Valero Energy Corporation

Strengths are the one component of internal analysis. The component describes any resources and capabilities that support a company to achieve its competitive advantage such as patents, excellent reputation, low cost structure and many more. Concerning the strengths of Valero, I see that the company has maintained continual efforts in developing every single company’s division to have competitive advantage over their rivals. In this situation, I see that the major strength of Valero is the company’s position as the largest refiner in North America with extensive throughput capacity about 3.

3 million barrels per day. In addition, Valero also has distinctive strengths in the number of distribution outlets, which outpaces the company’s rivals. In the company official web site (www. valero. com), the company says that they have become a leader in its respective market with over 5,000 retail sites branded as Ultramar, Valero, Beacon, and Diamond Shamrock in major states in the U. S. , Canada, Latin America and the Caribbean. In addition, other key strengths of Valero that stand the company out of the refineries industries include:

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• Listed as the world’s top refiner in 2005 and 2004 Platts Top 250 Global Energy Company Awards.
• Mentioned by IndustryWeek Magazine as one of the World’s 100 Best-Managed Companies. This recognition is because Valero has recorded and maintained excellent performance over years.
• Acknowledged as the company who conduct best Points of Light Foundation Excellence in Corporate Community Service Award (one of just nine U. S. companies honored) in 1999. This achievement should strengthen the Valero’s brand equity in consumers’ mind and therefore it is very beneficial to the company’s competitive advantage.

This is because consumers are likely to buy any product or service that is perceived to be high quality.

Key Weaknesses of Valero

The second internal factor in a SWOT analysis is weaknesses. This is simply in contrast to the strengths of a company in which the weaknesses are shown in the absence of specific strength that lead to weaknesses of the company. The weaknesses also include a lack of patent protection, high-cost structure and many more. Concerning the Valero’s weaknesses, I see that the company inability to manage their knowledge skills inventory was one obvious weakness.

The inability to manage the business was drawback to Valero’s business since Valero, as major refiner in the U. S. and in the world, needs to have human resource (HR) that meet the challenge in fast-changing and volatile Valero’s oil refineries business. In this situation, HR division of Valero should understand that corporate labor-supply- chain department is key actor in supplying labor solutions that will include the likes of full-time employees, both US citizens and foreigners. However, in recent months, I notice that Valero has taken appropriate strategy to turn the company’s weakness into company’s strength.

The strategy was to recruit a HR (Human Resource) professional named Dan Hilbert about two years ago. Since the appointment of Hilbert, Valero has conducted some suitable initiatives in their HR department including recruitment strategy, process engineering, and workforce planning, to name a few.

Core Competencies of Valero and Initiatives to Leverage the Competencies

The core competencies of Valero are easily obtained from the company’s products and mission statement since they represent Valero’s current competencies and initiatives that Valero has taken to achieve it.

In the description of Valero’s products, I notice that Valero has wide range of products including the production of premium, environmentally save products such as California Air Resources Board (CARB) Phase II gasoline, low-sulfur diesel, and oxygenates. Based on the range of products that Valero offers I can analyze which product or service that Valero excels its competitors. The analysis takes into account the Valero’s mission statement since it explains the actions Valero does to achieve the company’s goals that are to place their various products in most competitive position in the respective markets.

In the official website of Valero, I notice that the company’s mission statement comes in eight initiatives as shown below :

1. To encourage any acts that increases the safety of our employees and our operations as a core business value. In this first mission statement, Valero clearly defines that safety become their core competence.
2. To produce environmentally clean products in clean facilities; this statement also become competence of any oil companies since they are determined to produce clean products that do not harm our environment.
3. To pursue growth opportunities both domestically and internationally; this statement merely emphasize the financial objectives of Valero and cannot be considered as Valero’s competences since every company aims to achieve it
4. To develop all employees and regard them as our number-one asset; this statement clearly become one of Valero’s core competences. This is because a refiner like Valero needs to respond to the fast-changing oil refineries industry by acquiring and training their employees to keep to with the challenges.
5. To provide a challenging, rewarding environment that facilitates creative thinking, teamwork and opens communications; this is simply a statement that encourages internal elements (employees, managements, and shareholders) to serve the best.
6. To improve customers’ satisfaction by providing reliable and responsive products and services; There are no report providing facts about the comparison of level of satisfaction in oil refineries so that I do not consider this statement as core competence of Valero
7. To ensure a positive retail experience for consumers by focusing on convenience, value and quality service; this can be considered as one of Valero’s core competences since the company no only deals with oil production and refineries but also oil distribution. In the case of oil distribution, the major need of consumers is to have best quality of gasoline; the statement about this quality of services is important since it describes the Valero’s initiatives in delivering best quality of gasoline in their over 5,000 distribution outlets.
8. To take a leadership role in our communities by encouraging employees’ involvement; this is not a statement of Valero’s core competences. In fact, it reveals Valero’s commitment to serve communities as part of its Corporate Social Responsibility (CSR) program. Concerning the Valero’s competence to develop all employees and regard them as our number-one asset, (the fourth number in the above list); I notice that Valero has carried out appropriate strategy to achieve it. One of them is through the appointment of new Manager of Employment Service named Dan Hilbert.

Hilbert’s arrival in Valero has significantly helped the company to improve and maintain its core competences since previously knowledge skills inventory became a weakness of Valero. Some initiatives that support Valero’s competence in human resources include acquisition of talents in oil industry, process engineering, and appropriate planning in workforce. Forman, (2006) says that those initiatives are proven beneficial for Valero since it helps Valero to grow into a great company by conducting proper transformation in Valero’s staffing organization.

Generic Competitive Strategy

Pursued by Valero Discussing Valeros’ competitive strategy should address what the market needs. Current market situation in oil refinery industry is very challenging since the rising in the oil price will lead to negative impacts on a country’s economy, in general, and decrease company’s profits since customers must not accept the increase of gasoline price. The rise of oil prices has increased industrial costs. As a refiner, Valero needs to consider the impact of oil price rising since Valero cannot change their gasoline price many times.

However, the decision to keep the market price of gasoline in steady state might lead to the decrease of Valero’s profit margin. Concerning the issue, I notice that the generic competitive strategy that Valero pursues is by carrying out a series of mergers and acquisition (M&A) or in other terms Valero do proper vertical integration. By definition, vertical integration is the practice to integrate various parts of business, upstream and downstream, in order to increase the effectiveness of a company.

For example, an oil company that deals with the exploration of crude oil might decide to do vertical integration by doing merger and acquisition with a refineries and distribution network companies. The reason of conducting these initiatives is they give Valero possibility to control oil price and reduce supplier power that can increase the gasoline price based on the market condition. Therefore, by building a company that operates the oil exploration to gasoline distribution, Valero gains advantages of delivering competitive pricing scheme.

In his historical journey, I notice that Valero has evolved from a gas exploration company into a comprehensive energy company that does not only deal with the exploration but also the refineries and distribution of energy. Below are some mergers and acquisitions that mark the development of Valero into an energy company:

• In 1981, Valero commenced its first vertical integration initiative through the expansion into energy sector. The expansion was carried out by acquiring a small crude refining operation in Corpus Christi, Texas. In order to speed up the production, at that time, Valero decided to spend over $1 billion to develop the state-of-the-art refining unit in the U. S.
• In 1998, the acquisition of Mobil’s Paulsboro; the process to achieve the vertical integration objectives of Valero also happened in 1998 when the company decided to acquire Mobil’s Paulsboro refinery. By completing the important acquisition, Valero became the U. S. second largest independent refiner with a total production about 735,000 BPD.
• In 2000, the acquisition of ExxonMobil Corporation; the vertical integration process continues in 2000 when Valero acquired ExxonMobil Corporation’s Benicia, California. The acquisition gave Valero with additional 270-store retail distribution chain and 80 company-operated retail sites. This acquisition is the example of the integration that enriches the process of the company’s sales and distribution network.
•  In June 2001, the acquisition of Corpus Christi refinery; moreover, in June 2001, Valero also committed to buy a refinery in Corpus Christi, previously owned by subsidiaries of El Paso Corporation.
• In Dec 31, 2001, the acquisition of San Antonio-based Ultramar Diamond Shamrock Corporation; late 2001 became the historical date for Valero as the company completed its largest transaction by doing a merger with San Antonio-based Ultramar Diamond Shamrock Corporation. The ‘married’ company greatly adds Valero strengths as a company that grows through a series of vertical integration since Valero became one of the nation’s top three refining and marketing companies at that time.

Valero’s Competencies and the Pursue of the Generic Competitive Strategy

As mentioned at previous section, I notice that the generic competitive strategy that Valero is the initiatives to carry out a series of mergers and acquisition (M&A) or in other terms Valero do accurate vertical integration process in order to become the best energy company in the U. S. and in the world. To pursue this generic competitive strategy, I notice that the company’s four competencies are in line with the chase of the competitive strategy.

For example, Valero’s competencies to provide safety-working environments to their employees are advantageous when Valero acquires a company and set the same rules. In addition, Valero’s competency in producing environmentally clean products in clean facilities is also supportive to the achievement of Valero’s competitive strategy. This is because to become the most preferred gasoline retailers, Valero needs to produce clean products that do not harm environment. Moreover, Valero’s competency in developing all employees’ skills also complies with this statement clearly become one of Valero’s core competences.

This is because a refiner like Valero needs to respond to the fast-changing oil refineries industry by acquiring and training their employees to keep to with the challenges. Imagine, if Valero has unmatched labor skills because of acquisition over other companies, it could hurt Valero I the long term since there is no standard requirement for their employees. In compliance with the generic competitive strategy to be the best energy company, Valero also strengthen its competency to ensure a positive retail experience for consumers by focusing on convenience, value and quality service.

The competencies that Valero has and the competitive strategy that Valero attains have put the company to be one of oil refiner that listed in Fortune 15 Company and becomes a company that has the largest number of refineries in North America, filling stations nationwide and 22,000 employees. Part 2: External Analysis II. 1 Valero’s key opportunities The first external factor in SWOT analysis is Opportunities. These elements provide specific opportunities that may help a company to gain more profit and achieve sustainable growth.

They include unfulfilled customer need, new technologies, elimination of trade barriers and so on. Concerning the Valero’s opportunities, I see that market needs for high-quality-refined oil at affordable price becomes the key opportunities for Valero. This is due to Valero has facilities from oil exploration to distribution. Therefore, it has ability to control costs while its retailer competitors will hardly have similar condition since they depend on the price from refiners that account for 15% of total retail price. Figure 1 shows the cost to produce a gallon of oil in 2003 and 2004.

Figure 1 Composition of Oil Retail Price Source: Energy Information Administration. (2006). A Primer on Gasoline Prices Another opportunity is the fact that current technology can only afford to produce about 47 barrels of gasoline from every 100 barrels of crude oil. It means that, Valero could research some way to increase the efficiency of oil production so that they will have greater margin when the retail price is high and have no loss when the price is low.

Valero’s Key Threats

In addition, Threats describe any changes in the external factors that may put any company in unsafe position in the market.

They include a change in consumer tastes, new substitute products, new regulations and many more. In Valero case, I notice that the main threat is the volatility of crude oil price. As shown in the figure 1, the price of crude oil accounts for 44% of total retail price in 2003. Therefore, the increase in oil price still becomes critical and major problems of world economy and for an energy company like Valero it could be a disaster since sometime they make profit but in other time, they loose money. Its negative impacts seem to be the factors that haunt either industrialized countries or the developed ones.

Another threat for Valero is the natural disaster like Hurricane Katrina. Such disaster is potential to destroy Valero’s major oil pipelines that will result in the higher costs to deliver oil to refineries.

Valero and Environmental Opportunities and Threats

The demand for producing environmental-friendly gasoline becomes great opportunities for Valero. Its series of acquisitions over refineries in the United States gives benefits for Valero since they are able to find the best method to produce the demanded gasoline as affordable price.

However, the situation could be potential threat since in some states like California; it is needed to produce reformulated gasoline to sell to customers in urban areas where the cost of production of such gasoline is much higher than that of regular gasoline. In addition, refiners also face some restriction in some states in which in the 25 states, there are prohibition to use gasoline additive MTBE since the additive is found to be responsible of groundwater contamination.

For this reason, Federal Bureau of Land Management is to issue environmental impact statement so that refiners like Valero have the certainty whether to use oxygenated like MTBE.

Porter’s Five Forces of Valero

At the heart of this analysis is the industry analyzing model known as Porter’s five forces model which details the threat of new entrants, power of buyers, power of suppliers, rivalry among existing competitors, and the threat of substitute products for energy industry.

Degree of Rivalry

Rivalry in energy industry is intense as there are about 168,000 outlets across the United States; each of them might offer customers with high-quality gasoline in much competitive price. Therefore, a refiner and distributor of gasoline that could not fulfill this market requirement will be set aside from the competition. Figure 3 shows the various pricing of gasoline in some states in the U. S. The figure suggests that refiners and distributors like Valero should keep up with the average market price by keeping their costs below the price.

Source: Energy Information Administration. (2006). A Primer on Gasoline Prices

New Entrants

The threat of new entrants rises as the barrier to entry is reduced in a marketplace. As more firms enter a market, we will see rivalry increase, and profitability will fall (theoretically) to the point where there is no incentive for new firms to enter the industry.

One of common barriers to enter an industry is brand loyalty. In case of Valero, I notice that the threat of new entrants is quite low since within the past 29 years, there are no new refineries due to state restriction for fear of damaging impact on environment. However, this situation could be overcome immediately if Federal Bureau of Land Management is finished to report about refinery’s impact on underground water sources and endangered species.

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