrochemicals, environmental concerns may force a
shift back to more widespread use of carbohydrates in the coming decades.
Concerns over air emissions, toxic waste and global climatic change can lead to
the unpopularity of petrochemical products with regulators and environmental
activists. An emerging trend is towards biochemical substitution from plantderived chemicals, which offers significant environmental advantages over
petroleum-based products.
By studying these forces, the firm finds a position in an industry where it can influence
the forces in its favor or where it can buffer itself from the power of the forces in order to
achieve strategic competitiveness and earn above-average returns.