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Industry Analysis.

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3.2. Threat from the bargaining power of buyers4. DOMINANT ECONOMIC FEATURESINDUSTRY ANALYSIS – THE KENYAN OIL INDUSTRY1. EXECUTIVE SUMMARY1.1 The objective of this paper is to carry out an analysis of the oil industry in kenya based on: Degree of competition in the industry by use of Michael Porter's five forces model.  Dominant economic features Drivers of change in the industry Key success factors1.2 Methodology:To solicit data on the oil industry, we relied on both primary and secondary data particularly observation, interviews, internet, newspapers and reports on the industry. 2. INTRODUCTIONAn industry may be defined as a group of firms whose products have so many of the same attributes that they compete for the same buyers. This could also include closely related industries supplying services to the industry and receiving services from the industry. The main purpose of analysing an industry is to identify opportunities and threats posed by the state of the industry so as to match the strategy to industry conditions.Petroleum products account for about one fifth of all energy consumption in Kenya, the other sources being wood, solar power, electricity and charcoal. The main players in the Kenyan oil industry include Shell/BP, Caltex, Kenol/Kobil, Total and Mobil. Other small players include Triton, Engen, Petrol, NOCK, Fuelex and Dalbit. In our analysis of the oil industry we will concentrate on the following key issues: Degree of competition in the oil industry Dominant economic features Drivers of change in the oil industry1 Key success factors in the oil industry3. INDUSTRY COMPETITIONTo determine the degree of competition in this industry, we sourced for data from National Oil Corporation of Kenya (NOCK) and Kenya Pipeline Corporation (KPC). Industry competition depends on the structure of the industry as defined by the forces affecting the industry which determine profitability or attractiveness of the industry. Different models have been developed by laymen, economists as well other scholars. The model adopted for our analysis is Porter's model which is the most relevant for open market economies. According to Michael Porter there are five forces that determine the nature and degreeof competition in an industry. These forces are: Threat of new entrants Bargaining power of customers Bargaining power of suppliers Threat of substitute products Rivalry among the industry competitors3.1. Threat of new entrantsIn October 1994, the Kenyan government liberalised the oil sector making it possible for independent dealers to operate in the industry. Previously the industry was largely dominated by Multinational corporations e.g Kenya Shell, Agip, Caltex, Total, Mobil and Kenol and Kobil. The new entrants Have driven away MNCs from the rural markets and are rapidly expanding into the urban market. The huge capital outlay required to enter and operate in this industry creates a barrier to entry and therefore reducing the degree of this threat.2Legal FrameworkThe regulation is under energy ministry. Licensing of new marketing companies intending toimport petroleum supplies into the country is reviewed by Permanent Secretary in the Ministry of Energy and endorsed by the Minister. Gazetted powers however lie with the PermanentSecretary and the Ministerial review is a formality. A one year grace period is allowedwithin which period an importer does not have to process crude oil at KPRL to meet 70 % of his requirement. The rationale is that this period is required to determine a marketer’s demand upon which his mandatory crude oil yearly input calculations will be based. To date a number of companys have been struck off the authorized oil importation list due to their inability to meet this crude import / processing condition. A few who did in fact import crude for processing incurred heavy costs in terms of financing while a few have gone out of business, the others have not been able to import crude again and rely on procuring small amounts of crude from the multinationals. The licensing criteria for new marketing companies is not yet clear though the system has become more open in the recent past with new Permanent Secretaries in place and liberalization of the sector.However, acquisition of a license is still difficult as the government awaits the passingof a new Petroleum Bill that will create the necessary mechanism and authority to regulate the sub-sector. Some of the players in the industry have also relied on brand loyalty in selling products such as gas e.g. Total. 3.2. Threat from the bargaining power of buyersBuyers are able to reduce profits in the oil industry by exerting their market power.The buyers’ power in the oil industry is facilitated by their ability to increase competitiveness in the following ways: Forcing down prices3Oil products are usually undifferentiated; this raises the buyers bargaining power andis thus able to force down prices since the purchases are not distinct in terms of their function. Bargaining for high quality and improved services There is low brand identity with respect to a customer’s loyalty to the products of a particular oil company and thus they are able to influence the quality of service offered by oil companies. Playing competitors against each other Oil products are price sensitive and the higher the sensitivity the higher the buyers power. Buyers are able to utilize this power to force oil companies to instantly react toa competitors pricing strategy.3.3 Bargaining power of suppliersA) Alternative fuel:Both sugar and its by-products have huge potential for value addition. "Ethanol is increasingly acquiring global recognition as a renewable energy and substitute for fossil fuels", Mr. Kegode (a sugar industry and ethanol specialist and chairman of Sugar Campaign for Change (SUCCAM) said.Under pressure from soaring oil prices (prices standing at $76 per barrel as at 14th July, 2006) and growing environmental constraints, momentum is gathering for a major international switch from fossil fuels to renewable bio-energy sources, such as sugarcane or sunflower seeds, according to the United Nations statement from Alexander Muller, Assistant Director-General of the Food and Agriculture Organisation (FAO). Sustainable Development Department says: "The gradual move away from oil has begun. Over the next 15 to 20 years, we may see bio-fuels providing 25% of the world's energy

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