INTRODUCTION: COMPANY BACKGROUND
ExxonMobil is one of the largest American multi -national company operating in the petroleum sector and natural gas industry. With the goal to be the premier energy company in the world, ExxonMobil group has been striving for last 120 years and conduct business in more than 200 countries and territories in six continents. Oil and gas exploration along with production, transportation, and marketing is the major facets of ExxonMobil. Recently they are also involved in information technology, global real estates and global procurements in more than 200 countries and territories.
The understanding of energy demand and supply trends has been a critical success factor of ExxonMobil. The takeover of Mobil by Exxon is 1998 was one of the largest takeovers in the oil industry. This was during the Asian Economic crisis, which primarily led to oil glut and brought down oil prices to as low as USD 11.
BOUNDARIES OF THE FIRM, VERTICAL INTEGRATION AND DIVERSIFICATION
A company’s boundaries are the limits on boundaries set dynamically to avoid uncertainty in an optimal case, by determining the scope of business to be cleared in increasing corporate profits in the long term period. Likewise, vertical integration is a set of systematic steps undertaken to perform a series of activities in the company to create a value that can increase the size of the entity or its’ power in the market while the costs and risks are effectively managed. The diversification can be either related or unrelated.
At ExxonMobil, they understand that it is important to diversify their products and services as their primary concentration is in petroleum sector and natural gas industry, which are dependent on non-renewable resources. The company believes in optimizing their financial performance through geographic and functional portfolio diversity and integration.
ExxonMobil is organized functionally into a number of global operating divisions. These divisions are grouped into four categories for reference purposes:
Vertical integration in ExxonMobil determines the degree to which it owns its upstream suppliers and downstream buyers. Their upstream strategies is supported by their unparalleled commitment to technology which focuses on maximizing profitability of the existing oil and gas production and capitalize on growing natural gas and power markets. The downstream competitive advantage of ExxonMobil lies in their advancement of technology and dedicated workforce. The company’s downstream business has diversified and profitable segments with marketing presence and refining complexes all around the world. The refining and supply company of ExxonMobil concentrate on providing quality products to the customers whiles the fuels marketing focuses on how they can build stronger customer base all around the world with best practices. It is the world’s number one supplier of lube base stocks and a leading marketer of finished lubricants and specialty products.
The ExxonMobil Chemical Company provides a superior performance relative to competition throughout its business cycle. They are the leading producers of various petrochemical products which gives them a strong hold in the market. They continue to reduce their costs to achieve the best- in- class performance and selectively invest in internationally advantaged projects.
Source: Financial and Operating Review 2008
The figure shows that ExxonMobil has been successful in diversifying their products in the related fields. It is interesting to know that ExxonMobil has been equally successful in their unrelated diversification too. Under ExxonMobil Global Services Company, the company has invested in Information technology, Global real estate, procurement and business support centers. In the total shareholder returns graph we can observe that the average return on average capital employed for ExxonMobil is better than the industry average of the international oil group which consists of Royal Dutch Shell, BP and Chevron Texaco.
CONCLUSION
As one of the largest company in the oil and natural gas sector, ExxonMobil is an exemplary company that has successfully implemented vertical integration to increase its market share, sales revenue and overall profitability of the group as a whole. With related as well as unrelated diversification, the company has strategically marketed its brand in the market.
It can be seen that with effective implementation of vertical integration and moving out of the traditional market and boundaries of the firm, ExxonMobil has been a success story. The start up of major eight upstream projects during 2008 shows that despite the global economic recession, ExxonMobil has been stable in its performance. Much of the credit can be given to the strength of the long term business model that ExxonMobil has adopted. The model that ExxonMobil has executed shows that, with careful planning and proper use of resources, diversification can be an added advantage for the company.