The Concept Of The Value Chain

The concept of the value chain encompasses the activities that companies perform to achieve that competitive advantage, where the competitive advantage is having the ability to create superior value to its customers and at the same time superior value to themselves. Value chain analysis together with supply and demand chain analysis are staples of Modern Business Management. An effective business strategy must encompass all parts of the value chain configuration which includes both “primary” and “secondary” activities.

The value chain concept was first developed by Michael Porter (1958) in his work on Competitive Advantage in which he analyses the basis for competitive advantage and presents the value chain as a framework for diagnosing and enhancing it. However since then there has been a considerable amount of work done to expand on Porters original concept. Today more and more Managers are using value chain analysis part of strategic planning.

The process of globalisation incorporates the interaction and integration amongst people, companies and governments of different nations. According to “Black 2002” globalisation is defined as:-

“..process by which the whole world becomes a single market. This means that goods and services, capital and labour are traded on a world wide basis and information and the results of research flow readily between countries…”

Through globalisation economies both domestically and internationally have been opened up. Governments have adopted a free market economics systems whereby increasing their own productive potential in addition to creating opportunities for international trade and involvement. There is also the controversial aspect of globalisation where proponents argue that through globalisation poor countries and their citizens are allowed to grow economically. On the other hand opponents of globalisation claim that multinationals of the western world benefits at the expense of local enterprises, cultures and the common people.

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BP

BP is a multinational oil company with it headquarters based in the United Kingdom, London. It is one of the world’s top 10 private sector energy corporations in the world today. BP is engaged in oil, natural gas and alternative fuel exploration in addition to the marketing and sale of petroleum products. They are also at the forefront of delivering diverse, material and real solutions to meet the world’s needs for more, cleaner and affordable energy. Bp operates worldwide with branches in Africa, Asia and the Middle East, Australasia, Europe, North America and South America with operations in over 80 countries. Their largest division is BP America, which is the biggest producer of oil and gas in the United States of America. BP’s operating income in 2009 was USD $ 26.43 billion with a revenue of USD $ 246.1 billion. As at Dec 2009 they employed 80,600. In 2000 BP Amoco changed their name to BP and introduced a new slogan “Beyond Petroleum”. They also replaced their “Green Shield” logo with the “Helios” symbol, a green and yellow sunflower pattern representing energy in its many forms. (Wikipedia 2010)

BP’s rapid growth in world trade and investment is a direct result of the globalisation process in which multinational companies increasingly target parts of the globe as their domestic market. Since value chain is utilised to develop an organisations sustainable competitive advantage, it has become a powerful tool for Managers. The ability of any organisation to identify key activities and by extension perform activities along the line of value chain would create that competitive advantage that Michael porter spoke about.

Through its history Bp has invested in countries abroad such as the US, Middle East, Iraq Egypt, Indonesia and Trinidad and Tobago. In doing so they have been able to secure large oil reserves and be identified as one of the largest oil and gas exploration company ion the world today. Being true to their values of being progressive, innovative and performance driven they have integrated the key activities of the value chain to the benefit of their customers

BP’s global strategy in their operations has assisted in their objective for being cost competitive through the securing of various economies of scale. Their heavy investment in the U.S. is testimony to this, since the U.S. remains one of the most lucrative markets in the world for energy and energy related resources. They consume over 1.2 billion litters of oil per year an this figure is constantly growing. This together with political stability, infrastructure and transport mechanisms are vital ingredients towards BP’s investments there.

Through mergers and acquisitions over the years, Bp has managed to receive that competitive advantage. With the acquisition of Valdes oil terminal in the late 60’s, Standard Oil of Ohio in the 70’s and the merging of Amoco in 2000 they captured most of the US. market share. By maintained this by continuing to sell Amoco branded products through their service stations although they were already converted to reflect the BP brand, as Amoco was rated best petroleum by consumers.

Today BP continues to seek mergers and acquisition s worldwide in an effort to bring in additional revenue, increased profits, foreign assets and Human resources. Using an appraisal system based on the porters five forces which key elements include Threat of potential entrants,(2) substitutes, (3) bargaining power of suppliers and (40 power of buyers, together with an exploration of (5) degree of competitive rivalry, BOP appears to be highly competitive in their area of production.

Through increased exploration in new territorities such as Asia Pacific, Azerbaijan, Angola, Trinidad Gulf of Mexico and in more recent times Russia, BP is able to increase assets and by extension establish leadership position in these areas.

With the liberalisation of markets, advancement of technology and new regulatory regimes that stress greater competition international competition has increased. As a result Multinationals are forced to become more efficient in areas of production and marketing to achieve that sustainable competitive advantage. All organisations consist of activities that link together to develop the value of its business. Together these activities form the organisations value chain. Bp’s value chain over the years has become more complex. One of the ways they have addressed this is by diversifying their operations of petroleum exploration and refining system into retailing in cafes, bakeries and convenience stores. Their aim is not only to ensure customer satisfaction but also to be an attraction to prospective customers by marketing differentiated products, consequently creating a competitive edge and becoming more effectively aligned to its customers needs.

As mentioned earlier all organisations consist of activities that when linked together develop the value of the business and form the value chain. These activities are referred to as the primary and secondary activities, where primary is related to production inclusive of inbound and outbound logistics, operations, marketing and sales and service. The secondary or support activities assist in the effectiveness and efficiency of the company.

Bp to date has effectively utilised both logistical and value chain strategies in its overseas operations. In doing so, they have achieved competitive strengths and core competencies in the market place, ultimately creating value for the customer.

Inbound logistics

A substantial part BP’s production is derived from a number of oil and gas fields worldwide. The oil and gas are transported via a series of pipelines and ships to various conversion facilities like refineries, power stations and industrial facilities at different locations. The use of BP shipping, a subsidiary of the BP group also provides the logistics to move oil and gas cargoes. The BP management fleet consists of Very Large Crude Carriers (VLCC’s), liquefied natural gas (LNG) carriers, liquefied petroleum gas (LPG) carriers and coasters. Bp has also shifted some of their exploration activities from Alaska and the North Sea since leaks were discovered in the pipelines and posed a threat to the environment. Explorations are now concentrated in the Soviet Union, Rumaila and The Gulf of Mexico. Through pioneering new technologies – such as digital imaging of reservoirs there is also the potential to discover additional oil and gas out of some of their mature fields. BP’s interest in the Canadian Oil sands also provides a unique opportunity for creating a balance in upstream production and downstream conversion.

Operations

The operation of BP is spread over six continents. As at 2004 there were 23 refineries of which 5 are in the US, 12 in Europe and 6 in other parts of the world. At the refineries crude oil is refined through a process called ‘cracking’ during which it is cleaned and purified, separating gasoline, fuel oil and other hydro carbons.

Over the years the demands for energy has been on the increase and as a result Bp has invested heavily in the promotion of alternative energy in addition to improving energy efficiency in their operations.

Safety has also become a top priority In BP’s operation and is viewed as fundamental to their success. Consequently, they are constantly upgrading their refineries to improve safety. This has resulted in injury rates reducing by close to 75%.

Outbound logistics

BP’s transport network criss-crosses the globe. They control an international tanker fleet of more than thirty-five vessels, either fully owned or on long-term charter . Finished products such as fuel lubricants and chemical products are transported to various destinations through different methods. Fuels, for example are transported domestically through a vast truck and rail system, which is then stored in tanks at service stations to be retailed to the consumer. For the international market the finished product is transported via carriers which are then loaded onto trucks and rail cars for distribution. In the case of natural gas, depending on the location of the field it is transported through pipes to local distribution companies (LDC), or shipped using LNG carriers.

Marketing and Sales

This departments main strategy is to operate in markets where they can get the largest share and ensuring that it is kept well supplied at all times by supply advantage. The introduction of retail sites with convenient stores is one of the strategies adopted to achieve this

Environmental issues such as global warming have forced BP to address the issue of climate change. Their initial step was the changing of its brand image and logo. Being true to their values, BP is continuously seeking to increase energy efficiency throughout their operations. They also work alongside vehicle and equipment manufacturers, towards improving overall efficiency in the use of their fuel and lubricants. Bp has also differentiated themselves from their competitors by playing a leading role in the growing low carbon energy sector, focusing on bio fuels, wind and solar energy and carbon capture and storage.

Services

The dependence of oil, gas and energy related industries from unstable and or difficult parts of the world have always been a concern for many countries. Although the price volatility over the past few years has softened some of these concerns, they continue to exist. Terrorism in particular has become a top priority since September 11 20011. Consequently, Bp has taken steps in securing all activities along its value chain. Additionally, it is quite evident that BP’s commitment towards safety and climate change is constantly growing.