Aramco: A Case Study of a Saudi Multi-National Enterprise

1. Introduction

Multi-National Enterprises (MNEs) across the board are defined by their expansive vision, strategic business practices, and large market share. Aramco, the state-owned Saudi oil giant, is no exception to this definition. Aramco is shorthand for the Saudi Arabian Oil Company and was established in 1933 as a private enterprise. It was not until over fifty years later that the Saudi government gained complete ownership of the company. In that time, Aramco has established itself as one of the most valuable countries in the world, estimated to be worth close to $10 trillion by the Financial Times (2010).

Why is Aramco important in and of itself? For starters, the United Nations has classified over 60,000 MNEs worldwide. However, the largest 500 account for 80 percent of the world’s foreign direct investment and single-handedly account for world inflation and unemployment (World Investment Report 2001). The fact that it is such a large, state-owned multi-national corporation makes it a unique case study for the purpose of an analytic discussion of international business management strategies and frameworks. The following paper will discuss Aramco’s vision and practices from the understanding of MNEs outlined by Rugman and Collinson (2008). More specifically, the  paper discusses how Aramco’s orientation and overarching strategy in addition to discussing the what, where, why, how and when of the company. This is divided into a discussion of Aramco as a state-owned MNE, its strategic practices, and its classification as an ethnocentric MNE.

2. Aramco as a State-Owned MNE

First of all, Aramco’s status as a state-owned oil enterprise automatically puts it in a competitive position. Innovation is just a part of this. Aramco’s stated mission on their website is that they can “make a difference wherever we do business by investing in innovation and entrepreneurship, creating educational opportunities, powering economic progress, increasing environmental awareness, and working in partnership for energy sustainability.” This part of Aramco’s success, but ought to be taken with a grain of salt seeing as it is from a company vision.

As Rugman and Simon state, MNEs do not merely strategize by continuing to be innovative – as helpful and beneficial as that may be. In addition to innovative business practices, they maintain “competitive position by addressing the determinants of national competitive…by having related and supporting industries that are internationally competitive” (Rugman & Simon 25). This is, perhaps, the most salient to corporations like Aramco, which maintains its competitive position in a field that yields one of the most internationally competitive markets – crude oil and energy resources.

3. Strategic Practices

Of course, the fact that Aramco has been either state-owned or state-controlled by Saudi Arabia for the past half-century certainly helps their position. Rugman and Simon recognize that “State-owned oil MNEs are major competitors and often hold a privileged position when accessing their own country’s reserves” (26). This sentiment applies directly to Aramco and the company’s assets. For example, the company owns the world’s largest oil field, which also happens to be in Saudi Arabian territory. This has placed Aramco in a position to be internationally competitive, in a stable position to compete with the world’s largest oil companies.

In addition to being automatically placed in an internationally competitive position, Aramco utilizes a strategic management process in business decision making. This first involves identification of the company’s basic mission, analysis of the business environment (both external and internal), a formulation of objectives, the implementation of these objectives, and an evaluation and control of operations. As Rugman and Simon say, “Strategic planning is the process of evaluating an enterprise’s environment and internal strengths, identifying its basic mission and long- and short-range objectives, and implementing a plan of action for attaining these goals. MNEs rely heavily on this process because it provides them with both general direction and specific guidance in carrying out their activities” (225). Aramco, it seems, does a good job of taking these steps to ensure success.

This is most obvious in a quick look at what the company actually does in its day-to-day processes. As Aramco’s website states, their operations include exploration, production of oil and gas, refining, petrochemicals, international shipping, marketing, and distribution. Because Aramco is such a large and high-grossing company, it is an effective strategy to focus all of its operations on one specific market – that is, the energy market. By putting all of their resources toward this market, they have established themselves as the world’s largest energy supplier. As Aramco states, they are the only energy company that serves all three major world markets – North America, Europe, and Asia. This is, in large part, because of the focused strategy discussed above.

4. An Ethnocentric MNE

In addition to the strategies implemented above, Aramco falls within the EPG Model proposed by Chakrawarthy and Perimutter (1985). This model identifies multi-national companies as falling within a specific typology – ethnocentric, polycentric, or geocentric. Because Aramco effectively works as a state-owned enterprise, it most obviously falls within the ethnocentric identification or orientation. An ethnocentric orientation in MNEs is defined by a top-down organizational structure, global integration, hierarchical product divisions, prevalence of home country culture, mass production, and profits being brought back to the home country (Chakrawarthy & Perimutter 5). Each of these is discussed below, specifically in relation to Aramco as an ethnocentric MNE.

First of all, it is obvious that Aramco functions with a top-down, hierarchical structure. As the Aramco website states, the company reports “to the Supreme Council for Petroleum and Minerals Affairs, chaired by the Custodian of the Two Holy Mosques, King ‘Abd Allah ibn ‘Abd Al-‘Aziz Al Sa’ud.” The company is headquartered Dhahran, Saudi Arabia, but has offices and operations throughout the Kingdom. Despite being a global company with assets all around the world, the company operates mainly from Saudi territory, with the government having direct control.

In terms of global integration, Aramco describes itself as a “fully integrated, global petroleum and chemicals enterprise” which acts as “the world’s top exporter of crude oil and natural gas liquids.” This means that, despite being Saudi-owned and operated, Aramco has offices and facilities all around the globe. In order to operate as an ethnocentric MNE, a company has to truly be international. It is this status that makes Aramco’s ethnocentric interests so clear.

Even though Aramco is focused on energy production, it still has the hierarchical product division that is used to describe ethnocentric MNEs. As the Aramco website says, the company is “currently working on expanding our capability to discover, produce, process and transport natural gas for domestic energy, powering desalination plants and other industries, and as a vital feedstock for our growing petrochemical industry.” These growing industries of chemicals and natural gas are just two examples of Aramco’s differentiated product lines. The company must also use hierarchical divisions in their approach to the production, distribution and marketing aspects of the work that they do, which each reporting back to the centralized leadership discussed above.

Aramco also has the mass production required of an ethnocentric MNE. According to its website, the company manages reserves of over 260 billion barrels of crude oil. As of 2012, their average daily crude oil production was 9.5 million barrels per day. The total production for the year was 3.5 billion barrels of oil – “about one in every eight barrels of the world’s crude oil production”, according to Aramco’s website. The company also has similar reserves and production of natural gas. As discussed above, this places Aramco as one of the most competitive ethnocentric MNEs in the world. Finally, it is obvious that Aramco, as a Saudi-owned enterprise, brings its home country culture to its global presence and sends its profits back to the home country. These are two of the last descriptions of any given ethnocentric MNE.

5. Conclusion

Even with its status as one of the world’s largest energy suppliers, Aramco continues to grow – since 1998 it has added an average of 3.8 million barrels per day to worldwide crude oil production. The company’s unique operation as a state-owned, ethnocentric MNE and its use of the strategic practices discussed above only serve to strengthen its status as a global player.

Works Cited

Chakrawarthy, Balaji, and Howard Perimutter. “Strategic Planning for a Global Business.” Colombia Journal of World Business 1985: 5-6. Print.

Financial Times. “Big Oil, Bigger Oil.” Financial Times 4 Feb. 2010. Web. <http://www.ft.com/intl/cms/s/-value-saudi-aramco.htm>

Rugman, Alan, and Simon Collinson. International Business. Upper Saddle River: Prentice Hall, 2008. Print.

Saudi Aramco. Saudi Aramco Home, 2014. Web. 15 March. 2014. <http://www.saudiaramco.com/en/home.html#top>

UN, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001).