Description
This document includes a strategic management project conducted by me and two of my friends. All the information gathered is for academic purpose.
Conducted By Yasmin - Nada and Mominah
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CONTENT
COMPANY BACKGROUND INDUSTRY BACKGROUND STRATEGIC ANALYSIS PHASE ANALYSIS OF VISION AND MISSION STATEMENT VISION MISSION STATEMENT EXTERNAL ANALYSIS POLITICAL ANALYSIS ECONOMIC ANALYSIS FISCAL POLICY MONETARY POLICY SOCIO-CULTURAL ANALYSIS TECHNOLOGICAL ANALYSIS LEGAL ANALYSIS ENVIRONMENTAL ANALYSIS INDUSTRY ANALYSIS: FIVE FORCES MODEL INTERNAL ANALYSIS VALUE CHAIN ANALYSIS APPENDIX APPENDIX 1.0 APPENDIX 1.1 APPENDIX 1.2 APPENDIX 1.3
3 3 4 4 4 5 6 6 6 7 8 8 9 10 11 11 14 14 23 23 24 25 26
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Company Background As the major electricity provider serving almost 6 million customers in the Kingdom of Saudi Arabia, SEC is responsible for generation, transmission and distribution of electricity throughout the Kingdom. Wholly owned by shareholders, the SEC also sets the price of electricity sold to consumers and industry under rules set by the Saudi government based on the cost of production, distribution and services. On 05/04/2000, Saudi Electricity Company was established as a Saudi joint stock company. This stipulated the merger of all Saudi electricity companies in the Central, Eastern, Western and Southern Regions in addition to the ten small companies operating in the north of the Kingdom as well as all other electricity operations managed by The General Electricity Corporation, into a single joint stock company which is now known as Saudi Electricity Company. It is a Riyadh-based utility, with 80% state-owned and 20% listed shares. Saudi Electricity Company (SEC) is one of the largest utility companies in the GCC, both by market capitalization ($ 12,572M), and in terms of its installed power generation capacity (40.697GW). The company owns 85% generation and 100% transmission, distribution and retail of electricity in region. It generates 37GW of electricity from 45 oil and gas-fuelled power plants and has signaled interest in investing in solar energy, including a 20-30MW plant. Despite the rapid urban and economic growth in the Kingdom, the company has been a part, to a large extent, of this growth and worked to establish the infrastructure for the electricity sector. The boom in the electric power generation sector due to surging increase in demand for electric power has caused the company to increase its supply which the company has succeeded in providing in spite of financial difficulties, the global financial crisis, high cost of loans, and lack of substantial financial income.
Industry Background
Saudi Arabia has a massive electricity distribution network that extends to cities, towns and villages across the country. Its network consists of 8,750 miles of transmission lines, 52,000 miles of distribution lines and over 53,000 miles of service connections.
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The Kingdom also uses desalination plants to generate electricity using the steam that is a byproduct of the desalination process. The Kingdom generates more than 26,300 MW of electricity, 2,800 MW of which is produced by the desalination plants. Saudi Arabia eventually plans to increase the electricity produced by these desalination plants to equal half of the total output. The country has also begun working with GCC countries to link their national power grids. Ultimately, plans include linking the GCC grid with the rest of the Arab world and Europe through Turkey and Syria. So far, Saudi Arabia has a single vertically integrated electricity company - the Saudi Electricity Company (SEC) that owns most of the Generation, all of the Transmission, and all of Distribution. However, there are a number of other generators and IPPs and IWPPs that are producing power and sell to SEC or supplying isolated loads. Some of the large consumers do have internal generation that is used to feed large portion of their own load (Captive Generation). The electricity sector in KSA has witnessed a great progress in the past couple of years as several new electrical stations were set up for generation of electricity. Due to continuous developments in the economy and governments goal to improve the standard of living in the country, a specific emphasis has been laid upon the electricity sector of the region since it is one of the key ingredients for any kind of development the country may seek.
Strategic Analysis Phase Analysis of Vision and Mission Statement Vision “To help and improve the standards of living and enhance the economic competitiveness of the Kingdom of Saudi Arabia in all domains.” A vision is a very long term goal that is created to invoke inspiration and a passion in the employees of an organization to take the company forward to the desired state. The vision of SEC is very broad and overarching. SEC aims to support the government in increasing the wellbeing of the nation along with raising the economic competitiveness. This is clearly an inspirational vision that is compelling enough to motivate employees and the overall organization. As the company deals in producing and distributing electricity to the whole
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Kingdom which is a basic need for the society and plays a critical role in fostering the development of the country by powering various industries, therefore employees will perceive themselves as contributing to the well-being of the society and the economic development with their jobs. Moreover, the vision is in coherence with the organizational resources and
capabilities of the SEC and is reconciled well enough with the present state of the company, given the massive projects and investments that are being undertaken by the company along with the restructuring of the whole electricity system of the country, all in the expectation of achieving heights of efficiency and reliability that will ultimately benefit the wider society and development of the economy. Finally, as mentioned above, the SEC?s vision is all-encompassing in that it does not limits opportunities in enhancing the competitiveness of just the electric supply industry, but rather it seeks to augment the attractiveness of Saudi Arabia in all domains and sectors. Mission Statement “We are committed to provide our customers with safe & reliable electric services, to meet the expectations of our shareholders, caring for our employees, and ensuring optimum utilization of available resources.” A mission statement of a firm differentiates itself from the vision by stating the purpose of the company and the scope of its operations. The purpose of existence of the SEC and the scope of is operations is clearly made evident at the beginning of the mission statement in the commitment that it exists to safely and reliably supply electricity to its customers. In addition, the mission statement also notifies the specific stakeholders that it gives priority and importance to that are the shareholders and employees of the SEC, however, it does not state the social responsibilities of the company towards the nation in its mission statement which is actually one of the areas of focus for the company. Nevertheless SEC has reflected the importance of social activities and perception in its vision that is based on serving and developing the nation. Moreover, one of the key characteristics of an effective mission statement is the mentioning of the core competencies and the advantage that it has that distinguish the company from its rivals. In the case of SEC, it is the sole supplier of electricity in the Kingdom; therefore, there is no pressure for the SEC to stand out from the competitors as there are no competitors in the industry. Yet, the mission statement does state that it seeks to utilize its available resources and
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capabilities at their maximum. Thus, the mission statement of SEC is precise and concise, yet at the same time it is wholesome and effective. External Analysis In order to understand the external environment that might affect the operations of the company, we need to perform the PESTLE (political, economical, social, technological, legal and environmental analysis). The PESTLE analysis will be carried out in Saudi Arabia because the Saudi electricity company warehouses are spread throughout Saudi Arabia in each direction that is central north, east, south and west sectors and in each sector these warehouses are located in almost all the cities. Political Analysis Saudi Arabia government is a monarchy based on Islam. The government is ruled by the King Abdullah bin Abdul Aziz, who appointed Nayef bin Abdulaziz, as the Crown Prince to help him with his duties. The King governs with the help of the Council of Ministers, also called the Cabinet. There are 22 government ministries that are part of the Cabinet. Each ministry specializes in a different part of the government, such as foreign affairs, education and finance. The King is also advised by a legislative body called the Consultative Council (Majlis Al-Shura). According to the report presented by the economist Intelligence Unit in 2011, the rule of Al Saud family is expected to remain secure in 2012-2016. Although there is a risk that the wave of social unrest can sweep across the region and is possible that it might reach Saudi Arabia but so far the kingdom has remained largely untouched by the so called Arab Spring. King has shown no plan to grant political freedoms. Thus we note that long term stability might be extremely difficult for the Saudi government to maintain, as reflected in our long term political risk rating of 56.0 out of 100. The government tried to appease the public through means that do not weaken its ability to use force by providing very generous benefits- young men in Saudi Arabia can expect a government job, free health care and education as well as grant toward the cost of their wedding and first home. There is unlikely to be any democratic reform or any move to an elected parliament before 2006, and political parties are expected to remain illegal. A number of major infrastructure- power, water and transport- and hydrocarbons projects proceed with large government support. Saudi Arabian government is also a member of very important international 6|Page
organization such as United Nations, International Monetary Fund (IMF), World Trade Organization (WTO), and many others. Overall, the possibility of an all out insurrection remains very slim. The political analysis helps the company to understand the political structure and the government?s attitude towards business to be able to cooperate with the government and generate something that will benefit both the company and the public. Economic Analysis The government will remain a major force in the economy and provide employment for the country?s mass of young unemployed and raise the living standards overall. Thus, in early 2011 the king announced US$130bn of new fiscal initiatives, which include increased public sector hiring and in an effort to address the dearth of residential housing, a US$67bn program to build 500,000 affordable housing units. Despite the government?s new spending commitments, the fiscal account is only expected to move deficit from 2013. The benchmark interest rate in Saudi Arabia was last reported at 2.00 percent. Saudi economic growth will be buttressed throughout most of the forecast period from 2012 to 2016 by the two far reaching fiscal spending packages announced by the King in early 2011, worth a combined 30% of GDP. However, real GDP growth rate is likely to remain below 2011 level which is 6.8%. Saudi consumer price inflation is expected to remain manageable throughout the forecast period, in larger part reflecting the maintenance of price subsidies on a range of basic goods such as foodstuff and electricity. These helped to shield the Saudi population from the jump in global commodity prices in the first half of 2011; inflation averaged a relatively modest 4.8% in the first eight months of 2011, despite fast rising narrow money (M1) growth. Consequently, it is expected that inflation rate will slow to an average of 4% in 2011-14, as global commodity price decline and the dollar strengthens, before picking up to over 5% in the second half of the forecast period as these trends reverse. GDP per capita is quite good which about $ 16,995.78 according to 2011 report. The standard of living is better off. However, Unemployment rate among Saudi labor force was last reported to be 10.8% in 2010. Fiscal policy
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Saudi Arabia?s fiscal performance is likely to deteriorate in the coming years, as the knock on impact of the wages rises, welfare benefits and the house building program announced in 2011, combined with only slow oil production growth, is felt. As a result, we expect the fiscal account to record a much smaller surplus in 2012, of 3.6% of GDP, before returning a deficit averaging 3.3% of GDP over the remainder of the forecast period. Monetary policy The Saudi riyal?s is peg to the US dollar, which is likely to be maintained throughout the forecast period from 2012 to 2016. The Federal Reserve is expected to maintain low level during 2012, and is likely to begin monetary tightening only in early 2013, with the main US policy rate forecast to average 3% in 2016. SAMA is likely to maintain a small premium to US rates, given Saudi concerns about inflation. Lending growth, which has been sluggish since 2009, will remain slow, with the bulk of current lending going to larger companies; in an effort to address this, the government will extend financing guarantees to banks offering loans small and medium sized enterprises. The economic analysis have provided as an overview about the economic growth, inflation, monetary and fiscal policy, capital expenditures of the government that will help the company in forecasting the economic issue that it might face and exploit the opportunities. To view the complete economic indicators refer to appendix 1.0 Socio-cultural Analysis Socio-cultural analysis involves a discussion about the social trends that are on Saudi Arabia. Most of the people live in Saudi Arabia are Muslims and follow Islam as their religion. Muslims are very sensitive about their religion and doesn?t tolerate any act or action taken against their religion. These people accept all foreign product and service except what that their religion had forbidden for them. For example, swine meat, wine and alcohol are forbidden in Islam. Today, in Saudi Arabia, the income of the family is not only based on the earning of the man, but woman equally work and support the family. The Government is finding new ways to empower women by given them opportunities to work in the supermarkets as cashiers or as saleswomen in the malls to make them able to earn for themselves and their families. 67.6% of the population is aged 15 to 64 years and 78.8% of the population is literate. Saudi?s spend more 8|Page
money in buying luxury goods such as newly arrived iphone and black berries etc. Life expectancy rate is approximately 75 years. More people are joining the labor force thus this lead to increase in the use of electronics such as microwave, automatic dish washer and automatic washing machine. People are more depended on electronics to do their daily work. They are used to relax in air conditioned room. They charge their laptops, mobile phones using the electricity. The socio-cultural analysis is very crucial to understand the behavior and psychology of the society much better and to provide those opportunities and products that match their needs and wants. It is very important and sensitive matter that the company should consider that might affect their reputation in building loyal customer. Technological Analysis Technically, Saudi Arabia is becoming very advance, as all its business processes are dependent on technology to reduce the cost and increase productivity. Companies are investing a lot of money in research and development top find out the latest technological trend in the country and to gain competitive advantage. Many Companies and organizations in Saudi Arabia have advance information systems implemented in their organization to manage the organization resources successfully. The government is using technology extensively in the Ministry Of Defense and branches of the armed forces, Ministry Of Commerce, Saudi Arabian Monetary Agency and the Ministry of PTT. They are also implementing unique technology to capture the plate number of fast driving cars. The largest share of growth in IT is in the commercial sector. Saudi Arabia?s scientists will work with IBM to develop technologies in the areas of solar energy, water desalination and petrochemical applications such as recyclable materials. The King has also signed many agreements that are expected to develop Saudi Arabia as a regional hub of technology-based economic development. Saudi Arabia is seeking investors in a $109bn plan to create a solar industry that generates a third of the nation?s electricity within two decades. Saudi Arabia?s ambitions to boost renewable energy use as a way to pare back on oil consumption used for domestic desalinization and power plants, potentially saving 523,000 barrels of oil equivalent a day over the next 20 years. The government is targeting 25,000 megawatts from solar thermal plants to increase the reliability and efficiency of the electric grid and improve energy efficiency.
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Solar energy is being seen as an important alternative power resource that will generate over five giga watts of energy for the Kingdom of Saudi Arabia by 2020. Saudi electric company needs to develop strategies to meet the needs and demands that might arise due to innovative technological trends of the country and not wasting the natural energy source while keeping in mind that some technological hardware needs more electricity while the other need minimal. Legal Analysis In this section, the judicial system of Saudi Arabia will be discussed with regard to the labor laws, commercial disputes and settlement laws, company laws and many others. First of all, the legal system of Saudi Arabia legal system is based on Islamic Shari?a law with the Quran and Sunnah provides the most important source of law. However, the King, Crown Prince and other advisory Councils periodically issue new laws to meet the complexities of modern life and business transactions. But there laws are only valid if they do not go against the Shari?a law. . Sole proprietorships are required to register with the Ministry of Commerce but are not subject to the Regulations. Foreigners are not allowed to conduct business in Saudi Arabia as a sole proprietor. In addition, Saudi law forbids foreigners from engaging in business in the Kingdom under the name of a Saudi national. The Labor Regulation provides that the percentage of Saudi workers employed should not be less than 75%, but if Saudi workers are not available with technical or academic qualification then the Minister of Labor have the authority to decrease this percentage. At present the Ministry of Labor provides that the minimum number of Saudi Arabian employees in private sector businesses must be 30%,other than for certain menial labor sector, where the minimum Saudization rate is only 10%. Corporation tax of 20% is likely to continue to apply only to non-Saudi firms. Citizens and Saudi businesses pay no tax on income and are only liable for zakat, 2.5% of net worth. According to the foreign direct investment law, foreigners are allowed to invest in all sectors of the economy, except for specific activities contained in a "negative list." Minimum capital requirements to establish business entities have been substantially reduced.
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The legal environment is very important issue to conduct and understand the business environment of a country because this will allow the company to put rules and regulations in accordance to the legal limits of the country. Environmental Analysis In this section we will cover the main environmental issues common in Saudi Arabia and the laws and measurement taken to reduce these hazards. Saudi Arabia is facing a lot of Environmental issues such as waste management, sewage problem, flooding and storm drainage problem, and ground water rising. First of all, the waste management which is a critical issue of what to dump, where to dump all these waste and how can we find a better solution of recycling instead of dumping. The MEPA Meteorological and Environmental Protection Administration are currently finding alternative solutions to solve this problem and take corrective actions. Secondly, the water is a very expensive commodity and is very scarce in Saudi Arabia. The natural water through rain and ground water is not sufficient to the needs of the people. So the country management is finding ways to provide its residents with dependable water supply by recycling the used water in a proper way. However, the local geological structures and natural channels that had in the past handled the natural runoff have been altered significantly by human settlement and filling and groundwater, the city storm water drainage and sewer systems and the marine environment. This in turn has had cumulative on the natural, social and economic environment of Jeddah. The environmental issues should be kept in mind because these can act as a hurdle in conducting the operations of the company or expansion because the issues such as water rising above the ground, and improper sewage system can cause harm to the people and if there is problem in the wire of the electricity it is highly likely that it will affect the people, that can cause the company to lose reputation. Industry Analysis: Five Forces Model “Porter 5 forces” is the tool that we will use in order to for analyze an organizations industry structure in strategic processes. The industry under analysis is electric power industry. Threat of New Entrance
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The extent to which this threat is high or low for the existing companies depends on the barriers that restrict the entry of new firms. Profitability requires achieving economies of scale for example, in an Electric power industry, electricity is generated in bulk so the company will have the advantage of reducing cost and price per unit is also reduced. Thus the threat of new entrance is low. The product is undifferentiated because it?s a universal product and the industry only provides services and products related to electricity and transmission system. So, this made it difficult for new entrance to enter this market. The initial investment is very high, it requirement of capital and financing is extremely high because it requires a lot of capital to build large pillars and warehouses across different cities of a country. In this case, new entrance cannot easily enter this market so threat is low. There is no switching cost for consumers, because there is no substitute for the product that this industry offers and even the infrastructure (cables) are laid down to houses and buildings by existing company so accessing to distribution channel is difficult, thus this makes the threat of new entrance is low. Thus the overall threats of new entry are extremely low for this industry. Bargaining power of the buyers Buyers in any industry may pose a threat to an organization by demanding high quality products offered at low prices along with more and better customer services. The customers are the community, subscribers, shareholders and contractors. The number of buyers is high and not concentrated in one area but spread across the country. Thus this reduces the pressure on this industry to accept the bargains of the consumers; almost the whole population is the buyers. Threat of backward integration is very low because the buyers cannot become the supplier and generate and transmit electricity themselves. So, the bargaining power of buyers is low. Buyer purchases product in high volume and they need it all aspect of work as mentioned in socio-cultural analysis for electronic purpose. There is no substitute for electricity. So, this makes bargaining power of buyers low. Overall, the threats of buyers are very low. So, we can conclude that the overall threat from the buyers is low making the situation favorable for the industry. Bargaining power of the suppliers This threat involves suppliers exerting bargain power that serve as the raw inputs to other firms posing a danger to the profitability of these firms. Any electric company needs to have 12 | P a g e
suppliers to supply them with the different type of cables, wires, transformers, joint cable, pillars, fuses and many other things. In this industry, the suppliers are many and dispersed in different location. The buyers is more concentrated than the suppliers because there is one big buyer only, this makes the bargain power of suppliers low. Buyers can easily switch across different number of suppliers. Bargaining power of supplier is low. Another threat of forward integration in which the supplier can develop their own electricity plants is difficult because of the high threats of new entries described above. Buyers are educated about the product because these supplies are provided by different types of suppliers. This makes bargaining power of the supplier low. Buyers purchase product in large volume because they need many cables to build transmission units across cities and countries. Thus, buying in bulks from a supplier makes the bargaining power of suppliers high. The products in this case of the supplier are much differentiated because SEC can buy different types of wire of different quality, quantity and price but the substitutes are unavailable. Thus this makes the overall bargaining power of the supplier low. The threat of substitutes The overall threats of substitutes are low and almost non existence in this industry because there is no substitute of electricity in business. But in houses people can still work on power generators but this is not commonly used by people. Although people can use candles for light and heat for oven in the absence of electricity but in this age of modern science and technology people in Saudi Arabia are not used to such habits and it also doesn?t provide the same convenience. Competitive Rivalry The competition in this industry is non existence as there is only one electricity
producing company in Saudi Arabia and enjoys monopoly but within the regulations of the government. Overall, Electric power industry is very attractive because the bargaining power of suppliers and buyers are low. Moreover, the threat of substitute, threats of new entrants and Competitive Rivalry are low.
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Internal Analysis Value Chain Analysis It is an assessment of the activities within a business that add value at each stage of the process that results in the generation of the final product or service. A typical value chain analysis is consists of primary activities and support activities that are discussed as follows: Primary Activities Primary activities: These activities are the core activities of a business that result in the physical generation of a product from the input stage to the final delivery of the product to the end consumer. The activities classified as primary activities of a business? value chain are: Inbound logistics Saudi Electric Company (SEC) generates and distributes electricity to the whole of Saudi Arabia. 1. The Company?s power generating stations are distributed in all four operating regions to facilitate efficient supply of electricity to the whole of Kingdom: a. b. 25 in the Western Region with a total of 220 generation units. 22 stations in the Eastern Region comprising a total of 190 units
c. 12 power stations in each of the Central and Southern Regions. 2. SEC uses oil as well as natural gas mainly that are in abundant supply in the country for power generation which proves to be cost-effective. 3. In addition to own generators of power, SEC uses Independent Power Producers located in Rabigh, Dharma in Riyadh and Al Qurayyah with more IPP projects under construction along with Independent Water Producers to generate power so as to increase electricity supply to meet the growing needs in the residential and commercial sectors more efficiently. 4. Moreover, SEC also deals with the suppliers of electrical components such as transformers, fuse switch, digital meter boxes etc. that help in the next process of converting energy into final electricity. There are 47 warehouses for these electrical supplies products that are located across the four operating regions of the company.
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5. To export the electrical equipment, SEC makes use of sea transport, shipping, to order huge quantities and save on costs. 6. Finally, SEC requires all electrical and mechanical equipment to be boxed or crated and sealed for protection and to manage quick and efficient handling of the materials on field. Operations AS SEC is a vertically integrated business, the operating activities of the company involve power generation and transmission of electricity through (TBU) Transmission Business Unit. The company?s power generation function involves generation of power through energy sources of water and fuel and transmits it to TBU?s to produce electricity that is used for consumption. 1. SEC uses huge top quality internationally produced turbines to generate power in substantial quantities. 2. Modern technology such as the desalination plants run by steam is also made use of for generation of power. 3. It makes use of overhead lines to transmit power to for electricity generation that are naturally insulated through air, thus saving costs. 4. Underground lines are also used to facilitate the transmission process as they are less affected by bad weather conditions and less prone to damages. Therefore, a combination of the two, leads to an effective and constant supply of power. 5. Additionally, SEC has developed a Saudi Arabian Grid Code used for restructuring the power sector of the country that is expected to play an important role in increasing the efficiency of TBU and will eventually lead to a better generation of electricity as well contribute to the reliability of the network. 6. Finally, Saudi Arabia has also begun working with GCC countries mainly with the United Arab Emirates, Bahrain, Oman, Qatar and Kuwait to link their national power interconnecting electric power networks, leading to the development of an electricity line, producing 400 kilovolts and transformation stations with a capacity of 50 hertz, therefore, improvising electricity supply in all countries. Outbound Logistics
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After electricity has been generated, the Transmission System transports the electricity to the Distribution System, through which most customers are supplied electricity. 1. SEC maintains a separate division the Distribution Service Provider (DSP) that holds responsibility for the operation and the maintenance of a sound, reliable, efficient and an effective delivery of electricity through its Distribution System. 2. Some generating plants are connected directly to the Distribution System and are referred to as the Embedded Generators for quick supply of electricity to specific customers. 3. Use of other retailers and traders is made that are connected to the distribution system to dispatch electricity to licensed customers. 4. Moreover, some final customers are also connected directly to the transmission provider including Saudi ARAMCO and SABIC due to the nature and the size of their operations as they cannot afford any electricity shortages, hence they receive electricity via their own plants without undergoing the services of the distribution service providers. Marketing and Sales Being a supplier of a commodity that serves the basic need for the country and the sole supplier, SEC does not require any marketing and promotion activities to advertise its product that is generation of electricity, hence, it enjoys significant cost savings that are passed on to customers in terms of low price bills paid by them. Services 1. SEC operates customer service centers twenty four hours in the Eastern and Western regions of the country including voice reply systems installed to meet cater to customers? needs day and night. 2. Moreover, electronic services such as the SMS service is also developed that notifies customers by the means of SMS about bill issuance, bill payment confirmation, bill amount queries and discontinuation of service incase payment is delayed. 3. Furthermore, an email service is also developed that sends emails about the customers? bills due. 4. Additionally, 57 automated service systems were added to the customer services offices that enable customers to evaluate their accounts with the option of bill printing and subscription to certain services. 16 | P a g e
5. Also, a program supporting the payment of electricity bills for beneficiaries under social welfare was also developed. 6. Finally, with regards to the commercial sectors SEC caters to, a time-of-use rate application was developed. This application enables customers to apply for displacement of load at peak times of their activities so as to reduce the charges when electricity is utilized at off-peak times. Support Activities These are general activities that add value either by themselves or based on their relationship with the primary activities listed above or other support activities. General Administration Saudi Electricity Company today is a result of a merger between several different smaller units who came together to form one large giant firm –SEC. Three major general administration activities that have helped/are helping the firm add value to its product are: 1. Following the merger, the company, gradually and systematically, implemented work procedures and strategy applications according to the areas of specialization of each of the independent sectors (Generation, Transmission and Distribution). This has allowed the company to exploit the expertise of each of the sector while creating synergies in performance improvement and cost reduction by creating a competitive environment between the specialized companies. (See Appendix 1.3for SEC?s Organizational Structure) 2. The government of Saudi Arabia is a major shareholder of SEC which in turn gives it great authority over the firms operations making sure that SEC provides low-cost efficient electricity while not turning into a monopoly that exploits its customers. 3. The firm is relationship-oriented building and nurturing healthy relationships with all its stakeholders, from suppliers to customers and shareholders to employees. Still, given the high and rising demand for electricity and the nature of the product itself, the firm is highly receptive to flexible and exceptionally skilled workforce and strives to be a wholesome blend of both, strong and concrete human culture and vastly diverse and changing technical practices. This dedication and commitment of the firm
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to its employees has helped it provide quality service, proof of which is the Total Quality Management Award received by the company. Human Resource Management SEC views its employees as its true source of energy who participate effectively in the achievement of company objectives. This requires the manpower of the company to be qualified with high efficiency and ability to keep pace with the fast developments in the nature of work so as to attain the new aspired culture. Thus: 1. The company focuses heavily on training development of its employees. Human resources are developed „through adopted programs helping in selecting and improving the empowerment and efficiency levels of employees and planning their careers so as to guarantee the occupancy of all the company positions with the most efficient employees on a permanent basis?. The firm offers to fulfill the company requirements of all administrative and technical specializations by providing on-thejob-training to employees. 2. To develop the skills of employees, many short courses are organized along with self-development ones provided through E-learning systems (I-Learn). Fresh graduates employed are provided with Professional Development Program (Orientation). 3. SEC conducts field researches so as to create development program that maximize employees? capabilities based on their respective competencies. The findings of the research affect all areas of human resource practices like employee selections, employment, promotion, career planning and determining the developmental and training requirements of the employee. 4. The company indulges in countless other programs and schemes in order to award its excelling employees, encourage their participation in decision making, provide health services, ensure intercommunication in the company, motivate and enhance their loyalty. Some of these programs are: Employee Distinction Program (Employee Appreciation) Innovative Program (Employee Involvement & Decision Making)
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Future Vision Of The Performance Management System &Balanced Scorecard (Employee Evaluation) SEC?s continued efforts to make their employees more efficient has resulted in a 11% decrease in manpower employed at the firm while it?s operational efficiency has been reported to increase. Technology Development (Research Activities) It is at the heart of the company to constantly research not only into work practice methods and employee evaluation techniques, but also into technical processes and operation improvement methods. Once again, the nature of electricity makes R&D one of the most integral parts of the company. With increasing demand for its products and astronomical dependence of the country on SEC for its provision, continuous maintenance, repair and development is quintessential for the firm?s survival. The management of the company believes that their ability to deliver quality services and ongoing innovation is critical to the success of their business. Thus, among its „Pillars of Work? is innovation and development: Innovation - constant improvement towards achieving the best performance and to use the up-to-date / state-of-the-art management technologies in all Company processes Development -To focus on development, training, encouraging innovations and using latest management approaches and techniques in all operations of the Company. It is crucial for SEC to acquire and make use of the emerging technologies for electricity generation as and when they come so as to provide for its customers in a timely and efficient manner. Procurement SEC is a gigantic customer and can be seen as an intermediary between its suppliers and Saudi Arabia?s electricity customers. Thus, suppliers too seek to establish long-term relationships with SEC and benefit from this bond. 1. SEC provides manuals containing SEC?s general contracting policies and procedures as well as general information that assists and guides suppliers not only in seeking to do business with SEC and in preparing competitive bids but also in implementing their contracted work service to SEC.
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2. The company constantly updates and automates its contracting procedures which can be found on their website. Suppliers are encouraged to visit the SEC website in order to obtain relevant information regarding several things such as Delivery Procedure and Specifications of materials distribution (Item Distribution). This enables SEC to establish a fair and well rounded business relationship with its suppliers. Financial Analysis Liquidity ratios The overall growth in liquidity of SEC has declined highly over three years, yet the cash ratio shows a considerable growth of 114.58%. This indicates that SEC keeps minimal amount of other current assets, but huge amounts of cash and bank balances. Therefore, SEC has more than sufficient cash to easily pay off its current liabilities. However, a huge amount of idle cash is unproductive for the company that can be put to a better use to earn profit. Asset utilization ratios Overall, SEC has improved its utilization of assets over the years from 2008-2010. Analyses show that inventory is being well-utilized which could be due to increase in electricity sales. The number of days that cash is tied up in accounts receivables has improved, indicating a use of better credit management strategies. More use of capital is being made, increasing efficiency. Yet lesser sales are being generated relative to the size of the total assets SEC owns. Profitability Ratios Over the past three years, SEC has been able to boost its profitability. Since 2008, the firm?s profit margin growth rate has increased to 34.67% while the percentage of asset utilization in generation of profit has also improved to 32.35%. Hence, the firm has a growth of 47.7% in Return-on-equity benefiting the stockholders. Market-Value Ratios Saudi Electricity Company was previously selling its shares for 37 times its earnings in 2008-2009, this has reduced significantly to 18 times the earnings due to a substantial increase in
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the earning per share. This has helped the firm in creating and increasing the value for its stockholders by 23.16%. Hence, increasing the firms? market value over the years. Long Term Solvency Measure From 2009-10, the company performed better than the previous year 2008-09 because it was able to reduce the debt-to equity ratio by 4.76%. Moreover, the company was able to generate 13.04% more cash from its operation. Overall, its performance is reasonable but the company should recognize that keeping more debt can be risky but it can generate high profits. SWOT ANALYSIS
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STRENGTH Highly efficient, motivated, skilled and committed workforce Strong market position and brand strength, hence Large and well-built customer base Outstanding HR department and practices (implemented training, leadership, professional qualifications and development programs) Creditworthiness rating of A1 Excellent R&D and innovation trends and practices High quality provision of service (electricity) State-of-art management technologies Complete Government support Environmental Initiatives and Social Responsibility Strong financial position High share value High generation capacity Electricity generation facilities located all across the country in major regions. Use of modern technology and international quality turbines manufactured by General Electric for power generation. Reorganization of the grid code for better efficiency and improved quality and timely supply of electricity. Use of different distributive facilities as per the needs of its different commercial and residential customers. Large array of technology based and automated customer services provided to enhance their experience. Use of time-based rates for industrial customers that allows them to displace load, saving them huge costs. A culture based on innovation, improvement and optimum utilization of resources. OPPORTUNITIES Increasing demand for electricity Acquisition and Merger of other potential business Diversifying line of operations (into areas such as technology) SEC can increase its prices due to high standard of living (high GDP per capita). Due to women joining labor force, SEC can initiate and provide appropriate jobs for women.
WEAKNESSES Enormous funds required for the implementation of electric power generation and distribution projects Less generation reserve during summertime peak demand periods Some of the physical resources can be easily imitated by others.
THREATS Government regulations Seasonal variation of load (consumption of electricity) Arab spring might affect the political stability of the country Government influences and regulations to use new technology such as nanotechnology to produce electricity can be difficult for SEC to adapt because they are not used to it.
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Expansion to the neighboring gulf countries SEC will be able to lower its cost more and enjoy high revenues at the same time Government laws to increase the salaries of Saudi employees might be costly for SEC to retain Saudi employees in the company
Higher dependence on electricity means increase demand which might be difficult for SEC to supply. Natural disaster such as flooding might cause damage to the infrastructure.
Appendix Appendix 1.0
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Appendix 1.1
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Appendix 1.2
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Appendix 1.3
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doc_200876140.docx
This document includes a strategic management project conducted by me and two of my friends. All the information gathered is for academic purpose.
Conducted By Yasmin - Nada and Mominah
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CONTENT
COMPANY BACKGROUND INDUSTRY BACKGROUND STRATEGIC ANALYSIS PHASE ANALYSIS OF VISION AND MISSION STATEMENT VISION MISSION STATEMENT EXTERNAL ANALYSIS POLITICAL ANALYSIS ECONOMIC ANALYSIS FISCAL POLICY MONETARY POLICY SOCIO-CULTURAL ANALYSIS TECHNOLOGICAL ANALYSIS LEGAL ANALYSIS ENVIRONMENTAL ANALYSIS INDUSTRY ANALYSIS: FIVE FORCES MODEL INTERNAL ANALYSIS VALUE CHAIN ANALYSIS APPENDIX APPENDIX 1.0 APPENDIX 1.1 APPENDIX 1.2 APPENDIX 1.3
3 3 4 4 4 5 6 6 6 7 8 8 9 10 11 11 14 14 23 23 24 25 26
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Company Background As the major electricity provider serving almost 6 million customers in the Kingdom of Saudi Arabia, SEC is responsible for generation, transmission and distribution of electricity throughout the Kingdom. Wholly owned by shareholders, the SEC also sets the price of electricity sold to consumers and industry under rules set by the Saudi government based on the cost of production, distribution and services. On 05/04/2000, Saudi Electricity Company was established as a Saudi joint stock company. This stipulated the merger of all Saudi electricity companies in the Central, Eastern, Western and Southern Regions in addition to the ten small companies operating in the north of the Kingdom as well as all other electricity operations managed by The General Electricity Corporation, into a single joint stock company which is now known as Saudi Electricity Company. It is a Riyadh-based utility, with 80% state-owned and 20% listed shares. Saudi Electricity Company (SEC) is one of the largest utility companies in the GCC, both by market capitalization ($ 12,572M), and in terms of its installed power generation capacity (40.697GW). The company owns 85% generation and 100% transmission, distribution and retail of electricity in region. It generates 37GW of electricity from 45 oil and gas-fuelled power plants and has signaled interest in investing in solar energy, including a 20-30MW plant. Despite the rapid urban and economic growth in the Kingdom, the company has been a part, to a large extent, of this growth and worked to establish the infrastructure for the electricity sector. The boom in the electric power generation sector due to surging increase in demand for electric power has caused the company to increase its supply which the company has succeeded in providing in spite of financial difficulties, the global financial crisis, high cost of loans, and lack of substantial financial income.
Industry Background
Saudi Arabia has a massive electricity distribution network that extends to cities, towns and villages across the country. Its network consists of 8,750 miles of transmission lines, 52,000 miles of distribution lines and over 53,000 miles of service connections.
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The Kingdom also uses desalination plants to generate electricity using the steam that is a byproduct of the desalination process. The Kingdom generates more than 26,300 MW of electricity, 2,800 MW of which is produced by the desalination plants. Saudi Arabia eventually plans to increase the electricity produced by these desalination plants to equal half of the total output. The country has also begun working with GCC countries to link their national power grids. Ultimately, plans include linking the GCC grid with the rest of the Arab world and Europe through Turkey and Syria. So far, Saudi Arabia has a single vertically integrated electricity company - the Saudi Electricity Company (SEC) that owns most of the Generation, all of the Transmission, and all of Distribution. However, there are a number of other generators and IPPs and IWPPs that are producing power and sell to SEC or supplying isolated loads. Some of the large consumers do have internal generation that is used to feed large portion of their own load (Captive Generation). The electricity sector in KSA has witnessed a great progress in the past couple of years as several new electrical stations were set up for generation of electricity. Due to continuous developments in the economy and governments goal to improve the standard of living in the country, a specific emphasis has been laid upon the electricity sector of the region since it is one of the key ingredients for any kind of development the country may seek.
Strategic Analysis Phase Analysis of Vision and Mission Statement Vision “To help and improve the standards of living and enhance the economic competitiveness of the Kingdom of Saudi Arabia in all domains.” A vision is a very long term goal that is created to invoke inspiration and a passion in the employees of an organization to take the company forward to the desired state. The vision of SEC is very broad and overarching. SEC aims to support the government in increasing the wellbeing of the nation along with raising the economic competitiveness. This is clearly an inspirational vision that is compelling enough to motivate employees and the overall organization. As the company deals in producing and distributing electricity to the whole
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Kingdom which is a basic need for the society and plays a critical role in fostering the development of the country by powering various industries, therefore employees will perceive themselves as contributing to the well-being of the society and the economic development with their jobs. Moreover, the vision is in coherence with the organizational resources and
capabilities of the SEC and is reconciled well enough with the present state of the company, given the massive projects and investments that are being undertaken by the company along with the restructuring of the whole electricity system of the country, all in the expectation of achieving heights of efficiency and reliability that will ultimately benefit the wider society and development of the economy. Finally, as mentioned above, the SEC?s vision is all-encompassing in that it does not limits opportunities in enhancing the competitiveness of just the electric supply industry, but rather it seeks to augment the attractiveness of Saudi Arabia in all domains and sectors. Mission Statement “We are committed to provide our customers with safe & reliable electric services, to meet the expectations of our shareholders, caring for our employees, and ensuring optimum utilization of available resources.” A mission statement of a firm differentiates itself from the vision by stating the purpose of the company and the scope of its operations. The purpose of existence of the SEC and the scope of is operations is clearly made evident at the beginning of the mission statement in the commitment that it exists to safely and reliably supply electricity to its customers. In addition, the mission statement also notifies the specific stakeholders that it gives priority and importance to that are the shareholders and employees of the SEC, however, it does not state the social responsibilities of the company towards the nation in its mission statement which is actually one of the areas of focus for the company. Nevertheless SEC has reflected the importance of social activities and perception in its vision that is based on serving and developing the nation. Moreover, one of the key characteristics of an effective mission statement is the mentioning of the core competencies and the advantage that it has that distinguish the company from its rivals. In the case of SEC, it is the sole supplier of electricity in the Kingdom; therefore, there is no pressure for the SEC to stand out from the competitors as there are no competitors in the industry. Yet, the mission statement does state that it seeks to utilize its available resources and
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capabilities at their maximum. Thus, the mission statement of SEC is precise and concise, yet at the same time it is wholesome and effective. External Analysis In order to understand the external environment that might affect the operations of the company, we need to perform the PESTLE (political, economical, social, technological, legal and environmental analysis). The PESTLE analysis will be carried out in Saudi Arabia because the Saudi electricity company warehouses are spread throughout Saudi Arabia in each direction that is central north, east, south and west sectors and in each sector these warehouses are located in almost all the cities. Political Analysis Saudi Arabia government is a monarchy based on Islam. The government is ruled by the King Abdullah bin Abdul Aziz, who appointed Nayef bin Abdulaziz, as the Crown Prince to help him with his duties. The King governs with the help of the Council of Ministers, also called the Cabinet. There are 22 government ministries that are part of the Cabinet. Each ministry specializes in a different part of the government, such as foreign affairs, education and finance. The King is also advised by a legislative body called the Consultative Council (Majlis Al-Shura). According to the report presented by the economist Intelligence Unit in 2011, the rule of Al Saud family is expected to remain secure in 2012-2016. Although there is a risk that the wave of social unrest can sweep across the region and is possible that it might reach Saudi Arabia but so far the kingdom has remained largely untouched by the so called Arab Spring. King has shown no plan to grant political freedoms. Thus we note that long term stability might be extremely difficult for the Saudi government to maintain, as reflected in our long term political risk rating of 56.0 out of 100. The government tried to appease the public through means that do not weaken its ability to use force by providing very generous benefits- young men in Saudi Arabia can expect a government job, free health care and education as well as grant toward the cost of their wedding and first home. There is unlikely to be any democratic reform or any move to an elected parliament before 2006, and political parties are expected to remain illegal. A number of major infrastructure- power, water and transport- and hydrocarbons projects proceed with large government support. Saudi Arabian government is also a member of very important international 6|Page
organization such as United Nations, International Monetary Fund (IMF), World Trade Organization (WTO), and many others. Overall, the possibility of an all out insurrection remains very slim. The political analysis helps the company to understand the political structure and the government?s attitude towards business to be able to cooperate with the government and generate something that will benefit both the company and the public. Economic Analysis The government will remain a major force in the economy and provide employment for the country?s mass of young unemployed and raise the living standards overall. Thus, in early 2011 the king announced US$130bn of new fiscal initiatives, which include increased public sector hiring and in an effort to address the dearth of residential housing, a US$67bn program to build 500,000 affordable housing units. Despite the government?s new spending commitments, the fiscal account is only expected to move deficit from 2013. The benchmark interest rate in Saudi Arabia was last reported at 2.00 percent. Saudi economic growth will be buttressed throughout most of the forecast period from 2012 to 2016 by the two far reaching fiscal spending packages announced by the King in early 2011, worth a combined 30% of GDP. However, real GDP growth rate is likely to remain below 2011 level which is 6.8%. Saudi consumer price inflation is expected to remain manageable throughout the forecast period, in larger part reflecting the maintenance of price subsidies on a range of basic goods such as foodstuff and electricity. These helped to shield the Saudi population from the jump in global commodity prices in the first half of 2011; inflation averaged a relatively modest 4.8% in the first eight months of 2011, despite fast rising narrow money (M1) growth. Consequently, it is expected that inflation rate will slow to an average of 4% in 2011-14, as global commodity price decline and the dollar strengthens, before picking up to over 5% in the second half of the forecast period as these trends reverse. GDP per capita is quite good which about $ 16,995.78 according to 2011 report. The standard of living is better off. However, Unemployment rate among Saudi labor force was last reported to be 10.8% in 2010. Fiscal policy
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Saudi Arabia?s fiscal performance is likely to deteriorate in the coming years, as the knock on impact of the wages rises, welfare benefits and the house building program announced in 2011, combined with only slow oil production growth, is felt. As a result, we expect the fiscal account to record a much smaller surplus in 2012, of 3.6% of GDP, before returning a deficit averaging 3.3% of GDP over the remainder of the forecast period. Monetary policy The Saudi riyal?s is peg to the US dollar, which is likely to be maintained throughout the forecast period from 2012 to 2016. The Federal Reserve is expected to maintain low level during 2012, and is likely to begin monetary tightening only in early 2013, with the main US policy rate forecast to average 3% in 2016. SAMA is likely to maintain a small premium to US rates, given Saudi concerns about inflation. Lending growth, which has been sluggish since 2009, will remain slow, with the bulk of current lending going to larger companies; in an effort to address this, the government will extend financing guarantees to banks offering loans small and medium sized enterprises. The economic analysis have provided as an overview about the economic growth, inflation, monetary and fiscal policy, capital expenditures of the government that will help the company in forecasting the economic issue that it might face and exploit the opportunities. To view the complete economic indicators refer to appendix 1.0 Socio-cultural Analysis Socio-cultural analysis involves a discussion about the social trends that are on Saudi Arabia. Most of the people live in Saudi Arabia are Muslims and follow Islam as their religion. Muslims are very sensitive about their religion and doesn?t tolerate any act or action taken against their religion. These people accept all foreign product and service except what that their religion had forbidden for them. For example, swine meat, wine and alcohol are forbidden in Islam. Today, in Saudi Arabia, the income of the family is not only based on the earning of the man, but woman equally work and support the family. The Government is finding new ways to empower women by given them opportunities to work in the supermarkets as cashiers or as saleswomen in the malls to make them able to earn for themselves and their families. 67.6% of the population is aged 15 to 64 years and 78.8% of the population is literate. Saudi?s spend more 8|Page
money in buying luxury goods such as newly arrived iphone and black berries etc. Life expectancy rate is approximately 75 years. More people are joining the labor force thus this lead to increase in the use of electronics such as microwave, automatic dish washer and automatic washing machine. People are more depended on electronics to do their daily work. They are used to relax in air conditioned room. They charge their laptops, mobile phones using the electricity. The socio-cultural analysis is very crucial to understand the behavior and psychology of the society much better and to provide those opportunities and products that match their needs and wants. It is very important and sensitive matter that the company should consider that might affect their reputation in building loyal customer. Technological Analysis Technically, Saudi Arabia is becoming very advance, as all its business processes are dependent on technology to reduce the cost and increase productivity. Companies are investing a lot of money in research and development top find out the latest technological trend in the country and to gain competitive advantage. Many Companies and organizations in Saudi Arabia have advance information systems implemented in their organization to manage the organization resources successfully. The government is using technology extensively in the Ministry Of Defense and branches of the armed forces, Ministry Of Commerce, Saudi Arabian Monetary Agency and the Ministry of PTT. They are also implementing unique technology to capture the plate number of fast driving cars. The largest share of growth in IT is in the commercial sector. Saudi Arabia?s scientists will work with IBM to develop technologies in the areas of solar energy, water desalination and petrochemical applications such as recyclable materials. The King has also signed many agreements that are expected to develop Saudi Arabia as a regional hub of technology-based economic development. Saudi Arabia is seeking investors in a $109bn plan to create a solar industry that generates a third of the nation?s electricity within two decades. Saudi Arabia?s ambitions to boost renewable energy use as a way to pare back on oil consumption used for domestic desalinization and power plants, potentially saving 523,000 barrels of oil equivalent a day over the next 20 years. The government is targeting 25,000 megawatts from solar thermal plants to increase the reliability and efficiency of the electric grid and improve energy efficiency.
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Solar energy is being seen as an important alternative power resource that will generate over five giga watts of energy for the Kingdom of Saudi Arabia by 2020. Saudi electric company needs to develop strategies to meet the needs and demands that might arise due to innovative technological trends of the country and not wasting the natural energy source while keeping in mind that some technological hardware needs more electricity while the other need minimal. Legal Analysis In this section, the judicial system of Saudi Arabia will be discussed with regard to the labor laws, commercial disputes and settlement laws, company laws and many others. First of all, the legal system of Saudi Arabia legal system is based on Islamic Shari?a law with the Quran and Sunnah provides the most important source of law. However, the King, Crown Prince and other advisory Councils periodically issue new laws to meet the complexities of modern life and business transactions. But there laws are only valid if they do not go against the Shari?a law. . Sole proprietorships are required to register with the Ministry of Commerce but are not subject to the Regulations. Foreigners are not allowed to conduct business in Saudi Arabia as a sole proprietor. In addition, Saudi law forbids foreigners from engaging in business in the Kingdom under the name of a Saudi national. The Labor Regulation provides that the percentage of Saudi workers employed should not be less than 75%, but if Saudi workers are not available with technical or academic qualification then the Minister of Labor have the authority to decrease this percentage. At present the Ministry of Labor provides that the minimum number of Saudi Arabian employees in private sector businesses must be 30%,other than for certain menial labor sector, where the minimum Saudization rate is only 10%. Corporation tax of 20% is likely to continue to apply only to non-Saudi firms. Citizens and Saudi businesses pay no tax on income and are only liable for zakat, 2.5% of net worth. According to the foreign direct investment law, foreigners are allowed to invest in all sectors of the economy, except for specific activities contained in a "negative list." Minimum capital requirements to establish business entities have been substantially reduced.
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The legal environment is very important issue to conduct and understand the business environment of a country because this will allow the company to put rules and regulations in accordance to the legal limits of the country. Environmental Analysis In this section we will cover the main environmental issues common in Saudi Arabia and the laws and measurement taken to reduce these hazards. Saudi Arabia is facing a lot of Environmental issues such as waste management, sewage problem, flooding and storm drainage problem, and ground water rising. First of all, the waste management which is a critical issue of what to dump, where to dump all these waste and how can we find a better solution of recycling instead of dumping. The MEPA Meteorological and Environmental Protection Administration are currently finding alternative solutions to solve this problem and take corrective actions. Secondly, the water is a very expensive commodity and is very scarce in Saudi Arabia. The natural water through rain and ground water is not sufficient to the needs of the people. So the country management is finding ways to provide its residents with dependable water supply by recycling the used water in a proper way. However, the local geological structures and natural channels that had in the past handled the natural runoff have been altered significantly by human settlement and filling and groundwater, the city storm water drainage and sewer systems and the marine environment. This in turn has had cumulative on the natural, social and economic environment of Jeddah. The environmental issues should be kept in mind because these can act as a hurdle in conducting the operations of the company or expansion because the issues such as water rising above the ground, and improper sewage system can cause harm to the people and if there is problem in the wire of the electricity it is highly likely that it will affect the people, that can cause the company to lose reputation. Industry Analysis: Five Forces Model “Porter 5 forces” is the tool that we will use in order to for analyze an organizations industry structure in strategic processes. The industry under analysis is electric power industry. Threat of New Entrance
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The extent to which this threat is high or low for the existing companies depends on the barriers that restrict the entry of new firms. Profitability requires achieving economies of scale for example, in an Electric power industry, electricity is generated in bulk so the company will have the advantage of reducing cost and price per unit is also reduced. Thus the threat of new entrance is low. The product is undifferentiated because it?s a universal product and the industry only provides services and products related to electricity and transmission system. So, this made it difficult for new entrance to enter this market. The initial investment is very high, it requirement of capital and financing is extremely high because it requires a lot of capital to build large pillars and warehouses across different cities of a country. In this case, new entrance cannot easily enter this market so threat is low. There is no switching cost for consumers, because there is no substitute for the product that this industry offers and even the infrastructure (cables) are laid down to houses and buildings by existing company so accessing to distribution channel is difficult, thus this makes the threat of new entrance is low. Thus the overall threats of new entry are extremely low for this industry. Bargaining power of the buyers Buyers in any industry may pose a threat to an organization by demanding high quality products offered at low prices along with more and better customer services. The customers are the community, subscribers, shareholders and contractors. The number of buyers is high and not concentrated in one area but spread across the country. Thus this reduces the pressure on this industry to accept the bargains of the consumers; almost the whole population is the buyers. Threat of backward integration is very low because the buyers cannot become the supplier and generate and transmit electricity themselves. So, the bargaining power of buyers is low. Buyer purchases product in high volume and they need it all aspect of work as mentioned in socio-cultural analysis for electronic purpose. There is no substitute for electricity. So, this makes bargaining power of buyers low. Overall, the threats of buyers are very low. So, we can conclude that the overall threat from the buyers is low making the situation favorable for the industry. Bargaining power of the suppliers This threat involves suppliers exerting bargain power that serve as the raw inputs to other firms posing a danger to the profitability of these firms. Any electric company needs to have 12 | P a g e
suppliers to supply them with the different type of cables, wires, transformers, joint cable, pillars, fuses and many other things. In this industry, the suppliers are many and dispersed in different location. The buyers is more concentrated than the suppliers because there is one big buyer only, this makes the bargain power of suppliers low. Buyers can easily switch across different number of suppliers. Bargaining power of supplier is low. Another threat of forward integration in which the supplier can develop their own electricity plants is difficult because of the high threats of new entries described above. Buyers are educated about the product because these supplies are provided by different types of suppliers. This makes bargaining power of the supplier low. Buyers purchase product in large volume because they need many cables to build transmission units across cities and countries. Thus, buying in bulks from a supplier makes the bargaining power of suppliers high. The products in this case of the supplier are much differentiated because SEC can buy different types of wire of different quality, quantity and price but the substitutes are unavailable. Thus this makes the overall bargaining power of the supplier low. The threat of substitutes The overall threats of substitutes are low and almost non existence in this industry because there is no substitute of electricity in business. But in houses people can still work on power generators but this is not commonly used by people. Although people can use candles for light and heat for oven in the absence of electricity but in this age of modern science and technology people in Saudi Arabia are not used to such habits and it also doesn?t provide the same convenience. Competitive Rivalry The competition in this industry is non existence as there is only one electricity
producing company in Saudi Arabia and enjoys monopoly but within the regulations of the government. Overall, Electric power industry is very attractive because the bargaining power of suppliers and buyers are low. Moreover, the threat of substitute, threats of new entrants and Competitive Rivalry are low.
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Internal Analysis Value Chain Analysis It is an assessment of the activities within a business that add value at each stage of the process that results in the generation of the final product or service. A typical value chain analysis is consists of primary activities and support activities that are discussed as follows: Primary Activities Primary activities: These activities are the core activities of a business that result in the physical generation of a product from the input stage to the final delivery of the product to the end consumer. The activities classified as primary activities of a business? value chain are: Inbound logistics Saudi Electric Company (SEC) generates and distributes electricity to the whole of Saudi Arabia. 1. The Company?s power generating stations are distributed in all four operating regions to facilitate efficient supply of electricity to the whole of Kingdom: a. b. 25 in the Western Region with a total of 220 generation units. 22 stations in the Eastern Region comprising a total of 190 units
c. 12 power stations in each of the Central and Southern Regions. 2. SEC uses oil as well as natural gas mainly that are in abundant supply in the country for power generation which proves to be cost-effective. 3. In addition to own generators of power, SEC uses Independent Power Producers located in Rabigh, Dharma in Riyadh and Al Qurayyah with more IPP projects under construction along with Independent Water Producers to generate power so as to increase electricity supply to meet the growing needs in the residential and commercial sectors more efficiently. 4. Moreover, SEC also deals with the suppliers of electrical components such as transformers, fuse switch, digital meter boxes etc. that help in the next process of converting energy into final electricity. There are 47 warehouses for these electrical supplies products that are located across the four operating regions of the company.
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5. To export the electrical equipment, SEC makes use of sea transport, shipping, to order huge quantities and save on costs. 6. Finally, SEC requires all electrical and mechanical equipment to be boxed or crated and sealed for protection and to manage quick and efficient handling of the materials on field. Operations AS SEC is a vertically integrated business, the operating activities of the company involve power generation and transmission of electricity through (TBU) Transmission Business Unit. The company?s power generation function involves generation of power through energy sources of water and fuel and transmits it to TBU?s to produce electricity that is used for consumption. 1. SEC uses huge top quality internationally produced turbines to generate power in substantial quantities. 2. Modern technology such as the desalination plants run by steam is also made use of for generation of power. 3. It makes use of overhead lines to transmit power to for electricity generation that are naturally insulated through air, thus saving costs. 4. Underground lines are also used to facilitate the transmission process as they are less affected by bad weather conditions and less prone to damages. Therefore, a combination of the two, leads to an effective and constant supply of power. 5. Additionally, SEC has developed a Saudi Arabian Grid Code used for restructuring the power sector of the country that is expected to play an important role in increasing the efficiency of TBU and will eventually lead to a better generation of electricity as well contribute to the reliability of the network. 6. Finally, Saudi Arabia has also begun working with GCC countries mainly with the United Arab Emirates, Bahrain, Oman, Qatar and Kuwait to link their national power interconnecting electric power networks, leading to the development of an electricity line, producing 400 kilovolts and transformation stations with a capacity of 50 hertz, therefore, improvising electricity supply in all countries. Outbound Logistics
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After electricity has been generated, the Transmission System transports the electricity to the Distribution System, through which most customers are supplied electricity. 1. SEC maintains a separate division the Distribution Service Provider (DSP) that holds responsibility for the operation and the maintenance of a sound, reliable, efficient and an effective delivery of electricity through its Distribution System. 2. Some generating plants are connected directly to the Distribution System and are referred to as the Embedded Generators for quick supply of electricity to specific customers. 3. Use of other retailers and traders is made that are connected to the distribution system to dispatch electricity to licensed customers. 4. Moreover, some final customers are also connected directly to the transmission provider including Saudi ARAMCO and SABIC due to the nature and the size of their operations as they cannot afford any electricity shortages, hence they receive electricity via their own plants without undergoing the services of the distribution service providers. Marketing and Sales Being a supplier of a commodity that serves the basic need for the country and the sole supplier, SEC does not require any marketing and promotion activities to advertise its product that is generation of electricity, hence, it enjoys significant cost savings that are passed on to customers in terms of low price bills paid by them. Services 1. SEC operates customer service centers twenty four hours in the Eastern and Western regions of the country including voice reply systems installed to meet cater to customers? needs day and night. 2. Moreover, electronic services such as the SMS service is also developed that notifies customers by the means of SMS about bill issuance, bill payment confirmation, bill amount queries and discontinuation of service incase payment is delayed. 3. Furthermore, an email service is also developed that sends emails about the customers? bills due. 4. Additionally, 57 automated service systems were added to the customer services offices that enable customers to evaluate their accounts with the option of bill printing and subscription to certain services. 16 | P a g e
5. Also, a program supporting the payment of electricity bills for beneficiaries under social welfare was also developed. 6. Finally, with regards to the commercial sectors SEC caters to, a time-of-use rate application was developed. This application enables customers to apply for displacement of load at peak times of their activities so as to reduce the charges when electricity is utilized at off-peak times. Support Activities These are general activities that add value either by themselves or based on their relationship with the primary activities listed above or other support activities. General Administration Saudi Electricity Company today is a result of a merger between several different smaller units who came together to form one large giant firm –SEC. Three major general administration activities that have helped/are helping the firm add value to its product are: 1. Following the merger, the company, gradually and systematically, implemented work procedures and strategy applications according to the areas of specialization of each of the independent sectors (Generation, Transmission and Distribution). This has allowed the company to exploit the expertise of each of the sector while creating synergies in performance improvement and cost reduction by creating a competitive environment between the specialized companies. (See Appendix 1.3for SEC?s Organizational Structure) 2. The government of Saudi Arabia is a major shareholder of SEC which in turn gives it great authority over the firms operations making sure that SEC provides low-cost efficient electricity while not turning into a monopoly that exploits its customers. 3. The firm is relationship-oriented building and nurturing healthy relationships with all its stakeholders, from suppliers to customers and shareholders to employees. Still, given the high and rising demand for electricity and the nature of the product itself, the firm is highly receptive to flexible and exceptionally skilled workforce and strives to be a wholesome blend of both, strong and concrete human culture and vastly diverse and changing technical practices. This dedication and commitment of the firm
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to its employees has helped it provide quality service, proof of which is the Total Quality Management Award received by the company. Human Resource Management SEC views its employees as its true source of energy who participate effectively in the achievement of company objectives. This requires the manpower of the company to be qualified with high efficiency and ability to keep pace with the fast developments in the nature of work so as to attain the new aspired culture. Thus: 1. The company focuses heavily on training development of its employees. Human resources are developed „through adopted programs helping in selecting and improving the empowerment and efficiency levels of employees and planning their careers so as to guarantee the occupancy of all the company positions with the most efficient employees on a permanent basis?. The firm offers to fulfill the company requirements of all administrative and technical specializations by providing on-thejob-training to employees. 2. To develop the skills of employees, many short courses are organized along with self-development ones provided through E-learning systems (I-Learn). Fresh graduates employed are provided with Professional Development Program (Orientation). 3. SEC conducts field researches so as to create development program that maximize employees? capabilities based on their respective competencies. The findings of the research affect all areas of human resource practices like employee selections, employment, promotion, career planning and determining the developmental and training requirements of the employee. 4. The company indulges in countless other programs and schemes in order to award its excelling employees, encourage their participation in decision making, provide health services, ensure intercommunication in the company, motivate and enhance their loyalty. Some of these programs are: Employee Distinction Program (Employee Appreciation) Innovative Program (Employee Involvement & Decision Making)
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Future Vision Of The Performance Management System &Balanced Scorecard (Employee Evaluation) SEC?s continued efforts to make their employees more efficient has resulted in a 11% decrease in manpower employed at the firm while it?s operational efficiency has been reported to increase. Technology Development (Research Activities) It is at the heart of the company to constantly research not only into work practice methods and employee evaluation techniques, but also into technical processes and operation improvement methods. Once again, the nature of electricity makes R&D one of the most integral parts of the company. With increasing demand for its products and astronomical dependence of the country on SEC for its provision, continuous maintenance, repair and development is quintessential for the firm?s survival. The management of the company believes that their ability to deliver quality services and ongoing innovation is critical to the success of their business. Thus, among its „Pillars of Work? is innovation and development: Innovation - constant improvement towards achieving the best performance and to use the up-to-date / state-of-the-art management technologies in all Company processes Development -To focus on development, training, encouraging innovations and using latest management approaches and techniques in all operations of the Company. It is crucial for SEC to acquire and make use of the emerging technologies for electricity generation as and when they come so as to provide for its customers in a timely and efficient manner. Procurement SEC is a gigantic customer and can be seen as an intermediary between its suppliers and Saudi Arabia?s electricity customers. Thus, suppliers too seek to establish long-term relationships with SEC and benefit from this bond. 1. SEC provides manuals containing SEC?s general contracting policies and procedures as well as general information that assists and guides suppliers not only in seeking to do business with SEC and in preparing competitive bids but also in implementing their contracted work service to SEC.
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2. The company constantly updates and automates its contracting procedures which can be found on their website. Suppliers are encouraged to visit the SEC website in order to obtain relevant information regarding several things such as Delivery Procedure and Specifications of materials distribution (Item Distribution). This enables SEC to establish a fair and well rounded business relationship with its suppliers. Financial Analysis Liquidity ratios The overall growth in liquidity of SEC has declined highly over three years, yet the cash ratio shows a considerable growth of 114.58%. This indicates that SEC keeps minimal amount of other current assets, but huge amounts of cash and bank balances. Therefore, SEC has more than sufficient cash to easily pay off its current liabilities. However, a huge amount of idle cash is unproductive for the company that can be put to a better use to earn profit. Asset utilization ratios Overall, SEC has improved its utilization of assets over the years from 2008-2010. Analyses show that inventory is being well-utilized which could be due to increase in electricity sales. The number of days that cash is tied up in accounts receivables has improved, indicating a use of better credit management strategies. More use of capital is being made, increasing efficiency. Yet lesser sales are being generated relative to the size of the total assets SEC owns. Profitability Ratios Over the past three years, SEC has been able to boost its profitability. Since 2008, the firm?s profit margin growth rate has increased to 34.67% while the percentage of asset utilization in generation of profit has also improved to 32.35%. Hence, the firm has a growth of 47.7% in Return-on-equity benefiting the stockholders. Market-Value Ratios Saudi Electricity Company was previously selling its shares for 37 times its earnings in 2008-2009, this has reduced significantly to 18 times the earnings due to a substantial increase in
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the earning per share. This has helped the firm in creating and increasing the value for its stockholders by 23.16%. Hence, increasing the firms? market value over the years. Long Term Solvency Measure From 2009-10, the company performed better than the previous year 2008-09 because it was able to reduce the debt-to equity ratio by 4.76%. Moreover, the company was able to generate 13.04% more cash from its operation. Overall, its performance is reasonable but the company should recognize that keeping more debt can be risky but it can generate high profits. SWOT ANALYSIS
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STRENGTH Highly efficient, motivated, skilled and committed workforce Strong market position and brand strength, hence Large and well-built customer base Outstanding HR department and practices (implemented training, leadership, professional qualifications and development programs) Creditworthiness rating of A1 Excellent R&D and innovation trends and practices High quality provision of service (electricity) State-of-art management technologies Complete Government support Environmental Initiatives and Social Responsibility Strong financial position High share value High generation capacity Electricity generation facilities located all across the country in major regions. Use of modern technology and international quality turbines manufactured by General Electric for power generation. Reorganization of the grid code for better efficiency and improved quality and timely supply of electricity. Use of different distributive facilities as per the needs of its different commercial and residential customers. Large array of technology based and automated customer services provided to enhance their experience. Use of time-based rates for industrial customers that allows them to displace load, saving them huge costs. A culture based on innovation, improvement and optimum utilization of resources. OPPORTUNITIES Increasing demand for electricity Acquisition and Merger of other potential business Diversifying line of operations (into areas such as technology) SEC can increase its prices due to high standard of living (high GDP per capita). Due to women joining labor force, SEC can initiate and provide appropriate jobs for women.
WEAKNESSES Enormous funds required for the implementation of electric power generation and distribution projects Less generation reserve during summertime peak demand periods Some of the physical resources can be easily imitated by others.
THREATS Government regulations Seasonal variation of load (consumption of electricity) Arab spring might affect the political stability of the country Government influences and regulations to use new technology such as nanotechnology to produce electricity can be difficult for SEC to adapt because they are not used to it.
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Expansion to the neighboring gulf countries SEC will be able to lower its cost more and enjoy high revenues at the same time Government laws to increase the salaries of Saudi employees might be costly for SEC to retain Saudi employees in the company
Higher dependence on electricity means increase demand which might be difficult for SEC to supply. Natural disaster such as flooding might cause damage to the infrastructure.
Appendix Appendix 1.0
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Appendix 1.1
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Appendix 1.2
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Appendix 1.3
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