Team: ShootingStars

L&T OutThink 2017

Juggling Hypercubes: long-term EPC Business Strategy for Hydrocarbon Sector

September 30th, 2017

This case is developed by L&T Institute of Project Management, Vadodara.All the recommendations related to the business problems, as mentioned in the case, has been given by team Shooting Stars from IIM Rohtak

Image: Pexels

Executive Summary & the Approach

1

Existing Business Model

Value & Goals

External Analysis Internal AnalysisSWOT

Business Level Strategy

Global Strategy

Arena Selection Model

Corporate level Strategy

Portfolio Contribution

Impact on Competitive Advantage

Human Leverage

Stra

tegy

Fo

rmu

lati

on

Stra

tegy

Im

ple

me

nta

tio

n

1

2

3 4

5

6

7

8

9

10

Approach Flow Chart

1

2

3

Source: Case study, Team analysis. In our analysis we have assumed that DGHE business is very much similar to LTHE business of L&T Group

BCG, SWOT and Porter’s Five Forces analysis suggests DGHE has a strong competitive positioning

Arena Selection Model suggests Middle East & North Africa as a first choice followed by South East Asia. PESTLE analysis suggest South East Asian countries as 1st Preference

DGHE’s contribution to DGHE has significantly increased. Its EBITDA margin is 6.8%

3

Outlining DGHE’s Strategy (2-6)Arena Selection Model (7-9)DGHE’s Contribution (10-13)

Source: L&T annual report

DGHE executes capital projects through EPC contracts. DGHE can leverage on its value proposition to gain a competitive advantage in a maturing industry…

2*We have assumed that the growth in orders of DGHE is similar to LTHE unit of L&T. SOURCE: L&T Annual report , Case study & Team analysis

1 Existing Business Model

EPC Contracts

offshore onshore

• Well-head platforms

• Process Platforms

• Modular Structures like living quarters, heavy jackets

• Subsea pipelines, brownfield

• Floating system & offshore drilling rigs

• Refinery expansion and revamping projects

• Gas treatment facilities

• Fertilizer projects

• Petrochemicals

• Cryogenic storage tanks and terminals

• Pipelines₹ 7,025.00 ₹ 6,133.00

₹ 3,029.00

₹ 12,392.00

₹ -

₹ 2,000.00

₹ 4,000.00

₹ 6,000.00

₹ 8,000.00

₹ 10,000.00

₹ 12,000.00

₹ 14,000.00

₹ 16,000.00

₹ 18,000.00

₹ 20,000.00

2015-16 2016-17

Growth in Orders of DGHE Subsidiary*

Domestic International

Source: Annual Report and Appendix 1

Pros: “Single Point Responsibility” ensures completion of

projects in schedule and budget Guarantees Competitive advantage to clientsCons: Over-aggressiveness w.r.t schedule leads to unfavorable

delays, and decline in quality No periodic assessment of costs and risk of not having

the skilled labor force to complete the project

2 Value Proposition and Goals

Can DGHE meet its goal and continue offering the customer value?

The recent increase in the orders is favorable, but we should alsolook into the cons of the business model to address the demand

DGHE

Suppliers

Competitors Complementors

Customers

PLAYERS: DGHE, DGHE’s existing client base, new clients, other

competitors, Co-opetitors (Potential Partners)

ADDED VALUE: Flawless project deliveries, state of the art

execution, top class safety, sharp focus on quality, huge experience

RULES: Usually projects are EPC contract based, risk is high

TACTICS: Excellent PTR, high available capacity, integration

SCOPE: Huge scope in emerging economies

Currently, DGHE is more focused on Indian subcontinentand nearby regions. Existing business model offers anexcellent leverage to venture into other economies

0

2

4

6

8

10

12

14

16

18

1965 1975 1985 1995 2005 2015 2025 2035

OECD China India Other non-OECD Asia Africa Other

Following the prolonged downturn, the oil & gas industry is showing some signs of revival, oil prices are expected to rise and emerging economies will be the largest energy market …

3Source: Team analysis, BP global outlook 2017 . *scores based on team analysis

3 External AnalysisFive Forces Analysis*A region - based perspective

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

1965-75 1975-85 1985-95 1995-05 2005-15 2015-25 2025-35

GDP(%) Primary energy(%) Energy Intensity(%)

Growth in GDP is expected to become stable, but growth in primary energy is expected to decline

Due to increase in energy efficiency, there’s aslowdown in primary energy requirements.The pace at which global energy intensitydeclines is projected to increase as China’seconomy rebalances and India leverage itsgrowth on favorable macro conditions

• China is expected to be the largestenergy market, but India will overtake itby the end of 2035. Africa, also will be agrowth market in a long term.

• DGHE should consider it expansion inthese countries to gain as an earlymover by leveraging its valueproposition

Energy Consumption by region

0

1

2

3

4

Bargaining Power ofBuyers

Bargaining Power ofSuppliers

Threat of New EntratnsThreat of Substitutes

Industry Rivalry

Middle East and North Africa Russian Common Wealth

South East Asia North America

• Industry attractiveness is more in middleEastern Countries

• South Asian countries are center ofattraction for DGHE

Advancement in technology has led to slow down in oil demand from industry and transport sector. DGHE should focus on diversification of its services…

4

0

1

2

3

4

5

6

7

1965 1975 1985 1995 2005 2015 2025 2035

Industry Buildings Transport Non-Combusted

Production by region Consumption by region

0%

20%

40%

60%

80%

100%

120%

1975 1985 1995 2005 2015 2025 2035

Gas Non-Fossils Oil Coal

There’s a supply -demand gap ofaround 4-5 millionbarrels per day.Majority of theconsumption isfrom Asia PacificRegion, America& Europe

Due to recent advancement intechnology, the share of primaryenergy has shifted from coal to non-fossils sources of energy. It’s a riskfor Hydrocarbon Engineering EPCfirms

Shares of Primary Energy Increase in energy efficiency has led to theslow demand in industry and transportsector

Total energy consumption by sector

Macro factors are not that favorable, because it’s maturing industry. Business diversification is required

Source: Team analysis, BP global outlook 2017

Immense amount of experience has led DGHE to gain a competitive advantage. BCG analysis suggests that pipelines and head platforms are most profitable project types for DGHE…

5

4 Internal Analysis: Building Blocks of Competitive Advantage

Competitive Advantage:• Differentiation• Cost effective

Superior Quality

Superior Efficiency

Superior Innovation

Superior Customer

Responsiveness

• In-house capabilities helps to deliver complete from design to build turnkeysolutions

• The business has repeatedly delivered, large, critical and complex projects,globally, by virtue of its customer focus & responsiveness, experienced &highly skilled human resources, world-class Quality & HSE practices andculture of excellence

BCG Matrix analysis for project types (Revenue Streams)*

Relative Position (Market Share)

Gro

wth

Rat

e

High Low

High

Low

Invest ?

Cash Cow Dog

• BCG analysis shows that businesses like well head platforms, subseapipelines, cryogenic storage tanks, pipelines are in “investment zone”

• DGHE should use its resource to leverage on these kind of projects

Source: Team analysis, Annual Report, EY business outlook

SWOT analysis, with a score more than 2.5, suggests that DGHE has a huge competitive advantage over its competitors…

6

5 SWOT Analysis: Strategic Factor Evaluation Matrix

External Factors Weight Rating Weighted Score

Threats

High growth rate of renewable sources 0.15 4.8 0.72

Sharp decrease in demand of coal 0.15 4.2 0.63

Projected closure of global refineries in Europe, OECD Asia, North America

0.10 3.5 0.35

Decrease in demand of oil due to use of non-combustibles 0.05 1.6 0.08

Increasing energy efficiency 0.05 1.2 0.06

Total Scores 1.00 3.79

Internal Factor Evaluation Matrix

External Factor Evaluation Matrix

Internal Factors Weight Rating Weighted Score

Weaknesses

Little presence in markets other than India, Middle East 0.20 4 0.8

Project assessment not as good as European companies

0.10 2.5 0.25

ROE is less according to Indian standards 0.10 2.0 0.2

Total Scores 1.00 4.03

Internal Factors Weight Rating Weighted Score

Strengths

Robust track record on project deliveries 0.15 5 0.75

Vast client base, covers almost all major players 0.15 4.8 0.72

Market leaders in capital intensive projects 0.15 4.8 0.72

Major Focus on Operational Excellence 0.10 4 0.4

Umbrella for huge range of services 0.05 3.8 0.19

External Factors Weight Rating Weighted Score

Opportunities

Projected substantial increase in import of LNG in China and Europe

0.15 4.8 0.96

large scale and low cost resources in Middle East, US, Russia

0.10 3.0 0.3

Projected decline in liquids supply, while demand increases for China, Asia, Europe

0.15 3.4 0.51

Slow increase in oil producing market in Brazil 0.05 1.6 0.08

Increase in energy consumption to generate power 0.05 2 0.1

SWOT Analysis suggests that odds are in favor of DGHE

Source: Team analysis, case study, annual report

Hydrocarbon industry is in mature stage. The business level strategy for DGHE should be more focused on deterring rivals and diversifying across economies…

7

6 Business level Strategy: for Maturing Industry

Strategy for Deterring Entry of Rivals

Product proliferation

Price Cutting

Maintaining Excess Capacity

Strategy to manage Rivalry

Price Signaling

Price Leadership

NonpriceCompetition

Capacity Control

Market Penetration

Product Development

Market Development

Product Proliferation

ProductsExisting

Mar

keti

ng

Segm

en

ts

New

New

Exis

tin

g

• By focusing on diversified range of products,DGHE can improve its competitive positioningand deter competitors from entering

• Dynamic price cutting for high margin productsand efficient cost structure will give acompetitive edge

• DGHE can maintain excess capacity bydeveloping well tested processes

• DGHE can go for a tit-for-tat price signalingcompetitive strategy

• DGHE can leverage over its experience, resourcesand capabilities to gain price leadership

• Right forecast of capacity will help DGHE inefficient budgeting

• Hydrocarbon segment has high EBITDAmargin – hence penetration should bedone

• Electrical & Automation in Hydrocarbonsegment – penetration may lead tocompetitive advantage

• Innovation can lead to new productdevelopment in EPC life cycle

Four Nonprice Competitive Strategies

Source: Team analysis, case study, annual report

South East Asian & North African Countries seem very attractive after Middle East Countries. DGHE should look for divestment in these countries…

8Source: Team analysis, case study, annual report BP energy outlook

6 Arena Selection Model

Oil consumption per capita (in tonnes)Trade flows worldwide (in million tonnes)

Most trade flows in this region

Huge consumption in Middle East, America and South East Asia

Arena selection model suggests, after taking 7 important parameters, Middle Eastern and North African countries for penetration, followed by South East Asian countries. Qualitatively, south Asian countries are preferred..

9Source: Team analysis, case study, annual report

0

1

2

3

4

5

6

Track record RepeatableAvailability of

Projects

Customer Base PEST Analysis Risk Metrics Accessibility (CAGE) Availability ofResources

Middle East and North Africa Russian Common Wealth South East Asia North America Average Socre

Arena Selection Model – Analyze on different parameters and compare with the average

We can clearly see from the above model suggests Middle East, North Africa and South Asian Countries

0

0.5

1

1.5

2

2.5

3

3.5

4Political

Economical

Social

Technological

Legal

Environmental

Middle East and North Africa Russian Common Wealth

South East Asia North America

Average

PESTLE ANALYSIS

After qualitative analysis, preference order of region where DGHE should penetrate: South Asian Countries > Middle East & Africa > North America

After selection of the market, DGHE should align its global strategy with its business strategy and core competency…

10

8 Global Strategy: How to concur the world?

Glo

bal

Str

ateg

y fo

r Su

pp

ly C

hai

n o

f O

il an

d G

as

Cost cutting: A diet for the overweight

Vertical Integration: One-Stop shop

New Revenue models: for future rewards

Consolidation: Increasing Concentration

New Service models: Design to value

• Cost cutting by making well tested process • Use improved tech and BIM to reduce leaks

• Collaboration to simplify contractor management • In-house equipment purchase – 30% cost reduction

• High leveraged capital structure • Focus more on OPEX and capitalize by parts

• Joint ventures to gain the competitive adv. • Merger and Acquisition to gain mkt. share

• Collaboration with other co-opetitors• Leverage on technology

Company Response Strategy

Diversification of Revenue Streams

Effective cost controls & Customer Service

Safety and Human Capital Investment

• Offer broad service range • Consolidate & Leverage existing business in UKCS• Emerging market opportunities such as Africa

and Asia

• Continuous Capital Expenditure & Technology investments to improve economies of scale and efficiency

• Reduce operational cost base utilizing innovative approaches (e.g. cut down wastage)

• Ensure project deadlines & service delivery timely

• Investment in Employee Health & Safety• Initiatives to ensure continuous supply of talent

pool• Adequate succession planning for senior

management

Overcoming the Barriers to Change

• Utilize integrated logistics policies to cut down project timelines

• Bespoke risk & asset management strategies to address capital allocation decisions.

• Effective communication strategies to understand employee & customer needs

• Training and human capital development

Source: Team analysis, case study, annual report

D&G corporate strategy has four key areas. D&G group subsidiaries should contribute to D&G’s portfolio by focusing on these 4 areas…

11

9 Corporate level Strategy: Four Key Areas

Strengthening execution and operational

efficiency

Business value unlocking Digitalization

Emphasis on improving Working capital

level

D&G Group

DGHE

Source: Team analysis, case study, annual report

DGHE’s contribution to D&G’s portfolio is very significant. There’s a substantial increase in orders & EBITDA margin but asset size has remained low…

12

10 Portfolio Contribution of DGHE to D&G

6%

10%

0%

2%

4%

6%

8%

10%

12%

0

5000

10000

15000

20000

25000

30000

2016 2017

Number of Orders % Contribution

• There’s a significant increase in the number oforders from around 15000 to 25000

• The percentage contribution to total portfoliohas also increased significantly from 6% in2016 to 10% in 2017

• Hydrocarbon segment’s EBITDA margin hasincrease significantly frim 0.5% to 6.8% in amatter of one year

• Such increase indicates that the portfoliocontribution of DGHE to the parent companyhas become significant

• Despite being a significant increase in EBITDAmargin, there’s no significant increase inAssets as such

• DGHE has achieved such a high EBITDAmargin by having a light asset base

D&G consolidated – Hydrocarbon order bookD&G consolidated – EBITDA Margin D&G consolidated – Assets

Source: Team analysis, case study, annual report

The Impact web shows that the there’s a huge impact of corporate level strategy on DGHE’s business. DGHE’s should effectively use human capital to gain competitive advantage …

13

5

2

3

4

Strengtheningexecution and

operationalefficiency

Business valueunlocking

Emphasis onimproving Working

capital level

Digitalization

The Impact Web

• High EBITDA margin from DGHE business is inline with the corporate strategy ofstrengthening operational efficiency and execution

• D&G is planning to divest some of its business to diversify. DGHE being a highEBITDA and low asset business, it’s highly unlikely of such case to occur

Leveraging Human Capital

Organizations deliver superior and sustainable value when they have:

Evolutionary Purpose

Spiritual Intelligence

Entrepreneurial Ability

Shared Tacit Knowledge

Trust Communication

DGHE should leverage on it’s strong human capital by creating a trust among the employees

Source: Team analysis, case study, annual report