Chevron Case Study
Case 1: Chevron October 24, 2011 ? Introduction of the Company Chevron began with the discovery of oil north of Los Angeles in 1879 and was originally named the Pacific Coast Oil Company. Later John D. Rockefeller’s Standard Oil bought Pacific Oil in 1900 to form Standard Oil (California). In 1911, the Sherman Antitrust Act would force the breakup of the parent Standard Oil and Chevron became Standard Oil of California or Socal. Socal would go on to form joint venture with Texaco in 1936 to form Caltex, to develop and market oil in the Middle East and Indonesia.
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It would then go on to form the Aramco partnership in the Middle East, which composed of Socal, Texaco, Exxon and Mobil but by 1980, Aramco was completely owned by the Saudis and became the Saudi Arabian Oil Corporation. In 1984 the merger between Standard Oil of California (Socal) and Gulf Oil was the largest merger in history at that time, nearly doubling the company’s size and as part of the merger Socal changed its name to Chevron Corporation. By 1988 Chevron was one of the largest gas producers in the United States. In 2001, Chevron expanded again by acquiring Texaco for $37. billion. Today Chevron is the second largest integrated energy company in the U. S. and among the largest in the world. Mission Statement Analysis “Our Company’s foundation is built on our Values, which distinguish us and guide our actions. We conduct our business in a socially responsible and ethical manner. We respect the law, support universal human rights, protect the environment, and benefit the communities where we work. ” Since Chevron is an oil company, it is imperative that their mission statement reflects the importance of operating in a responsible and ethical manner.
They want to let the world know that they respect the laws, human rights, the environment, and more importantly want to provide a benefit to the communities it serves rather than bring harm to them. Internal Assessment Marketing Chevron’s marketing tends to be more complex than just selling gas at the pumps; it focused a large part of its 2008 television campaigns on the environmentally friendly and human side of its world-class operations. As mentioned earlier, this is particularly important in establishing a good reputation in an industry with an image problem.
Chevron’s marketing division is responsible for the marketing, advertising, sale and delivery of its products and services to retail, commercial and industrial customers worldwide, which include 25,000 retail outlets located in the U. S. , Latin America, the Caribbean, Asia, South Africa, and the United Kingdom. The strategy is to focus on three marketing points; provide clean, safe, reliable operations through operational excellence; align the marketing portfolio to capture integration value with the refining system; and leverage brands to grow value in key markets.
The marketing portfolio has become more closely align with the company’s refining system through market exits and divestitures of retail sites in an attempt to focus in areas of market strength. Starting in 2004 the company began selling its marketing businesses in 22 countries around the world exiting the fuels-marketing business. Today Chevron markets itself under three key brands: Chevron, Texaco, and Caltex. Chevron was ranked as the most powerful gasoline brand in the United States for five consecutive years.
At the end of 2008, more than 5,000 Chevron retail sites had been updated as part of a multi-year marketing strategy to refresh the Chevron brand image. More recently Chevron continues its market thrust in clean premium fuels through the expanded incorporation of patented activities such as Techron and in 2008, Chevron sold gasoline with Techron in 27 countries, comprising 90 percent of the branded gasoline sold worldwide. Organizational Structure Chevron’s organizational structure consists of a Chairman and CEO by the name of David J O’Reilly, a Vice Chairman of the Board and Board of Directors.
The excutive level consist of and Executive VP of Technology and Service, Executive VP of Global Upstream and Gas, Executive VP of Strategy and Development and an Executive VP of Global Downstream. Each play an important role in Chevron operations to ensure each area of operation is properly addressed and executed successfully. Financial Analysis Chevron is the second largest producer in the U. S. and one of the six largest producers of oil in the world. In 2009, Chevron reported Q3 earnings of $3. 83 billion compared to the $7. 89 billion reported in Q3 of 2008.
Chevron had total revenue of $273 billion, its total cost and expenses were $37 and had a net income of $24 billion in 2008. For the first 9 months of 2009 earnings were $7. 41 billion, down 61% from $19. 04 billion in the first 9 months of 2008. Chevron’s net profit margin in 2008 was 8. 8 percent, slightly lower than the industry average of 10 percent, its debt to equity ratio was only . 10 less than the industry average of . 25, making it easier for Chevron to borrow more if needed. In 2008 Chevron had a return on equity of 27. percent surpassing the industry average of 19 percent and a price per earnings ratio of 8. 2 times. Chevron performed well when it came to management efficiency. Their income per employee was 372,758 outperforming the industry standard and S&P and had $4 million in revenue per employee. They had an inventory turnover of 23. 2 and an asset turnover of 1. 2, again outperforming both the industry average and S&P. While the financial ratios calculated for Chevron outperform the industry average and the S&P, they were still slightly lower than past performances.
The lower results were a result of a poor U. S. economy and an overall slow economic growth worldwide. Although the results in 2008 were lower than previous years, Chevron was still had the capacity to execute its operational strategies. The Internal Factor Evaluation (IFE) Matrix Key Internal FactorsWeightRatingWeighted Score Internal Strengths 1. Strong Management0. 2040. 80 2. Geographically Diverse0. 2040. 80 3. Good Distribution System0. 1030. 30 4. Low Debt/Equity 0. 2030. 60 Internal Weaknesses 1. Oil Reserves 0. 2020. 40 2. Hostile Foreign Governments0. 520. 10 3. Negative Public Perception 0. 0520. 10 Total1. 003. 10 The Internal Factor Evaluation allows us to evaluate the company as it refers to its internal strengths and weaknesses. The value of a variable can be assigned a 1-4, which gives a mean of 2. 5. The higher the number, the better the internal situation is. Chevron has an IFE value of 3. 10, which suggest that it is better, then the mean. Chevron is geographical diversity and strong distribution system put it in a position to capitalize on the growing demand for oil in developing nation and helps give it a high IFE value.
While Chevron will benefit from growing demand in developing nations, it still faces threats from negative public perceptions and hostile governments, as such is the case with Ecuador who in 1992 filed and won a law suit in the billions of dollars against Chevron for damages to the Amazon caused by Texaco which it acquired in 2001. External Analysis Economic Forces The economic downturn in 2008 has affected Chevron’s profits as oil prices increased, forcing already cash strapped consumer to consume less fuel. While profits in the U.
S. slowed down, Chevron was able to profit from developing nation demand for oil and benefited greatly as the largest private oil provider in Kazakhstan. Social, Cultural, Demographic and Environmental Forces Negative public image within the oil industry, particularly after the BP disaster, can greatly affect Chevron’s profits and overall perception. While this perception may slightly hurt Chevron, growing demand in oil along with reputation marketing can prove to be more influential in developing nations worldwide.
Chevron’s merger with NGC corporation in the area of natural gas and acquisition of Unocal, the largest producer of geothermal energy, have position Chevron to be a leader in providing alternative energy as the demand grows for cleaner and safer energy. Political, Governmental and Legal Forces New fuel economy regulations, the U. S. looking to close tax loophole for oil companies and increase taxes will affect profits. Strong environmental laws will also affect future oil drilling projects worldwide as Chevron looks for new oil deposits to combat decreasing oil reserves.
Technological Forces Growing social media sites on the internet will play a key role in reputation marketing for Chevron. This will be beneficial in gaining public and governmental support of future projects in order to sustain Chevron’s profits. New technology in drilling equipment will help keep environment safe and intact. Chevron also uses drill ships, which allow drilling in various places without having to build oil rigs through the world. Competitive Forces Chevron is considered one of the Big Five, along with ExxonMobil, BP, Shell and ConocoPhillips.
While Exxon is the largest publicly traded in the world and earned a record net income in 2008 of $45. 2 billion, Chevron had a 106 percent replacement through exploration ratio, approximately 40 percent higher than its nearest competitor. They have also accomplished this with the lowest exploration cost in the industry, this is an important skill as commodity prices fall, affecting overall profits. As Chevron’s competitors are reducing investment in renewable energy supplies, Chevron spent $3. 2 billion in 2002 and plans to spend an additional $2. 7 billion in renewable energy over the next three years.
The External Factor Evaluation (EFE) Matrix Key External FactorsWeightRatingWeighted Score Opportunities 1. Increasing demand for alternative fuel0. 2030. 60 2. Chinese demand0. 2040. 80 3. Emerging Markets0. 1540. 60 4. Growing U. S Economy0. 1540. 60 Threats 1. Downturn of the economy0. 1020. 20 2. Competition 0. 0510. 05 3. Increase Taxes 0. 1020. 20 4. Environmental Constraints 0. 0520. 10 Total1. 003. 15 Chevron has a value of 3. 15 is above the average of 2. 5. Chevron can greatly benefit from several external opportunities.
The most immediate is the increasing demand from Chinese consumers as well as other emerging markets throughout the world. Also as the U. S. economy grows increase demand for oil will increase as people began to purchase more cars and businesses begin to grow. The increasing call for alternative fuels will also work to Chevron advantage. While Chevron is position to take advantage of many of these opportunities however, it still faces threats from stiffer taxes and environmental constraints, which together will affect both profits and oil exploration. Competitive Profile Matrix Chevron Shell Exxon Critical Success FactorsweightRatingScoreRatingScoreRatingScore 1. Advertising0. 0530. 1020. 1020. 10 2. Inventory0. 2040. 8030. 6040. 80 3. Sales Distribution0. 1030. 3030. 3030. 30 4. Production Capacity0. 1040. 4030. 3030. 30 5. Management0. 1030. 3020. 2030. 30 6. Financial Position0. 2040. 8030. 6051. 00 7. Market Share0. 0530. 1530. 1530. 15 8. Global Expansion 0. 20 4 0. 80 3 0. 60 3 0. 60 Total1. 003. 702. 853. 55
The Competitive Profile matrix puts Chevron slightly ahead of Exxon and well ahead of Shell. This is a result of Chevron’s global presence, inventory and strong financial position, as well as a strong management structure. Overall Chevron performed well in all areas, giving it a strong competitive profile. Competitive Analysis: Porter’s Five-Forces Model Potential development of substitute products I Bargaining Power of Suppliers-Rivalry Among Competing Firms-Bargaining power of consumers I Potential Entry of new competitors 1)Rivalry among competing firms Rivalry among competing firms is fairly low.
Each firm has an established market, although competition may begin to increase as developing nations increasing demands for oil promises big profits for oil producers. 2) Potential Entry of new competitors Entry is very difficult for new oil producers. This industry requires a lot of startup capital as well as years of experience and understanding of the oil industry. 3)Potential development of substitute products Although there are currently very few alternatives to fuel, increasing demand from both the world governments and the public for alternative energy, are forcing changes to occur in other industries that rely on oil.
These industries included the car industry, which have been increasing their research and development in electric cars. Chevron is an industry leader in the hunt for a renewable energy that will replace oil as the primary source of energy. 4)Bargaining power of suppliers Chevron is a major producer and one of the biggest oil companies in the world, providing strong bargaining power with suppliers. Chevron also produces many of the supplies needed to locate and refine oil through its many divisions within the corporation, resulting in very little need for outside suppliers )Bargaining power of consumers Consumers have little too no bargaining power as oil prices are the result of oil reserves levels and supply and demand. Consumers can simply demand less oil which may result in a slight drop in prices, but this is difficult the purposely due as the need for oil for cars, heating, etc. is inevitable. SWOT Matrix Strengths – S 1. Strong U. S. Presence 2. Financial Position 3. Strong Market Position 4. Increase in Supply 5. Investment in Renewable energy Weaknesses – W 1. Declining Oil Reserves 2. Declining Sales of refined products 3. Hostile Foreign Governments
Opportunities – O 1. Increasing Demand in China 2. Increasing Demand for Alternative Energy 3. Biofuels initative 4. Capital Investments SO Strategies 1. Increase market penetration (S3,O1) 2. Become involved in the U. S. Biofuels Imitative (S1, O3) 3. Use cash reserves to invest in alternative energy program ( S5, O4) WO Strategies 1. Make capital investments to increase oil reserves (W1, O4) 2. Increase presence in China (W2, O1) 3. Work on alternative energy and Biofuels (W3, O2, O3) Threats – T 1. Tax Regulation 2. Downturn of U. S. economy 3. Fuel Economy Regulation 4.
Environmental Regulations ST Strategies 1. Use strong presence to lobby for tax reliefs or breaks (S1, T1) 2. Increase supply will lead to reduce oil prices (S4, T2) 3. Invest in alternative energy (S5, O3, O4) WT Strategies 1. Focus on renewable energy (W1, T3, T4) 2. Work with foreign governments and local communities (W3, T2) Creating a SWOT Matrix we can help you visually see and understand Chevron’s strengths, weaknesses, opportunities and threats and come up with strategies how to best address them. With SO we can use Chevron’s internal strengths to take advantage of external opportunities.
Chevron geographically diverse locations and strong market penetration, positions the company to benefit from increasing demand for oil coming from China. With a billion plus Chinese and a growing economy the demand has never been so high. Chevron can also use its strong U. S. presence can best positions it to become increasingly involved in the U. S. Biofuels Initiative Program. The company investments in renewable energy will benefit greatly from Chevron’s capital investments. WO strategies aim at improving internal weaknesses by taking advantage of external opportunities.
Chevron can use its capital investments to increase oil exploration and possibly increasing its oil reserves. Declining sales of refined products in the U. S. can be combated by the increase in the demand from China as well as other emerging markets. One way Chevron can handle hostile governments is to invest in alternative energy and continue involvement in the Biofuels Initiative. ST strategies use a company’s strengths to reduce the impact of external threats. Chevron can use its strong U. S. presence and influence to lobby against tax regulations and possibly working with the U.
S. government to receive tax breaks. Increasing oil supply will result in lower prices at the pump. This will be beneficial in the U. S. where high prices and a slow economy have resulted in declining sales. Finally investing in renewable energy will help Chevron work around fuel economy and environmental regulations, as safer, cleaner sources of energy will benefit all. The last stage of the SWOT Matrix is the WT strategies which are defensive tactics directed at reducing internal weaknesses. Again, increase development in renewable energy will help Chevron deal with increased conomic fuel regulations, as well as environmental regulations. As the U. S. economy continues to struggle, Chevron can work on public image in foreign countries and appeal to those countries through community involvement. The will lead to better relationships and easier penetrations in new and lucrative markets. Space Matrix Financial StrengthRatings Return on Investment5. 0 Earnings per Share 3. 0 Working Capital 3. 0 11. 0 Industry Strength Growth Potential3. Technological Know How5. 0 Financial Stability6. 0 14. 0 Environmental Stability Competitive Pressure-2. 0 Price Range of Competing Products-2. 0 Rate of Inflation-2. 0 -6. 0 Competitive Advantage Market Share-1. 0 Technological Know How-1. 0 Customer loyalty-4. 0 -6. 0 Conclusion ES Average is –6. 0/3= -2, IS Average is 14. 0/3 = 4. 67 CA Average is –6. 0/3= -2, FS Average is 11. 0/3 = 3. 67 Directional Vector Coordinate:x-axis: -2+(+4. 67) = 2. 67 y-axis:-2+(+3. 67) = 0. 67 Insert Space matrix The SPACE Matrix illustrates that the Chevron has an aggressive profile.
The Space Matrix indicates that Chevron is financially strong and has achieved major competitive advantages in a growing and stable industry. BCG Matrix HighMediumLow Medium Stars Gasoline ?’s Jet Fuel Low Cash Cow Gas Oils & Kerosene Dog Other Refined Products The relative circles would be as following representing the revenue share of the company the higher share would be illustrates with a larger circle: Gasoline 53,254,000,000/273,005,000,00019. 4% Gas Oils & Kerosene40,940,000,000/273,005,000,00014. 6%
Jet Fuel 23,056,000,000/273,005,000,000 8. 4% Other Refined Products6,407,000,000/273,005,000,000 2. 0% The BCG Matrix helps identify which divisions of Chevron are performing well and which ones are not doing so well. Clearly Chevron star segment is sales of gasoline worldwide. In 2008 it generated over $53 billion in revenue and accounted for 19. 4 percent of total revenue. Chevron’s cash cow is its Gas and Kerosene segment which generated close to a $41 billion in net revenue and accounting for 14. 6 percent of total revenue.
Jet fuel plays a small role in total revenues, while other refined products represent the dog in the BCG matrix with just over $6 billion in net revenue. Strategy Recommendation Chevron has been an industry leader for over a hundred years and in that time has become the second largest oil producer in the U. S. and among five of the largest worldwide. Chevron as done a excellent job expanding globally and strategically aligning itself with other companies in order to continue to gain market share. As governments worldwide and the public alike look to toward safer and cleaner alternative energy, Chevron is poised to become an industry leader.
As increase demand grows from China and other emerging markets, meeting this demand while balancing fuel and environmental regulations particularly here in the United States will be a difficult challenge, but one that Chevron is prepared both financially and through its operational structure. Chevron should immediately begin new oil exploration projects. As oil reserves begin to decline and demand grows oil prices will begin to increase dramatically. This increase will further the push for alternative energy sources such as electricity, which in recent years has become a popular idea among the public and governments in developed nations.
The downturn in the U. S. economy has already pushed for car makers to increasingly look toward electricity at a rapid pace. While increased exploration will cost more increasing the $37 billion Chevron paid in total expenses in 2008, with net income at $24 billion this is more than doable for Chevron. I would recommend spending an additional $10 billion in oil exploration projects. While this will hopefully alleviate the decline in oil reserves, Chevron should also continue to make investments in alternative energy. Alternative energy will undoubtedly be the wave of the future, with increased pressure from The U. S. overnment and a demand from the general public, Chevron cannot afford to ignore this area. Chevron has already committed $3. 2 billion since 2002 and looks to spend an additional $2. 7 billion over the next five years. This is particularly important as governments continue to stiffen economic fuel and environmental regulations, making it even more difficult for oil exploration and making it more costly to produce the oil. Increased taxes are also an area of concern as this too will eat into profits as governments look to please its constituents who have an already negative view of the oil industry and its record profits.
By looking toward renewable energy, Chevron will be making headway into the future while at the same time avoiding some of the regulations imposed by local and foreign governments. This will also give Chevron and more positive image and could possibly lead to tax break for companies working on renewable energy to offset higher taxes on the oil industry. With an increased development in renewable energy, Chevron will also gain a more positive image with hostile foreign governments. As China and countries such as India grow economically, so is the demand for fuel.
While short term profits in these regions will be generated primarily from the production and sale of crude oil, they too will look to renewable energy as the government and population becomes more educated and aware of the need for alternative energy. Entering into this market financially position well and with the required reserves to fully satisfy China’s and all of Asia’s appetite, Chevron’s profit should see an increase of at least 50 percent. It will require strong marketing which Chevron already has in place and large capital investments to successfully complete this market penetration.
Epilogue Section As of 2011, Chevron has shown improved revenues from 2008. (Morningstar. com) They have increased production by 15 percent from a year earlier, this has to do primarily with the restoration of volumes that were offline due to the increase in hurricanes in the gulf in 2008. (rigzone. com) Although this a step in the right direction for Chevron, the company still is looking for ways to increase production through oil exploration. In recent months Chevron secured a five year gas permit to explore for gas deposits in northeastern Bulgaria. money. msn. com) As Chevron continues its investment in renewable energy it also recently signed an LNG agreement with Nippon Oil and Energy Corporation to develop a liquefied natural gas plant in Australia. (3) These are just some of the projects that Chevron is involved as it looks to increase its oil reserves and focus on alternative energy. References Strategic Management, Concept & Cases 13th ed. , David 1. www. Chevron. com 2. www. moneycentral. com 3. www. money. msn. com 4. www. morningstar. com 5. www. rigzone. com 6. www. yahoo. com