Gazprom is the Russian largest company which deals in production of natural gas and other related substances. It produces 85% of the nation’s natural gas and also controls 17% of world’s natural gas reserves. This makes it the largest gas producer in the world. By 2004, it had more than 400000 employees. The main functions of this company are exploration of gas, processing and transport. It also markets its products both internally and in the international markets. A key strategy which has helped this company to be economically sound is the use of vertical integration.
This is a technique used for increasing or decreasing the control a company has on its inputs and the distribution of its outputs. It can either be forward where a firm is in control of its distribution or backward integration where the firm controls its inputs or even the supplies (Miller, 2004). Gazprom economic activities and strategies The demand of oil and gas products is influence by the economic activities in a country, the population growth and the efficiency of the energy to all sectors in a country. For this reason, a company has to create a competitive edge in these areas so as to run
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Gazprom Company is no exception to these rules even though it is the largest company in the country. There are several strategies it has adopted to ensure that it remain profitable and relevant in the dynamic business world. One of the major strategies that this company attributes to its success is the use of vertical integration. This involves creating a network of chains of supply to ensure that gas products reach the products within the country and in international markets. Gazprom employs what is referred to as full vertical integration.
This is whereby the firm incorporates in its own value chain either or both the value chain of suppliers and that of the distribution channel. This also involves the expansion of operations of the company. The company also has set strategies to install pipelines in various places to ensure they remain the leading suppliers as well as capturing new market. This is also meant ensure that they remain the market leaders in the gas and energy industry (Miller, 2004). Gazprom Company has entered into major contracts with distributing channels different parts of the world which has been made possible by vertical integration idea.
For example, it has signed contract with the central Asia gas through Kazakhstan and natural gas via Uzbekistan. There are other contracts that it has made with other companies and countries all over the world. This has ensured that they their reliability is increased as well as their supplies. Such agreements have opened new areas for the company to sell their products. This increase in their scope and market leads to increases production to cater for this expansion. This in the long run leads to the benefits associated with economies of scale.
Trade agreements allowing the company to supply its products in a region also open up new markets in the area. This leads to an increase in the consumption of the products leading to increased returns. These opening also creates a chance to market the company’s other products in those regions (Osipov, n. d). Mergers, acquisitions and partnerships are another mode of vertical integration which Gazprom Company employs. In this strategy, part of or a whole company may be taken by a larger company and its functions assimilated in that company. This is referred to as a merger.
In acquisition however, the company being taken over retains its identity and its operations. Gazprom Company has employed this strategy to improve its functions (Siegel, 2007). An example of this form is the partnership agreement by the Belarus government and state pipeline company. The Beltransgas agreed to hand over 50% of its share capital in return for a 25% stake for a gas field to be established by Gazprom Company. The gas is meant to be used in Belarus. This in turn has opened more market for the company leading to increased gas production thus increased sales.
The Gazprom Company has also been opening new gas field through the use of these partnership agreement thus leading to its continuous growth as a gas supplier firm. Another strategy which Gazprom Company is using is to try and utilize as well as securing a big part of central Asia gas. This is meant to optimize its investment funds towards developing new fields and continue maintaining its gas supply in the region (Stern, 2005). Gazprom Company uses this vertical integration to reduce costs associated with production. The partnership agreements for example allow the company to produce and supply gas in the region while partially owning it.
The cost of production and supply is much lower than producing in Russia and transporting the product to these areas. Vertical integration is thus meant to reduce the production cost of gas while at the same time creating more markets for the product. Marketing cost of the product is also greatly reduced as the product is viewed to be local by the residents making its acceptability easier (Osipov, n. d). Another strategy that the Gazprom Company is employing is the use of five factor framework to ensure its continuous growth and expansion.
The five factor framework consists of five main elements which include the rivals, supply power, barriers to entry, threats of substitute and buyer power. For an organization to thrive in a competitive market, it has to make these five factors work for it and not against it. Gazprom Company has incorporated this framework in its operations to ensure it works for its advantage. It has ensured that it remains the supply giant of gas in the most places. This has gained it the power over supplies in the region. It has also monopolized the market with its high supply.
Also since it was taken over by the government, the prices of its products are subsidized than the rest of gas (Stern, 2005). This has enabled it gain the buyer power thus increasing its profitability. The problem of threat to entry is well taken care of by this company. Instead of making contracts with individual companies in foreign land, they have instead made them with their government thus avoiding the complications which could arise later. Having government’s approval also helps in the marketing of their products. Though different companies have come up which produces gas, this do not pose a major threat for these company.
However, the increased use of electricity poses a threat. Effective management of the company has made it possible for the integration of these factors to the company’s advantage (Kossov & Gurkov, 1995). Diversification strategy is another form used by this company to ensure its continued economic progress. It has aimed at producing other products which are related to natural gases. These products are also complex processed by the company. This is aimed at ensuring that economic base of this company is boosted even in time of low business times.
The other products that Gazprom Company has planned to start producing are oil, petrochemicals, gas chemicals and synthetic liquid fuel. In its diversification strategy, it also aims at starting to produce electricity which has become a competitive commodity to gas. These diversifications are aimed at ensuring that the profitability of the company remains stable (Hoover’s, 2002). The company’s last strategy is the exit strategy. This strategy deals with the strategic flexibility in action. That is the ability to exit a venture if it is no longer healthy to operate it.
This is possible due to the changing energy industry in Russia. The company may in future consider closing or turning down a plant in any area if it does not favor them (Robinson, 2005). Conclusion Gazprom Company has so far faired well in the gas industry. The strategies they use fit to their growth and expansion goal and their vision of becoming the world’s number one energy suppliers. However, these strategies may not always stand especially with the current dynamic energy world. They are constantly reviewed to fit to certain changes in the environment and the business industry.