This report highlights three aspects of business development and market growth for British Petroleum considering the competitive environment of BP, the key business strategies of BP for five years and the resources and capabilities that are available to BP for the last five years. The competitive environment point towards new capabilities that BP has developed for years to maintain competitive advantage. Competitive advantage has been analyzed using Porter’s model and it is suggested that differentiation and focus could be a response to changing market conditions. The competitive environment is also affected by factors such as brand image and reputation as related to social responsibility and environmental awareness. BP’s strategies have focused on IT outsourcing to energy efficiency, leadership building and stakeholder management, application of resources and technologies, safety as well as climate change concerns. BP’s investments have led to sustained production and volume growth and this is expected beyond 2010. BP’s capabilities and financial resources received a boost with the rise of oil prices and growing demands worldwide with BP main businesses being in petrochemicals, petroleum refining, and oil and gas exploration and production.
1. Competitive Environment of BP
BP is a diversified energy products company engaged in oil and gas explorations and development or production and transportation of crude oil and natural gas. BP is responsible for refining, marketing, transportation, sale of gasoline, diesel fuel, jet fuel and other petroleum products; and the production, marketing and sale of petrochemicals. The global oil and gas industry being high competitive show that with expanse and success of a company, capabilities are stronger and competitors could have problems understanding or imitating these. So developing new capabilities would be essential in maintaining competitive advantage.
Competitive advantage is attained when capabilities are neither simple and highly imitable nor too complex that defies internal steering and control. Capabilities that grow through use are considered critical to success and BP and other similar companies will have to develop such capabilities (Kay, 1993). A resource based view suggests that sustainable competitive advantage could help in developing existing and new resources and capabilities in response to changing market conditions. Knowledge and knowledge management are related to value creating assets and helps in competitive advantage.
As far as the competitive environment is concerned, there could be sufficient competition in the main markets of BP although world energy markets are unaffected by government policies and changes. The global economy and globalization could be some of the factors that have triggered competition in the world market and more so for the oil and gas industry (Bowman and Faulkner, 1997). The oil industry has been dominated by a few major international oil companies, including BP, Shell, ExxonMobil and Chevron along with companies of the gulf states. Seven major oil companies produced, transported and refined as well as marketed two thirds of the oil supply around the world for several years. State owned oil companies as in Saudi Arabia, Gulf and OPEDC countries are the largest suppliers of crude oil even today. Aramco has produced more than four times as much oil as ExxonMobil which is the largest private sector oil company and ExxonMobil produces twice as much oil and gas. Gazprom is another such company which is majority-controlled by the Russian government but also privatized and is responsible for more than 20% of world production and of exports of natural gas.
The oil industry and companies in the OPEC states have diversified into refining, marketing and petrochemicals, but these may be of secondary importance when considered on a global basis although the contributions of such companies are important in certain regional markets.
There are also problems of environmental awareness and corporate responsibility and BP’s strategies have been framed by these considerations. Sarkis and Tamarkin (2005) addressed the ways of reducing greenhouse gases and organizations involved in reducing emissions and with emergent markets. Investment in equipment could help reduce emissions and could boost sales. However there could be a faster price rise and projects may not be economically feasible leading to the need for more stringent regulations. Real options analysis is considered an important tool for the energy industry and the energy industry is still completely influenced by greenhouse gas policies drawing attention to emissions and the role of controlling greenhouse gas emissions within the industry.
2. Key business strategies of BP over the past five years.
Analysis using Porter’s generic strategies to discuss why this strategy was pursued or changed.
Some of the key directions towards strategy included energy efficiency with BP operations such as considering the price of carbon in investment decisions and promoting low cost energy pathways through gas or power generation. The company also plans to make continued investments in alternative energy with bio fuels, wind and solar or carbon sequestration and investments in research and technology. Companies focus on safe and reliable operations with continued journey in personal safety and implements operating management system with compliance.
The people efforts are on building capabilities and leadership behaviors and performances help in restoring revenues or reducing complexity and costs. Apart from the culture of leadership and restructuring, building skills and capability and diversity or reward for performance are important elements of company strategy. BP already identified new regions of access for its operations including Iraq, Indonesia, Jordan, and new acreage in Gulf of Mexico and Egypt. The reserves and resource replacement are at 12%-250% and production growth was at 4% (Hayward et al, 2010).
The success story of the company has been projected as governance and shareholder alignment, safer operations and volume growth as well as steady financial performance. 2010 expected performance has been projected at $4 billion investment, production growth of 1-2%, focus on cost efficiency and development of projects with an average 1-2% volume growth until 2015 with increased potential and sustained growth to 2020.
Resource bases and sources of growth beyond 2015 has been marked through expanding deepwater, leveraging expertise in gas and managing the giant oil fields of the world and enabling application of technology. The focus of the company has been on cost and capital efficiency and profit growth and diversifying the portfolio with a growing resource base. A momentum on costs and strategies and operations and an average 1-2% volume growth was expected until 2015 (Hayward et al, 2010).
BP is also shown as having increased potential to sustain growth to 2020 and changes in the process could drive capital and cost efficiency. Fuel value chains through quality and integration could mean right markets and right locations for logistics and refineries and quality products and brands through marketing and channel management. BP has also highlighted supply optimization and trading and common processes at the back office.
Among its infrastructural changes, BP has undergone major rebuilds of CDU to process heavy crude and for the manufacture of crude oil and also new world scale sulphur removal and gas oil hydro treating units. Refinery infrastructure upgrade shows location advantage. The market share possibilities discussed showed 40% capital employed in growth markets with leading technologies and strong customer relationships with margin share growth and premium brands.
The company also gives importance to safety and efficiency, quality and integration and application of resources and technology and the emphasis provided is on safe and reliable operations. In the next 2-3 years over $2billion of pre tax performance opportunity was also identified. Costs were at 2004 levels with their refinery modification in 2012 (Hayward et al, 2010).
The strategy of the company was given as a focus on the growth of profits as well as cost and capital efficiency through upstream production and downstream strategies are higher turnaround and cost efficiency. Alternative energy is seen as focused and disciplined with higher corporate efficiency and strategic growth. The focus on strategy is based on profit growth and use of alternative energy, as also a focus on corporate performance and efficiency and on cost and capital efficiency.
BP was among the first multinational companies that joined in the merging consensus to address climate change (Kolk and Levy, 2001). BP has focused on a strategy to reduce greenhouse gas emissions and along with solar energy, BP’s other lines of business are seen as exploration, oil and chemicals. However as far as BP’s position towards climate change is concerned, analysts have tried to examine “Is BP reacting to inevitable environmental pressures, but conducting business as usual, or is BP seizing the moment and opportunity and using global climate change as a doorway to a new business model for the 21st century?” This seems an important analysis as it marks whether BP is projecting a new business model through the climate change focus or simply responding to the global environmental pressures and challenges and whether the climate change focus within its strategy would be positive or negative for BP (Lowe et al, 1998).
As far as the analysis of BP’s strategies are concerned, Porter has argued that any firm’s strength would ultimately depend on cost advantages and differentiation. The generic strategies that should be followed by any firm for success have been given as cost leadership, differentiation and focus (Porter, 1998). Cost leadership is attained through low cost of materials and integration decisions and differentiation strategy offers unique products and attributes to clients giving a competitive edge, and focus provides a narrow market focus so that specific needs of segments are met. Porter’s general strategies could explain the key business strategies adopted by BP in the last five years and these were related to climate change as well as cost and capital efficiency and profits.
Juris (1998) suggested that in the UK it is possible to move from a monopoly of one company dominating the market to a competitive environment with many players and this is true even in the natural oil and gas industry without significant structural reforms within the business environment, although this could be expensive. Structural reforms and innovation brings about differentiation and launch of products and services that the consumer perceives to be different, Any form of change or deregulation must be accompanied by regulatory and institutional frameworks and all entrants to the market should be given equal rights. With cooperation between the government and industry participants, there has to be mechanisms for appropriate balancing and operating. BP will also have to follow these regulations towards market balance despite being a major player.
Industry participants have tried to reach a consensus on how to enhance the existing framework that could make markets more efficient. British oil and gas industry will have to effectively give more time and resources to developing a tariff structure for pipeline capacity and transportation services in tariff markets (Juris, 1998). BP has a role to play in stabilizing tariffs that could make the markets efficient.
Cross (1995) highlighted outsourcing as a BP strategy and explained how the BP Exploration Operating Company, $13 billion division of British Petroleum Company explores and produces oil and gas and outsourcers all IT operations in efforts to cut costs and get more flexible higher quality IT resources to improve business. At BP exploration it was decided that the company no longer needed technologies that provided business information to employees and this could be outsourced. There were problems encountered with internal IT departments and the old and new machines as well as the need to focus on technological details rather than wider more important business issues led to the need for outsourcing these to technicians.
As far as BP’s technology strategy is concerned, BP diverted its IT support through outsourcing. Outsourcing helped in the reshaping of the IT department. At BP information technology was used as utility for operations to develop application and supply processing power as also to provide technology support. This is now given to outsourcing providers and the company buys generic applications or contracts the work. The IT department is expected to improve business rather than be an internal group that simply meets supply of the company.
The company however has a different IT strategy and does not rely on a single supplier for all IT needs although this could make BP to escalate its fees and become more rigid in its services. At the same time selective outsourcing and division of IT operations led to strain on management resources. BP’s IT strategy focused on buying IT services from multiple suppliers although these could be delivered in a way as if by single supplier. Contractors delivered services to 42 BP businesses worldwide. The subcontracts were also performed effectively and the cornerstone of the BP outsourcing strategy was to use services from multiple suppliers and yet project them as one. The IT department is kept separate from Operations so that the IT managers could independently work on the business rather than get involved in technicalities. Several IT services including large and small providers were used for outsourcing which was however a difficult task but had the benefits of reduced fixed costs, improved service, and access to new ideas and technologies (Cross, 1995). However the downsides were the technical issues and the danger of operations and management getting loaded with IT problems.
3. Resources and capabilities of BP over the five years, and analysis of the extent to which the company has aligned its resources and capabilities to its business strategies
The alignment or use of resources and capabilities to shape business strategies of the company shows that BP placed a great emphasis on infrastructure and profit growth by building its resources and through partnering and strategic alliances. BP has built its larger base by organizing around the smaller business units and the company has several smaller business units that work together and the resources are available easily and quickly. The company follows a decentralization strategy with its various units having independent operations although there are differing views on whether this has been particularly helpful or led to original thinking. New approaches to BP business showed how the BP business could successfully steer through crises although the recent focus has been on BP’s strategy towards climate change (Kolk and Levy, 2001).
Considering the changes in BP strategy, it has been noted that BP had a politicized bureaucracy managed matrix structure and with the complexity performance declined and the company faced financial crisis. In recent years however BP has reported highest profits $4 billion in the third quarter of 2004 alone. The high prices of crude oil added to the profits although the company’s cost efficient operations were key to strong performance. The company also absorbed two oil companies Amoco and Arco and other companies and the acquisitions helped in the expanse and scope and several strategic and organizational changes added to the remarkable turnaround in the company’s performance (Roberts, 2005). BP’s transformation came as it divested unrelated lines of business and divided business into units with three basic businesses with upstream oil and gas exploration and production, downstream petroleum refining and marketing and petrochemicals. There were different functioning markets and the units were run independently adding to the strategic advantage of the company.
The company presentations showed that the US refining portfolio was fully operational and US convenience retail helped in reducing marketing footprint with cash costs down by 15% in 2008. $4billion was invested by the company for alternative energy since 2006 and employee count was reduced to 7500 and cash costs were also reduced by billions in 2009, bringing down the overall expenses of the company (Hayward et al, 2010).
Among other strategic directions of the company are using solar energy as alternative energy and fuel and BP has been successfully developing the solar energy potential as one of the greener sustainable sources of energy. BP corporate strategy has also been focused on issues of climate change (Kolk and Levy, 2001) and there are two directions to this strategy. One is the potential advantage in corporate reputation and image if BP is projected as green and clean company which controls its business units and functions according to global climate conditions, and the other is the possibility of a new business model within which BP could work and using of solar energy as green energy is already a step towards this motive.
In the last five years BP resources and capabilities have changed drastically. Along with addition of BP solar energy, there has been increased investments and increased profits with higher oil prices. BP has also potentially expanded its reach and operations across many new regions and continued to add new resources and capabilities including material and financial to fulfil its strategic directions. The business strategies of BP have been primarily geared towards profitability and corporate responsibility so along with cost leadership, focus, innovation, differentiation and climate change, BP had diversified and categorized its business units along with mergers and acquisitions.
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