External and Internal Environments in Organization - Case Study Example

? External and Internal Environments Introduction The ability of any organization to take strategic decisions dependsupon the critical analysis of the external and internal environment. This is because of the reason that the business environment and the external environment share a cause and effect relationship. In other words the external environment is the cause and the internal environment is the effect (Parker, 2009). The internal environment is affected by the external environment. The research paper endeavors to create a descriptive analysis of effect of the external environmental factors over the strength and weakness of an organization and the strategies adopted by the organization to counter such altering forces. 2. Influence of the external environment The outcome of an organization as well as the industry to which it belongs depends upon the affect of the external factors. USA is reviving slowly from the catastrophic financial distress. The financial distress wrecked havoc in all the industrial sectors. The banks and financial institutions suffered the most as well as the oil and gas industry (Stephen, 2012). This is because of the reason that the USA government provided significant amount of financial help in the form of rebates and commissions to the oil and gas companies. The financial distress reduced the financial help packages forwarded by the government to the companies by almost half. Thus it is important to analyze how the oil and gas industry adopted to the changing environmental factors. The company chosen for analysis is British Petroleum (BP). There are several factors affecting the outcome of the organization like the political, economical, social, technological, legal and environmental (Stigler, 2009). Among these only technological and economical factors are chosen since both these factors have the most significant influence over the outcome of the organization. The economical aspect affects the cost of carrying out the operations. Advanced technological innovations affect the progress of oil and gas exploration activities of BP as well as the oil and gas industry as a whole. 3. Five forces of competition In the last few decades BP has made tremendous progress in technological innovation. BP has adopted several strategies to tide over the various environmental concerns. To improve the technological efficiency BP concentrated on the rapid improvement of the three most basic and important part of the whole operations. One is achieving operational excellence in the upstream activities, the second one is achieving operational excellence in the downstream operations and the third one is improvising the distribution system (Subramanyam, 2002). The improvement in the above three areas increased the generation of revenue by as much as 10% over the last ten years. The economical conditions are different across different countries from where BP operates. BP adopted the strategy of netting the transactions. Netting helps to bring balance in the overall transactions. Due to different economical conditions of the countries, transactional imbalance sets in. The transactional imbalance is nullified with the help of netting. Over the last couples of decades BO has formed strategic partnerships with several small and medium oil and gas companies (Subramanyam, 2006). Other than that it has performed several mergers and acquisitions. These strategic partnerships and mergers and acquisitions have helped the company counteract the ups and downs of the economy across several countries. 4. Ways in which the company address the forces BP has a dedicated team of experts comprising of technicians, engineers, scientists and field specialists spread across different operational base. These teams of experts usually work far away from the actual operational site. Due the need to innovate and improve the present technologies, BP is contemplating to form dedicated research teams for each operational bases. This way the work load will get distributed (Teoh, 2003). As it is already stated that the success for an oil and gas company depends upon the technological advances, this way BP will improve the growth of technological innovation. Apart from that, BP will partner with various educational and professional institutes as part of the technological innovation program (Verrecchia, 2001). These institutes will provide BP with theoretical expertise in the field of drilling and exploration operations. In order to address the instability brought in due to the intermittent economic shocks, BP aims to form an economic distress management team. These teams will comprise of group of mathematicians, statisticians, econometricians, and head representatives from each every department. The head representatives will be advised by the group of economists and mathematicians on the way the future will pan out (Verrecchia, 2008). These representatives will consider the advices and choose the most suitable strategy and forwards it to the higher authority for further approval and inspection. 5. External threats and opportunities External threats: Threat of new entrants is significantly less. Threats of substitutes are low but increasing with technological advances (non renewable sources of energy). Threat of competitors is high particularly in those countries which depends more on non-renewable sources of energy. Threat of suppliers is nil, although there is significant threat from distributors. The most important threat is the threat of the buyers (Vincent, 2007). The buyers do not enjoy the privilege of bargaining but the chance of brand switching is always present. This is because the cost of switching is negligible since all the competitors are maintaining the same price tags. In order to address this issue BP is cutting down on operational cost, by reducing the factory overhead cost (variable overhead) and by reducing the dependency on transportation vessels for fuel transportation from the seas to the storage tanks (Watts, 2004). Decrease in the variable overhead cost and reduced dependency on the manual transportations system will decrease the cost per barrels of oil. This will in turn help BP decrease the sale price and in turn decrease brand switching propensity of the customers (Wernerfelt, 2005). Opportunities: BP has forged partnership with several medium scale oil companies. Several of these oil companies have large inland distribution networks spread across different countries. BP can use these existing distribution networks to access a wider market. This presents one of the several opportunities for BP. 6. Greatest strength and significant weaknesses The greatest strength is the state of the art technology and equipments applied in the oil and gas exploration activities. Thus, BP has the advantage of keeping the costs of running the upstream operations down to minimum low ($ 45 million) (Wiggins, 2001). Whereas, other oil and gas exploration companies find it a daunting task to keep the upstream operational cost down to minimum low due to absence of technological knowhow as well as expertise (Industry average $ 51 million/annum). If BP wants to decrease the costs of running upstream operations to less than $45 million/annum then the operations can be outsourced (Stephen, 2012). Through phased outsourcing coupled with training, retraining and further calibrations of the outsourcing agencies, BP can concentrate on more important procedures like achieving operational excellence. BP’s has weak safety and hazard control mechanism. This constitutes the most significant weakness of BP. In order to address these issues BP should form hazard and disaster management team. This team will form blue prints of safety mechanisms and carry out extensive simulated disaster scenarios. The stimulated disaster scenario will indicate how effective the hazard control mechanism will work. In this way through constant addition and update, safety and hazard control mechanism can be developed which is effective as well as applicable (Verrecchia, 2008). Apart from that, BP should conduct yearly hazard and safety control drills and runs. 7. Companies resources, capabilities and core competencies BP’s resources constitute intellectual property. This is perhaps the most important properties of BP. Through years of pioneering research and experiments, BP has achieved technological prowess. The company employs three different kinds of employees. One is the permanent employee, second one is the temporary employee and the last one is the ad hoc based employees (demand based). The recruitment system of BP is very stringent. After successful recruitment the employees are sent for training purposes. This ensures that the employees have the required skill set to match the job responsibilities. The capabilities of BP include achieving a total production of 3768 barrels per day, reaching a maximum of 25 different distribution centers (Stephen, 2012). Apart from that, if the distribution centers are running at full capacity then a total of 2 weeks of reserve can be kept stored. This ensures that if a major technical snag hits the company, the reserve fuel will suffice the demand for two consecutive weeks. The core competencies of BP include highly efficient oil exploration techniques and well connected distribution networks. The state of the art oil exploration technique ensure that in almost 77% of the times the reservoirs are able to provide more than 56% of the estimated reservoir output. While the well connected distribution network ensures that the transit time consumes less time, fuel as well as minimal fuel leakage. 8. Value chain analysis The diagram gives an indication of the crude oil value chain of BP. The crude oil value chain starts with the exploration, then production, then transportation, then refining and finally marketing. Using state of the oil exploration technique ensures that the oil exploration costs are kept at its minimal low. Using artificial methods like suction pumps the oil is brought to the surface. After refining they are stored in temperature controlled tanks and trucks (Stephen, 2012). The crude oil is converted into finished products and finally to the retailers. Refining is the most vital aspect of the value chain since it increases the value of the final product and at same time leads to generation of subsidiary products. Fig 1: Crude oil value chain Source: (Stephen, 2012) The natural gas value chain is depicted in the diagram below. One very important distinction between the natural gas and crude oil value chain is the processing technology or refining technology applied. In case of natural gas also the use of sophisticated technology ensures that the final product produced after refining is of high quality. Fig 2: Natural gas vale chain Source: (Stephen, 2012) The diagram given below gives an indication of the value added to the natural gas production and crude oil production through the use of advanced oil exploration technique as well as the use of the sophisticated filtering and processing system. Table 1: Value added Source: (Stephen, 2012) References Parker, H. (2009). The statistical handbook of oil and gas industry. Weekly Journal of Oil and Gas Exploration Management 4.9, 67-80. Stephen, R. (2012). The current strategies of the oil and gas industry of USA. Journal of Energy Management 2.4, 45-56. Stigler, G. (2009). The theory of economic regulation. 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Management Science 31.9, 928–939. Wiggins, R. (2001). The earnings-price and standardized unexpected earnings e?ects – one anomaly or two. Journal of Financial Research 14.3, 263–275. Read More