Gaining a Competitive Advantage in the Global Bioethanol Industry Strategic Options for Large Scale European Producers MSc Thesis – Management Studies Group Wageningen University David Borgman January 2009 Scientific advisors: Dr. Elizard de Vries Dr. Emiel Wubben Disclaimer: Information provided in this report by market experts and stakeholders (respondents) is confidential. No information from chapter 7 may be copied or reproduced without the explicit authorization of both the researcher and the respondent(s) involved. The respondents can not be held (legally) accountable in any way for the information provided in chapter 7 and the interview reports. EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Preface This research is performed by David Borgman, and forms the MSc. thesis, the culminating element of the study Management, Economics and Consumer studies at Wageningen University. I would like to gratefully thank Dr. Elizard de Vries and Dr. Emiel Wubben for their guidance, support and feedback during the research period. This research has been a great learning experience and could not have been realized without their support. Furthermore, I would like to thank all the market experts and stakeholders for their valuable perspective. Their input has been crucial for the success of this research and has contributed to my enthusiasm and ambition for making a contribution to the development of renewable energy. Finally, I would like to thank my family for their continued support during this research period. Without them, I could not have realized this achievement. This thesis has been a great learning experience, and I hope that it can serve as an input and inspiration for bioethanol producers, policy makers and scholars. Wageningen, January 2009 David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Abstract This explorative research is aimed at the formulation of strategic options for large scale EU bioethanol producers, which enable the firm to achieve a competitive advantage in comparison to Brazilian and U.S. producers. On the basis of a literature review, a theoretical framework is developed which serves as a phased model for the formulation of strategic options. The theoretical framework is based on the Industrial Organization paradigm and features various strategic management based models and techniques for the analysis of the industry, societal environmental factors, the selection of external and internal strategic factors, key success factors, comparison of the competitive position of bioethanol industries, and the formulation of strategic options. The first empirical step of this research concerns an analysis of the basic conditions and industry structure. From this analysis it becomes apparent that the EU bioethanol industry is in a relatively poor competitive position in comparison to the Brazilian and U.S. industries. Especially with regard to production costs, the energy balance of the production process, available land resources, governmental support and market protection, the EU industry can currently not compete with the Brazilian or U.S. industry. The development of advanced bioethanol (i.e. cellulosic ethanol) through biorefinery is identified as an important opportunity for the EU industry to improve its competitive position and to establish a competitive advantage. In addition, increased governmental support and the implementation of sustainability criteria are identified as important contributing factors for a competitive advantage. On the basis of several strategic factors, which were derived from the industry analysis, four strategic options for large scale EU producers have been formulated by the researcher. These four options are validated through eight in-depth interviews with bioethanol market experts and stakeholders. On the basis of these validation sessions the strategic options are adapted, which results in a reduction to three strategic options. These options include; a Strategic Alliance option with a (U.S) technology partner or U.S/Brazilian producer, a Global Strategy in which the large scale producer establishes production in the Brazilian and/or U.S. industries, and an Innovation option in which the large scale producer develops advanced bioethanol and/or diversifies with the production of high-end biobased products through biorefinery. The strategic options serve as the main recommendation for large scale EU bioethanol producers. The strategic options and market analysis (techniques) serve as an input for strategy development for large scale EU bioethanol producers. Several additional recommendations for further research are made with regard to the strategic options and EU governmental policy. EU Bioethanol Firm Strategy MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Table of Contents Abstract 1 Introduction..................................................................................................................................... 1 1.1 Project context............................................................................................................................... 1 1.2 Research description .................................................................................................................... 2 1.3 Research Objective....................................................................................................................... 2 2 Methodology ................................................................................................................................... 3 2.1 General research question............................................................................................................ 3 2.2 Research Strategy ........................................................................................................................ 3 2.3 Research framework and Methods ............................................................................................... 3 3 Literature Review ............................................................................................................................ 5 3.1 Market analysis ............................................................................................................................. 5 3.1.1 Market analysis - Industrial Organization .............................................................................. 6 3.1.2 Market analysis – Strategic Management............................................................................ 13 3.2 Competitive Position ................................................................................................................... 19 3.3 Strategy Formulation................................................................................................................... 23 3.3.1 Competitive Advantage........................................................................................................ 23 3.3.2 Generic Strategies ............................................................................................................... 24 3.4 Conclusions................................................................................................................................. 35 3.5 Theoretical framework................................................................................................................. 37 4 Basic Conditions and Industry Structure .........................................................................................41 4.1 Five Forces of Market Structure.................................................................................................. 41 4.1.1 Industry competitors ............................................................................................................ 41 4.1.2 Bargaining power of Suppliers............................................................................................. 65 4.1.3 Bargaining Power of Buyers ................................................................................................ 73 4.1.4 Threat of New Entrants........................................................................................................ 78 4.1.5 Threat of Substitutes............................................................................................................ 84 4.1.6 Conclusions Five Forces Model – Bioethanol industry........................................................ 90 4.2 Societal environmental influences............................................................................................... 91 4.2.1 Political-Legal factors........................................................................................................... 91 4.2.2 Economic factors ................................................................................................................. 95 4.2.3 Sociocultural factors ............................................................................................................ 99 4.2.4 Technological factors......................................................................................................... 102 4.3 Future market expectations....................................................................................................... 106 5 External and Internal Factor Analysis ...........................................................................................115 5.1 EFAS ........................................................................................................................................