Strategy Analysis

Expanding Abroad

As a company looks to expand into international markets, it is essential that its entry strategy is based on the firm's larger strategy. The company should know what advantages may be gained by expanding into a new country and what competitive advantages it already has which it can bring to the new market. A company must also frame any decision to enter a foreign market in the risks associated with the market.

Under the communist regime, the Soviet Union had taken complete control of the oil industry. Through its structure and rules, the government managed to create tremendous market inefficiencies. With the decline of the centrally-planned economy, the oil industry started opening up to foreign investment. As is consistent with the theory of location-specific advantages, foreign firms were very attracted to the opportunity to combine their unique assets (technology, capital, know-how, etc.) with access to the oil located in Russia. But with this opportunity came tremendous risks. With no legal frameworks, state-owned enterprises, and an instable political system, companies had to weigh the advantages to be gained to the risks they took on by entering the market.

Phibro

Phibro's strategy when entering the Russian oil market was to try to take advantage of being a first mover. As a new, smaller firm within the large oligopolistic structure of the oil industry, Phibro's move was risky but potentially necessary to in order to move itself to a better position within the market. By moving into Russia first through a joint venture with VNG, Phibro hoped to gain access to a significant source of a scarce input, crude petroleum.

One of the main reasons for moving into a new market is that a company has specific expertise to share to allow it to gain a competitive advantage. While Phibro certainly had capital to contribute to any venture, its expertise in the oil industry was limited, as it had only been in operation for less than ten years before it took on the White Nights Project. This lack of expertise showed itself in the mistakes it made while entering this market. First, the company had trusted the Russian estimates of the available oil rather than doing its own research. This was a costly mistake when it turned out that the estimates of available crude oil had been too generous. Second, the company entered into a contract that left it dependent on its foreign partner. Phibro promised to provide capital to fund the needed technology and services, while VNG would provide the fields and the infrastructure. This left Phibro with little control over how the work was implemented in Russia. It also left Phibro with a partner that was required to continue to selling oil to its traditional customers, which, because of the economic crisis in Russia, could not afford to sell pay for the oil. Finally, Phibro did not bring any other strategic partners into its agreement.

Phibro did make some positive steps. First, it attempted to create a contract that would align VNG's goals with its own. Second, even though it did not make partnerships with organizations with political clout, it did come quickly up to speed on the political front by working with other oil companies on multiple fronts to change the export tax. Finally, the decision to move into the Russian oil industry was consistent with Phibro's position as a small player. They took on significant risks as a first mover into this environment, but they set themselves up to be the potential recipients of a significant reward if everything worked out.

Mobil

As one of the oldest and largest players in the oil industry, Mobil was well-established and comfortable. Based on expertise alone, Mobil had a huge competitive advantage. Many would assume that Mobil would use that competitive advantage to enter the Russian oil industry; however, Mobil chose to watch and wait. When considering Mobil's current strategy to cut costs, the declining price in oil, and the risks in the Russian market, it makes sense that Mobil would not participate in the global environment.

By not participating, Mobil did set itself up to miss out on a valuable investment opportunity; however, there are significant benefits to its position. First, at this time in history, oil prices were declining. By adding more oil to the world market, prices would go down even more. Therefore, it was probably in Mobil's best interest for the Russian oil industry to remain inefficient. Second, Mobil is able to avoid significant risk inherent in Russia's turbulent economic and politicial system. Third, it can be argued that Mobil is not missing out on a valuable investment opportunity. Even when they were not involved in projects, the Russian government tried to get them involved. Mobil's expertise made them a valuable partner for Russia. It stands to recent that as the oil industry stabilized, Mobil would still have access to the industry when it was ready to enter.

Conoco

Conoco's entrance into foreign direct investment in Russia was the most strategic of the three firms. As a medium-sized player, it is evident that Conoco is willing to take on some risk in order to place its firm more strategically. Also, Conoco does have significant industry experience, so it has capital and "know-how" to bring to any venture.

Though Conoco made a lot of smart moves, it did open itself up to risk in a few ways. Mainly, it spent a significant amount of money in creating infrastructure, like pipes, wells, etc. These physical investments cannot be removed once they are in place, regardless of what occurs with the venture.

Conoco did the most of any company to mitigate any risks. First, it had a strategy of sequential investment. Not only does that allow Conoco to learn about the foreign market, but it also helps to ensure that the Russian government will interfere less with any of its projects, in the fear that Conoco will stop investing in the oil industry. Conoco also mitigated its financial risks. The financial investments it made were done in stages, allowing it to stop investing at any time. It also brought in multiple investment partners to spread its costs. These partners helped Conoco mitigate its political risks. By bringing in US government organizations, Conoco aligned itself with organizations that could provide significant political pressure when necessary. Also, Conoco actually chose to build a lot of the infrastructure. While this vertical investment was very expensive, it ensured that Conoco had more control over the entire