Table of Contents
1 Introduction. 3
1.1 Background of the case. 3
2 Critical analysis of the internationalisation strategies. 4
2.1 Current Internationalisation pattern 4
2.2 Theories of Internationalisation. 6
2.2.1 Sequential Theory (Uppsala model) 7
2.3 Critical assessment of the current Internationalisation strategies. 8
2.3.1 Joint ventures. 9
3 Recommendation. 10
3.1 Recommended Future strategic direction. 10
3.1.1 Proposed strategy. 10
3.1.2 Porter’s Generic Strategy. 11
3.1.3 Ghemawat’s Strategic choices. 12
4 Conclusion. 13
5 References. 14
The first part of the current report is a critical analysis of the internationalisation strategies embraced by Petrobras, a petroleum company headquartered in Brazil. The background section presents the major patterns and trends in the international business activity of this company. The current internationalisation pattern in the company is identified and categorised into the appropriate internationalisation theory. A critical assessment of the current internationalisation strategies is provided and the specific strategy in current use identified as development of joint ventures. It is recognised that Petrobras enjoys a number of benefits by using joint ventures as an internationalisation strategy. This analysis is followed by a recommendation on the most appropriate strategy to allow Petrobras to maintain or improve its competitive advantage. This is classified as a differentiation strategy and linked to the right Ghemawat’s strategic approach.
1.1 Background of the case
Petrobras is a multinational corporation doing business in the petroleum industry and headquartered in Rio de Janeiro, Brazil (Fleury & Fleury 2011). It has operations in six business areas, each contributing a certain amount of revenue to the total revenue collection of the company. To begin with, Petrobras generates most of its revenue from refining, transportation and marketing of oil in Brazil. Another significant source of the company’s revenue is exploration and production of crude oil and natural gas liquids (NGLs). It is also involved in the distribution of oil products such as biodiesel, natural gas, and ethanol to various wholesalers in Brazil. Production of biofuels such as biodiesel and related products has been another revenue-generating activity associated with Petrobras (Musacchio, Goldberg & Pinho 2009). Excess electricity and sugar are produced by the company using sugarcane bagasse. Petrobras is challenged by the increased competition in the international oil market especially in the regions it has launched international investments. It has to consider better ways of improve its competitive advantage since almost 10% of its production is based outside Brazil. Most of this production takes place in South American countries such as Chile, Colombia, Argentina, Paraguay, Uruguay and Bolivia. Other international investments are in Japan, United States, Mexico, Namibia, Gabon, Benin, and Nigeria (Clifton, Comín & Díaz-Fuentes 2011). These areas, just like the rest of the world, are experiencing an increase in the desire for a carbon-free world. The fear of changes in the world’s climatic conditions as a result of inappropriate use of energy has encouraged environmentalists to advocate for the use of less fossil fuel and more of renewable energy (Gupta 2013). At the same time, Petrobras has to operate in a market characterised by an increase in the demand for energy and slumping oil prices.
2 Critical analysis of the internationalisation strategies
2.1 Current Internationalisation pattern
The internationalisation pattern used by the Petrobras can be described as a systematic one since it uses a single strategy at a go. Once one strategy has been explored extensively, the company considers pursuing another strategy. At the same time, the company prefers expanding to a single country at a time to avoid the risks associated with expansion to multiple countries in a simultaneous manner. In 1972, for example, Petrobras expanded into Colombia to with an aim of exploring and producing oil and gas. This was the initial aim of expanding into Colombia and can be described as a resource-seeking strategy. After acquiring the resources, the company was to be involved in retailing and distribution of the acquired resources. Therefore, it can be said that the second reason why Petrobras expanded into Colombia was to seek a new market. As argued by Ang & Ding (2006) resource-seeking strategies should be pursed before marketing-seeking strategies if a company is to succeed in its internationalisation process. This may be the major reason why Petrobras embarked on resource-seeking expansions into Libya, Iraq, Angola, and the United States in 1974, 1978, 1979 and 1987 respectively. Although the company was involved in some market-seeking and strategic asset-seeking activities, resource-seeking activities were its major focus (Cuervo-Cazurra & Dau 2009).
Every phase of the sequential expansion embraced by Petrobras was determined by the prevailing national or international conditions. The first phase, the phase majorly based on resource-seeking activities, started in the early 1970s mainly due to the prevailing oil crisis. Petrobras wanted to minimise the country’s dependence on external sources of oil and oil products. Banalieva & Dhanaraj (2013) avowed that an internationalisation strategy must start with experimentation, which was considered by Petrobras before market liberalisation took place in 1988. In this first phase, Petrobras was able to acquire resources in with countries known to have friendly relations with Brazil. This was an opportunity to internationalise into Colombia, North America, and the Middle East.
The second phase of Petrobras started after the market liberalisation that took place between 1988 and 1997. This is described as defensive internationalisation and was mainly based on strategic-asset-seeking. During this period, the company was involved in a number of acquisitions of foreign ventures in the oil industry. The government aimed at protecting Petrobras from the local economic crisis that followed the economic crisis. Political instability prevailed during this time and there were fears of reform reversals.
2.2 Theories of Internationalisation
According to Cuervo-Cazurra et al (2014), there are three major theories of internationalisation, which include the Network Model, the Transaction Cost Theory, and the Upssala Model. It should be appreciated that the internationalisation process is very complex, making it necessary for different scholars to develop these theories to allow companies achieve internationalisation with ease. According to the Uppsala theory, firms must pursue success in their home country before expanding into neighbouring and other countries of the world in that order (Kuramoto Gonzalez & Kindl da Cunha 2012). Therefore, the first approach is to expand into geographically or culturally close countries before expanding into geographically and culturally distant countries. As far as Petrobras is involved, the strategy was the most appropriate in making sure that challenges were minimised in the process of expanding into Latin American nations and the rest of the world. When this theory is embraced by a company, it is important to start with traditional exports before implementing demanding modes of operation such as sales subsidiaries in the foreign nation or at the company level.
Petrobras had also to consider the transaction cost theories when expanding into foreign markets. This theory focuses on costs involved in the internationalisation process and possible effects of these costs on the firm’s choice of a certain market. The effect of the costs on the mode of entering in the new market is also considered in the Transaction Cost theory. Transaction cost is the most important factor affecting the success of an internationalisation strategy. In the internationalisation process, costs may be incurred in information search about the target foreign market, customers, products, and negotiation (Bass & Chakrabarty 2014).
The network model or theory of internationalisation has an influence on the internationalisation process at Petrobras. This theory views the market as a system of industrial and social relationships (Dantas & Bell 2009). The new markets targeted by Petrobras are made up of different players such as suppliers, customers, competitors, friends, and friends. Therefore, Petrobras should assess its relationships with other parties in the market before making any strategic decision.
2.2.1 Sequential Theory (Uppsala model)
Among the identified theories of internationalisation, the sequential theory or the Uppsala model is the most important in explaining the expansion journey followed by Petrobras. This theory proposes that the firm must gain experience in the domestic market before expending into foreign markets. This model was well considered by Petrobras in its internationalisation strategy. This is because the company initially focused on establishing production bases in geographically close nations such as Colombia in 1972 and Argentina in 1993. According to the Uppsala model, a country may be considered close to another in terms of culture and allow a firm to expand into such a country in its initial stages of expanding into foreign markets. For this reason, culturally close countries were initially considered by Petrobras in its internationalisation process. For example, the company expanded into nations such as Libya in 1974, Iraq in 1978, and Angola in 1979.
The Uppsala model insists that a company expanding into a foreign country should initially trade in its traditional exports before considering trade in other areas, products, and services. This provision was considered by Petrobras in its internationalisation process since the initial aim was to seek resources in regional and global markets. Later, the company started developing and trading in more innovative products and services.
Although the Uppsala model has continually allowed Petrobras and other companies to successfully expand into foreign markets, it is associated with some drawbacks. To being with, it is evident that the model is very deterministic since its principles are determined by time evolution. The country where the firm is located or it is planning to expand to has a great influence on the approach to be taken in the expansion process. Therefore, the interdependencies between markets in Brazil and markets in other nations are not recognised by the Uppsala model.
2.3 Critical assessment of the current Internationalisation strategies
There are different modes of entry to a foreign market to be considered by a company interested in improving its global presence. Each of these modes or strategies has its own advantages and disadvantages, which must be considered before selecting the most suitable internationalisation strategy (Duanmu 2014). Petrobras has used most of the strategies to some extent, although a specific strategy is currently in use since its strategies are utilised in a sequential manner rather than in a simultaneous manner.
The use of wholly owned subsidiaries can be used by oil companies and companies in other industries to expand into a foreign market. In this mode of entry, the extending company owns all the stock of the subsidiaries. The company can either achieve this by setting up another operation in the foreign land or acquiring all the assets of an established firm in the target country. Petrobras has used this strategy to some extent, with the examples of Petrobras Netherlands BV in the Netherlands and BRASPETRO Oil Services Company in Cayman Islands. The company also acquired an energy group in Argentina known as Perez Companc in an effort to expand into the oil market in Argentina. The disadvantage associated with this mode of entry into a foreign market is that it is associated with a high initial cost. However, wholly owned subsidiaries are easier to control than joint ventures (Cantwell, Dunning & Lundan 2010). Therefore, Petrobras can find it easy to make strategic decisions.
As another method of entry into a foreign market, Petrobras embarked on exporting its oil products to countries such as Chile, Uruguay, and Bolivia. This was done to avoid the high cost involved in the establishment of manufacturing operation in a new market in the initial stages of the internationalisation process. After a good capital base was established, the company considered other capital-intensive entry modes. Formation of joint ventures is another method that can be used by firms to penetrate foreign markets and is described below.
2.3.1 Joint ventures
The internationalisation in current use at Petrobras is formation of joint ventures. A joint venture is involves coming together of two or more companies through a formal arrangement to be carry out a business activity that will yield mutual benefits (Cerny 2010). The benefits associated with joint ventures have allowed Petrobras to deal with political, economic, and legal issues that arise when a business has an international presence. A good example of a joint venture has been the partnership between Petrobras and BTG Pactual, with business activities in various parts of Africa. BTG Pactual has a better understanding of the political, social and economic challenges of the African countries involved, including Namibia, Angola and Tanzania. Therefore, information from BTG Pactual about such issues is of great importance to Petrobras when making political, economic, and social decisions. The same case applies to other joint ventures maintained by the company.
Joint ventures have also allowed Petrobras to deal with the challenges associated with international HRM. Some people may not be willing to relocate from their country to serve work in a wholly owned subsidiary in a foreign country. By setting up joint ventures, Petrobras has given most of these individuals an opportunity to serve a global company while in the home country. International marketing issues have also been handled by some of the joint ventures maintained by Petrobras. For example, Petrobras has been able to trade with nations that have poor relationships with Brazil. This is achieved by developing a joint venture with a company based in a country with a good relationship with Brazil. As far as international logistics issues are concerned, the company uses the joint ventures in different countries as warehouses for products meant for other destinations. Therefore, it can be concluded that the joint venture strategy has been highly successful since Petrobras has gained access to diverse human resources, technology, distribution networks and new markets. However, the success of this strategy has been challenged by some issues, such as cultural and communication barriers.
3.1 Recommended Future strategic direction
Despite the fact that the previous and current strategies have allowed Petrobras to gain some competitive advantage in the international market, a better strategic direction is required in the future.
3.1.1 Proposed strategy
Research shows that more and more companies are taking advantage of green packaging materials regardless of the sector or industry they are operating in (Campos, Tolmasquim & Alveal 2006). Green packaging materials are materials that can allow the product users to reduce the level of environmental pollution. Therefore, Petrobras can take advantage of this preference to become more competitive in the oil and gas industry. Paperboard dispensers can be used to replace plastic materials used to create storage materials for oil-based products. Such dispensers are environmentally friendly since they are biodegradable. Moreover, this strategy should be extended to cover a change in the aspects of labels on packaging materials used by the company. The amount of glue utilised and the weight of the labelling material should be considered when implementing the changes.
A company involved in sustainable packaging is in a better position to acquire more customers than a company in the same industry that does not embrace such a strategy (Carvalho, Costa & Duysters 2010). This is especially true for companies in the oil and gas industry since most of the customers in this industry are educated and differentiate between a packaging material which is friendly to the environment and the one with the potential to pollute the environment (Choudhury & Khanna 2014). The cost benefit of using green packaging materials will allow Petrobras to reduce its cost of operation. A reduction in the cost of operation will translate into improved profits. Consequently, the increased profits will be used by the company in production improvement and provision of better services or even after sale services. Such changes have a great potential to attract more customers. The cost-benefits may involve a reduction in improper packaging-related lawsuits and lower price of green packaging materials than conventional packaging materials. This strategy can be made more effective by making sure that the label on the packaging materials has a message advising the user to dispose the material in the right way. When making these changes, Petrobras must do a research on the packaging materials and messages used by its competitors to make sure that the changes embraced will be unique.
3.1.2 Porter’s Generic Strategy
There are three Porter’s generic strategies that can be used by companies to gain competitive advantage in their respective markets. The three are focus, differentiation and cost leadership. Cost leadership involves lowering the price of product or service below the market price through a reduction in the cost of production (Murray 2008). Differentiation strategy involves improving the firm’s products and/or services to make the more attractive and different from those of its competitors. Companies using the focus strategy concentrate on serving a specific niche market. They make effort to understand the factors that shape demand and supply in that market to develop niche-specific products and services (Hood 2015). From these definitions, the strategy recommended for Petrobras should be categorised into the class of differentiation strategies. This is because the primary reason for making these changes will be to make the firm’s products more environmentally friendly than those packaged by their competitors, hence making them more attracting.
3.1.3 Ghemawat’s Strategic choices
According to Ghemawat’s global strategy framework, there are three generic approachs to be considered by companies when creating a global value. These include adaptation, aggregation and arbitrage. Adaptation is achieved through a change in one or more aspects of the product or service offered by the company (Ghemawat 2002). On the other hands, aggregation involves creation of economies of scale to deal with differences. In such a case, the company takes advantage of similarities among various geographies as opposed to making adaptations to meet a certain specification. Lastly, arbitrage is where a company exploits the differences among markets, such as buying goods at a low price in one market and selling them at a higher price in another market (Ghemawat 2002). From these definitions, it is clear that the differentiation strategy recommended for Petrobras falls on the adaptation approach. This is because the company will be required to make changes in its packaging material and label to take advantage of the increasing demand for environmentally friendly packaging materials. Consumers in markets served by Petrobras are expected to recognise a change in the packing material used by the company a few days or months after the implementation of the changes. Most of them will shift from their current supplier to Petrobras, allowing Petrobras to gain a competitive advantage in its markets.
It can be concluded that Petrobras has enjoyed a significant level of success in its effort to expand into foreign markets. From the report, it is clear that the use of joint ventures to penetrate new markets is more effective than other approachs. Furthermore, companies in the gas and oil industry can successfully enter a foreign market if a sequential strategy is embraced. Petrobras will need to rethink its role in minimising environmental pollution. This should involve making appropriate changes to the packaging materials and product labels as described in the report.
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