Corporate Strategy of Gulf Oil Spill - Case Study Example

Corporate Strategy of Gulf Oil Spill Table of Content Table of Content 1 Summary 2 Introduction 3 Performance of BP Plc. in 2009 4 Strategies Undertaken 5 Theoretical Analysis 6 PESTLE Analysis 6 Porter’s Five Forces Model 7 Threat of New Entrants 7 Bargaining Power of Buyers 8 Bargaining Power of Suppliers 9 Threat of Substitute Products 9 Competitive Rivalry 10 BP Plc in 2010 12 Gulf of Mexico Oil Spill 12 Reasons 13 Results 14 Performance after the Gulf Oil Spill Massacre 15 Conclusion 17 References 18 Bibliography 22 Summary Corporate Strategy plays a significant role in developing a company’s status and provides it a competitive edge in the related market. There are three phases to evaluate the strategic structure of a company, i.e. identification of strategic need, planning the appropriate strategies, and implementation of those strategies. Worth mentioning, any of the three stages if not performed with care can lead to overall failure of the company’s performance. The best recent example is of BP Plc, when same thing happened in its case during the mid of 2010, when unfortunately it came across an accident which took place in Mexico, and was named as The Gulf of Mexico Spill. The company despite of having a fair and suitable strategy planning related to certain major issues like safety, technology, and employee needs, was unable to use superior technology, and safety measures that would have helped to abolish the chance of such massacre to take place. The accident not only caused immense damage to the company strengths but also hampered the environment with a recorded spill of more than 5000 gallon of oil in the offshore region. This study thereby, analyses the company position before the Gulf of Mexico Spill blast and its recovery strategies. It also aims at studying the facts that led to this massacre and accordingly suggest the relative measures it could have taken to avoid the incident. The study comprises of two phases as such. One describes the theoretical analysis of the company strategies before the oil spill and the next includes a realistic analysis of company’s strategic failure, its reasons and solutions. Introduction BP Plc has already registered itself as one of the largest oil companies in the world, being the leading oil corporation in United Kingdom. It was the first company to discover oil in Iran during mid 90s at the pre-war phase. From then it has created its importance in the oil industry of the world. It enjoyed a very strong perspective at its growth stage by vertically integrating the market of oil refiners, distributors and extractors, almost covering all aspects of the then market. A remarkable phase of this corporation was the challenges that broke out during the 20th century in the global market. At that period it had to follow an efficient restructuring and analysis in order to perform at a competency level (Corporate Watch, n.d.). British Petroleum led its foundation in 1909 when D’Arcy started the first Anglo-Persian Oil Company with the name APOC. The company after that came to be known as the Anglo-Iranian Oil Company in 1935 enjoying a monopoly in the market. By the year 1953, the Iranian Government nationalised the oil market and hence the company needed to drive back from the Iranian Market. However, it was during this period that the company gained its name as British Petroleum. The company’s journey till mid 20’s, followed a large number of mergers and acquisitions in order to expand its activities in the international market. During the year 1999, British Petroleum merged its entity with another oil company, Amoco and came up with a new identity as BP Amoco Plc. in the international market. Later in the mid of 2000, after acquiring Atlantic Richfield Co. and the Burmah Castrol, the company initiated to adapt a global outlook with the name BP Plc. (Kamiar, 2010). The global oil industry at the initial stage of BP Plc. has drastically changed its standpoint with an increased level of competency and challenges for its participators. Some other fast runners in the market are Arabian Oil Company, Iranian Oil Company and many more. Certainly, the company in this situation do posses certain strengths and weaknesses in the market. One of its major strengths to be mentioned is it’s widely ranged exploration and production which is currently active in 30 countries including almost 16 refineries wholly and partly all around the globe. On the contrary, one of its major weaknesses is the inadequate safety provisions that have already provided rise to numerous arguments in the world economies. While, to put into account, the opportunities that lay on the context is the growing demand of LNG and aviation fuel in the global market. A few of the brands that it acquired are Castrol, BP, Arco and Aral (BP, 2010). Performance of BP Plc. in 2009 To mention its performance during the year, it has witnessed a gradual rise in its safety provisions recording lesser numbers of injuries than 2007 and 2008. The figures also show a relative improvement in the GHG reductions comparatively from the past years. The cash flow structure has decreased to a level of 27.7 in 2009 from 38.1 in 2008. The overall performance during 2009 as highlighted in the company’s annual report has figured an increase in production by 4% as a result of its major projects started up during 2008 and 2009. It also has a steep increase in the reserves placement ratio, and a fall in replacement of cost profit compared to its performance in 2008. Notably, the year 2008 has been a downfall for the company which led to the restructuring of its strategies (BP Plc., 2009). Figure 1 (Stockopedia, 2010). Strategies Undertaken After evaluating the company’s market status and performance in 2009, it stated a new strategic outlook for the year 2010 in order to have a better presentation. The first priority on this behalf is provided to the most important factors of the company, i.e. safety, people and performance. The strategies include a higher level of efficacy development in the field of safety and reliability with new designing of organisational structure by aiming at the optimum use of skilled labours for its production. In exploring and production sector, the company is on a move to invest in order to incur a sustainable growth throughout its operations by high quality earnings and returns. Another major field for its activities i.e., refining and marketing, its prime focus is on the value chain and performance aspects through improving portfolio quality and integrating activities in the chain. Last but not the least in the sector of alternative energy, the strategy is to redesign the competitive edge of the company with a new point of view. As stated from the strategies mentioned by the company it aims at a growth strategy with restructuring and investing in different forms to enhance its production, exploration, refining and marketing prospects (BP Plc., 2009). Theoretical Analysis PESTLE Analysis The global oil industry is no doubt at a healthy pace, but in recent past it has witnessed a volatile situation in the price swings mostly because of the political and social factors. The growing concern on environmental pollution and safety measures adapted by the participant companies are a few of the influencing factors of the industry. The economy in this scenario too plays a major role. With an increase in price it leads to an increase in project costs for any new proposed project resulting in delay or cancellation of the proposed project. All these aspects conclude to the market volatility in upcoming years for the stakeholders in global perspective. As such the cost structure of any company should be revaluated and redesigned efficiently to overcome these challenges. Although the political, economical and social factors are identified to be volatile, the technological aspects are likely to grow and prove effective through better modelling of exploration. As well as from the legal aspect, the NOCs and IOCs are expected to play a major role in the industry (Nachet, 2010). The economical factors play the most significant role in describing the sustainability of any international oil company. Energy in today’s social life has become a necessity and continuous oil extraction has resulted into a shortage of power supply. As a remedy to the matter, new alternatives are being invented to meet the global demands. A number of major economies certainly shall suffer the changes and BP Plc. is also not excluded. This factor will surely bring about major changes in the global oil industry (ASPO USA., 2010). Porter’s Five Forces Model The appropriateness of the strategies adapted by BP Plc. with the given socio-economic environment can be better analysed with the help of Porter’s Five Forces Model of competency. According to the model, there are five components to state the efficiency of a company’s strategies i.e., threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products and industry competitors (Value Based Management, 2010). Threat of New Entrants Undoubtedly the oil industry is huge and gathers too many scopes for diversification e.g., the exploration and refining, and distributors. The threat of new entrants is a major issue of concern for many companies. It becomes more important for companies like BP Plc. due to the reason that the company has its participation in exploration to distribution almost in all the spheres of the industry. With such a volatile future and changing internal environment of the company, the threat of new entrants in the global market certainly becomes a factor to be considered by the company. On this context, there are certain barriers that work for any new set up in the international oil industry. Moreover, the industry being constraint to political and economical factors also act as obstructions to any new entrants. Hence, the threat of new entrants may fall into a group of considered factors, but still is not too serious factor to worry about, especially for a public limited company like BP Plc. (Investopedia ULC, 2010). With the investment strategy to obtain a higher level of return and increased number of market share the company certainly minimises the risk of new entrants. Bargaining Power of Buyers In the present scenario, the power is rapidly shifting towards the buyers, which implies a growing rate of bargaining power of the global buyers. The increasing demand and the shortage in supply are simply leading to an imbalanced ratio of power between buyers and suppliers. Thus, the factor creates a strong impulse on the company’s status in gaining competency. Notably, the strategy to consider the value added chain to enhance the quality of performance and product the company is at a phase to obtain a competitive edge in the global scenario. Bargaining Power of Suppliers In the global outlook, there are many participants in the oil industry negotiating the power channels they enjoy. Although there are so many suppliers, there are only a few who plays a major role in the industry. Being one of the major players in the industry, BP Plc. by investment can certainly enjoy an enhanced bargaining power in the industry. Hence, in regard to the factor of bargaining power of suppliers, the company has a well-build competitive structure. To be highlighted, the mergers and acquisitions of the company has moved it a step further in negotiating the power with suppliers in the international market. However, the power enjoyed by the company is influenced by the substitutes present in the market (Investopedia ULC, 2010). Threat of Substitute Products This is indeed a fact to worry about for any company in international oil industry. Alternatives in this case are hydroelectricity power, coal, wind-power, and solar-energy. Due to high price and shortage of supply according to the markets demand the customers all around the globe is certainly to fall for alternative products in the market. On this context it should be mentioned that the function of fuel is not only used to run vehicles but also used in many manufacturing industries, like plastics and other materials. Therefore, if the customers are going for other power substitutes in daily life; they shall have least choices in the industrial prospect (Investopedia ULC, 2010). To state about the company, it has already extended its production in the spheres of substitute product manufacturing by producing solar-energy, bio-fuel and wind-power in different parts of the world. As such the company at this stage gained a competitive edge to survive in the industry (BP Plc., 2009). Competitive Rivalry A number of factors like the low entry barriers and high exit barriers play a vital role in describing the competitive rivalry of a company in the oil industry. Additionally, there are number of oil refineries and exploring companies in the globe that certainly provides a competitive level to the industry, e.g. the OPEC countries. Moreover, almost similar kind of product differentiation causes an increase to the competency ratio. To relate BP Plc. with the context, it has these reasons to worry about in its stage of decline, where an organisation can only survive by attracting more customers than other competitors in the industry (Investopedia ULC, 2010). Conclusively, the restructuring of the company’s strategies on the theoretical part certainly states that it has an enhanced perspective in the future aiming at a long-term competency. But on the contrary there are lot many factors and issues that influence the company’s operations in the realistic international market scenario. To put into the framework, the company has faced a lot of ups and downs in the year 2010 despite such well-build competitive strategies. BP Plc in 2010 From the beginning of this new fiscal year, i.e. 2010, BP Plc. has witnessed lots of ups and downs not only regarding its operations in the international market but also in its internal business environment. One of the topics to be highlighted is the oil spill during the month of May in this year i.e. 2010. It not only hampered the international relationship of the company but also did a great loss in its profit structure. Until its third quarter, the company is on a run to overcome this challenge. Gulf of Mexico Oil Spill The accident that occurred in May, 2010 in the Gulf region of Mexico caused an enormous cost not only to the environment but also to the financial aspect of the industry. Moreover, it resulted in a fall of its profit and even in the part of trust worthiness to the US Government. It was recorded that more than 5000 barrels of oil was sweeping in the Deepwater Horizon which was certainly more than what US government and the company had estimated. It was of course a huge disaster for the company’s performance as this reported an immense wastage of production cost as well as loss of market share (Adam Gabatt and Agencies, 2010). Reasons With such a competitive structure of strategies keeping in mind the regular issues and regulatory matters, some questions certainly arises regarding the occurrence of the massacre. The company’s strategy as stated previously for the fiscal year 2010 had a proposed initiative to make further investment in the company to help it overcome the flaws of recession. This invested amount was further reported to be used in compelling up-dated technology, up-grading preliminary safety measures, increasing employee performance, and many other sectors which were rather vital for the company operations. So, why did not that happen? The answer is because of the poor implementation of proposed strategies, faulty operational management, and above all lack of concern regarding the fact. However, to state the reasons of this massacre, analysts stated that the arrogance, recklessness and the negligence were the major issues. For all the companies in the industry, trust matters a lot to regulate their operations. Well, this industrial feature often proves as a barrier to most companies in the inclusion of up-dated technologies, which could have provided a better security alignment. The same happened for BP Plc. also. The second reason was that the company has a history of oil spills and inadequate security systems that obviously clarifies the inattentiveness of the company which drives it backward in comparison to the other big oil companies. The third reason to be included is the negligence of top level officials to this regard (Romm, 2010). Precisely, the reasons for BP Plc’s failure, despite having a fair competitive structure and well analysed strategic planning were that the company had a major fault in implementation. The importance of proper strategic implementation is also a prime factor along with appropriate planning. As stated by BP officials, the multifaceted and interlinked mechanical breakdowns, faulty engineering designs, group interfaces and moreover the defective operational implementations are the major causes of this tragedy (BP Plc, 2010). Results The results of this incident had great impact all around the world. As reported more than 11 people were killed in the blast, highlighting the accident to be the most unfortunate than any other blasts that took place in past. Moreover the continuous outflow of oil through various leakages shall result to a long-lasting damage to the environment. The US market, one of the most significant and promising markets of the company lost its trust on the company, certainly reducing its market share. Considering all the reasons, the company also replaced its CEO which influenced the internal structure of the company’s operation widely. To be put into account, the new strategic remedy that the company is focused on is to regain its market share in the US market as stated by the new leader Mr. Bob Dudley and hence again calls for a strategic planning (Addicott, 2010). Again in the recent month, the new trend in big oil companies to get excluded from the retail market was repeated by the decision of BP Plc. to sell out its forecourt network in South Africa to the international trader, Trafigura. Additionally, the company has been recorded to increase its market value by the end of next year. This was certainly another result of the Gulf Oil Spill. These actions are surely the reflection of cost reduction strategies undertaken to face the damage and recovery costs of the “Gulf of Oil Spill” (Hardy, 2010). Performance after the Gulf Oil Spill Massacre The performance of BP Plc. had been recorded to be shuttering in the first and second quarter of the year with certain serious drawbacks in strategy implementations. Precisely, the company witnessed a huge amount of wastage in production, loss in market share, and huge recovery cost. Despite having a strong infrastructure and industrial position the company was experiencing rapid fall in its profit. But, in its third quarter it has shown a remarkable recovery from its early stage earning a profit of $1.8 billion in comparison to the huge loss of $17 billion in the second quarter due to the oil spill massacre (Cable News Network, 2010). With higher oil and gas prices the company is certainly on a healthier path than it faced in the beginning of the current year. Although its profit is reduced by 60 percent than what was expected due to the heavy loss incurred from the oil spill in May. For the company and its investors it is evidently a time to settle down from its unpredictable experiences. All the facts and figures in the third quarter according to the CEO, Mr. Bob Dudley are indications of company’s recovery (Skoloff & Wardell, 2010). In its previously stated strategies the company has provided priority to its safety, production and employee factors, but after the second quarter disaster safety has become the most vital element in re-designing the strategies. However, to state about its future the company has to stop the spill, meet the costs of compensation and fines and do a lot to meet the organisational objective (Corrigan, 2010). Figure 2 (Trustnet Limited, 2010). Conclusion Gulf Oil Spill is surely not the first one that happened in the BP Plc. There are number of big and small blasts that took place in the company’s history. During 2005, a major blast occurred in Mexico killing 15 people. Not only BP Plc. but also many other Oil Exploring companies have witnessed such accidents in its history, like Exxon in 2007. What matters for the company is not to let such incidents repeat as a cause of inefficient performance (Mouawad, 2010). To conclude on the fact, company strengths, weaknesses, opportunities and threats in the industry has gained a new look from the recent past. The company’s strengths have consecutively reduced increasing its number of weaknesses and threats in the global market. Previously, the company had a competitive edge to face its rivals with the strengths of wide ranged service in more than 24000 service stations and an employee base of nearly 100000, the company also has certain opportunities. Moreover, it ranks the third among the major players in the world market. But at present its biggest weakness is its technological drawbacks, faulty operational management and negligence to the aspect of safety. As such the company at present scenario has a higher amount of threat related to the cost that has to be attained by the company to pay-off the damage and increased digit of rival companies after losing its competitive edge. Suggestively, the company needs to follow an effective measure to reduce its cost in production and other variables to meet this urgency. As well as the company needs to critically focus on the issue of safety and ensure the involvement of supreme engineering efficiency and operational performance. References Adam Gabatt and Agencies, 2010. Gulf Oil Spill 'Five Times' Larger Than Estimated. Guardian News and Media Limited. [Online] Available at http://www.guardian.co.uk/world/2010/apr/29/gulf-oil-spill-larger-estimated [Accessed November 16, 2010]. Addicott, A., 2010. New BP CEO Seeks U.S. Trust. The Washington Times, LLC. [Online] Available at: http://communities.washingtontimes.com/neighborhood/flip-side-faith-politics-communication/2010/oct/27/new-bp-ceo-seeks-us-trust/ [Accessed November 16, 2010]. ASPO-USA., 2010. 2010 Peak Oil Conference. The Future of Oil, Energy and the Economy. [Online] Available at: http://aspo-usa.com/worldoil2010/ [Accessed November 15, 2010]. BP, 2010. BP at a Glance. Facts and Figures. [Online] Available at: http://www.bp.com/sectiongenericarticle.do?categoryId=3&contentId=2006926 [Accessed November 15, 2010]. BP Plc, 2009. Annual Review 2009. Operating At the Energy Frontiers. [Online] Available at: http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Review_2009.pdf [Accessed November 15, 2010]. BP Plc, 2010. BP Releases Report on Causes of Gulf of Mexico Tragedy. Press Releases. [Online] Available at: http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7064893 [Accessed November 16, 2010]. Cable News Network, 2010. BP Posts Third-Quarter Profit. Business. [Online] Available at: http://edition.cnn.com/2010/BUSINESS/11/02/bp.earnings/index.html [Accessed November 16, 2010]. Corrigan, T., 2010. Will The BP Of The Future Stand For Big Petroleum - or just bit player. Telegraph Media Group Limited. [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7819692/Will-the-BP-of-the-future-stand-for-Big-Petroleum-or-just-bit-player.html [Accessed November 16, 2010]. Corporate Watch, No Date. BP Plc. History. [Online] Available at: http://www.corporatewatch.org.uk/?lid=287 [Accessed November 15, 2010]. Hardy, W., 2010. BP Sells Southern Africa Fuel Retail Units. Tiscali UK Limited trading. [Online] Available at: https://www.talktalk.co.uk/business/news/reuters/2010/11/15/bp-sells-southern-africa-fuel-retail-units.html?tplate=/money/feeds/reuters/story-template.html [Accessed November 16, 2010]. Investopedia ULC., 2010. Industry Handbook: Porter's 5 Forces Analysis. Features. [Online] Available at: http://www.investopedia.com/features/industryhandbook/porter.asp [Accessed November 16, 2010]. Investopedia ULC., 2010. The Industry Handbook: The Oil Services Industry. Features. [Online] Available at: http://www.investopedia.com/features/industryhandbook/oil_services.asp [Accessed November 15, 2010]. Kamiar, M., 2010. A Short History of BP. Counter Punch. [Online] Available at: http://www.counterpunch.org/kamiar06162010.html [Accessed November 16, 2010]. Mouawad, J., 2010. For BP, a History of Spills and Safety Lapses. New York Times. [Online] Available at: http://www.nytimes.com/2010/05/09/business/09bp.html [Accessed November 16, 2010]. Nachet, S., 2010. 11thInternational Oil Summit. Oil Industry Future Challenges. [Online] Available at: http://www.ief.org/whatsnew/Documents/OilSummit2010_SN.pdf [Accessed November 15, 2010]. Romm, J., 2010. Gulf Oil Spill. The Three Causes of BP's Oil Disaster. [Online] Available at http://www.salon.com/news/feature/2010/05/10/oil_spill_causes_climate_progress [Accessed November 16, 2010]. Skoloff, B. & Wardell, J., 2010. BP Turns 3rd-Quarter Profit. The Lawrence Journal-World. [Online] Available at: http://www2.ljworld.com/news/2010/nov/03/bp-turns-3rd-quarter-profit/ [Accessed November 16, 2010]. Stockopedia, 2010. British Petroleum (BP): In Need of More Refining. Content. [Online] Available at: http://www.stockopedia.co.uk/content/british-petroleum-bp-in-need-of-more-refining-37508/ [Accessed November 16, 2010]. Trustnet Limited., 2010. Performance of BP's Shares over 1-Yr. Managers Cut BP Exposure. [Online] Available at: http://www.trustnet.com/Fundswire/InvArticle.aspx?id=84613&type=fn [Accessed November 16, 2010]. Value Based Management, 2010. Five Competitive Forces Model by Porter. Outside-in Business Unit Strategy Five Competitive Forces Framework. . [Online] Available at: http://www.valuebasedmanagement.net/methods_porter_five_forces.html [Accessed November 15, 2010]. Bibliography De Wit, B. & Meyer, R., 2010. Strategy: Process, Content, Context, an International Perspective. Cengage Learning. Johnson, G. & Et. Al., 2008. Exploring Corporate Strategy: Text and Cases. Pearson Education Limited. Pfeifer, S., 2010. BP Links Bonuses to Safety Performance. The Financial Times Ltd. [Online] Available at: http://www.ft.com/cms/s/0/ca170960-dadf-11df-a5bb-00144feabdc0.html#axzz15QTLEo6O [Accessed November 16, 2010]. Read More