This is second part consists Dissertation on British Gas Literature Review. Assignment Help showcase the complete dissertation in Three parts so stay update for next and enhance knowledge with this part of dissertation.
BRITISH GAS -COMPANY PROFILE / ORGANIZATIONAL BACKGROUND
British gas agency commonly known as BG group is a leading player in the global energy market. It has widespread operations in five continents capturing 25 countries in all. The BG group is growing dynamically over the years. The head quarters of British gas agency is situated in United Kingdom (UK). The BG team comprises of young and talented individuals, out of which 60% are from outside UK. The area of specialisation of the group is whole energy sector especially comprising of natural gas, where they have experience across the entire gas chain – from exploration to delivery to the consumer. BG Group is a publicly listed company on the London Stock Exchange and is also listed on the US over-the-counter market known as “International OTCQX”. The business strategy of BG group focuses on building, understanding and supplying natural gas markets all around the world. Their area of operation basically comprises of three key business sectors – Exploration and Production, Liquefied Natural Gas, and Transmission and Distribution. The centre of gravity of their activities is their high performing Exploration and Production business. The increasingly opportunity-rich Liquefied Natural Gas (LNG) segment, together with Transmission and Distribution form their downstream activities and give them the complete range of skills across the gas chain.
Revenue and other operating income of BG group for the year 2010 is 17363 dollar. Total operating profit for the year 2010 is 6925 dollar which has shown increasing trend as compared to 2009. Earning excluding disposals and re measurements for the year 2010 is 4013 dollar. Earnings per share excluding disposals and re measurements are 118.7 cents. Earnings per share, excluding disposals and re measurements continuing operations are 3383 dollar for the year 2010. Cash generated by operation for the year 2010 amounts to 8370 dollar, while the capital investment is 9427 dollar. The average number of employees recruited by the BG group for the year 2010 is 6172, majority of these works outside UK.
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Market for fuel and gas is entire world with every country having different type of needs and levels depending upon their population’ industrial development’ weather conditions and domestic production. Majority of countries are dependent on imports to sustain their energy requirements. There is a gap in demand and supply of the products by domestic purposes in all countries except oil producing countries. These producing countries have economies based on their oil producing business. Most of the oil producing countries is members of association of oil producing countries like OPEC etc. To maintain a healthy price in the market these association determines the level of production to be undertaken so that prices do not fall beyond a certain level (Hutchison, 1987).there are various other factors also which impacts the international crude oil prices like overall economic scenario of the world (growth phase or recessive phase)’ demands from other countries’ usage of alternative and renewable source of energy ( solar power’ wind energy etc)’ increased demand for heating fuel in cold weather conditions’ demand from developing countries’ discovery of new oil fields and their commissioning etc.
International prices are currently hovering in the range of (100 dollars to110 dollars per barrel of crude oil) with fluctuations depending on the market forces. The future market for crude oil is also giving signals of down trend in oil prices. Most recognized and traded international oil markets are New York mercantile ‘London crude’ Brent crude etc. The other markets for oil trading take cues from these markets in determining their prices. In last couple of decades the prices for crude oil has increased many folds and their demand has also grown exponentially. Market researchers claims that main reason for increase in the prices and demand are increasing level of globalization and industrialization’ a very high demand from developing economies which are consuming high amount of fuel for fulfilling their energy needs and power generation’ increased lavish life style with frequent flying and purchase of motor vehicles’ development of technologies in industrial sector which leads to automation of manual process by consuming fuel or electricity’ depleting existent source of fields and political instability and war like situations in majority of oil producing countries in middle eastern and African countries (McCullough, 2006).
Crude oil is usually purchased on contract basis by marketing and refining companies for long term with frequent revision of prices as per their international market trading prices. The crude oil is refined by refineries and different products are distilled from it. Cost of transportation of crude oil and refining is a major part of the prices offered to the end product consumers. After era of liberalization of markets’ opening up of many closed economies for international business the consumption of fuel has increased and the market became more competitive. Both government organizations and private industry players are striving to lure the consumers with value added services and their pricing structure. Economic recession has intensified the competition and emerged with the survival concept of Darwin “survival of the fittest” .the organization’s who are able to cut down on their cost’ pass on the benefits to the end product consumers and remain profitable in tougher economic times are only organization’s which can enjoy having a sustainable advantage over their competition and remain profitable and growing in economic recessive times (Kitasei, 2010).
UK and European Union market for energy is very competitive in nature. The market is huge with immense consumption capacity and huge potential to grow in future years. The demand for energy is majorly from domestic sector’ power generation companies’ refineries’ automobile industry’ and other manufacturing sector. These industries draw a large amount of fuel and energy and before developing a project they always ensures that their long term energy requirements are fulfilled and guaranteed. Companies like British gas fulfil these needs and draw long term supply contract as well. For retailing of fuel the companies uses their own retail outlet called as petrol pumps or gas stations. The requirements of domestic and commercial vehicle fuel are fulfilled through these retail outlets. House hold need of energy for cooking’ heating is fulfilled by supplying gas through pipelines and gas connections to individual households and charging them as per the units they have consumed. The British thermal unit of (btu) is internationally recognized unit of measurement of efficiency and energy supplied by the fuel on its consumption (Haigh et al., 2005).
To gain an understanding of what pricing strategy is all about, one must first understand the concept of price. Lancaster and Reynolds (2004) understand price to be the means using which a business would support its research costs, marketing costs, the costs of manufacturing and a few other activities. Boone and Kurtz (2009) have provided us with a simple definition of price where “Price is an exchange value of a good or service”. It is crucial for marketers to understand whether the price paid for a good or service is worth paying the price for it. Again while in some cases consumers are willing to pay a high price if the product is of a superior quality, in other cases high prices often drive customers away (Boone and Kurtz, 2009).
(Kotler 1997) is of the view that for the marketing mix, pricing is one of the most essential elements as it can transform fast while, also, contrasting product features and companies commitments. To this, Lancaster and Reynolds (2004) add that for a company to generate huge revenue it is important to have a good pricing strategy, a marketing mix and a suitable method of marketing the service or product.
Pricing strategy is seen as a course of action that is designed to accomplish set goals. The practical problems faced by marketers in setting prices can be solved by using pricing strategies. The prime factors in business which assist in deciding on a subsequent pricing strategy completely rely on its marketing and pricing objectives, on the market for their product, on the product life cycle, on product differentiation and other factors of forum (Pride and Ferrell, 2008). Organizations should have a consistent and suitable pricing strategy which will give them an advantage over the other competing organizations in the market (Dibb and Simkin, 2001). Here the pricing strategy plays two roles in the success of the organization. Firstly, it helps generate sufficient revenue and, secondly, it aids in affecting the customers thought process when buying things (Kotler, 1997).
Although the pricing strategy of a product changes as time passes companies launching a new product often find it difficult to set a price for the first time. To assist them in choosing the right strategy, they can choose between two broad strategies. These are market-skimming prices and market-penetration prices. However many companies also uses a mixed type of strategy all of the strategies are explained below
Here companies examine the maximum income for a newly launched product by setting a high price for it. This strategy targets the few customers who are willing to pay a high price. However, for this strategy to be effective it must meet certain conditions. Firstly, the high price charged for the product must be supported by its quality. Secondly, the production cost of the product should not be so high that it is disadvantageous to produce a smaller quantity of the product. Lastly, there should be differentiation. In this it should be difficult for competitors to enter the market and sell at a cheaper price (Kotler and Armstrong, 2010). Here the company’s internal costs and their profit margin determine the price which is either too high or relatively low in relation to their competitor products and the company’s brand equality and their brand name and reputation (Kotler, 1997).
This strategy allows companies sell a new product at a low price so as to target a larger number of buyers. They penetrate the market at a fast pace and in a deep manner with the sole intention of attracting a large number of buyers as quickly as possible. As with the previous strategy, for this strategy to work several conditions must be met. Firstly, the market segment in target should be responsive to fluctuations in prices. Secondly, with the increase in the sales volumes, there must be a fall in the cost of production and distribution. Lastly, the companies using this strategy should continuously maintain its low prices else the price advantage would only be temporary (Kotler and Armstrong, 2010).
in this strategy companies uses both market skimming and market penetration strategy with changing times. When a new technology or a new product is launched in the market with no other competitive forces applicable in environment then companies try to earn maximum profitability by market skimming strategy. Since there is no competitive player in market for that particular product so companies can charge a premium and earn profits till they can and in due time when competition catches up and launches their own product in competition then the first organization lowers its prices and take advantage of the brand name and customer loyalty it has formed over the time period. Now the organization plays on number and penetrates the market deeply with its low cost product and large number of customer base. This strategy enhances the profitability of an organization to the optimum level since it is using both pricing strategy as and when applicable to earn maximum profits.
The Economics-Dictionary (2011) defines the Price Theory as “the part of economics which deals with prices at a microeconomic level, in particular the theories of demand and supply”. This theory defines the role that prices play in consumer demand and the supply of a service. Price theory concerns itself with the creation and transfer of goods and services between different trade and industry agents where the price of one item is comparative to another. The price here is determined by the demand for the commodity and its supply (Freidman, 2007). If demand is equivalent to supply then the market remains very stable and prices does not fluctuates often but in case of gaps in demand and supply and other environmental factors which impacts the prices like political environment’ economic environment etc then the pricing remain very unstable and volatile.
Arbitrage Pricing Theory
In 1976 Stephen Ross introduced the Arbitrage Pricing Theory which deals with the practice of taking advantage of condition of difference thereby linking more than two markets and thus building a danger free profit. In this theory Ross argues that“if equilibrium prices oﬀer no arbitrage opportunities over static portfolios of the assets, then the expected returns on the assets are approximately linearly related to the factor loadings” (Ross, 1976).
This Arbitrage Pricing Theory sets a valuation which is important in the pricing of stocks. This theory argues that a financial advantage could be a linear role of different macro-economic factors or theoretical market indices and factor specific beta coefficient represents the sensitivity to changes in each factor. This theory was introduced to be used when the current price is too low or existing price is too high. Ross’s theory gives justification that by adopting a safe profit which is bereft of risk management through asset pricing could help a company or Organisation in maintaining a sustainable and competitive role. This theory can be measured well to recognize the ways in which a pricing strategy can resolve the necessary factors introduced in the current unstable market, even if the price is too low or too high (Huberman and Wang, 2005).
Theory of Price Elasticity
The Theory of Price Elasticity of Demand measures the effect of a change in the price to the demand and supply of a product. Products that are considered to be necessities are less affected by a change in the price as the consumers need the products and will continue to buy them. However, a product of less need will keep customers at bay owing to the high prices charged (Investopedia, 2011).
“To determine the elasticity of the supply or demand curves, we can use this simple equation:
|Elasticity = (% change in quantity / % change in price)|
If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic” (Investopedia, 2011).
Investopedia (2011) provides us with the factors that affect the demand elasticity. These are:
The availability of substitutes
here consumers would readily substitute one product for another, if the price of the product is too high. For example, the substitution of coffee by tea.
Amount of income to be spent on the product
an increase in the price of a commodity but not in the income of a consumer will force the consumer to lower his/her demand of the particular commodity. Here there is an elastic reaction to demand where demand is affected by the change in the price.
If the price of a commodity goes up and there are no substitutes, the consumer will continue buying the commodity which is here seen as inelastic. However, if the consumer cannot afford the high price of the commodity he/she will stop buying it for a period of time. Here the price becomes elastic for the commodity in the long run.
PRICING STRATEGY AND PRICING MODEL
British gas statistics is a big group and is an integrated company and has a record of delivering robust growth and focusing on selected markets of high value and is all about securing low cost gas for delivering into those markets. The strategy of BG group is same since years because it has proven very fruitful for the company and has contributed in a robust manner for the development in business environment and it has continued to deliver value to its customers and its stakeholders. The specialisation of BG group is in gas and it has developed the skill set to compete in all the steps of gas value chain from reservoir to burner tip. The major strong points of the company which proves helpful to compete in the market are a deep understanding of gas markets, the skills and experience to invest throughout the chain, and a focus on project delivery. These enable the Group to respond swiftly to market trends, targeting investments where value can be created. The BG groups strategy focuses on strong growth which is a distinctive, low cost, long-life asset base with an in-built potential for continued growth into the next decade. The strategy is developed very keenly and is very helpful to accomplish the goals of the company as it focuses on both the aspects maximising the potential obtained through existing asset base and also augmenting it through the addition of various other opportunities as well as new projects.
Soaring natural gas and oil prices have helped BG group to shrug off the increase due to recent north tax and thus it plans to increments capacity further in Kenya, Egypt and various other parts of the world. The strategy is helping the BG group to decide about the pricing strategy of the company and to perform well in the competitive market. The prices of gas and oil always remain high, and the robust economic growth contributes in this. This rise in price is beneficial as well as disadvantageous for the BG group. As there is rise in prices it contributes in enhancing revenues but it also creates a continuous pressure on underlying costs. As all other competitors get affected similarly BG group gets affected by this pressure but it gains a competitive advantage because of its low cast asset base from which the group expects to continue to deliver a top quartile performance on unit costs. In the light of higher prices, governments in countries with significant hydrocarbon resources are changing their perspectives on how these resources should be developed. Now, a great focus is on achieving a balance between retaining gases for domestic markets as well as providing new supplies for export projects. BG Group has the expertise in the natural gas business and it has the talent and desire to engage with partner governments and this provides a support to these important stakeholder decisions and positions the Group favorably to participate in new opportunities.BG group operates in an industry which is facing a high growth rate and thus has a bright future, the forecasted growth rate of LNG industry is 12% annually up to 2012 and the demand for gas will continue to outstrip supply and this will contribute to increase the value of the Group’s existing LNG portfolio. As a result, the Group has been able to realize this greater value by capturing opportunities to market LNG, originally destined for the USA, in alternative markets in Europe and Asia.
The group focuses more on long term growth rather than short term growth and this type of growth is achieved by exploration as well as appraisal. The focus of BG group is to achieve and sustain a robust and strong organic growth with the help of a programme that targets on new ‘play opening’ opportunities, extends existing plays, and seeks to appraise and develop existing discoveries, including some that can be commercialised rapidly through existing infrastructure. British gas agency has been successful in becoming a market leader and building a model which is based on providing leading low cost through the supply backed up by flexible LNG portfolio and market access in Atlantic basin. Customers are also provided with added services which give value to the service and help to strengthen the bonds with the customers and contribute in customer relationship management. The additional services provided can be listed as combination of flexible supply contracts, access to multiple markets, control of shipping, low cost infrastructure and the skills and experience to capture global marketing opportunities. This is proving successful in ensuring that BG Group is able to access the highest value markets, wherever and whenever they occur. BG group has also established its presence in Brazil and India, which is a very strategic step and focuses on strengthening the integrated gas strategy downstream of the LNG degasification terminals and is aiming at maximising the value of BG Group LNG supplies to the world’s largest energy market.
SWOT Analysis of the BG group
The swot analysis of BG group gives an overview and in depth analysis of the market attractiveness and the external and internal factors contributing to avail these market opportunities. It gives an understanding of company’s business as well as operations. The compilation of profile has been done in order to bring a clear and an unbiased view of the company’s key strengths and weaknesses and the potential opportunities and threats. The profile helps to formulate strategies that augment business by enabling to understand the partners, customers and competitors better.
Strengths of BG group–
BG group are the market leader in natural gas production and distribution, it is positioned as a multinational firm and its headquarters are located in UK. It operates in energy sector and has a wide network scattered in 55 countries covering 5 continents. It has many subsidies and new projects in many countries and has many upcoming projects in countries like Egypt, Kenya etc., Participates in London Stock Exchange, IPO in New York Stock Exchange. And is listed in the FTSE 100 Index; It enjoys strong brand loyalty among customers, it has a strong brand management, the strategic planning and business strategy assignment is very good, pricing strategy of the company is very strategic, company operates in a segment which is having a very high growth rate and it is predicted it will grow at a rate 12% till 2012.
Launch of controversial business, Increase in petrol and natural gas prices in the UK, Explosion of some refinery and plants, Criminal charges due to various issues, closure of some resources, scarcity of sources, continuous rising trend in prices, pressure of maintaining cost of production.
Various investments will be very fruitful in coming future which will help in the research conducted for various alternative fuel methods including hydrogen, natural gas, and wind and solar over the forthcoming decade, several expansion strategies in different countries, Extension of strategic oil and gas acquisitions in North Sea area, Launch of more flexible price policy to compete main rivals.
The energy sector is very sensitive for environment and thus environmentally unsound policies due to oil and toxic spills can create many problems for the company, Occasional refinery explosions takes place which leads to loss of labour and resources, Further lawsuits considering the company’s ecological activities.
PEST analysis of BG group
Threat of geopolitical instability is making world energy markets more and more volatile. Climate de-stabilizations are increasing because of these companies as they lead to carbon di oxide gas emission which are leading and encouraging more and more sustainable forms of energy. World energy markets are becoming more and more volatile as the oil requirements are increasing and creating tension between nations.
Economics assignment is underpinned by its energy and gas supply. Demand in energy market is continually increasing by almost 60% as the fossil fuels are getting depleted and renewable sources of energy and nuclear energies, both of these have relatively low contribution. Various alternative sources of energy supply are increasing and thus expected to continue doing this.
Various social issues involved are the Kyoto Agreement was signed in 1992 and has led to various carbon funds and the emission and trade all over around the world and big countries like Europe and this is in fact becoming a legal requirement in today’s era. Sustainability of future is a great area of concern as peoples worldview is starting to change to a concern and this is not at all justifiable and expected to change dramatically to justify widespread changes for energy supply and use.
Technology- The various agencies and norms are of importance as the international energy agency states that alternative energy markets will be underpinned by various technological breakthroughs. Technology is the key to gain competitive advantage as explained in various strategic management theories and research whilst alternative energy technologies are underpinned by 48 critical success factors across commercial, technological, socio political, and organizational categories.
PORTER’S 5 FORCES MODEL OF BG GROUP
Barriers to entry–
Technological focus on alternative energy industry is there and thus high proprietary learning curve will be obtained due to this. There is a big deal and to inputs and various government policy and requirements to operate in industry exists. As in the energy sector is witnessing continuous rise in prices and it creates a pressure to maintain economies of scale and thus gain competitive advantage by enjoying cost leadership.
Theory of substitutes–
Because of higher cost the inclination of buyers towards substitute or alternative energy is increasing but still is low. Thus because of this high price performance tradeoff between substitutes as traditional sources of energy are still cheaper as well as reliable as compared to alternative energy in this era.
The competitive rivalry is high because of the exit barriers. Industry concentration is very low and fixed costs are high. For the long term future of the industry alternative energy source are vital and thus the industry growth is slow. The rivals and competitors are many and diverse in rationale for strategies to invest and to enter into the industry.
Bargaining power of buyers–
the bargaining leverage of buyers is low, the buyer volume is also low, buyer information is also low, importance of brand identity is high, and availability of substitutes is also high. In terms of tax breaks and energy provider buy backs buyer incentives are relatively higher.
Bargaining power of suppliers–
the concentration of alternative energy suppliers is low and the importance of volume to industry development and survival is high as the focus is on low cost and the economies of scale to compete in industry.
There are different types of pricing models to support pricing strategies. These are revenue models and asset model. Revenue models– it comprises of three models subsidy model upgrade model and advertising model. Subsidy model- in this customers all customers pay, here the customer has to buy two products out of which one is the paid product while the other is the free product. As the customer buys the paid product he gets the free product as paid product had subsidized it. The second is upgrading model– Here not all customers pay only some customers pay, it is also known as free mum model. In this model the customers who pay to or upgrade to the paid (premium) product have to pay for the customers and then they get a free (basic) product. The third model which is used is advertising model in this the vendor’s pay for the customers as they get a free sample and avail the benefits and then they will have to pay for the product if they want to use it second time. This type of strategy is used for promotion of the product.
The second model is asset model in which the acquirer’s pay. Here the customers asset is build by the company and the entire customer base get the free products. The company realizes the value by the sales incurred by the company. Asset model is a path to exit for a venture (Baker et al, 2010).
2.13Link between Literature and Research Questions
See the First part, Research Proposal British Gas Pricing Strategy>>>>