Gran Tierra Inc Case Study Solution
Performance of Gran Tierra
Since the firm’s strategy is based on positioning that is targeting the countries with right resources at the right time. It can be said that the strategy is successful and sound as it enabled the firm to achieve success in many regions it had entered in.
The company started its operations in 2006 from Argentina and achieved massive success in this region. The company then moved to Columbia in 2008, the firm was again successful in making the right decision as after expanding into Columbia, the firm’s net income increased by 42% (See Exhibit 5 of the case) in 2009, the cash and cash equivalents increased by 54% % (See Exhibit 5 of the case) and the firm’s total assets in 2012 increased by 61% compared to 2009 when Columbia market was tapped.
The firm then entered into Brazil in 2009 and the firm’s overall performance increased again in 2009 till 2011 proving that firm’s strategy has helped the company grow. However, the firm’s net income and cash declined in 2011 as a result of failure of implementation of horizontal drilling technology and other challenges and unfavorable conditions witnessed in Brazil. % (See Exhibit 5 of the case)
By analyzing the firm’s overall performance from 2006-2012 it can be concluded that the firm’s strategy is sound and effective.
Firm’s Specific Advantages
One of the core strength of the company is local experienced and qualified staff appointed by the firm to look after its operations which is the core reason of its success. The firm appointed chartered accountants, experienced geologist and employees with strong business relationships which are the key requirements of oil and industry sector.
The firm operates at a low cost compared to other oil and gas companies in the regions as the firm invest in regions with low taxes and attractive fiscal terms. Also, the firm enjoys recognition of a social contributor due to its investments in local projects. These factors have provided competitive advantage to the company.
The firm has provided decision making autonomy to its employees which is the main reason of strong performance of the business. One of the main strength of the company is its financial stability, the firm earned higher profits through its operations in various markets which has guaranteed smooth running of its operations.
Relevant Location Advantages
The firm looks for countries and regions which has undervalued assets, attractive fiscal terms, stable legal systems and where foreign direct investments are welcomed. The firm’s internationalization strategy and investments in markets depends on these factors.
Since the company was based in North America, it was able to easily allocate resources to Argentina, Peru and Columbia at a lower cost since they were also located in the same region and was able to take advantage of the opportunities offered in North America.
Since the company was located in South America, it had the knowledge about the local conditions and laws therefore, investing in Brazil was easier due to the knowledge about the market. Due to its local existence, the company had knowledge about the technological challenges the Brazilian Oil and gas market faces and therefore, was able to introduce new technologies in the market which gave the company a competitive advantage.
Also, local existence protects the investors from government restrictions, cultural differences and biasness and reduces the entry or investment barriers for local investors. These factors provided competitive advantage to the company as it was based locally.
The reason why company was attracted to Brazil was its local existence, availability of local teams, no cultural differences or biasness, stable legal systems, no government restrictions as steps were taken to flourish the same country’s economy.
Similarities between Brazil Market and Host Market
When the firm entered Argentina market there was less competition therefore, achieving success was easier. However, when the firm diversified towards Brazil, entry had already became difficult due to intense competition and monopoly which reduce the chances of Grann Energy Tierra’s success in Brazil.
Brazil had favorable economic environment, stable legal systems, effective regulations etc. however both Columbia and Argentina faced political and economic instability which was the key reason of the firm’s decision to diversify towards Brazil.
The firm entered the three markets in South America either by acquisitions or establishing a team of local executives as the risk at the time of entrance in these markets was low. However, huge risks were involved in investing in Brazil market therefore, the firm had to shift from its traditional models as the firm partnered with other service companies already performing business in Brazil to carry out operations in Brazil.
Feasibility of Current Operating Model
Since the current operating model is the core reason of the organization’s success it is likely that it will be feasible to practice the same business model in Peru as well.
Since the firm is already established and successful, as per the current business model, the firm would be able to attract qualified and experienced locals from Peru which will ensure long term success of the business in Peru.
Since Peru has favorable fiscal terms, low cost, tax incentives, policies stability, favorable exchange rates will be ensured increasing the chances of firm’s success in Peru while maintaining is financial stability.
Since the country manger appointed for Peru’s operations is an experienced geologist, it is likely that exploration in Peru will be successful which will open new opportunities of expanding into further regions of South America for the firm.
The fact that Peru had suffered environmental damage previously as well makes the exploration process riskier and since heavy costs are involved for the exploration, investing in Peru is doubtful and the investment might affect the overall financial stability of the firm.
Risks faced by Grann Tierra
One of the main risk that the firm faces is political risk as the political and economic environment of the South America is region is ins table creating difficulties for firm’s operations in Columbia, Peru and Argentina.
Almost all Oil and gas industries are severely exposed to environmental risk, pollution is created as a result of exploration and development of the mines which significantly damages the environment. Also, Peru is already environmentally sensitive and has faced incidents of exploration failure and environmental damage in the past increases the exposure of environmental risk for the firm………….
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