Analysis & Recommendation for International Expansion

Asphalt and sulfur are two of the main products produced by Valero, they also use raw materials provided by their refineries to produce plastics that are used to build computers, medical devices and household items such as plastic wrap (Valero8, 2008). Their service line includes wholesale gasoline stations, while their main source of revenue is refining (see Table 1 in Appendix). Valero produces clean burning fuels that create two types of oils: lubricant base oil and process oils. Valero paraffinic oils are lubricant based that are used in automotive, railroad and industrial lubricants (Valero8, 2008). Process oils, called aromatic extracts are compiled under Occupational Safety and Health Administration (OSHA) standards and are used for plasticizers and extenders in rubber materials (Valero7, 2008).

Technology

The process for refining oil is tightly controlled by the government, specifically the Environmental Protection Agency (EPA). The refining process separates crude oil, which begins with fractional distillations or a newer process called conversion. The finished product is stored and then delivered through pipelines, trucks or marine transportation to various markets to be sold mainly at gasoline stations. The waste is then carefully treated to minimize harm to the environment.

Reason for Selection Valero, although a Fortune 500 company, was selected because it does not have any operations outside of North America, Aruba or the Caribbean. Its main business is located in Texas, where it is headquartered in San Antonio. Valero is not at the top of their industry, but ranks high in producing clean burning fuels. By not having operations outside of North America, Aruba and the Caribbean, Valero is a superior selection to provide an analysis on for global expansion into Turkey.

Marketing Issues Oil companies as a whole have an advantage for trying to enter a new country because everyone uses it; there are little influences on sex, age, income, race, education and social factors. Oil is a product that is popular mainly by brand name and strategic pricing, marketing for oil companies’ focus on keeping the customer and doing what is right for the environment. Valero’s best interest is to provide the best product and use advanced technical standards that meet the preferences of the consumer (Hill, 2008, p. 480).

Turkey is geographically close to major shipping routes and is placed strategically between Europe and the Middle East nations, which is helpful as a distribution strategy to bring it quicker to the consumer. This distribution channel is exclusive to the area and will provide quality service. Valero has opened many retail gasoline stations and this type of distribution will help build their brand name by delivering right to the consumer.

Due to a high volatile state of the economy and the war on terror make marketing issues a sensitive subject. It is Valero’s duty to be successful in their new expansion and create and environment that is sensitive to the people of Turkey. Cultural barriers will be a common occurrence when entering a new country, these barriers will be broken as long as they are made aware of and enough research prior to entry is conducted.

As Valero Energy plans to expand by buying out wholly owned subsidiaries in Turkey, initially it should follow a polycentric staffing policy to meet its talent needs (Hill, 2008). This will help Valero meet any cultural and political challenges in Turkey and then once it is established it can follow a more geocentric policy to take advantage of international talent and use the expertise for its growth in other countries.

Valero Energy will need to provide training to its managers and staff in Turkey ; the US to help them navigate around cultural differences, language barriers and technical training related to oil and energy resources. The other challenges in international expansion include fair performance management processes, fair compensation policies and strategy towards labor relations (Hill, 2008). Talent Retention According to Ozcelik ; Aydinli (2006), when the importance of human resource management was compared between companies in Turkey and Germany ; Spain in terms of the importance businesses attach strategically to human resource management, it was found that the importance of HR was similar in all three countries amongst global companies. In addition, in order to retain talent, Valero Energy must ensure equal treatment and opportunities in the workplace.

Risk and Opportunities

Today, 88% of Valero’s revenues come from inside of the United States. This leaves Valero extremely vulnerable to ebbs and flows of the US economy (Datamonitor, 2007, p. 6). Turkey has enjoyed a recent boom of over 2,000% of increased Foreign Direct Investment (FDI) in the last several years, so it is clear that corporations in other countries have recognized this investment opportunity as well.

Hill (2008), states that First Mover Advantages provide benefits to the initial entrant into a market (p. 78). While Valero will not be the first mover into Turkey, they can still be an early entrant. Turkey has implemented several economic, legal, currency and legal regulations that ensure that Turkey will remain an optimal market for foreign investment. It is our belief that Turkey is a country that provides an excellent opportunity for foreign investment. However, it is worth noting that even with Turkey’s recent removal of trade restrictions and implementation of policies designed to attract FDI, they are still not receiving as much FDI as countries with similar GDP per capita such as Poland and Mexico (Datamonitor, 2007, p. 6).

While there are many advantages to expand into Turkey, Valero must be aware of the risks associated with any expansion. The petroleum industry always faces the possibility of competition in the form of alternative energy. Valero has logistical advantages by operating in North America, which consumes a third of the world’s oil, but a move into Turkey would require them to set up completely new distribution channels (Datamonitor, 2007, p. 6). Furthermore, Valero must take the risk of increased labor and resource costs. An increase in the GDP per capita in Turkey will force Valero to offer higher wages to stay competitive.

Business Issues Sustainable Development and the Challenges Associated

During the last decade companies around the world have become increasingly aware of social, financial and environmental demands that their business faces (Hall & Vredenburg, 2003, p. 61). Many scholars argue that these demands offer a wonderful opportunity for innovative companies, while companies that ignore these demands do so at their own peril. The reality is probably not quite that simple. In actuality managers have had great difficulty in developing a model of sustainable development. This is due in part to the uncertainty and complexity of the new demands that will be put on the company by the public (Hall & Vredenburg, 2003, p. 61).

In order to be successful, the strategy must integrate both the goals of sustainability and innovation while not going against the social, environmental and financial demands set upon the company by outside forces. Sustainable development innovation (SDI) is more complex than market driven innovation because of the fact that there are usually a larger group of stakeholders and the demands of these stakeholders will often be quite different and often contradictory (Hall & Vredenburg, 2003, p. 61). Further complicating the problem is the issue of SDI is the fact that SDI often involves technology that is cutting edge and has yet so be accepted by the scientific, political, religious and business communities (Hall & Vredenburg, 2003, p. 61). In the case of Valero, they must be particularly careful about the environmental and financial impact that they will have in the areas where they operate. Due to all of the uncertainty surrounding SDI it is often difficult and risky to attempt to implement.

Take the experience of Monsanto Co., during the 1970’s and 1980’s they were a chemical company that sold pesticides to farmers. Later they decided to change from a chemical company to a bioscience company. As a result they were able to introduce to the market a group of genetically modified crops that would not have as much a need for pesticides due to their genetically increased resistance to insects. By 1997, the company’s logo had become “sustainable development for the world’s future” (Hall ; Vredenburg, 2003, p. 62).

So what went wrong? While Monsanto had successfully innovated technology necessary to increase crop production, they only took into account the concerns of their customers and did not take the concerns of other stakeholders. While Monsanto’s partner (farmers and food producers) had similar inters such as increased production, safety and profit margin growth, they failed to ask what others might think of the ethics behind genetic modification and the environmental impact that might occur (Hall & Vredenburg, 2003, p. 62). In the future, Valero, whether in Turkey or some place else in the world, must be extremely considerate as to how their operations will impact the environment around them. While their shareholder and customers may be happy with Valero’s product, other people’s demands may be quite different.

There are other examples of where companies were forced to acquiesce to outside demands in order to continue to goal of SDI. One occurred in the mid 1990’s when Suncor had to make a financial change to stay in the good graces of the area that they were operating out of. Suncor, one of the pillars of the Canadian energy sector was operating in rural Canada, when many of the local residents became quite upset over the industry intrusion and increased pollution. To placate the local population, Suncor made the financial decision to make 12% of workforce indigenous of any area which the company is conducting business (Hall ; Vredenburg, 2003, p. 65).

Valero would be wise to follow Suncor’s example and placate the local population by employing a percentage of them. TransAlta is a publicly traded Canadian electric company which had relied on the Alberta regions abundance of low-cost coal. TransAlta correctly predicted that changing views regarding the environment and carbon dioxide emissions would cause a strong regulatory and public back lash (Hall & Vredenburg, 2003, p. 66). They worked to reduce greenhouse gas emissions by developing new grasses to be used on Ugandan cattle ranches. They also purchased a wind electricity generator firm as part of a ten year 1-2 billion dollar plan to increase its generation capacity from renewable energy sources to 10% by 2012 (Hall & Vredenburg, 2003, p. 66). Valero, will, doubtlessly face pressure from many groups to be more eco-friendly and will have to take steps to show the public that they are taking steps to protect the environment.

Dow Jones Sustainability Index The Dow Jones Sustainability Indexes were launched in 1999 and designed to track the financial sustainability-drive of companies throughout the globe (Corporate Sustainability, 2008). This is based on the cooperation of several indexes such as the Dow Jones Indexes, STOXX Limited and Sam Group. With these, assets managers are provided with reliable and objective benchmarks to establish sustainability portfolios (Corporate Sustainability, 2008).

The Dow Jones Sustainability World Index covers 10% of the 2,500 world’s largest companies that are traded on the Dow Jones. It judges them in terms of economic, social and environmental criteria. This index came into existence in September of 1999 (Corporate Sustainability, 2008). There are now 70 DJSI licenses that are held by asset managers in over 15 countries which serve to manage many different financial products including active and passive funds and segregated accounts.

Mode of Entry

The following several sections will address issues that play an important part in determining the most advantageous method of market entry. These issues include: Valero’s business model; Turkey’s demographic ; socioeconomic status and receptiveness to such a venture; Porter’s 5 Forces; Porter’s Diamond and applicability to this scenario; FDI, advantages, disadvantages, applicability; Regional Economic Integration (REI) and relevance to Turkey; global market, friction, relativity; and the most advantageous expansion mode given all these characteristics.

Valero’s Business Model

Valero’s business model is the core of the company’s competitiveness; Expand during market pullbacks and other areas of opportunity, practice fiscal conservatism, and extend conversion capabilities to increase profit margin. Get quality people, keep quality people and convert low grade inputs into high quality outputs. These are Valero’s operations. At no time in the company’s history have there been more economic turmoil and decline than at the present, leaving Valero with significant opportunity should they intend to pursue it.

Numerous forces consistently influence energy prices, driving inconsistencies in supply and demand. These forces are not on just a local level, but an international one as well. Energy prices affect the level of economic activity in every industry and play a key part in importing and exporting. Valero must pay attention to other forces as well, such as legislation, regulations and environmental concerns and pressures. Chief economist John Felmy of API, a national trade association representing the petroleum industry states that “hurricanes, the war in Iraq, OPEC and a growing global market for energy have made the oil market more complicated,” significantly less predictable and more susceptible toward speculative trends (Byron, 2008).