Juggling Hypercubes: long-term EPC Business Strategy for Hydrocarbon Sector

Team: ShootingStars

L&T OutThink 2017 (Finals)

November 10th, 2017

Image source: L&T annual report

This case is developed by L&T Institute of Project Management, Vadodara. Case solution is given by the team ShootingStars of IIM RohtakAll the recommendations related to the business problems, as mentioned in the case, are based on the assumption that DGHE is similar to LTHE of L&T Group

Anupreet | Neha | Utkarsh

1

10 Year Road-Map for DGHE1

1 In our analysis we have assumed that DGHE business is very much similar to LTHE business of L&T Group

Year 1 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10Year 2Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

A

B

Long Range Planning

A BIdentification of Corporate Strategy and initial fund allocation

C

D

Focus on intensive growth

Focus on integration of the functional areas

Focus on diversification

Use present capabilities to gain a competitive advantage

C Integrate various areas and create a design chain where everything is popularly communicated

New Services & Product Development

Market Penetration

Create Design Chain

Outsource Activities

Integrate Different Functions

After Construction Services

Renewable Businesses

Leveraging on core competency

Diversify in other potential areas such as renewable energy sector

D

Integration & creating Design Chain

Diversify across Businesses

2Source: Case study, Team analysis.

Internal and External Analysis explains the risks and uncertainties. It suggest to adopt internal strategies to achieve future outlook

Climate change concerns

-

-

-

--

-

Uncertainty energy policyWorsening fiscal

terms

Access to reserves: political constraints & competition for proven reserves

Competition from new technologies

Cost containment

Health risks

Human Capital deficit

New Operational challenges

Price Volatility

Predicted Risk level

-More Same Less

51% 48% 58% 48%

Automation Enhanced oil recovery

High Pressure Drilling

Sub-sea & Deep-water Equipment

Before 2020 Around 2025 Beyond 2025

Fiscal Policy Shifts in Middle East Distribution of risk, becoming less

favourable to EPC Contractors The abundance of assets, might lead

to fierce pricing competition

Explore New Markets Undertake efforts in North Africa

and CIS Strategize roll out of Government

Plans

Operational Excellence Alliances Cost optimizations Improved Customer Intimacy Compliance with Standards

Uncertainties

Internal Control Strategies

Future Outlook

3Source: Case study; Team analysis;

Total energy investments over the next 5 years will reach $900 billion. Largest Player plans to spend $334bn across the value chain by 2025.

Pipeline to transport to China has been constructed. Proportion of crude oil to Asia has significantly increased

Mexico to boost its internal gas pipeline, expected to grow more than 90%. Highly integrated energy market, attract investments and lower capital costs.

Gas production is expected to climb rapidly from most offshore area. The region is net exporter of Gas, mostly to North Asia as LNG.

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

1990 2000 2005 2010 2011 2012 2018

Production (kb/d) Demand (kb/d) Net Imports (kb/d)

0

1

2

3

4Political

Economical

Social

Technological

Legal

Environmental

0

10

20

30

40

50

60

70

KSA Iran Egypt UAE Iraq Algeria

EPC FEED Study

Global Persspective

Along with internal strategies and brief analysis of the conditions of different regions, we recommend extensive focus on Middle East and North Africa

4Source: Case study, Team analysis.

Intensive & Integrated growth are short term options, whereas Diversification in the long term leads to quantum leap of revenue and profits margin

0

5000

10000

15000

20000

25000

30000

35000

0

5000

10000

15000

20000

25000

2014 2015 2016 2020 2025 2028

Natural Gas Production (bcm) Natural Gas Consumption (bcm) Oil Products Production (bcm) Oil Products Consumption (bcm) Global Energy Investment (in USD trillion) Revenue

EXPECTED GROWTH DUE TO DIVERSIFICAITION

EXPECTED GROWTH DUE TO INTEGRATION

EXPECTED GROWTH DUE TO INTENSIVE GROWTHBASE CASE

STRATEGIC GAP

Valu

e o

f G

row

th D

rive

rs

Rev

enu

e in

Rs.

Cro

re

Growth Forecast for different cases

5Source: Case study; Team analysis;

In order to reduce strategic planning gap, DGHE should focus on existing market penetration and new product development

1 Based on the regression model with various driving factors

Strategy in a case of super-abundant capital age

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

2016 2020 2025 2028

Base Case Intensive Integrate Diversification

B

Intensive Growth Strategy

Integration

Diversification

D

B

C

Base CaseAStrategy Planning Gap

Exhibit 1: Financial Projections for Various Strategies1

DGHE can use 3 growth strategies to achieve long-term goal Intensive Growth Strategy

Current Value Propositions?

• Hydrocarbon Offshore • Hydrocarbon Onshore • Hydrocarbon Construction Services • Hydrocarbon Modular Fabrication Services • Hydrocarbon Engineering Services

Market Penetration

ProductDevelopment

Market Development

Product Proliferation

Products

Existing

Mar

keti

ng

Segm

en

ts

New

New

Exis

tin

g

But How?

BY DEVELOPING NEW PRODUCTS & SERVICES BY UNDERSTANDING CLIENT’S REQUIREMENT

C

D

A

• Long term agreement with client like Saudi Aramco

• Associating with more companies like ONGC for piloting the products

• Explore new markets with good long term business potential

• Strengthen support to international clients other than L&T Offshore Projects

• A percentage of Engineering Man Hours can be invested on EPCM in Middle East

• End-to-end solutions for Onshore and Offshore Construction

Rev

enu

e in

Rs.

Cro

re

6Source: Case study, Team analysis; Strategies for minimizing information asymmetries in construction projects, Anita Ceric

Integration growth strategy reduces risk and delay in the value chain of EPC based business by outsourcing and integrating functional areas

Integration

The value chain for EPC based contract exists only for the duration of the project1

Integrate various aspectsof value chain to make a“design chain”, in which allvalue chain members areengaged in collaborativedesign problem solving

PO PM PM CHires

Performs

Monitors

Informs

Hires

Performs

Hires

Performs

Self In

terest

Self Interest

Self Interest

Self

In

tere

st

po c

Procurement

Design

Finance

RISK DELAY

Value ManagementDesign ManagementFinancial risk

Timely ReviewOver aggressivenessPressure from Client

1 Create Design Chain 2 Outsource Activities

A firm may specialize,based on strength andweakness, in one or morevalue chain activities andoutsource the rest.

3 Integrate Functional Areas

Effective integration of all thefunctional systems. Primarily aconducive environment needsto be created within alldivisions and subsidiaries ofthe company.

4 After Construction Services

Provide ancillary constructionand maintenance services andcreate knowledge resource

1 PO = Project Owner, PM(po) = Project Owner’s Project Manager, PM(c) = Contractor’s Project Manager, C = Contractor. Relationship between PM(po) & PM(c) is the key to success

7Source: Case study, Team analysis; Wardley Maps; based on John Boyd’s OODA framework & Sun Tzu’s book – “Art of War”

For long term, DGHE should focus on diversification, moving towards renewable sources like Solar and Wind

Diversification

Market Penetration

ProductDevelopment

Market Development Diversification

Products

Existing

Mar

keti

ng

Segm

en

ts

New

New

Exis

tin

g

DGHE should diversify, in solar & wind, in order to survive in the long

How to implement the strategy?

Purpose

Landscape

Climate

Doctrine

Leadership

Observe

Orient

Decide

Act

Vision, Mission & GoalsMission is to provide integrated solutions for Oil and Gas Industry to build end-to-end solutions including all services Professional management, focus on customer satisfaction

Business-EnvironmentThe oil & Gas industry is maturing . There’s a shift from non-renewable energy to renewable energy

Macro-EnvironmentMacro-Environment factors are good enough to give EPC business a growth of 7%-8% CAGR

Competency

DGHE’s huge experience in setting processes, methodologies, technologies can be used for competitive advantage

Leadership

DGHE project managers should embark Strategic Thinking as a skill to take project decisions. The strategy should be properly communicated to the lowest levels

0

20

40

60

80

100

120

140

2012-13 2014-15 2016

Wind Solar

Linear (Wind) Linear (Solar)

Expected Annual Power Generation (in Twh)

8Source: Case study; Team analysis; Balance Score Card – Robert . D. Kaplan, David P. Norton

Note: Based on Balanced Score Card Methodology

Primary strategy which should be pursued by DGHE and management teams is Communication, Business Planning and Strategic Learning

POTENTIAL AND GROWTH

CHALLENGES

INTERNAL PROCESSES

CHALLENGES

CUSTOMER CHALLENGES

ACHIEVE MARKET SHARE GROWTH

ACHIEVE SUSTAINABLE AND POSITIVE FINANCIAL

RESULTS

SATISFY THE CUSTOMER’S

EXPECTATIONSIMPROVE COMPANY’S

IMAGE

DEVELOP EFFICIENT

PROCUREMENT MANAGEMENT

GAURANTEE CUSTOMER ORIENTED

INNOVATION MANAGEMENT

INCREASE DIRECT PROCESSES EFFICIENCY

CREATE AND MANAGE A ROBUST PROJECT MANAGEMENT STRATEGY TO ADAPT TO RISKS AND DELAYS

GAURANTEE DECREASED COSTS AND NO DELAYS

DEPLOY PROJECT MAMANGEMENT TECHNIQUES

ACHIEVE HIGH PERFORMANCE

CULTURE

BECOME SECTORIAL REFERENCE FOR AUTHORITIES

DEVELOP SUSTAINABILITY AS

MANAGEMENT PRINCIPLE

INCREASE INDIRECT PROCESSES EFFICIENCY

STRATEGY MAP

Translating Vision

Communication & Linking

Business Planning

Strategic Feedback & Learning

Use high quality employees to provide services that surpass customer needs

Communicating & Linking through various channels. Linking reward program with performance and setting goals

Setting Targets, Aligning strategic initiatives, allocating resources, Establishing Milestones

Learning that produces a change in people’s assumptions and theories about cause-and-effect relationships

9Source: Case study, Team analysis; Making Flowing Stream Strategy Work – Sushil, IIT Delhi

DGHE should extend its services for new customer by following shift and divert strategy channels. It should also diversify its business in different sectors

ContinuityForces

Change Forces

0

1

2

3

4

5Core competence

Customer base

Infrastructure

TechnologyLabour

Brand

Culture

0

1

2

3

4

5Globalization

New Opportunity

Competition

New Technology

Government Policies

Global Standards

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

LOW

HIGH

HIGH

DGHE

CHANGE MASTER (Wind)

QUICK ENHANCER (Mushroom)

SYNTHESIZERS(Flowing Stream)

STABALIZERS (Tree)

CONTINUITY FORCES

CH

AN

GE

FOR

CES

Vital: Customer BaseDesirable: CultureBurden: Low skilled labor

High Impact: New OpportunityMid Impact: Government PolicyLow Impact: Competition

0

1

2

3

4Cost Reduction

Improvement inProcess

Market PenetrationMarket Share in

Renewable Sources

End to End Solutions

As-is To-beStrategy Landscape –Before & Aspirations

VDB analysis of Continuity forces

VDB analysis of Continuity forces

Strategy Channels

Divert

Partition

Shift

Extend services and penetrate the market

Shift some of the activities to other business verticals or create new verticals

Diversify in renewable sources

10Source: Case study, Team analysis; Characteristics of a project friendly enterprise, Vittal Anantatmula; Strategic thinking: can it be taught?, J M Liedtka;

Considering the key competencies of DGHE, project friendly organization can be achieved by competent and productive teams

DGHE project teams should

encourage lower levels to practice

intelligent opportunism in

order to avoid strategic

dissonance

Strategic Thinking

Systems Perspective

Intent Focused

Thinking in Time

Hypothesis Driven

Intelligent opportunism

DGHE project teams should see vertical & horizontal linkages within the system from multiple perspective

DGHE project teams should marshal and leverage their energy, to focus attention, to resist distraction, and to concentrate for as long as it takesto achieve a goal.

DGHE project teams should think on what to keep from past, what to lose from past & what to create in present to reach the desired goal

DGHE project teams should accommodate

both creativeand analytical thinking

sequentially in its use of iterative cycles of

hypothesis testing.

Increases Project

Productivity

DGHE project teams should embark Strategic Thinking as a skill to take project decisions

Competent Practices & Professionals

Productive Teams

Project Friendly Organization

Rank value of proposal & project Rank desirability of Contractor Manage project facets like cost,

duration, risk using planning, fine tuning, Change management& tradeoff analysis

Measure the attributes

Divide into teams – proposal team, proposal portfolio team, project team, project portfolio team

Make a team charter – specify personal behavior & professional performance

GuidelinesProcedure & Models for Managing attributes

Project Proposals Portfolios

Consistency in Performance Success

Team Norms for Performance

Deliverables Reporting Punctuality

Behavior & Attitude Trust Conflict

management Harmony

Ideal Competencies for DGHE Making DGHE a project friendly organization

THANK YOU

Team: ShootingStars