The Foundations For Burmah Oil Company Commerce Essay

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The Burmah Oil Company was founded in 1886 by Scottish entrepreneurs interested in exploiting newly found oil deposits in Burma. Success there was followed by a milestone investment in exploration concision across a substantial area of Iran acquired from the Shah. That company, then called the Anglo - Persian Oil Company, later became British Petroleum (BP). Burmah held major shareholding in BP right through until the early 1970s. Indeed, after a long period operating effectively as an intermediate holding company for BP shares, the management of Burmah in the 1960s used the value of the shares as collateral to embark on an ambitious plan to turn Burmah into both a fully integrated oil company and a substantial conglomerate group. Businesses bought included Castrol and Signal Oil and Gas; other interests included major exploration licenses in the North Sea, a substantial fleet of oil tankers and a raft of other activities, including high-street retailer Halfords, various chemicals companies and Quinton Hazell, an automotive component supplier. This period of expansion was brought to an abrupt halt by the recession consequent on the Yom Kippur war in 1974 (Johnson, Scholes & Whittington).

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Strategic management involves taking decisions and planning ahead for the long term survival and success of organization. It is important to identify the direction in which the organization is and should move in and also in achieving its goals.

This assignment requires that the case of Burmah Castrol Oil Company to be critically evaluated in order to determine their strategic decision on the sale of Burmah Castrol to Bp Amoco. This will be an opportunity to analyze and understand in depth various strategic management approaches. And provide effective approaches regarding the sale of Burmah Castrol.

We are able to apply the theoretical knowledge gained about various strategic models & approaches to a real life situation in a practical and comprehensive manner which would lead to a better practical knowledge and understanding.

The Theories Used

The theories used in the evaluation of this case can be broadly categorized as both traditional and emergent. The most important theory to be used will be the model of the process of strategic management (Appendix 1). Other theories that will be used in the evaluation process will include: McKinsey's 7S model, Triple Loop learning model and also the cultural Web model.

MCKINSEY'S 7S MODEL:

According to (Rasiel & Friga, 2001) The 7 S framework of McKinsey is a Value Based Management (VBM) model that describes how one can historically and effectively organize a company. (Refer figure 2, appendix). The 7 S factors are: Shared Values, strategy, Structure, System, Staff, Style and skill.

TRIPLE LOOP LEARNING:

As stated by (Bast, 2009), While change at the incremental and reframing levels is quite common. Transformational (Triple-Loop) Learning involves transforming the current status by creating a shift in the context. (Refer figure 4, Appendix).

CULTURAL WEB MODEL:

The cultural web (Refer figure 4, Appendix) will help to provide an understanding regarding the manner that Burmah Castrol conducts its operations. By identifying these various aspects we can better understand the functions of Burmah Castrol and also, when and where there is inconsistency with the strategy; it can be changed to be made consistent.

Process of strategic management followed by Burmah Castrol

According to the case, Burmah Castrol divided its focus into two major prongs; one is to continue to develop the successful global business of Castrol and secondly to provide a substantial counter weight to the chemical business and operate as a separate entity in order to focus more effectively. And the strategy the management undertook was to slim down the other part businesses in order to build up the portfolio of the chemical business.

Business Environment

Organizations must operate in a certain environment, and as a result this external environment will greatly influence the organization. It can be categorized as: macro and Industry Environment.

The macro environment factors are largely uncomfortable and may impact the strategies as well as the performance of the organizations. This may include competitors, government regulations and can be identified a PEST analysis. In the case of Burmah Castro, we were able to identify various elements impacting on the operations of business.

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Favourable political support for more development was predictable since the government saw this as an employment generator.

The ability of Burmah Castrol to match its demand due to the market size, geographical proximity.

The increase in the purchase of vehicles hence, the recovery from the war situation and this meant that there is more demand for oil.

Threats

Technology improvement proved to threaten by the need for advanced oil with more efficiency for the engines, additional with a longer change period.

The consolidation in the oil industry, which would give an economies of scale for larger companies and that is something that Burmah Castrol cannot survive and was a threat that Burmah Castrol would face in near future.

Burmah Castrol has to licences the oil drills and there are changed laws that the company had to face and this threaten the company legally.

Industry environment analysis is traditionally the second stage of strategic analysis. Its purpose is to determine the level of competitive pressure your business is likely to be exposed to in the foreseeable future.

(http://www.whatmakesagoodleader.com/Industry-environment.html).

Porter's five forces is a very useful tool that can be used to perform an analysis of the industry (Refer appendix 6). The Burmah Castrol PLC has a high threat of competitive rivalry hence, the joint venture of large Oil companies. Moreover, due to the fact, that there is predictable consolidation in the industry.

Resources Analysis

Each organization has internal competencies, skills, knowledge that can be appropriately used and applied to achieve success in a competitive environment. As stated by Hubbard (Hubbard, 2008), the analysis of the internal environment of an organization helps to understand its resources, capabilities, dynamics, and strategic capabilities and it helps an organization to understand what its doing better than their competitors which is valuable to the customers and which is difficult for the competitors to imitate or replicate. Conducting an internal analysis in an organization will result in identifying strength and weaknesses. Exploitation of the strength and overcoming weaknesses can help an organization succeed.

According to (Hill, 2007), the distinctive competencies of a company arise from two complementary sources: its resources and its capabilities. The resources based view will help determine the Burmah Castrol Company's sustainable competitive advantage and it will depend on the extent to which their resources are valuable, rare, inimitable, non - substitutable and exploitable. This will identify the Burmah Castrol's strength and weaknesses.

Strength - Burmah Castrol is a well established company capturing a huge market share and with many skilled managers and employees who are good in managing both human and identifying excellent investment opportunity. This has been the rationale to its successful acquisitions made by the organization over the years.

Weakness - the major issue is that the company has always kept the stakeholders and the shareholders importance on the ahead of all the business operation. It has always been that the shareholders were consulted first before an acquisition or divestment and this has resulted in the sales of the company at the end.

Organizational structure

The company began a real change its organizational structure in 1960s when it went for a diversification and till then it operated as an entrepreneur of many products with many acquisitions.

The company sold the signal oil and gas and many others in order to slim down the company into two major areas of business. First was to continue the development of Castrol business even through the chaos, the company has faced earlier and now it had become globally increasing powerful brand and a successful business. Secondly the company is focusing on the chemical business and planned to provide the equal weight age to it as to Castrol.

Burmah Castrol concentrated more on the chemical industry and there was a key change in the organizational structure because the management was in a argument on the facts that they can handles the chemical successfully as much they do in Castrol hence they find many similarities in both the businesses. They anticipated that the Castrol and the chemical business would grow and flourish immediately and please the shareholders with high revenue.

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The management feared that the business would fail even though it's growing steadily in the shot run. This is due to the fact that the change in the organizational structures for the acquisition of Foseco. Foseco was a company that has a chemical business and was losing its business and Burmah Castrol was successfully acquired the company and the company generated revenue by the improvement in the economic condition.

One of the main organizational structural changes which took place just before the sale of Burmah Castrol to BP Amoco was that the company changed from a geographically based model to a more market based model covering all four market areas. Raw materials, blending, distribution and customer relationship was focus on mainly once this structural change took place and success was obtained by the company by taking this approach rather than the old geographically based structure. As mentioned above, Burmah Castrol has gone through many organizational structural changes over the past 100 years and the main changes have been documented above and discussed in detail.

Corporate Parenting

The Burmah Castrol had a very sound corporate parenting at the establishment stage hence; they didn't have much acquisition to focus on. After the organization grew over from the years and diversification in the year of 1960s and corporate parenting dropt down. Burmah Castrol should have been enforced corporate parenting to an extent when it made the diversify of business but this did not happen to the required extent and the company also took most of time to the growth of the chemical business portfolio than the oil business.

Burmah Castrol should have realized that the oil business was the way forward and although similarities existed in the chemicals business, the oil business through corporate parenting should have been concentrated on more than the other.

Why should Burmah Castrol Company be sold to BP Amoco

There were many reasons for the sale of the company and some of these include the attractive offer of pounds 16.75 per share, BP Amoco promising to make Castrol its leading lubricant brand, strong brands and innovative skills for powerful future growth and a larger customer base and the opening of new global markets once the acquisition has been completed by AP Amoco.

Justification

There are many advantages to the sale of Burmah Castrol to the BP Amoco and most importantly there are numerous issues that the company was facing at the time of sale. One of them was that there was a fall in share price and that created the pressure from the shareholders of the organization. And secondly there was arising condition where the lager companies were in the position to merge, to achieve economies of scale and this brought in the compulsory situation where Burmah Castrol has to either merge with a larger company or sale itself to another company.

Moreover, the sale of Burmah Castrol to BP Amoco offered an attractive price of 16.75 pounds per share; this was something that gave no chance for Burmah Castrol to ignore it especially when the shareholders were unhappy about its fall in the share price. Nevertheless, the sale of Burmah Castrol to BP Amoco gave much broader and global recognition. And BP Amoco has much stronger and tougher mangers than Burmah Castrol in regard to the costs and mange the level of economies of scale by the acquisition of Burmah Castrol by BP Amoco and provides a greater advantageous over its overall competitors.

Therefore, considering all the reasons from this section the sale of Burmah Castrol to BP Amoco was the right strategic decision taken for both the companies. This will provide great amount of revenue over the years.

Reference

Afuah, A. (2004). Business models - a strategic Managemnt Approach. New York: McGraw-Hill/Irwin.

Hill, C. (2007). Strategic Management:An intergrated Apporach, (2nd edition.). Australia: John Willey & Sons Australia, Ltd.

Hubbard, G. B. (2008). Strategic Management: Thinking analysis action (3rd edition.). Australia: Pearson Education.

The industry environment analysis: What every manager should know; Retrieved on the 21st of January 2010 from:

http://www.whatmakesagoodleader.com/Industry-environment.html

Stakeholder Definition, Retrieved on the 19th of January 2010 from:

http://www.mariosalexandrou.com/definition/stakeholder.asp

Appendix

Appendix 1

THE PROCESS OF STRATEGIC MANAGEMENT

Appendix 2

MCKINSEY'S 7S MODEL

Appendix 3

Triple loop