Corporate strategy in forward integration of an oil company. A study of the implications of an oil company's diversification into the petrochemical business and the design of appropriate corporate strategies for its achievement.

Abstract

The aim of this thesis is to explore the diversification of a major oil company into the. petrochemical business and then through thorough analysis to recommend the appropriate corporate strategies to be followed by the petrochemical subsidiary of such a company in the 1980's and the 1990's. The petrochemical industry has undergone great changes during the last decade. In the early 1970's it entered a new era of maturity, however due to the misplannings of the late 1960's extending to the early 1970's the industry was suddenly faced with significant overcapacity which has persisted to the present date and is expected to last well into the 1980's. The 1974 oil crisis caused a further decline in the growth of demand, hence exacerbating the situation. During the seventies the industry has had to operate under increasing material prices, unlike the past, which when coupled with the problem of overcapacity and the resulting deterioration of prices, has caused considerable decline in the financial ability of the companies to finance their capital expenditure programmes through internal cash generation (which was the case in the industry's 'golden era'). This situation is threatening the long term viability and survival of the petrochemical businesses. A System Dynamics model for a hypothetical petrochemical subsidiary of a major oil company has been constructed which embodies all the policies inherent in such a system. The dynamic behaviour of the model closely resembles that expected from the real system such as the declining financial ability, which is mostly due to the inflationary conditions. Through thorough analysis, the impact of varying inflation level on the performance of the system was explored, and the need for adopting suitable accounting policies which would take account of the replacement costs of assets, during periods of high inflation, was proposed. The adoption of a number of policies led to a certain degree of improvement in the financial performance of the system, and these are recommended concerning the corporate strategy of the company for the next two decades. Finally it was discovered that due to the low level of growth of demand (compared to the past), the large economic sizes of the petrochemical plants and the market share consensus, the companies will have to go into joint ventures in the future.