Overview of Chevron

Energy is the focus of the American multinational firm Chevron. The corporation has its global operations in more than 180 countries, with its headquarters in San Ramon, California. Chevron operates in the production of energy products such as gas, oil, and geothermal energy (Chevron Corp). Along with manufacturing and selling chemicals, it engages in the exploration, refinement, manufacture, transportation, and marketing of energy products. The business is one of six of the world's main oil producers, and in 2013, it was ranked 11th among the Fortune Global 500 largest corporations. In 2016, however, it fell to number 31. The company’s downstream operations are involved in the manufacturing and selling of various products such as fuels, petrochemicals, lubricants and additives (Chevron Corp). The most significant areas where a majority of the company’s operations lie are in North America, specifically the West Coast, the USA Gulf Coast, Australia, South Asia, South Korea and South Africa. In the year 2010, the company reported sales of approximately 3.1 million barrels daily of refined energy products including diesel, gasoline and fuel (Chevron Corp).

The company’s alternative energy operations constitute of solar energy, hydrogen, biofuels, wind energy and fuel cells. The company has had various plans in place for spending considerable amounts of money on research, development in renewable sources and ventures. The company is among the largest producers of geothermal energy and in the year 2011, it launched a 29-MW thermal solar to steam facility for the production of steam in the Coalinga Field (Chevron Corp). This was one of the largest projects of its kind in the world. The company has been successful in most of its years of operation in the energy industry although it has not been without several controversies as well as environmental and safety scandals. One of the reported scandals was in1950 when the company was convicted of taking part in the Great American Streetcar Scandal. It is also worth noting that between the years 1970 to 2000, the company evaded federal and state law taxes amounting to $ 3.25 billion through a complex scheme in the petroleum industry. The company also experienced a large fire in the year 2012 due to some of its aging facilities and equipment. There was also an occurrence of a lack of oversight at one of Chevron’ refineries in Richmond California as well as a series of lawsuits filed by indigenous people in Ecuador.

The size of the firm

Chevron is the second largest energy company in the world and it also stands among the world’s largest firms in terms of market capitalization. It carries out its business activities all over the world with the help of a highly skilled and diverse workforce which consists of about 61,500 employees and more than 3,300 workers at service stations (Chevron Corp). The capital and exploratory expenditures of the company that was invested in the year 2015 were approximately $34 billion with projected outlays of $26.6 billion in the year 2016. Chevron is has put a continued focus on the completion and ramping of various projects that are underway as well as the funding of other high return investments and preserving options for other long-term projects. As of 2016, the company reported sales and other operating revenues of approximately $129.9 billion, a net income of $4.6 billion with a return on capital employed if 2.5 percent, cash flows of $19.5 billion and cash dividends of $4.28 per share (Chevron Corp).

The latest accomplishments of the company in the upstream include exploration drilling success rate of about 62% with 36 discoveries globally. The company has also been able to add about 1.8 billion barrels of oil equivalent resources and continued with other drilling programs in the USA, Canada, and Argentina (Garcia et al. 22). Some of the company’s portfolio additions include the acquisition of offshore acreages in the US Gulf of Mexico, New Zealand, Canada. Myanmar and Mauritania (Chevron Corp). There are also some unconventional acreages in the United States’ Marcellus/Utica trend. The company’s production can be said to constitute a daily amount of 2.622 million oil-equivalent barrels. About 73% of this volume is from more than 20 countries outside the United States of America (Chevron Corp). Some of the company’s major projects include a first production in the Angola-Congo Joint Development area and a continued ramp of production at the US-Gulf of Mexico project. Regarding Chevron’s downstream operations, it is being involved in the construction of an advanced petrochemical project in Texas. The project incorporates an ethane cracker with a likely output capacity of about 1.5 million metric tons (Chevron Corp).

The company’s corporate strategies regarding its financial return objective focusses on the creation of value for the shareholders as well as achieving sustainable financial returns from those operations that are likely to enable it to outperform its competitors (Shuen et al. 6). The enterprise strategy of the company is to continue investing in people for strengthening organizational capability and developing a talented and able global workforce that targets on the acquisition of results in the right manner (Chevron Corp). The company aims at the execution of this strategy with utmost excellence by applying its operational excellence and capital systems coupled with effective cost management. The growth of the company’s profits can be attributed to competitive advantages for maximizing value from the existing assets and new opportunities.

The firm’s distinctive competencies

Chevron has upstream and downstream operations which give it distinctive competencies. The company’s upstream operations are in oil, thermal energy, and natural gas industries while its downstream operations involve products such as fuels, petrochemicals, and lubricants. The firm’s success is mainly driven by its vision of being the most admired global energy company for its outstanding performance, personnel and partnerships as well as a reflection of their initiatives towards social responsibility and exceeding expectations (Chevron Corp). Despite a huge growing concern towards the use of renewable sources of energy, the company has been able to remain competitive through the establishment of international joint ventures and other long-term projects for ramping up their production growth. One of the most predominant elements attributed to the growing success of Chevron is their long-term decisions which include the multibillion-dollar projects and takeovers. The company has also been able to maintain its core operations around the refinement of crude oil into various products. This has been able to help the company remain oriented towards results rather than accepting the demands presented by lobby groups.

A firm’s strategy and distinct competence are illustrated by the position of that firm in the industry it operates in as well as its competitive advantage in such a landscape. The competitive advantage is derived from a combination of things such as what the company owns (assets) and how the company conducts its business (capabilities) (Shuen et al. 7). The image of the energy sector and the oil industry is tailored in a manner which takes into consideration of mostly the assets and therefore competitive advantage is drawn from a combination of tangible assets, intangible assets such as intellectual property and goodwill as well as other capabilities (Garcia et al. 25). The particular capabilities that have the power of setting one firm apart from another in the oil and gas field which is highly competitive are those capabilities with a complex bundle of items needed to solve key challenges (Shuen et al. 8). It is very difficult to develop and emulate these capabilities because they require a lot of effort and dedication. Chevron and its main competitors are good at many things, an aspect which gives them a competitive advantage. It is necessary for them to competent because the market they operate in is characterized by high competition but with low margins and long cycle times for projects (Shuen et al. 10). It should be noted that there are high stakes associated with every single decision that is made by these companies. Poor performance could imply that a company is losing control of the corporate history it has created for many years.

Chevron’s key competencies are drawn from being good at the exploration, drilling, refining and transportation of energy products (Chevron Corp). The company has various powerful tools that enable it to achieve outstanding performance over the rivals. One tool is their expense structure which is tailored in the manner that personal costs are kept at a minimum, therefore, making it easy to afford in paying for talent. It can also be noted that Chevron has high operational capabilities as compared to most of its rivals (Chevron Corp). The operational capabilities give the company a potential to undertake its activities on an ongoing basis by applying more or less the same techniques to promote the existing products. The company also has dynamic capabilities which are those elements that make a firm different from other firms based on a combination of resources. The dynamic capabilities go beyond what a firm needs to perform well, and they need to be intentional and repeatable. Chevron’s dynamic capabilities can be explained through the resource-based view framework which denotes that an organization obtains a competitive advantage through a combination of distinctive bundles of resources. Chevron has been involved in a continuous process of integrating important resources as a crucial response to the ever-evolving environments.

There are basically two key skills that make a difference in the oil and gas industry; geological interpretation and modeling as well as financial risk management. Chevron has been able to develop competencies in these areas which have made it successful. It is not so difficult to drill and pump oil from a well, but the most difficult part is to locate the oil and where you are supposed to drill (Garcia et al. 26). The oil companies highly depend on geological interpretation because poor exploration is likely to lead to a very low success rate given the time and resources dedicated to the process. It is the drilling and exploration success rate which determines the future of an oil company. Most of the oil wells are depleting, and companies such as Chevron are always on the verge of looking for new wells. Chevron has been able to succeed because of its ability to constantly find more productive wells (Chevron Corp). Risk management is also another capability that gives Chevron its competence. Chevron is an integrated energy company which has the ability to shift resources and lean on other businesses during tough economic times.

SWOT analysis

Strengths

Chevron is a highly diversified company because of its presence in the oil and gas sector as well in geothermal production. It has capabilities to undertake exploration, refining, and production of these products. It is the largest manufacturer of geothermal energy with its global presence where it has employed over 67,000 workers in the 180 countries it operates in (Chevron Corp). The company is also the second-largest energy corporation in the USA and is among the top companies globally. Another important strength that Chevron has is its strong financial position and constantly increasing sales revenue (Barney 51). Its balance sheet is healthy as characterized with over $15 billion in cash and a debt to equity ratio of only 8%. Chevron also has a long history of involvement in major mergers and acquisitions. Some of the company's significant acquisitions include the 2005 acquisition of Unocal Company which runs the geothermal operations in South East Asia (Chevron Corp). It also acquired the Pennsylvania based Atlas Energy in the year 2010 for $3.2 billion dollars. It is also worth noting that Chevron has a global market network in approximately 84 countries and about 24,000 sites for running its retail businesses (Chevron Corp). The company also has a good reputation and a massive brand loyalty, especially for gasoline.

Weaknesses

The company also experiences some notable weaknesses especially in relation to the various legal issues which hamper the progress of the company and negatively impact its energy business. Chevron has experienced various claims regarding environmental issues especially in relation to oil and gas. There have been claims that Chevron broke the Clean Air Act in the United States of America and as a result, it is facing various lawsuits (Chevron Corp). It has also been criticized for not honoring its tax liabilities in the US by purchasing oil from Caltex at inflated costs. There has also been a serious condemnation of the company’s activities in Ecuador, California, and Africa because most of its operations have been deemed as being environmentally unsafe. The conflict of employees in Nigeria, as well as legal actions in Iraq, have also been contributing to the decline of sales in these nations (Chevron Corp). Generally, the constant decline in the revenue amount attributed to refined products has been reported. The gradual decline of Chevron’s oil and gas reserves presents a serious challenge.

Opportunities

Despite the weaknesses, Chevron has various potential opportunities for growth and one of them is that the global demand for energy is likely to rise to a surprisingly high of 36% by the year 2035. In 2009, the oil demand was approximately 84 million barrels a day, and by 2035, it is expected to rise to a high of 99 million barrels a day (Chevron Corp). There is also an opportunity in the United States because it is enlarging its domestic oil production. The gas and oil sector is likely to remain as the main global pillar for the supply of power and energy. Gas and oil are usually moderately priced, and this makes them more attractive as compared to the renewable sources of energy such as solar and the wind (Barney 58). The company also takes part in the use of renewable sources of energy such as geothermal which presents huge opportunities. There is also the possibility of new drilling methods that are likely to present new opportunities for high-class oil and gas resources. At the moment, there are sufficient reserves of gas and oil that are likely to steer the company ahead until alternative technologies take center stage. There has been a discovery of enormous oil fields in Africa, Canada, and Brazil (Chevron Corp).

Threats

One threat Chevron is likely to experience is that of exploration of Canadian oil which is said to be more environmentally unsafe than a majority of the conservative oils because the mining and exploration of the fields need the application of more force and clearing of forests. The drilling methods for gas may expose the underground water system to dangerous chemicals. The economic downturns throttle the global demand for energy sources especially in the United States (Chevron Corp). The enforcement of strong environmental controls globally is also a critical threat. Geopolitics in oil and gas fields in areas such as the Middle East also limits the exploration. There are also some particular risks associated with the undertaking of businesses outside the US, and there is a prediction that the US only had 25 years of gas assets, and in the future, it will need to rely on importation (Barney 56).

Porter’s five forces analysis

The threat of new entrants

In the energy sector, there is a high barrier for new entrants because the required is extremely high, the same case as the level of knowledge. This gives Chevron and other companies in the industry a good opportunity to thrive and control the markets. There are also heavy regulations imposed by the government as well as the environmental safety organizations which further contribute to the unlikelihood of new entrants to maneuver into the industry (Porter 27). In entering this industry, it is also necessary to have strong distribution networks because the movement of the energy products is expensive. A lot of capital is equally required in order to start dealing and effectively competing in the energy market. Chevron and other players in this industry have also established strong brand names, and therefore new competitors need to improve their brand value before they can efficiently compete (Chevron Corp). Another barrier to entry are the advanced technologies required by new competitors to remain viable in this industry. One factor that can favor the new entrants are the geographical factors whereby the new entrants might have a geographical advantage to effectively compete.

The intensity of competition

There are government regulations in the energy sector which limit the competition levels. The laws, policies and regulations set by the government dictates how Chevron competes with its rivals. The size of this industry is large which gives multiple players the ability to prosper without affecting another firm’s market share (Porter 31). The industry’s fast growth rate is also a bonus point because most of the players are growing quickly in terms of revenue and this makes them less competitive because the industry is growing as well (Chevron Corp). This is unlike the slow growth industries whereby the only way to prosper is to steal your rivals’ market share. Lastly, there are low exit barriers implying that the weaker firms are likely to drop the market thereby increasing profitability for the remaining firms.

Threat of substitutes

The substitute products in this industry are of a lower quality which implies that the customers are less likely to switch from the use of Chevron’s products to other products. The substitutes also have lower performance and inferior as compared to the products of Chevron (Chevron Corp). The switching costs are also high because the number of substitutes is limited which implies that customers lack the flexibility to easily switch to other similar products and services and enjoy the same benefits. The substitutes for energy products are highly limited, and therefore customers cannot easily find alternatives (Porter 37).

The bargaining power of consumers

In this operating environment, the buyer price sensitivity is lower, and this implies that the buyers are less sensitive to prices. Chevron and other players can, therefore, increase prices, and the buyers will have no choice but to buy the energy products (Porter 34) still. The inelastic demand in this industry has a positive impact on Chevron’s demand. The energy products are very important to customers, and because they cherish these products, they are likely to pay more. The customer base is also large, and therefore one particular customer has no bargaining leverage over Chevron and its fellow players in the energy sector (Chevron Corp).

The bargaining power of suppliers

There is a high competition among the suppliers of energy products, and this gives producers like Chevron an opportunity to reduce prices. There are also diverse distribution channels which give single suppliers less bargaining power against Chevron. In this sector, the volume is also important to suppliers. Most suppliers rely on high volumes of energy products, and this gives Chevron the ability to have more bargaining power because of the ability to cut down volumes thereby hurting the suppliers’ profits (Porter 38).

The strategic issues facing Chevron

Despite Chevron’s many years of success in the energy sector as well as its current strong financial health, it faces considerable strategic issues especially in relation to the internationalization of its operations. One strategic issue is in the acquisition of rights to drill oil and gas in some international countries (Chevron Corp). There are several oil and gas fields all over the world that are yet to be drilled, and Chevron has been making various attempts to acquire those reservoirs, but it has not been able to manage. This is mainly because some countries are not ready to give up their oil fields even though they are incapable of exploiting them. Oil is usually considered as a national treasure in most countries, and therefore it is difficult to acquire such fields for exploration. This issue has led to the company dedicating considerable amounts of compensation packages before being given an opportunity to drill in such nations. Additionally, there have been various tensions in some of the countries where Chevron conducts its operations mainly due to land disagreements and political wrangles. Another critical strategic issue that has been affecting Chevron is on the environment and the call for conservation (Chevron Corp). A majority of Chevron’s operations have had adverse impacts on the environment. One specific case that has been hitting the headlines is that of Ecuador whereby it has been facing various lawsuits from the local communities who have made claims concerning the destructive nature of the company’s operations. This issue affects Chevron in many other countries because governments have set up stringent regulations against pollution.

Final strategic recommendations

One key strategic recommendation that can help in solving the strategic issue of lack of willingness by some countries to give drilling rights to Chevron is to take into consideration the well-being of the people in those countries through heavy investments. Chevron should draw from the case of Angola whereby it has made various efforts to improve the lives of people in that country (Chevron Corp). As a result, they have rights to drill, and there is little resistance from the community. Chevron should replicate the same in Ecuador because its activities have led to the suffering of many people as a result of medical complications brought about by the spill of toxic chemicals during extraction. This leads to the other strategic recommendation whereby the company should shift its focus from investment in oil and gas to renewable energy sources. The company has put remarkable efforts in the development of geothermal energy, but it has done very little in other forms of renewable energy (Chevron Corp). There should be more investments in solar energy, wind energy, and biofuels. Most importantly, Chevron needs to focus on ethical operating standards which will, in turn, translate to improved company image and reputation.

Works Cited

Barney, Jay B. "Looking inside for competitive advantage." The Academy of Management Executive 9.4 (1995): 49-61.

Chevron Corp. 2016 Annual Report, 2016. Web. 22 April 2017.

Garcia, Rodrigo, Donald Lessard, and Aditya Singh. "Strategic partnering in oil and gas: A capabilities perspective." Energy Strategy Reviews 3 (2014): 21-29.

Porter, Michael E. "The five competitive forces that shape strategy." Harvard business review 86.1 (2008): 25-40.

Shuen, Amy, Paul F. Feiler, and David J. Teece. "Dynamic capabilities in the upstream oil and gas sector: Managing next generation competition." Energy Strategy Reviews 3 (2014): 5-13.