Oiltech Laboratories PDF Print E-mail

lan Saunders was not looking forward to the Board Meeting due later that morning. He was heading for a major difference of opinion and perhaps a showdown on strategic thinking with the company's financial chief, John Haynes.

Saunders was Marketing Director of OilTech, the largest oil analysis company on the African continent, and market leader in South Africa. With an average 70% market share in each of the segments it served, Saunders had masterminded OilTech's impressive growth over the five years he had been with the company. Through the introduction of aggressive, imaginative marketing - in stark contrast to the industry norm - Saunders had grown monthly sample volumes from 15,000 in 1993 to 30,000 in 1998. Moreover, the forecast pointed to a net profit of 20% on a turnover of some R25 million for year-end 1999. A shrewd strategist, Saunders had moved OilTech from serving only the earthmoving industry, into being the dominant oil analyst in the mining, rail and passenger transport segments as well.

From humble beginnings twenty-five years ago, when chemistry graduate, Barry Labuschagne, had started the original company, OilTech had grown steadily and diversified into its current leadership position. Oil analysis is the first stage in a company's planned maintenance programme. It's designed to maximise the life of both the equipment and lubricating oil being used. The resulting extension on machine life also produces massive savings on maintenance, refurbishment and replacement.

From inception, Labuschagne, who owned 80% of the company, had always believed in investing in the latest technology and thinking to better serve their customers. Indeed, according to research commissioned by Saunders, the key success factors in this industry were fourfold. Customers wanted consistency and accuracy of diagnoses and interpretation of results, easy access to company management, quick turnaround time on samples submitted as well as practical and useful advice and recommendations. For OilTech to continually achieve this, Saunders knew that ongoing investment in the latest technology, the most highly qualified and experienced staff possible, as well as in state of the art information systems was an absolute necessity, and that this formed the core of the competitive advantage the company currently enjoyed.

Pricing was also a consideration, but Saunders's research also indicated that customers knew they were buying world class knowledge and skills. Although OilTech's service was slightly more expensive than that of its rivals, customers on the whole did not balk, provided the savings they gained justified the price-service relationship. Being one of the most technologically advanced oil analysis companies in the world, together with the strong customer service ethos that Saunders had introduced, ensured that OilTech had an almost unassailable position in the local marketplace.

Saunders's strategy was essentially a directional one. He planned to take OilTech into the aviation segment, confident that overall, he could grow sample volumes by ten per cent, per annum, compounded over the next five years. Already some aviation clients had been using OilTech on a trial basis and had been most impressed with the results. With the increase in domestic and international carriers in South Africa, Saunders felt that here was a growth segment that was not being properly served by his opposition, and was therefore ripe for the picking.

John Haynes, however, disagreed. An accountant by profession, he had been with OilTech five years longer than Saunders and held the remaining ten per cent of shares in the business. More importantly, Haynes held the ear of Labuschagne, who had come to trust his financial judgement and general business acumen.

His criticism of Saunders's proposed strategy was that it was too marketing orientated, and not strategically broad enough, an opinion with which Labuschagne appeared to agree. At the last Board Meeting, Haynes had argued strongly in favour of a strategic alliance with a large (yet unnamed) international company. This, he said, would enable OilTech to make greater inroads throughout Africa, by using the partner's financial muscle combined with OilTech's technological superiority. The core of his argument was that many South African companies both within and outside of the segments OilTech was serving were already moving into other parts of Africa. It would be better to spend resources to move with them, and to do so sooner rather than later. He pointed to the example of US service companies that experienced dramatic growth by accompanying American manufacturers into Europe after World War II. The South African market, stated Haynes, could not offer OilTech the potential it needed to grow.

Privately, Saunders acknowledged that Haynes held a powerful argument. Haynes had pointed to the bottom line, reminding the Board that globalisation was now the name of the game. The size of South Africa's domestic market meant expansion northwards was not an option, but a necessity. He had added that Africa was not only a very large, but also a very risky, place. A partnership with one of the major oil companies would give them marketing muscle and spread that risk.

He had countered Haynes's argument by insisting that the choice of segment in which a company chose to do business was highly strategic, as it defined the competitive parameters within which the company would operate. Labuschagne had not been convinced and decided to carry the matter over to today. With Haynes's words still ringing in his ears, Saunders rehearsed the four reasons which formed the argument he would deliver to the Board.

Firstly, he favoured independent growth to an alliance. OilTech had proved itself in all the segments it had entered, and in particular, aviation customers were showing a willingness to do business with the company. He specifically wanted to see OilTech completely dominate the local aviation sector before thinking about the rest of Africa. Moreover, contrary to Haynes's views, his analysis indicated that there was plenty of potential for developing the domestic market further, and in particular the manufacturing segment which was under represented. OilTech would then have an even stronger base from which to launch into Africa.

Secondly, OilTech's technological superiority was the backbone of its marketing prowess. Thus, any alliance partner would gain more from the alliance than would OilTech. Thirdly, he believed it would be difficult to co-operate loyally with a partner whilst still preserving the interests of OilTech. Lastly, he knew that if an alliance was to go ahead, it would be difficult for OilTech to protect its technology and know-how, thereby putting itself into a strategically vulnerable position.

In effect, the company would lose its independence, which it had fiercely protected during the past twenty-five years. That, he felt would ultimately lead to the erosion of its competitive advantage, and perhaps its credibility with customers, who had become proudly accustomed to a South African company utilising locally developed technology to lead the global field. The last thing he wanted to create was a perception amongst his customers of a sell out.

The concept of an alliance was a strategic option he had considered and rejected on the grounds of what he believed to be sound marketing judgement. Yet it appeared that the shareholders might think otherwise. So strong were his feelings against the formation of such an alliance that he was beginning to wonder if his position was about to become untenable.

Meet Paul Dorrian
Principal Consultant

Paul has over twenty years experience as a management consultant, and has directed many projects in the fields of strategy, marketing and organisational effectiveness. His expertise has assisted many of South Africa's leading companies across numerous industries and national backgrounds....
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