Sembcorp is currently undergoing a drastic drop in their profit making. The company is dealing with changing market trends. This has seen them experiencing a shift in the sector that is the most profitable. The shift has been partly motivated by the global rise in use of the combined cycle gas turbine technology(CCGT). The technology has been adopted in a large scale, leading to an increse in the generation of clean fuel. A further drop in prices was observed following the rising popularity of wind and solar energy. Sembcorp have been disadvantaged by this move as it ended their dominance as the market leader in clean energy solutions. The other two sectors of the company were unable to cover the drop in profit. This is despite the utilities section enjoying an upsurge in the income generated.
The main problem facing Sembcorp is a drop in the profits. This has made them experience major losses following the oil and gas downturn. They were able to observe a shift in the profitabilty earners from development sector to the utilities. This led to a change in strategy, with the aim of capitalizing on the new biggest earner. The new strategy has led to an additional strain on the finances. This is because it has been focused on additional investment to grow the utility section of the company. This has cost alot in terms of capital investment while it has not made a significant difference in profit making as yet. The company is now faced with a big challenge as to how to increase the profit margins while maintaining the growth and expansion plan.
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Brief summary of case study
Sembcorp Industries is a conglomerate of businesses that owns 3 main lines of business. They are namely marine, utilities and urban development. The group is made up of 60.6% of SembMarine which majors on rig and ship building and repair as well as engineering and construction. Temasek Holdings have a minority share holding as well. The major industrial parks provide services such as waste water management, solid waste management and recycling. The case study gives the history of the company and its current status. It also highlights its performance in markets such as Vietnam, Myanmar, India, Bangladesh, Oman, China and Singapore. The current business strategy is examined and its sustainability is scrutinised. The case study concludes by comparing the company's financials in its various markets and over the passing years.
Analysis of issue : SWOT Analysis of Semborg
Strengths
Sembcorp was an early entrant in the green energy market. They were therefore able to have had an easier transition into the industry. They were able to convert their plants at a lower cost and thus they did not experience a loss in the shutting down of plants. This gives them an advantage over other providers of clean energy who have to use their finances to convert their infrastructure.
The company has infrastructural assests in over 70 locations. These machinery is set up as the support system for the utilities section. This gives them an advantage over incoming players in the industry. The company can use this facilities against competitors in order to lower costs of operation and widen their market coverage (Diep & Pham, 2015)
The last two decades have seen Sembcorp taking part in many governnment to government (G2G). This gives them a greater vantage point in negotiating government projects. This experience is also valuable to them as they expand into new markets. Most of the challenges faced with new markets are likely to be similar. The different cultural and bureuacratic processes involved are likely to be easily solved by banking on past experiences. The company has a strong team of experienced and competent staff that have a rich diversity. Their presence in various countries helps them to be able to diversify their market and to grow their portfolio. It is also easier for them to grow their leadership base by internal training. The top tier of management are able to handpick their best employees and groom them to take over from them. The company has invested in various organisations through the stock market and other financial arrangements. This gives them some cushioning against poor returns as they are able to exploit their passive income choices (Malatji, 2014).
Weaknesses
Sembcorp is currently suffering from reduced flexibility in cash flow. The drop in profit has seen the company experiencing a lower disposable income. This has led to a reliance on capital investment from outside sources. The company is therefore under strain with a lower capacity to expand. The process of acquiring and maintaining long term financing is also disadvantageous.
Opportunities
Sembcorp can capitalise on their strengths to introduce sustainable green energy solutions to other markets in the process of transitioning. For example, some parts of Asia are in the process of reducing their reliance on fossil fuels. The company can outsource their staff for training endevours similar to those done under the G2G programs. This partnership can then be expanded into one that incorporates the services of Sembcorp into the implementation stages. The other less profitable ventures can then be marketed with their other functions through this avenue.The company can capitalise on utilities like recycling water and providing clean energy to the masses. Other services they can then offer are rigging and construction expertise in regions where this industries are robust (Soy, 2015).
The company has a chance to expand their operations in the 14 countries where they already have a market prescence. The facilities can be slightly adjusted to cater for a larger clientele. The expansion of these existing facilities can be used to increase the company's capacity. This will provide a greater platform for income generation without the massive capital investment necessary for initiating an initial project (Malatji, 2014).
Threats
The company is facing major competition from the new players in the market. For example, alternative desalination plants as well as rigging plants all offer stiff business competition. The use of cheaper and more effective technology has seen some companies overtake Sembcorp and take up its market share. This has been further slowed down by the crawling pace of expansion. Other entities have been able to dominate areas that Sembcorp could have controlled if their plants were operational.
Strategic alternatives and recommendations
Sembcorp is going through a temporary cash flow problem as they seek to change their strategy to suit the current market trends. Their curent largest expenditure is in infrastucture. This includes penetration into new markets through land acquisition, licences and plant set up. A substantial part of the budget will also go into marketing. Sembcorp has an option of diversifying its whole portfolio globally so as to regain the lost capital influx through new territorial conquests. The other option is to pursue the new strategy that emphasizes the profitability of the utilities unit (Li, 2018).
Pursuing the utilities unit is the most sustainable alternative. It is recommended because it has the greatest potential to grow. Moreover, the decision to expand this division comes with a long term guarantee of success. The best way to actualize this strategy is to reduce the cost of expansion. This can be done by entering into joint ventures that eliminate the need for excess borrowing of capital. An example of such an arrangement is by partnering with governments to acquire or lease land on their behalf so that this cost is eliminated. Such partnerships will lower the company's expenditure and fast track their expansion. This will increase their profits gradually and the company will be back on its feet once more.
References
Diep, T., & Pham, H. (2015). Foreign investors in Vietnam: An increasingly attractive market.
Li, L. (2018). A Study on Enterprise Risk Management and Business Performance. Journal of Financial Risk Management, 7(01), 123.
Malatji, E. S. (2014). An analysis of strategy plan on business performance of a water utility: a Midvaal water company case study (Doctoral dissertation).
Soy, S. (2015). The case study as a research method.
