University of Stirling Pre-Masters Skills for Business Environment Value chain analysis of Aggreko Name: Rita Date: 2011 Tutor: David Dick Value chain analysis of Aggreko 1. Introduction Currently, along with the increasingly development of globalization, every walks of life has to confront with the fierce competition. Even electric power market is no exception as well. Furthermore, more and more companies have not satisfied with the domestic market, they have focused on expanding the international market, such as Aggreko.
As leader of the world’s temporary power industry Aggreko has achieved a serious of success in recent years, even they need to face to intense competition from domestic and international market. This essay will through analyze the operation process and the creating of competitive advantage of Aggreko, in order to find out the reasons of Aggreko’s success. Therefore, this essay will be divided into four parts: the first part will introduce Aggreko Company briefly. Secondly, it will explain the value chain theory.
And then the third part will use the value chain theory to analyze the competitive advantage of Aggreko. Finally, this essay will conclude Aggreko’s operation and its competitive advantage. 2. About Aggreko Aggreko is currently recognized as the world’s largest specialist energy company, which provides specialist temporary energy rental solutions, such as Power Generation, Temperature Control, Oil-Free Air (North America only), Risk Management, Aggreko Cooling Tower Services, Aggreko Event Services, Aggreko Process Services. The company was created in Netherlands in 1962 and established in Scotland in 1973.
For the goal of delivering attractive and growing return to shareholders, the excellence service for customers by becoming the world leading temporary power provider and temperature controllers, Aggreko takes fleet investment and geographic expansion as their strategy to operate their business (Aggreko annual report, 2010). Specifically, at the end of 2010, it had a fleet of 13,500 generators ranging in size from 10KW to 2MW which, in aggregate, amount to over 6,600MW of generating capacity, the equivalent of about 10% of peak power demand on the UK national grid.
In terms of marketing performance, in 2010, the Local business had revenues of ? 696 million which is 60% of Aggreko’s total revenue excluding pass-through fuel. On the other hand, in 2010, the International Power Projects business generated revenues of ? 460 million, or 40% of Aggreko’s total revenue excluding pass-through fuel revenue (Aggreko annual report, 2010). And The International Power Projects business also sells power and delivers using power plants built, which owned and operated by company selves.
In spite of this, for expanding economic scale, acquisition policy also is the indispensable part of Aggreko’s operation strategy. Specifically, on 3 December 2010 Aggreko completed the acquisition of Northland Power Service, a leading provider of power solutions for the oil and gas exploration and production market in the Rocky Mountain region of North America, for ? 16. 7 million. In addition, to invest continuingly in their business is necessary for Aggreko’s sustainable development.
Accordingly, in 2010 the capital fleet expenditure increased from ? 105 million to ? 254 million as 1. 7 times depreciation (Ibid). Over the last nearly 50 years development, Aggreko has a huge progress, it has 144 service centers in 34 countries, more than 3,800 employees and customers around over 100 countries throughout the world (Aggreko official website). In 1997, Aggreko is listed on the London Stock Exchange and also a company of FTSE 100. And now, Aggreko company share price has achieved 1880. 00 GBP (Burns, 2010). . The overview of the value chain theory Value chain is a model, which introduced by Michael Porter in 1985 in his book named Competitive Advantage. This model is useful to separate the business system into a series of value-generating activities as a chain structure. Porter generally divides today’s business activities into two parts: primary and support activities (Sheldrake, 2003). Specifically, the primary activities comprise inbound logistics, operation, outbound logistics, Marketing and sales, and service.
Whilst there also have some activities, including firm infrastructure, HR management, technology development, and procurement, support company’s primary activities (ibid). Furthermore, a firm’s profitability can attribute to its effectiveness in performing these activities efficiently, and in these activities, a firm has the opportunity to generate superior value. On the other hand, a competitive advantage also can be achieved by reconfiguring the value chain to provide lower cost or better differentiation (McGuffog and Wadsley, 1999).
For those reasons, the value chain model is a very useful analysis tool for defining a firm’s core competencies, such as cost advantage and differentiation (Ibid). In terms of cost advantage, Porter identified 10 cost drivers related to value chain activities, included economies of scale, learning, capacity utilization, linkages among activities, interrelationships among business units, degree of vertical integration, timing of market entry, firm’s policy of cost or differentiation, geographic location, and institutional factors.
The company can through controlling these drivers develop a cost advantage (porter, 1985). In addition, porter also identified divers of uniqueness that related to the value chain, included Policies and decisions, linkages among activities, timing, location, interrelationships, learning, integration, scale, and institutional factors. Those activities tend to serve as cost drivers as well. Therefore, differentiation often results in greater cost, resulting in tradeoffs between cost and differentiation.
In addition to this, these value chain activities usually connect each other; one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities (Sheldrake, 2003). Moreover, technology is applied, to some extent, in value creating activity. Consequently, changes in technology can impact competitive advantage by changing the activities themselves or by making possible new configurations of the value chain. And technology may affect cost drivers or uniqueness, which can lead to a competitive advantage (ibid). . Value chain analysis Value chain is a model that is used to separate the business system into a serious of vale-generating activities as a chain structure, and this theory also researches the process from input to output for creating competitive advantages, such as cost advantage and differentiation (Porter, 1985). In terms of Aggreko Company, due to the nature of industry the investment and the equipment produced by Aggreko is the input of the business, the services, such as fleets renting and problem solving, delivered to customers is the production of Aggreko.
Therefore, this part will through analyzing the operation process by using value chain theory explain the creating of Aggreko’s cost advantage. 4. 1. Supply chain of Aggreko In terms of suppliers, due to the specialty of the industry, the assembly in their business is very important. Over 70% of Aggreko’s fleet was assembled by Aggreko owned manufacturing facilities, which is based in Dumbarton, Scotland. And remainder of equipment is for third party manufacturer to finish products and assembles components (Aggreko annual report, 2010).
Therefore, Aggreko do not depend on some particular supplier, their own designing and manufacturing capability can reduce the cost of operation greatly. In addition, Aggreko (2010) annual report stated that, Aggreko is also engaged to develop more suppliers as the third party manufacturer in many countries, such as China and India, thereby increasing the influence from their suppliers. 4. 1. 1 Aggreko’s fleet manufacturing
Compare to other large equipment rental companies, Aggreko can independently build and design the majority of fleet in Aggreko owned manufacturing facility in Scotland, which can be a unique competitive advantage for Aggreko (Aggreko annual report, 2010). Specifically, according to the requirement from customers to design equipment not only can improve the degree of customer’s satisfaction, but also can provide more options for consumers, thereby expanding the scale of service. For instance, a generator of Aggreko can be designed to work faultless at +50? in the Saudi Arabian desert or to run at -40? n Siberia. Furthermore, the capability of independent manufacturing enables Aggreko to be the largest buyer for some special designed equipment. It means that in terms of bargaining power as a buyer Aggreko has the significant advantage, in order to reduce the cost of procurement greatly. In spite of this, to respond the requirement of customers quickly can improve Aggreko’s service quality, as well as reducing the production cycle. Independent manufacturing capability allows Aggreko to avoid wasting time for convincing the third party manufacturer. 4. 2. Operation and logistics
According Porter (1985), operation in value chain model is to transfer input to finished production and service (Ibid). Therefore, the ways and approaches to operate and organize the resources efficiently can contribute to the building of a company’s competitive advantages, thereby capturing maximum profits from market (ibid). As the world leading temporary power provider and temperature controllers, Aggreko always takes continuing investment and geographic expansion as business strategy to operate their business (Aggreko annual report, 2010). 4. 2. 1 Global scale
The vast economies of scale can deliver crucial competitive advantages for Aggreko, which enables company to achieve huge profits. Specifically, Aggreko takes the international operation as a long-term strategy. In the last seven years, Aggreko have acquired five small businesses, in order to expand size of company, it not only enables company to expand their scale, but also can gain more benefit from larger market. In spite of this, Aggreko can deal with any events happened in anywhere around world, and deliver their equipment to anywhere of the world Aggreko annual report, 2010).
In spite of profit gaining from international market, expanding company scale to be big can contribute to the operation of local business and international projects, such as reducing the reacting time of customers and building the high-quality logistics. 4. 2. 2 Local business and High-quality logistics In order to deliver services to customers efficiently and conveniently, Aggreko has built 148 service centers in 34 nations in North, Central & South America, Europe, the Middle East, Africa, Asia and Australasia.
Therefore, depend on the high quality system and robust transportation network, Aggreko can provide superior customer service at a competitive price, due to the low-value transportation. Specifically, the application of ‘hub-and-spoke’ system is the feature of Aggreko’s local operation. In this system Aggreko has two types of service center. The ‘hub’ center hold large items of equipment and also offer service and repair facilities. And, the ‘spoke’ center as a small logistics points is responsible for delivering equipment to customer’s site quickly (Aggreko annual report, 2010).
Under this system Aggreko can organize and deliver their resources efficiently. In addition, the global scale enables Aggreko to build their high-quality logistics system (ibid). 4. 2. 3 International Power Project International Power Project refers to provide power generated by plants financed, built, commissioned and operated by Aggreko’s workers. ‘To be big’ is the core of this strategy. Specifically, In terms of the areas without local business of Aggreko’s, such as, Africa, Asia, Central and South America, with improving of the economic development for these areas the demand of the power will increase.
Consequently, International Power Project can contribute to the further development for Aggreko (Aggreko annual report, 2010). 4. 3. Service According to porter (1985), service in value chain model refers to support customers after the products and services are sold to them (ibid). In Aggreko’s operation process the services can be reflected in daily maintaining equipment, problem solving, and the time of service delivering after customers utilizing Aggreko’s fleets. 4. 3. 1 Accumulation of professional experience In terms of the timing of entry the market, the Company was created in Netherlands in 1962 and established in Scotland in 1973.
Because of over 50 year’s accumulation of experience, the professional level of Aggreko is unsurpassed among the whole industry (Aggreko annual report, 2010). In addition, a third-party research about customer satisfaction illustrates that, Aggreko is one of the best-performing companies. The brand reputation is the advantage for Aggreko’s operation, which also needs long-term accumulation (Aggreko annual report, 2010). In addition, the global scale enables Aggreko to respond the customer’s problem and requirement quickly and conveniently, that can ensure Aggreko to deliver the high-quality service to their customers (ibid). . Conclusion In summary, Aggreko is one of the leading temporary power generation and temperature control equipment leasing companies in the world. This essay through analyzing Aggreko’s operation process explains the creating of cost advantage. Firstly, a vast economy of scale is a key factor for competitive advantage of Aggreko, which allows company to make huge profits, whilst it also brings cost advantage to the company. For example, to build a high-quality logistics can exert a profound influence to the local business, in order to deliver superior service to their customers with low-value transportation.
Moreover, international operation not only makes Aggreko can gain more benefit from larger market, but also enables Aggreko to build their competitive advantage through acquiring more developing opportunities. Specifically, 148 service centers have built in 34 nations in North, Central & South America, Europe, the Middle East, Africa, Asia and Australasia. The global operation allows Aggreko to respond to the requirement of customers quickly. In addition to this, the capability of independent manufacturing can reduce the cost of Aggreko’s procurement greatly, and also avoid the situation of over depending on the some particular suppliers.
In spite of this, for some special equipment production, the manufacturing capability enables Aggreko to be the largest buyer, which, to some extent, improves the bargaining power of Aggreko in procuring market. Furthermore, the timing of entering market also can be a factor that achieves the competitive advantage for Aggreko. Due to the accumulation of professional experience and brand image, Aggreko is one of the best-performance companies for the customer satisfaction in the world. So that customer loyalty for brand can contribute to the competitive advantage building.
However, the threats from international market are higher than local business. In terms of flexibility in local market those small local businesses are usually higher than Aggreko. Finally, Aggreko’s success can attribute to its clear understanding for the current position and right strategy establishing. For instance, because of supporting FIFA World cup in 2002 Aggreko’s share price soared by 67%. Based on this experience London 2010 Olympics games contract also be won by Aggreko successfully (Aggreko annual report, 2010). Consequently, the economic scale, global operation, independent anufacturing capability, and timing entering the market can be the factors and reason for Aggreko’s cost advantage creating. Bibliography 1. Aggreko. Aggreko plc. Annual Report and Accounts 2010. Retrieved 28th June, 2011. From: http://ir. aggreko. com/agk_ir/finreps/2010/ar-2010/ar-2010. pdf 2. Aggreko. (2011) What we do. Retrieved: 25th June, 2011. From: http://production. investis. com/agk_ar08/directors-report/what-we-do/. 3. Aggreko. (2008) Aggreko plc Annual Report and Accounts 2008. 4. Aggreko. (2011) Aggreko Appoints Ana Amicarella Vice President, North Business Unit. Business Wire, c33507057. . Anon (2002) Aggreko halts slide: The decision by UK power hire company Aggreko to reduce its exposure to the difficult North American market has been well received by a stock market which has been marking down the shares in the company over the last year. Power engineering international. Vol. 10. 6. Burns, R. (2010). The Naked Trader’s Guide to Spread Betting: How to Make Money from Shares in Up Or Down Markets. UK: Harriman House Ltd. 7. McGuffog, T & Wadsley, N (1999). Value chain management. An international journal. 4(5). 8. Morden power system. (2010) Aggreko signs World Cup contracts.
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