The Generic Strategic Choices - Assignment Example

The Generic Strategic Choices Executive Summary: The case study on BP Exploration deals with issues relating to how the exploration of BP has helped in the success of oil and natural gas industry. Here the BP exploration for the last 5 years has been discussed. The generic factors that leads to the success of BP in the industry is also analysed by applying the Porter’s Generic Factors. From the discussion it revealed that cost leadership, product differentiation and focusing are the factors that contribute to the business growth of the company. The key resources that held by the company supportive to the generic strategies are also discussed. Further current BP exploration strategies are evaluated using suitability, feasibility and acceptability criteria. Thus from the above four questions discussed we can reach conclusion that the BP exploration has helped the company to reach in its current position in the oil and natural gas industry. 1) To what extent has BP Exploration met the critical success for the sector or industry in the last 5 years? The oil and natural gas industry has generated many earnings. “Over the past five years, the earnings average of the oil and natural gas industry was 5.9 cents per dollar of sales compared to 5.6 cents per dollar of sales for all U.S. industry combined. Last year, it was 8.5 cents and the all-industry average was 7.7.” (Sound energy policy should be based on fact: API’s cavaney 2009). BP’s Exploration and Production has helped in finding, producing and transporting oil and gas to the market. There are more than 20000 people employed in it and BP operates in about 29 countries. BP’s exploration has helped them to grow efficiently through: 1. Finding new fields of prolific hydrocarbon basins 2. Becoming one among the leaders in the hydrocarbon areas 3. Improving productivity and technology for the above exploration 4. Developing control measures to reduce the declination of existing areas of production BP Exploration and Production Gas, which is one of the business segments of BP, perform activities like exploration, development and production in the oil and natural gas area. The exploration has made a contribution in the Group profit over the three quarters. It was seen that the about 60% of exploration profit was from USA and UK. The UK daily consumption of oil is about 115% and that of gas is 95% of the total production. This is equal to the daily production of BP which is about an average of 1.9 million barrels of oil and 8.6 billion of gas. Comparison of the production between the oil and gas fields shows that only small number of fields contributes to the production. Among the world’s exploration records of an average of four, BP’s has a record of six among ten over the past few years. BP is the one who have lead to the discovery of many fields, in turn. leading to the success of oil and natural gas over the past few years. Strategic partnership of TNK - BP has created a new entity among the profit centres in Russia. BP always optimizes productivity by maximizing the economic recovery of barrels from the assets at North Sea, Alaska and North America., thus “focusing on capital productivity and by pursuing a best-in-class operating cost structure. Assets which do not merit investment when compared with the rest of the portfolio are divested, as a part of an ongoing strategy to continuously improve the quality of the portfolio over the long-term.” (BP plc: unternehmenasprofit). During the past five years, 2003 was an unstable year with strong variations in the demand and supply of oil and natural gas. The published statistical review of world energy for 53 years by the company figures out the following statistics: 1. The exploration has helped in the increase of current reserve to 70% higher than what was during 1980. 2. 176 trillion cu m, was reported by the BP in the global reserve area which is 13% higher than the previous year. (Lorenzetti 2004). Tony Hayward, CEO of BP has pointed out those 3 points, which will help the market to solve the energy crisis. 1. Prices were justified and there was no speculation. 2. The contribution of renewable energy is less by nearly 2%. 3. As there are plenty of reserves, there is less chance of peak oil or energy crisis. (BP CEO: oil markets will save us 2008). The following combinations were made to explore the opportunities: 1) Merger with Amoco and acquisition of ARCO during 2000. 2) During 2003, a new Russian venture called TNK-BP was formed with Alpha Access Renova. (An interview with Tony Hayward chief executive of BP exploration and production). 2. Porter’s generic strategies: The profitability of a firm mainly depends on the attractiveness of the industry to which the company belongs and performing functions. The secondary determinant of the profitability is the position of the particular business firm in the industry in terms of market share. Even a company existing in a below average profitability industry can ensure superior returns through its optimal positioning. The position of a firm depends on its ability to leverage its strengths. According to the concept of Michael Porter the core strength of a firm in the industry depends mainly on its cost leadership and the product differentiation. In the business unit level, there are three generic strategies such as cost leadership strategy, strategic product differentiation strategy and focus strategy. These are referred as generic strategies because it is independent from the firm or the industry. (Porter’s generic strategy 2007). The ‘generic’ strategic choices that BP exploration appears to have made: Cost leadership strategy: In order to achieve the cost leadership in the industry the company should have low cost production techniques together with specified quality level. BP is considered as a global energy group having the cost leadership in the petrochemicals industry. It is the world’s second largest producer of fossil fuels. It achieved cost leadership in the industry through the application of advanced technologies in the exploration process. Merger and acquisition strategy is adopted by the company in order to strengthen its position in the industry. It helped the company to achieve cost reduction through the technique of economies of scale. Large scale production strategy was adopted by the firm which helped them gain economies of scale in operation. Joint implementation policy ensures technology co- operation between countries and BP adopted this strategy also in the exploration field. Differentiation strategy: Product differentiation strategy is made possible in the industry through offering unique attributes which are valuable to the consumers. The BP Plc employed product differentiation strategy by way of branding of products. Re-branding efforts are adopted by BP in order to attain larger customer base. The BP Plc has concentrated on the corporate campaign strategy for creating brand image of quality product and honest consumer transactions in order to gain the customer loyalty by reconciling their need for fuel with less pollution efforts. “Since 2000, BP's "Beyond petroleum" campaign, via WPP Group's Ogilvy & Mather, has been praised by the consumer business press and awards shows as a prescient model of credible corporate social responsibility and criticized by skeptics as "greenwashing" by an oil producer and refiner that's no different from its competitors.” (Solman 2008). Through the introduction of product differentiation in the motor fuel category, they achieved customer base in different product category. The major product category includes lubricants, petrochemicals, global fuels, and solar energy. This helped them to gain increased market share with increased profitability and business growth. The company replaced its multiple brand images with a distinct and unique identity. Focus strategy: The focus strategy is mainly based on concentrating on a particular segment in the industry in order to achieve cost leadership and customer loyalty in that segment. The company focused on the fast growing Asian markets for its petrochemicals business growth. Through the adoption of environmental friendly production techniques the company achieved cost reduction with technological advancement. The company focused on the solar energy sector with the objective of tripling of its business return in the next decade. BP Solar expanded its exploration for adding annual capacity. A typical new fossil fuel plant of BP has the capacity to produces 500 to 1000 megawatts of energy and it is above the industry average. “Richard Sowter, former President of BP Solar America, said systems integration is a key source of competitive advantage for its solar products. BP delivers solar modules with thin film PVs, converters, and all components packaged in a ready to install system. He sees utility de-regulation and consumer incentives included in the Million Roof Solar Initiative announced by President Clinton (a part of the U.S. greenhouse gas reduction strategy) as important drivers for growth in demand and improvement in cost-competitiveness.” (Lowe & Harris 2005). 3 A). Identify the key resources and capabilities which BP exploration has used to support these strategic choices in the last 5 years Key resources of BP: The key resources of BP in the field of petrochemicals industry over the past 5 years are discussed below; 1. Right technology: In the petroleum industry, technology is a key factor that determines the competitive strength of the business firms. The larger size of the business with wider portfolio of activities provides competitive advantage to the company. It occupies technologies contributing to higher operational performance of the company. World class in-house production techniques are developed by them. “BP is rising to the challenge of meeting the world’s increasing energy demand by finding new ways of accessing more hydrocarbons from existing and new resources, and by developing and delivering new products to customers. And – critically – looking further ahead, BP has established a coherent framework for creating a path to a ‘low carbon’ world and a sustainable energy future.” (Smart technology moves 2009). 2. Efficiency in the production process: New energy technologies are developed by them. Through the business combination with IBM, it achieved greater cost reduction in the non core operations field. Continuous transformation of the business models and volumes becomes possible through this approach. Through the global sourcing and process reengineering, IBM helped the BP to reduce its cost of production and maintain the quality. Outsourcing strategy is adopted by the company for cost reduction purpose. 3. Efficiency in the refining process: In the refining sector, also the company has advance technical capabilities. The capability of the company to produce process crude effectively contributes to the business growth of the company. In the petrochemical sector, with the proprietary technologies in the production and processing fields, company attained leadership position. 4. Well established research and development department: Through the supply of leading edge products and technologies, the research and development department of the company is well supporting the business growth. Alternative energy sources are explored for attaining cost reduction and business expansion. The Company also possesses advantaged fuel value chain. 3 B) Evaluate whether these resources and capabilities generate sustainable competitive advantage Leading technologies in the field of lubricant formulations and petrochemicals process are the major competing strengths of company. Through this technology they offered leading fuels and convenience brands capable of attracting wider customer base. (100 years of operating at the frontiers 2009). In case of BP Plc, the exploration strategies are mainly focused on cost reduction and as such advanced production techniques are always adopted by them. Through this, they attained the leadership position in the industry in terms of cost. The company has business collaboration with IBM and it ensures the cost reduction to a greater level. “BP increases the strategic value of its Procurement organization when it engages in a program designed to quickly develop high-level procurement skills with a unique combination of coaching, structured group learning and e-Learning—all delivered on demand by IBM Global Business Services.” (BP fuel costs reduction, process improvement from business transformation outsourcing). The exploration and processing techniques adopted by the company is of advance nature. Through the common system platform, it attained the position of geographic centres of excellence in terms of quality and efficiency. The business collaboration with IBM is of greater advantage to the company for the cost reduction purpose. “Investing in technology is helping to shape BP’s business and is opening up new options. The company is committing more money year on year to technology – the technology budget is growing on average at 15 per cent per year for 2003-2006, and is expected to continue growing thereafter. But, as Meggs stresses, this is not just about throwing money at research and development (R&D).” (Smart technology moves 2009). 4) Using the criteria of ‘Suitability, Feasibility and Acceptability’ from the course, further evaluate BP exploration current strategies against the future competition they face 2007 was a year of change for BP. The rise in the oil prices and the economic trends made the company create strategies for medium and long term for exploiting the opportunities in the challenging market. The three exploration strategies of BP are: 1. Identify the potential new profit centres in the large oil and natural gas fields. 2. Explore the new profit centres and develop it as the best project. 3. Investing in the producing assets to maximize the operations. (Sugiyama et al 2006). The BP’s overall key strategy was to take actions for reducing the gap in the areas of safety, people and performance. BP holds an exploration strategy to sustain production of 4m barrels/day out to 2020. “In Refining and Marketing it intends to close the performance gap progressively over the next few years by restoring performance in its key refining facilities and by re-organizing to operate more efficiently and optimize margin capture.” (BP / strategy and financial highlights information from ICIS 2009). We can see the financial performance of BP over the past 5 years. 2008 2007 2006 2005 2004 Sales ($ m) 361,143 284,365 265,906 239,792 192,024 Operating Profit ($ m) 21,157 20,845 22,000 22,341 17,075 R&D ($ m) 595 566 395 300 234 Total Assets ($ m) 228,238 236,076  217,601 206,914 194,630 Diluted earnings per share ($) 111.56  107.84 109.00 104.52 76.87  Number of Employees 92,000 98,100  97,000 96,200 102,900  One of the estimation points out the following: “Over the next four years BP's production should grow by about 7% annually, predicts Bear Stearns oil analyst Fred Leuffer. By contrast, rivals such as Exxon Mobil, ChevronTexaco, and France's Total will see their production increase by 4% a year--at most.” (Schwartz 2009). The major competitors of British Petroleum are Burlington Resources Inc, Chevron Corporation, Conoco Phillips, Halliburton Company etc. (2008 repot illustrates top-level data and analysis covering British petroleum Plc’s 2008). The following statistics shows the contribution towards reserves and market capitalization by BP and other major players during 1997. i.e. before implementing the exploration strategies. Reserves Market Capitalization (bn boe) ($bn) BP + Amoco 15 119 Exxon 14 172 Shell 19 181 Amoco 6 38 Arco 4 23 BP 9 81 Chevron 6 53 Elf 3 37 ENI 5 54 Mobil 7 56 Texaco 4 32 (BP corp north America Inc 2009). The above analysis of exploration strategies of BP by comparing the financial performance over the past 5 years and market share of BP before and after the implementation of exploration strategy shows suitability, acceptability and feasibility of BP exploration strategies. Reference An interview with Tony Hayward chief executive of BP exploration and production, Photography Simon Kreitem / Profile, viewed 29 April 2009, http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/B/BPM_04one_P19-22_Profile.pdf BP plc: unternehmenasprofit: exploration and production, DGAP, viewed 29 April 2009, http://www.dgap.de/dgap/static/Companies/?companyId=483&companyName=ircenter_dgap&language=German&id=1030&companyDirectoryName=bp BP CEO: oil markets will save us 2008, The Oil Drum: Europe, viewed 29 April 2009, http://www.theoildrum.com/node/4137 BP / strategy and financial highlights information from ICIS: BP’s overall key strategy 2009, ICIS.com, viewed 29 April 2009, http://www.icis.com/v2/companies/9145151/bp/financial.html BP corp north America Inc 2009, SEC info, viewed 29 April 2009, http://www.secinfo.com/d2r6q.73.d.htm BP fuel costs reduction, process improvement from business transformation outsourcing, IBM, viewed 29 April 2009, http://www-935.ibm.com/services/us/index.wss/casestudy/gbs/a1026136?cntxt=a1000453 Lorenzetti, Maureen 2004, BP: world oil and gas reserves still growing at healthy pace, Energy Bulletin, viewed 29 April 2009, http://www.dgap.de/dgap/static/Companies/?companyId=483&companyName=ircenter_dgap&language=German&id=1030&companyDirectoryName=bp Lowe, Ernest A & Harris, Robert J 2005, British petroleum’s Decision on Climate Change: BP solar, An Indigo Industrial Ecology paper: Creating Systems Solutions for Sustainable Development through Industrial Ecology, viewed 29 April 2009, http://www.indigodev.com/BPclim.html Porter’s generic strategy 2007, Quick MBA: Knowledge to Power Your Business: Strategic Management, viewed 29 April 2009, http://www.quickmba.com/strategy/generic.shtml Smart technology moves: having the right technology is vital for a competitive energy business and crating sustainable future Terry Knott talks to Tony Meggs, BP’s group vice president for technology, about the company’s business accomplishments arising from its technology leadership positions, and to Steve Koonin, BP’s chief scientist, about BP’s strategy for the future 2009, BP, viewed 29 April 2009, http://www.bp.com/genericarticle.do?categoryId=9013611&contentId=7012829 Sound energy policy should be based on fact: API’s cavaney 2009, Energy API, viewed 29 April 2009, http://www.api.org/Newsroom/archive/redstatement06apr24.cfm Solman, Gregory 2008, Coloring public opinion, Spinwatch: Monitoring Prand Spin, viewed 29 April 2009, http://www.spinwatch.org.uk/-news-by-category-mainmenu-9/277-advertising/4548-coloring-public-opinion Sugiyama, Akiko etal 2006, BP: the case of alternative energy, BP, viewed 29 April 2009, http://www.seattlesynergy.com/documents/BeyondPetroleum.pdf Schwartz, Nelson D 2009, Inside the head of BP he doesn't like red meat he thinks green what is John Browne doing running the world's largest oil company, Cnn Money.com viewed 29 April 2009, http://money.cnn.com/magazines/fortune/fortune_archive/2004/07/26/377141/index.htm 2008 repot illustrates top-level data and analysis covering British petroleum Plc’s..2008, Reuters, viewed 29 April 2009, http://www.reuters.com/article/pressRelease/idUS174934+18-Jan-2008+BW20080118 100 years of operating at the frontiers 2009, BP Strategy Presentation, viewed 29 April 2009, http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/I/IC_bp_strategy_presentation_march_2009_slides.pdf Read More