Operations are part of business logistics that are required for the smooth running of company’s transactions. Logistics are all the activities done from within or without a company’s setting to ensure that there is quality production and supply of products to customers according to their demand (Langford 1998). Logistics are grouped into two major categories that is the inbound logistics and out bound logistics, with operations falling in the category of inbound logistics.
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Operations according to Berry (2004) are all the processes or activities that are employed by a company in the processes of production of a commodity or services for example operations involved in production of natural gas are prospecting, location drilling, processing and packaging. However these are just physical operations that can be done by anybody as long as the required tools and equipments are present/available. The major driving force in all businesses is always the logical operations without which the company will either collapse or operate at very low levels of technology and advancement.
Logical operations always consists of three important management imperatives, that is generation of recurring incomes, achievement of business worth and value and how to secure income and worth of the business Eureka (1990). Though these three are considered as the driving force behind the company’s success, creation of recurring income becomes the number one logical operation to be used by most affluent and prosperous business men as well as companies. Creation of recurring income is an operation aimed at helping the company to expand its income base and achieve market dominance through higher ceiling prices, with reduced level physical involvement of the company in all their transactions.
Generation of recurring income is therefore the most effective, cheap, flexible, achievable, time saving and the most rewarding business operation used in multimillion capital businesses like the William’s natural gas production company.
Generation of Recurring Income as Business Operation Approach
William’s (NYSE: WMB) is a leading business enterprise that primarily provides innovative, effective and effective creation of recurring income business operation approach to their production. This is a company, which is concerned mostly with the prospecting, production, gathering, processing and transporting natural gas in several parts of the world. They are also involved in operations and management of wholesale power business and management of gas pipelines.
William’s enterprise are the sole providers of natural gas to the pacific north-west, regions around the rocky mountains, the gulf coast, southern California, and the eastern sea board countries, making it the largest company of its own and with the ultimate market dominance.
In the second half of 2005 financial year, the chief executive officer of William’s enterprise proudly announced a great improvement in their un-audited net income in terms of million pounds due to the generation of recurring income practiced in their business undertaking in all the countries in which the company’s branches are located.
William’s company was able to generate recurring income through initiation of new drilling wells, opening up new markets, intensified processing and through contracts provided by other companies to locate viable natural gas and crude oil wells. Essentially all the revenue generated by the William’s company before the second quarter of the financial year ending 2005 were through increased levels of natural gas production and higher average prices, the continuation of reliable and conducive natural gas processing margins and increased prospecting and gathering volumes.
To provide more transparent and high levels of disclosure in their generation of recurring income the William’s company has opted to provide an annual analysis based on recurring earning which are equally adjusted for all mark-o market effects. This has made them to achieve higher levels of recurring incomes.
Business operations are all the activities that are utilized in the smooth running of a business with the major purpose of producing worth and value to the stakeholders involved in this particular undertaking (Richard E.W). The expected outcome from a business operation is the achievement of value from the assets owned by that particular business, where assets here mean the physical or intangible inputs in the business (Kaplan 1996). Example of value that can be derived from intangible asset like idea is royalty and from physical assets like oil or natural gas products is the net profit from their annual sales.
A business operation consists of three important managerial imperatives that are al aiming at maximization of value to be attained from both physical and logical business assets. The managerial imperatives include; generation of recurring income, increasing the value of the business and securing the value and income generated within the business. However all these managerial imperatives are mutually dependent upon each other, for example if the assets generate more recurring income then the business becomes more and more valuable as compared to businesses generating lower recurring incomes.
This is because business’s product portfolio considers all those goods and products that sell at the highest rates, prices and volumes to be the most valuable in the markets. Then as the product becomes more valuable it will be the most targeted in the markets leading to strong hold foundations for the creation of recurring income from the sales by either expanding or venturing on other lines of business undertakings. For example in most motor vehicle markets it is easy to lease a Mercedes Benz at higher prices compared to that of Toyota corolla.
Further on this value and income generating potentiality of business assets it will be worthless to strive for the two if there is no reliable way of ensuring how to secure them. For example petroleum deposits are always value less unless all the processes of mining and the equipments, tools and skills are not invented an utilized to extract the crude oil, refine and then distribute profitably to the customers.
This example then gives William’s company a chance to be evaluated closely on how they have employed generation of recurring income operational approach to their business transactions and management. It will examine how it operates, how to ensure that it is flexible, qualitative, fast and affordable, its capabilities and limitations and possible reengineering approaches to make it more vibrant and effective.
To be able to generate recurring income in a business the company’s managerial board is supposed to follow the following strategies; the company must create a reliable system of serving the customers efficiently and effectively, create quality products and automate their fulfillment, be sure to invest in commission income opportunities and must also invest in leveraged markets. Customers are core participants in business operation since they determine achievement or failure of the business operation (Jim2006). By creating a reliable system to serve them effectively the business will be sure of achieving high levels of generation of recurring incomes.
The management of a particular business should always have an in-depth understanding of who is having the particular need for the product, what are their requirements, how does the company meet these requirements, how will the company streamline and customize their products, should they charge same prices for all customers or should they charge higher prices depending on the market ceiling price and the economic position of the country in which the market is located and above all the companies should have principles to guide all these approaches to customer service.
The William’s company has been able to serve their customers well and that is why they have been able to achieve the highest ceiling price for their natural gas, power and other products with successive attainment of market dominance in the Rockies region, the North America and the San Juan Basin.
Secondly the other important strategy after customer service is creation of quality products and automating the fulfillment by the products. This can be achieved through turning the creative capital into packaged products to be bought again for example the William’s company can decide to write a book on natural gas potentiality, prospecting, processing and packaging to be sold into the markets to be used by other companies that are interested in the same business.
The company should also ensure that they set up a product store to ensure that there is always continuous supply of the product in the market regardless of the time of the year or the market price at that particular time. The William’s ensured that they had natural gas in store by hedging the prices in Rockies regions and the San Juan Basin which was later on used to achieve the ceiling prices in the second half of the financial year ending 2006.
Thirdly the companies are supposed to find and establish commission income opportunities that entails affiliate marketing and promotion and ensuring there are new recommendations given to the old customers (Rutherford 2002). Since a company has already created good relations with their customers they will be in a position to know best what they want at what time and on this basis they can make new recommendations to the old customers. By so doing the company will be able to make new innovations and expand their market basses due to generation of more recurring incomes.
Lastly a company is expected to rely on leveraged income that is the act of using other companies or individuals to work on their behalf or through leasing their products, equipments or personnel to other companies in exchange for recurring income. In this respect the William’s company could lease their gas pipelines to other companies that produce natural gas or can sell their skills to the young upcoming industries or the William’s company could make us of the existing companies in their regions of new prospects.
William’s company primary business was exploration and production of midstream gas and liquids, however due to creation of recurring income in their business empire made them to be in a position to invest in other income generating sectors like management of gas pipelines, power production and wholesaling to ensure that their company achieved expected standards of worth and value in the world markets. This effort reported a combined segment profit of 316.9 million pounds in the second quarter of 2005, with an expectation of approximately 2.3 billion pounds in the consolidated segment in 2007 as the company continues to grow.
By definition according to Kaplan (1996) generation of recurring income in a business setting is the ability of that particular business to earn large some of income from their operations without having to be physically involved in all the transactions but through having reliable affiliates to transact some of the operations. Generating recurring income is the most simple, well-understood and straightforward management imperative of business operations as compared to value and security because the former is easy to determine than the later.
The primary goal of his operation is to ensure the implementation of sustainable delivery of goods and services to the customers and at a cost that is less compared to the funds received in exchange for the particular goods and services in question. In short the aim and objective of generating recurring income is to profit maximization that is also translating to the main reason why individuals or companies invest in multy million capitals based business operations.
Profitability is measured in terms of revenue and expenses, such that a business having greater revenue than the general expenses is generally referred to profitable business regardless of the other achievements relating to customer relations or attainment of ceiling price in the markets (Hugh 2005). Business revenue refers to the funds that are acquired directly by the business in exchange for the offered gods or services while expenses are all the costs met during the development, production and delivery of the goods and services.
According to Steve Malcolm the chief executive officer of William’s company, their businesses around the world are producing very strong, reliable cash flows and have consequently achieved greater heights of maximum profitability that they have been expecting. By may 2005 they had a total production of increase of about 20 percent up compared to total productions in the second half of 2004. For example they were able to open up to around 1,600 new drilling places in the Piscean valley and they also made a grand entry into Fort Worth Basin reducing their risk around natural gas prices by having more assets giving them another long term, value growth and creating more opportunities.
To ensure permanent generation of income a business organization must consider expansion of their market basses within a short period of time and this is absolutely possible because no additional cost is to be met but it’s a mater of just expanding the existing assets an will also not consume any time but just little capital to install information technology like the software packages in the operation (Kotler 1991).
In this connection the William’s company have been able to expand their assets based on improvement of generation of recurring income for their business. The company has been able to execute natural gas price hedges in form of collars in the second quarter of financial year ending 2006 for certain cubic feet of natural gas in the Rockies and San Juan Basin through to 2007. The collars are used as derivative instruments to set a leveled floor for minimum production cost and favorable ceiling prices that in turn set maximum price to be received by the William’s company from the hedged prices.
More explorations and productions are yet to be put in place for the natural gas production in the Rockies, San Juan basin and the Mediterranean as well as oil exploration, development and production in South America. These new innovations are expected to boost daily average production from low domestic and international interests to approximately 633 million cubic feet of natural gas. From the information it can be seen that developing a business to expected worth through generating recurring income is not time consuming but contrarily its achieved within a short period of time with less physical involvements and less capitals.
In terms of operation capabilities generation of recurring incomes approach is evaluated with reference to “multiple streams of incomes”, which refers to the freedom and ability to set one line of income generating activities (Robert 2005). As mentioned earlier business operations encompasses three managerial imperatives all-aiming at achieving maximum profits. For all organizations imagining the feeling of security, contentment and the assurance that they have reliable bases for generating recurring income empire that that is capable of pumping out cash every single day throughout the year, will not stop at anything but ensure that they are always able to generate more and more recurring incomes.
Generation of recurring income is therefore considered as an important tool in the business operations because it ensures that the business expands to higher levels of interest rates. Passive, residual or recurring income as defined earlier is the income that continues to be paid or received after the initial starting capital has ceased, in other words it is an ongoing and almost permanent income for the business organizations (Kubr 1998).
The hugest benefits of generating recurring income is that once the business has set up one line of income generating activity they are free to set up some more, with clarity and secure knowledge that each is ongoing and productive (Vincent 1998). This approach to generation of recurring income is referred to as “Multiple Streams of Income” and the leverage it provides allows business management units to earn considerable amounts of income within relatively short time scales. For example the William’s company production of natural gas was expanded their business tremendously during the second quarter of the financial year ending 2005 as compared to what they achieved in the second quarter of the financial year ending 2004.
Majority of rich and affluent business organizations have created great wealth through forming the recurring income stream which include production of goods, owning rental property and royalties in new inventions or creativity. An example of generation of recurring income activity is selling anything that is automatically renewable, for example in the case of William’s company their generation of recurring income activity is to explore and create more natural gas wells to ensure that the customers are supplied with the product on demand.
Recurring income from continuing operations excluding the items of income or loss that the William’s company characterizes as unrepresentative to their ongoing operations was 65.9 million pounds and so the company moved upwards their expectations, for generating recurring income from continuing operations from the ranges of 62 cents per share to the range of 82 cents per share in the second quarter of the financial year ending 2005.
This was because the William’s company had a forecast of improved results in midstream gas and oil exploration and production with long increased mark-to-market gains in power in the second half of 2005. they also ensured that there was a provision of an added level of disclosure and transparency in their transactions by providing annual analysis of recurring incomes adjusted for all mark-to market effects. They in turn achieved 99,5 million pounds or 17 cents per share in 2005 compared to 18 million pounds or 4 cents per share in 2004.
Though several business organizations have used generation of recurring income approach to business operations successfully, it is however entitled to some pitfalls that can adversely affect the business organization if not properly addressed by the management units within the company. Generation of recurring income is very demanding and is end user oriented than being helpful across the board, for example generation of recurring income using the “Multiple Steams of Income” is very dangerous if the company does not employ a team qualified personnel to run the lines of income generation.
More so if the company does not employ a team of auditors to carry out financial auditing in the component parts forming the larger company there are chances of financial mismanagement and embezzlement in these lines of income generation. Considering the fact that generation of recurring income is mostly concerned with serving the customers effectively and efficiently it is considered more of end user oriented than being universal to all.
This means than the company employees will spend time working hard to satisfy the customers but their lives here will be in danger due to strain and stress they undergo. However the potential benefits of using this operation in business transactions out do the pitfalls by far and so the few areas of problems should be addressed accordingly to ensure that the business achieves maximum profitability from higher ceiling prices attained in the markets.
No employer will be interested in paying their workers more if it will lead to cutting of the turn over rates to half, they would instead prefer to retain their employees than employing more to ensure that there are lower rates of stock turnover consumption and high productivity and thus higher rates of generating recurring income (Don 1997). Retention of employees is very beneficial because it leads in savings both in terms of time and money required for training new employees, helps to increase in the quality of work done and leads to reduction of vacancy rates in the company’s management units.
Some other employer will resort to business reengineering process, which according to Davenport (1995) are all the reasons the companies will put forward to lay off their employees and get the chance to hire new members and possible changes to ensure that there is a remarkable improvement in the performance level.
Business operation reengineering is a management approach aiming at the improvements in the means and practices of elevating the effectiveness and efficiency of the operations that are existing within the business organization (Hammer 1993). Information technology is playing a very important role in the reengineering concept of ensuring that more generation of recurring income is achieved by business organizations. Guhas (1993) have also recognized the role played by information technology in the reengineering processes but with absolutely different perspective, he feels that it brings more skills in people thus elevating their traditional way of thinking.
Information technology is therefore considered by affluent business organizations as a way of improving generation or recurring income because it challenges the traditional ways of doing the same. Information technology is also very important in the process off reengineering the operations that are geared towards the improvements of profitability.
As Randolph (2006) suggests the key contributions of communication technology in the improvement of the performance in generating recurring income includes; there are always shared database between companies and customers, making information to be available to the customers at al the places they are located. Once the consumers have acquired the right information about a product they will always be willing to purchase it while others will disseminate this information to the others making the company to attain market dominance.
Information technology leads to new innovations and improved expert systems; this will allow generalists to perform complex tasks without any problem. For example the William’s company aiming at opening up new prospects of natural gas in South America will be in a position to do so more effectively and efficiently without failures maintaining their reliability in the market. To achieve more value centralization and decentralization in large business organizations like the William’s company is very important and this can only be achieved through information technology.
Decentralization for the case of William’s company will mean to locate their production and processing firms in the regions with reliable natural gas while centralization will mean to have one particular headquarter to over see all these processes, and without information technology all these cannot be achieved. It will be very expensive to physically locate in each and every region for natural gas harvesting and production.
Other benefits of using information technology includes faster decision making as decision support tools are provided making both the customers and the company managers to be part and parcel of decision making. There will also an automatic identification and tracking system within the organization, this will reduce theft rates and as for the William’s it will increase their ability to easily locate natural gas wells and finally the company will achieve on-the- fly planning and execution of transactions due to high performance computing.
From the graph we can conclude that the production of oil and gas by Williams natural Gas Company increased from the year 2001 to the year 2004. The increase in production has led to realization of huge financial benefits by the company due to generation of recurring income practiced. The huge profit was as a result of opening up new markets and drilling new wells leading to increase in production of more volume of gas and oil form the year 2001 – 2004.
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