Managing Organisations in a Global Context. Chevron Corporation - Essay Example

? Managing CHEVRON Chevron in context of global knowledge economy executive summary This report studies and analyses Chevron Corporation’s preparedness and response to the changing external environment, driven by forces of globalization and emergence of knowledge-based economy. With respect to that, the report analyses if Chevron is aware of this changing environment, adaptive to the change, generating value and improving its capabilities in a cost-effective manner. Global scale of its operations, scarcity of skilled workforce, and a highly competitive commodity based business makes Chevron highly vulnerable to the external environment. For Chevron to retain its market leadership in a competitive global knowledge-based economy, it has to depend on efficient knowledge exchange between its operations groups (customer facing) and the technology center staff (responsible for technology and support). Therefore, it is important for Chevron to actively engage in knowledge management activities to increase operational efficiencies and overall cost-advantages. The report analyses the structure, organizational culture and leadership of Chevron to study its internal capabilities. Chevron has a decentralized organizational structure that poses both a threat and advantage to implement necessary changes for knowledge sharing and team collaboration. The principles of “The Chevron Way” that acts as a learning tool to communicate and reinforce the values and goals of Chevron is a key artifact for its team and learning-based organization culture. Chevron leader­ship has been instrumental in driving key initiatives as best practice sharing, operational efficiency management system and benchmarking wrt industry practices. The key issues that are important to be addressed for Chevron’s long-term future are low-cost competition from state-owned oil companies, global communication challenge regarding environmental concerns and its existing decentralized structure. Introduction The financial crisis of 2008 highlighted once again two key lessons for organizations all over the world: firstly, that organization cannot operate in vacuum and is not invulnerable to what is happening in the external environment and secondly, the world is so interconnected that positive and negative effects in organizations can have ripple effects across the globe in a matter of minutes. External environment comprises of factors such as administrative and legal (international, non-governmental policies and regulations, legislatures and legal frameworks), technology (innovations, research and development), politics (government support and political systems in the geographical region), economics (inflation, labour laws, opportunity costs, currency restrictions etc.), society and culture at local, national and regional levels and stakeholders (Harrison, 1970). There are evident examples of organizations that have been deeply impacted due to pressures of the external environment such as Kodak at the advent of disruptive innovation in digital imaging (Forbes, 2008), Lehman Brothers bankruptcy due to 2008 global financial crisis (Investopedia, 2009) etc. Globalization has transformed contemporary business environment into a knowledge-based economy that makes organizations even more vulnerable to changes. Oil and Gas companies are no exceptions to this turbulent environment. The relevance of geopolitical tensions, environmental considerations, oil economics and market dynamics make them complex entities to operate. They deal with a number of complex tasks, which reason the necessity of knowledge management system in the oil and gas organizations. Globalization, innovative technologies, outsourcing and offshoring, new joint ventures, government regulations and scarcity of experienced personnel have amplified the need to share and mobilize knowledge, expertise and best practices across multi-national organizations to retain their competitive advantage (Leavitt, 2002). This report addresses the above factors in case of CHEVRON Corporation, and analyses the extent to which the internal environment of Chevron is prepared for this challenge in order to survive and prosper in global knowledge economy. The report is organized in five sections as per follows: Report Section Brief Description 1 Executive Summary Provides a high-level summary of the report reflecting the current situation of Chevron, its capabilities and readiness towards external environment and respective key issues that Chevron faces. 2 Introduction Introduction of the report describing the scope of work and the context. 3 Background to the organization Brief overview of Chevron, its history, sector and industry background and current leadership. 4 Findings and Discussions Elaborate analysis of Chevron within the context of global knowledge economy, scorecard for Chevron’s preparedness and key issues that need to be addressed. 5 Conclusion Concluding remarks on the report. background to the organization Chevron Corporation is one of the world’s largest integrated energy companies, engaging in every aspect of oil and natural gas industry, including exploration and production, refining, marketing and transportation, chemicals manufacturing and sales, geothermal, mining operations, and power generation. Brief History: Chevron Corporation was established in 1879 as the Pacific Coasts Oil Company when oil was discovered in the Pico Canyon Oilfield (Thompson, 2010). Upon being acquired in 1900 as John D. Rockefeller’s Standard Oil Trust, the company began its international explorations in the Middle East (Bahrain and Saudi Arabia). In 1936, it partnered with Texaco to expand into the Asian, African and European markets. It continued its operations after World War II with major discoveries in South East Asia, Australia, and Gulf of Mexico. Standard Oil acquired Gulf Oil Corporation in 1984, which was one of the largest corporate mergers in US history. Upon the merger, Standard Oil changed its name to Chevron Corporation. In 2011, Chevron earned $244 Billion as its operating revenues, making it one of the top twenty largest companies in the world (Chevron Corporation, 2011). It currently holds the market cap value of $208.8 Billion (CNN Money, 2012). Chevron, like other key integrated oil companies, functions in both upstream (exploration and production of oil and natural gas) and downstream operations (refining, production and distribution of oil and petroleum-based products). Chevron’s closest competitors are the four other “super major” oil companies that historically originated after WW-II: BP, Total, Royal Dutch Shell, and Exxon Mobil (Hurley, 2010). All of these companies compete in a global resource market and have largely comparable business and operating models. Apart from super major global oil companies, Chevron also competes with majority state-owned companies such as Chinese (CNOOC, SHI, China Petroleum Corporation), Brazil (Petrobras) and Russia (Gazprom, Lukoil, Roseneft) etc. Chevron also functions in other businesses including mining functions, power generation, international cash management and debt financing tasks, commercial administrative services, insurance, real estate activities, alternative energy options, and technology organizations (Wall Street Journal, 2012). Chevron’s footprint across the whole energy value chain provides opportunities to optimize and diversity its business while minimizing risks associated with oil and natural gas sector. With Headquarters in San Ramon, California, USA, Chevron operates in approx. 180 countries across the world, and has about 58,000 employees (Forbes, 2012) (Chevron Corporation, 2012). Chevron has a broad presence across various regions in the world. The organization’s revenue stream is spread in terms of geographies, namely US and International. Chevron’s Board of Directors includes its CEO John S. Watson with 12 other directors from diverse backgrounds. The organizational set-up within the management is structured across functions (human resources, downstream and chemicals, policy and planning, technology and services, upstream and gas, financial administration, technical operations, legal, business development, secretary and governance) and geography specific (Asia pacific, North America, Africa, Eurasia exploration) (Chevron Corporation, 2012). findings & discussions This section analyses the nature and extent of external forces as globalization and a knowledge-based economy in relation to the internal capacity and corporate strategies of Chevron Corporation. This section is further classified into the following sub-sections: 1. Repercussions on Chevron in context to global knowledge-based economy 2. Measures taken by Chevron to adapt to the changing ecosystem 3. Key Issues that might influence the organization’s long term future Repercussions on Chevron in context to global knowledge-based economy Before assessing the impact of global knowledge-based economy on Chevron, it is important to understand what a global knowledge-based economy means and how does it impact multi-national corporations especially in the oil sector. OECD defines a knowledge-based economy as “economies, which are directly based on the production, distribution and use of knowledge and information” (OECD, 1996). Knowledge-based economy that operates across all industries such as manufacturing research, creative, relies on high-technology investments, high-tech industries such as computers, electronics and aerospace and a highly skilled labor-force (Brinkley, 2008). Key drivers of knowledge-based economy are consumer demand (value added services), technology (both supply and demand side enablers), competitiveness and globalization (Kefela, 2010). Globalization has resulted in greater access to markets, exposure of knowledge-services based industries to international competition, international labour markets for highly skilled workforce, global investment capital along with novel technologies, information, ideas, knowledge and business intelligence. In contemporary context of strategic management, external drivers such as globalization, tough competition, knowledge-based economy, increasing international mobility have made the concept of knowledge management a high stake process (Benmahamed & Ermine, 2007). The basic factors make the oil and gas sector a significant beneficiary and stakeholders of knowledge management – the global scale of its operations, scarcity of skilled workforce, and the fact that it is a highly competitive, commodity based business (Edmonds, 2002). The business drivers in shaping such an external environment are the need to minimize capital costs, improving operational efficiencies, minimizing risk, optimal use and efficiency of refineries, brand management and market positioning. Due to ever-increasing reliance on scarce oil sources across the world and environmental concerns associated with this sector, knowledge management initiatives help make operations more efficient and effective. Most of the oil companies today invest in technological innovation, capacity building and operational excellence through minimizing downtimes. For Chevron to be competitive and sustain market leadership in a competitive global knowledge-based economy, it has to rely on effective knowledge exchange between its operations groups (customer facing) and the technology center staff (responsible for technology and support). The prospective damage resulted due to the loss of a key staff or competencies or a substantial turnover in the companies amongst its most experienced staff is a high cost to pay for Chevron. As the price of oil exploration and production increases every year, big oil companies such as Chevron and Shell need high-tech machinery and technology to increase productivity and cut costs, more, better and local oil field service suppliers that satisfy local content regulations. Hence, it is not only beneficial but also critical for global organizations as Chevron Corporation to engage them actively in knowledge management and become a leader in surging global knowledge-based economy. Measures taken by Chevron to adapt to the changing ecosystem Being a leading integrated energy company, Chevron has been engaging in knowledge management practices much earlier than others. By the late twentieth century, driven by the outgrowth of the quality movement, Chevron began to benchmark itself with other organizations in order to cut operating and administrative costs through its TQM initiatives (APQC, 2000). It was followed by numerous community-based websites that provided more real-time best practice sharing and lessons learnt than static databases (Oilfield Review, 2001). Since then, Chevron has successfully applied knowledge management processes in drilling, refinery maintenance and safety management, capital project management, and other areas. Following are different parameters by which we can assess the measures taken by Chevron in adapting to a global competitive knowledge-based economy: Structure: Chevron has a decentralized organizational structure that is spread across multiple business units and operating entities (HBS, 1999). For example, the corporate IT group is located at its Headquarters at San Ramon (US) along with corporate human resources, legal and specific marketing teams and technical support for Overseas Petroleum Company. The decentralized structure acts as a challenge to launch organization-wide initiatives such as those of knowledge management. Organization Culture: Continuous learning (as a learning organization) and committed teamwork are the key pillars for Chevron’s culture towards managing knowledge. The management works on the principles of “The Chevron Way”, corporate artifact that acts a learning tool to communicate and reinforce the values and goals of Chevron across new and old employees (DERR, 1999). Comparing Chevron’s performance with that of its competitors, it is evident that Chevron is doing better than average in their operations across teams and team collaboration. It uses the “best practices” sharing methodology for creating a competitive edge and to learn faster and better through benchmarking with the competition. Chevron categorizes best practices into “good idea”, “good practice”, “local best practice” and “industry best practice” (Dalkir, 2005). The best practice culture is embedded in all functions and divisions even the evaluation of employees for salary purposes. Innovation is considered an important driver in company’s growth and therefore receives ample management attention. Chevron, as an organization sees knowledge management not a tool but core business strategy. Therefore, “sharing and reuse of knowledge” becomes a part of employee evaluation and annual performance process and is often used as a benchmark for promotions and career growth (Andriessen, 2006). In view of rising relevance of global knowledge economy, Chevron is prepared well, attributed to its learning organization culture. The organization is aware of its environment, adaptive to change (e.g. Shifting business interests from Western economies to Asia-Pacific and other developing nations), value generating (by creating more technology and energy related services rather than a commodity-organization), Innovative, capable and cost-effective. Leadership: Owing to its knowledge management efforts, Chevron earned savings of $650 million in 8 years (1991-1999), increased productivity by 30% and employee safety by 50% (APQC, 2000). These figures were enough to convince leadership at Chevron, the significance and impact knowledge-sharing infrastructure has. The former CEO of Chevron, Kenneth T. Derr persuaded employees to contribute in "Upward Feedback" program that provided employees to advice their managers on performance improvement. He diligently advocated the benefits of knowledge sharing and always emphasized the importance of best practice sharing (DERR, 1999). Chevron leader­ship shaped and promoted "The Chevron Way" as the strategic vision devoted to develop Chevron as a "first-rate learning organization." “The Chevron Way” was the foremost and most significant step that drove and directed its KM program (WDC, 2012). Another Chevron CEO, Dave O’Reilly, also was a big believer in knowledge management and has introduced a number of initiatives, which foster mutual learning and team-collaboration, as a business strategy (Stemke, 2008). Key Initiatives at Chevron: Following are few of Chevron’s key initiatives in response to the growing significance of globalization and knowledge-based economy: 1. Best Practices Transfer Initiatives: Two factors pushed the use of internal best practices in Chevron: a determined effort by its leaders on the strategic and competitive need for substantial cost reduction through sharing, along with a decentralized operating structure that offered both opportunities and bottlenecks to sharing practices. Best practice sharing initiative started with refinery operations but soon spread to other Key Chevron processes. 2. Operational Excellence Management System: the Company created an operational excellence management system that effectively integrated operational excellence goals, strategies, processes and behaviours into their day-to-day operations and ensure safety to their employees and environment (Chevron Corporation, 2007). 3. The Benchmarking Method: Benchmarking is the search for cross-industry best practices to elevate performance. Chevron engaged in industry group measurements, best practice studies, cooperative benchmarking, and competitive benchmarking to analyse and understand their position within their business ecosystem and adopt methodologies that would gear up its bottom line (Gass, 2010). Key Issues that might influence the organization’s long-term future Overall, the global energy sector is highly exposed and vulnerable to geopolitical, environmental and macro-economical risks such as reduction in energy demand and consumption triggered by low economic growth of the countries, competition from India and China, Iran-US tensions etc. (KPMG, 2011). In terms of performance, Chevron is way ahead of its competitors, in management and growth forecasts. The trend is, however, attached to the market-wide risk of the political circumstances in many oil rich states, the unpredictability of oil and gas prices, deteriorating reserves, and a shortage of new exploration and discoveries. Along with these risks, the external environment poses another change through restructuring of knowledge-based economy. Fresh national and regional centres of knowledge are emerging across the globe, as governments (especially middle-east) are intensifying their efforts to grow in-house high-technology facilities, talent and technologies (World Bank, 2007) (Saudi Aramco, 2010) (Gulf News, 2011). Consequently, global communications, information networks, and knowledge sharing are expanding, diversifying, and strengthening. These changes have also highlighted key issues for Chevron’s long-term sustainable growth: Low cost competition and state-owned knowledge Economies: Presently, big Oil companies such as Chevron are facing competition from Chinese and Indian oil companies, who have been undergoing a lot of merger and acquisition activity. The Chinese organizations, in particular are seeking to secure supplies through the supports of their governments. Middle-east oil companies on the other hand are developing their own knowledge-based economies to diversify risk and dependency on western technologies, human capital and access to financial markets. This poses a big challenge for Chevron as the growing states-backed competition can introduce barriers to entry for the American organization. Hence, Chevron needs to invest in diversifying its risk, away from just oil as a commodity but focus on value added services as well such as State-of-art distribution systems, R&D on exploration and production etc. Environmental concerns and risks of global communications: A globalized knowledge-based economy creates fuzzy boundaries between various stakeholders i.e. the lines between company's operations and that of consumers, customers, suppliers, regulators, and competitors are becoming more and more blurred (HART, 2010). The value network created by this complex, inter-connected matrix is replacing conventional vertical integration that Chevron has mastered. This is a big challenge since Chevron like other oil and gas companies faces high criticism for its environmental policies. BP oil spill, for example, has become a case study for a PR fiasco (HBS, 2011) for handling its Gulf of Mexico catastrophe. With the new, transparent media in new economy, old hierarchical models of management would need to change in order to ensure proper crisis and stakeholder management. Globalization vs. decentralization: Another key challenge for Chevron is to restructure its “decentralized” model based organization to adapt to a smaller, globalized and more centralized external environment. Global knowledge-based economy implies that organizations need to break their silos and integrate their communication and collaborative networks as well. conclusions It is a known fact that an organization’s strategy has to be as much inward looking as outward. In order to grow sustainably and progressively, companies today are spending millions of dollars on market research, to understand external environment and how it affects them. One of the key global trends identified in this report was impact of globalization and knowledge-based economy on Chevron, an integrated energy organization. Globalization and emergence of knowledge-based economy has resulted in an environment with real-time information flows, high mobility of workforce, advancements in technology to optimize productivity in processes and overall growth. This environment poses opportunities and threats, especially to oil and gas companies that are in need of highly skilled labour, have higher environmental, political and economical risks and implications. Upon analysing the internal capacity of Chevron with respect to global knowledge-based economy, it is found that Chevron is adequately prepared for the challenge. Its pioneering efforts in knowledge sharing and management have allowed Chevron to contain costs, improve productivity and retain talent in the organization. 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