Case Study - Company Analysis
This report will present a comprehensive analysis of the strategic position of Enbridge Energy Partners. The current and past financial position will be analyzed and an interpretation will be given. Portfolio Analysis Tools like the BCG Matrix, and the Grand Strategy Matrix will be used to study the firm’s current strategies in place, and include suggestions for future strategic changes with help of the SWOT Matrix. Porter’s Five Forces Model will be used to evaluate the current scenario and make projections.
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Organizations utilize scarce resources to take advantage of a limited number of relevant opportunities. Strategic Planning is all about defining and redefining hypotheses based on new acquired information, research and experience (Richard, 1999).
It is often perceived to be very risky when a firm pursues multiple strategies, but organizations like Enbridge Energy Partners with entirely different Strategic Business Units, often find it feasible to implement a combo of three or even more.
Enbridge Energy Partners operate in the crude oil and liquid petroleum transportation and storage assets. The company aims to maintain low investment risk position while providing the maximum possible returns to its shareholders. The mission is to provide incremental value to its customers.
The strategies of market and product development and market penetration are the focus of the company in the current scenario. The facilities of gathering, processing, storage etc, are being expanded to meet the growing customer needs through additional asset acquisitions to broaden the energy asset platforms. Due to the financial burden it imposes, acquisitions are not the primary strategy being employed. Add to this the fact that the inflated prices of the energy assets sought, plus the finances required for massive internal growth opportunities all make it non feasible to pursue acquisitions.
The company currently operates in three business segments, namely Natural Gas, Liquids, and Marketing. In the Liquids segment, due to the existence of a number of extensive pipelines that connect the North American region with Canada, the segment has shown steady growth over the last few years and the demand is expected to grow in future also.
The Marketing segment provides supply, transmission, storage and sales services to producers and wholesale customers on the gathering, transmission and customer pipelines, as well as other interconnected pipeline systems. All Marketing activities are primarily undertaken to realize incremental revenue on gas purchased at the wellhead, increase pipeline utilization and provide other services that are valued by customers.
A brief analysis of the reported financials for the three business segments indicates that the liquids segment’s operating income has declined from the last year. This is attributed mainly to the increasing pension and healthcare related costs, plus the declining volume of transported liquid due to a pipeline breakdown.
The Natural Gas segment on the other hand, has recorded substantial increases in the net operating income due to the increase in the average daily volume and proceeds from the sale of its gathering and processing assets. Access to new markets are being planned to ensure delivery to regions beyond Canada and North America.
The Marketing segment has recorded losses mainly because of capacity constraints that prevented the division from providing services to the more profitable markets. Add to it, there were multiple supply side disruptions in the Gulf and Mexico region due to hurricanes. The segment has witnessed continued declines since 2003 in the operating profit category.
This part of the analysis focuses on how effectively the company is implementing its current strategies, and what, if any strategic changes need to be made.
BCG Matrix is used to represent the SBUs of a firm with their relative position along the market share situation, and the industry’s growth rate in which they operate. As stated previously, the company has 3 operating subsidiaries, each of which has its unique position in the BCG Matrix (Cook, 1998).
The Liquids segment has been classified as a “Star” for the company since the segment is expected to grow further in terms of demand, and due to a number of major pipeline projects connecting Canada and North American regions, Enbridge has become a segment leader in Liquids gathering, processing, and storing. It is the organization’s best long run opportunity for growth and profitability. More investment should be made so the division can recognize its true potential.
Due to its strong financials, the Natural Gas segment has been classified as the Cash Cow for the company. It has recorded continued and substantial positive cash flows and net operating income, as per the consolidated financial statements.
Since the Marketing Segment that provides additional value added services to the customers of Enbridge, and the fact that it is still in its developmental stages, and the future of the division in terms of long run profitability and sustainability is uncertain, the division has been classified as a Question Mark. The high potential for increased market growth in the industry might be utilized to achieve long term revenues and profits.
Relative Market Share Position
High Medium Low
Grand Strategy Matrix
Grand Strategy Matrix provides an overall perspective on the performance, both current and future of the organization’s divisions, evaluated along two dimensions (Anderson, 1995). According to the quadrant placement of the division, the future strategies can also be worked upon and devised.
Rapid Market Growth
Strong Competitive Position
Weak Competitive Position
Slow Market growth
As per the quadrant placement, the following are the recommended strategies for each division:
Liquids: Should pursue Market Penetration, Market and product development and all forms of Integration strategies to further improve its excellent strategic position.
Marketing: Market and Product Development, and market penetration are the ideal strategies, but if the situation becomes too dire in terms of financial loss, then liquidation and divestiture may be considered (Anderson, 1995).
Natural Gas: Should pursue related and unrelated diversification and joint ventures to continue to operate profitably in its market characterized by strong competitive situation yet a relatively slow market growth.
SWOT Matrix is used as a matching tool whereby managers can leverage on a company’s existing strengths and reduce the impact of its weaknesses. Similarly, the opportunities can be utilized by minimizing the impact potential of threats (Amara, 2003).
Strength Opportunities Strategy
· Well positioned to develop additional infrastructure to deliver growing volumes of crude oil that are expected from the Canadian oil sands
· Construction of a new 500 MMcf/d intrastate transportation pipeline to carry increased volumes of natural gas
Weaknesses Threats Strategies
· Operations are subject to many hazards inherent in the liquid petroleum and natural gas gathering, treating, processing and transportation industry. The company maintains insurance coverage for our operations and properties considered to be customary in the industry
· Our financial performance could be adversely affected if our pipeline systems are used less.
· Changes in tariff rates or challenges to tariff rates could have a material adverse effect on financial condition and results of operations; a recent FERC Policy Statement that limited allowances for income tax in an unrelated pipeline’s cost of service, if applied to FERC-regulated systems, could adversely affect rates.
Weakness Opportunities Strategy
· Competition may reduce revenues.
· Competition with Enbridge may reduce our revenues.
Strengths Threats Strategy
· Gas marketing operations involve market and certain regulatory risks.
· Compliance with environmental and operational safety regulations, including any remediation of soil or water pollution or hydrostatic testing of our pipeline systems, may increase costs and/or reduce our revenues.
· Failure of pipeline operations due to unforeseen interruptions or catastrophic events may adversely affect our business and financial condition.
Porter’s Five Forces Model
Porter’s Five Forces Model is often used in strategy formulation by analyzing the competitive situation in the market/industry. Of the five forces, the most important is rivalry among competing firms (Amara), 2003.
Rivalry among competing firms: This factor has a high relevance for both Liquids and Natural Gas segments. The Marketing segment operates in a sector that has relatively less competition. Natural Gas segment is a highly competitive market that is rapidly changing. Since the competitors are becoming more resourceful, mergers and acquisition to achieve consolidation in the market are high.
For the Marketing the rivalry among competing firms is on the lower side. The SBU is at a developmental stage with increase in sales and growth and increased consumer demand in the value added service provider.
Potential Entry of new competitors in the market is very easy for the Marketing sector. However for the remaining both, due to the extensive initial capital expenditures required and the heavy governmental regulations in place, the entry is very difficult.
The potential for the development of substitute products is low for all three sectors. Both Natural Gas and liquids are necessities without which the energy needs cannot be satisfied. The bargaining power of suppliers has an effect on the competition strength in the industry. Being one of the rare suppliers of crude oil, the company has extensive bargaining power since it operates in regions where others do not.
The bargaining power of consumers is limited for both Natural Gas and Liquids segments, since there are very few options to choose from. As the Marketing sector develops, the future may hold a greater variety to choose from.
The company has been strong financially for the last few years since it has played safe on most occasions in terms of investment project selections. The heavy regulatory framework within which it operates also is a factor contributing to these decisions, but the strong management controls and the authority of the Enbridge Partners to set cash reserve limits on the subsidiaries is also crucial to be mentioned.
The demand for the company’s products is not likely to decline in the near to long term future, and hence carefully planned investment is needed to expand capacity. Also, hedging through financial derivatives is an important strategy where the uncertainty factor is so high in terms of operations uncertainty and the effect of natural elements such as hurricanes.
The company should continue with its policy of focusing on projects that enhance internal growth without taking the risks involved with acquisitions due to the high costs of the assets involved. Also, continued funding for exploration and research purposes should continue to ensure long term profitability and growth.
Alpert, Richard (1999). Strategy Reform and development: A Case Study
Amara, Roy (2003). Strategic Planning in a changing corporate environment.: Long Range Planning.
Anderson, Carl (1995). Managerial Perceptions and Strategic Behavior: Academy of Management Journal.
Cook, Curtis, (1998). Corporate Strategy Change Contingencies”. Academy of Managemnt Proceedings.
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