The OMV Case
Date: 23 October 2013, Vienna
Industry Attractiveness: Porter’s Five Forces Analysis
Risk of entry (low)
The risk of entry in the downstream oil industry for the CEE markets can be considered rather low because of several market entry barriers. First, the refining industry requires high upfront capital investments for construction of oil refineries. Second, the large incumbent firms enjoy important economies of scale which gives them a competitive edge over potential newcomers. Third, the strong vertical integration of incumbent firms, which benefit from direct control over supply and distribution, represents another entry barrier. Thus, entering the downstream oil industry seems not very attractive.
Rivalry among established firms with similar business models (high) Due to a period of consolidation of independent refineries in the 1990’s, the downstream oil industry is now dominated by few large players like OMV/Avanti, Shell, BP/Aral, Exxon/Esso, ENI/Agip and regional players like MOL (Hungary), PKN Orlen (Poland) and Lukoil (Russia). These firms compete on two generic strategies: cost leadership (e.g. Avanti) and differentiation (e.g. OMV, BP, Shell, Agip/ENI). Additionally, incumbent firms are facing increasing competition by retailers (i.e. Tesco, Carrefour) in the low-cost segment. Due to over-capacity in gasoline and undersupply of diesel fuels competition is intense. Limited differentiation possibilities lead to additional rivalry. Finally, the existence of high exit barriers also increases competition. As a result, competition in the downstream segment is very intense. Bargaining Power of Suppliers (low)
Unless not outsourced, OMV takes care of the transportation of raw oils from the production sites to the refineries on its own. Currently (2005) OMV has 5 refineries (1 in Austria, 2 in Germany, 2 from the acquisition of Petrom (Romania)). Due to the high capacity rate in the refining facilities, OMV supplies its downstream business with internally generated resources, thus the bargaining power of suppliers is low.
Bargaining Power of Buyers (high)
Since consumers can drive to any gas station without significant lock-in effects, switching costs are zero. In general, consumers are price sensitive and choose to get gas from the retailer with the lowest prices. This price sensitivity is mainly the reason why car drivers in the CEE region are demanding more diesel-powered cars. Due to this shift in fuel demand, OMV faces costly investments in order to be able to convert light sweet crude and heavy sour crude oils to low sulphur diesel fuel (p.11). Furthermore, consumers are very location-sensitive. Specifically, the customers of the OMV premium brand are sophisticated customers demanding premium differentiated fuels (e.g. Alpin Diesel, p.11). Though they are willing to pay for specific fuel types, they won’t pay any price and they are reluctant to additional services like the forecourt shops.
Avanti brand customers on the other hand, are highly price-focused and merely want standard quality fuels. Since price is the main selling argument, additional services don’t provide any further benefits for the consumers.
We categorize the bargaining power of the buyers as high, especially due to non-existing switching costs and widely available exit options for consumers. Threat of Potential Substitutes (high)
In times of high oil prices, consumers often switch their behavior and simply use less heating or buy cars with better fuel efficiency or even alternative power units like hybrid/electric cars (p.4). For this reason, the threat of potential substitutes is categorized as high. Industry Attractiveness
To sum up, we consider the downstream oil industry attractive for existing firms. Although the threat of substitutes and bargaining power of buyers’ are rather high, the low supplier power and the low threat of entry outweigh the negative aspects. It is true that...
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