British Petroleum Company Analysis - Case Study Example

Company Analysis: British Petroleum (BP) Table of Contents Executive Summary 3 Conclusion 13 References 15 Executive Summary In this study, the strategic environment in which British Petroleum (BP) operates has been discussed. The company follows a ten point strategy which includes the safety issues and the operational functions that are based on the strengths of the company, such as relationship with the employees, value chain, technology, etc. If the business trend of BP is considered then it can be said that it did not reveal a positive scenario because of the oil spill that took place in the Gulf of Mexico. The US government had nearly cornered BP and its operations in its geography due to the environmental damage its oil spill had caused. This also negatively affected the company in terms of its goodwill and financials. The competitive element that helps BP to recover faster is its alternative energy initiative to produce renewable energy, bio fuels and other energy through wind and solar power. As far as the core competencies of the company are concerned, it has strong goodwill, internal control and it is also well known for its exploration skills. The major competitors of BP are Exxon Mobil, Royal Dutch Shell, Chevron, Valero Energy, ConocoPhillips, Sunoco and LUKOIL Petrobras. However, three of its competitors, namely, Exxon Mobil, Royal Dutch Shell and Chevron are chosen for conducting a comparative analysis with BP, in this study. Different companies in the same industry have different competencies, but this does not mean that they hinder the growth of other companies. The companies in the oil and gas industry have huge market capitalization and their customers are also fixed, so there is negligible scope for cannibalization of market share. Question 1: Critically assess the strategic context within which your firm operates using any conceptual framework which you think is appropriate, and explain which are the most important general business trends and competitive elements. Which of these should strategic decision makers in the company of your choice consider the most and why? Answer 1: This study aims at critically analyzing the strategic context in which British Petroleum (BP) operates, by utilizing conceptual framework. Further, the significant business trends would be identified and competitive elements would be discussed, so as to identify the strategies which BP should focus on. BP is listed on the London Stock Exchange and its market capitalization in the year 2012 was £81.4 billion (BP Plc, 2013a). The major products that BP offers are natural gas, aviation fuels, motor fuels and petroleum. The revenue of the company in 2011 was $375,517 million, compared to $297,107 million in 2010 (Yahoo, 2013). BP is into finding and extracting oil, moving them to different place, refining them, finding ways to generate low carbon energy and offering various services to customers through their retail outlets. The well-known brands of BP are Castrol, ARAL, ARCO, AmPm and Wild Bean Café. The companies in the oil and gas industry all around the world are looking for better opportunities and solutions in order to overcome the challenges and problems related to procurement strategies corresponding to multi-cultural complexities in different countries. Companies seek to achieve competitive advantage in the market and grab market share in order to attain long term sustainability (Market Watch Inc., 2013). Multinational oil companies are not exempted as they also have been striving hard to perform better than its competitors and have been looking for better opportunities in different parts of the world. Procurement and supply chain are used alternatively in the oil and gas sector industry. Procurement was not a major area of concern for the companies in the oil and gas industry previously. They were more concerned about rapid expansion of their business through fast exploring of oil using improved technologies for the purpose. Until recently the oil companies started realizing the fact that a major portion of their operating expenses were spent on its procurement or supply chain system. It has also been observed that a particular project can go in vain if its procurement system is not managed and controlled effectively. BP follows a ten point business strategy to grow value for its stakeholders. These ten points are the ten values that BP expects to deliver to its customers and other stakeholders of the company. The first point is to focus on the safety issues and function based on the strengths of the company, such as gas value chain, deepwater, technology, employee relationship and giant fields (Tech, 2012). The customers can expect safety and effective risk management measures, strong focus, standardized services, visibility and transparency. Apart from this, the measurable values that BP offers to its customers are, active management of portfolio, increasing operating cash of the company, strong balance sheet and stable financial condition of the company. As far as the existing market is concerned, BP has penetrated into many countries and has many retail outlets too; which most oil and gas companies do not have. This means that they cater to corporate clients, but also offers value to retail customers through their products and services. Moreover, in order to expand its area of operation to other untapped markets, it has to spend on advertising, promotion and flexibility in terms of price, procurement policies and strategies based on the market condition of the country. BP has also taken initiatives to produce bio-fuels, in order to find sustainable ways of designing products. Even solar energy and wind energy are being utilized by the company, to offer eco-friendly products and services to the customers around the world. Since the level of competition in the oil and gas industry has increased, companies are looking out for ways to differentiate their products and services from others (Clegg, Carter, Kornberger, and Schweitzer, 2011). In case of this industry, offering environment friendly products and services is a unique selling proposition on the part of the company. Considering the present scenario the business trend of BP does not reveal a positive picture. This is because of the Deepwater Horizon oil spill that took place in the year 2010. After this incident, the US government has cornered BP and the company was not offered federal contacts, which was a huge blow to the bottom line of the company. A heavy penalty was levied on BP for such a massive environmental damage that occurred due to the mismanagement and lack of attention and sincerity (BP, 2010a). Due to this reason the company recorded a net loss of $2.4 billion in the year 2010. They also spent around $ 17.7 billion to clear up the oil spill. Apart from that, they gave away more than $15 billion to the trust funds as compensation to the victims of oil spill. This reveals that BP has been confronting volatile trends in business since the oil spill. The stock prices of the company went down considerably leading to a loss of $60 billion in the market value of the stock prices of the company (Ferris, 2012). Based on the information of the external and internal market trend, BP’s production in 2011 was lower than that in 2010; this was due to divestments, and diminishing rate of production in the Gulf of Mexico. The loss that BP had to incur due to the oil spill in the Gulf of Mexico affected the company’s financial strength in 2010 an also shadowed the company’s growth and profitability in 2011 (BP, 2010b). In the year 2011, BP got into a deal with Rosneft, the market leader in the Russian oil and gas industry. The company got into a deal with Rosneft for long-term profitability. It exchanged 5 percent of its shares with 9.5 percent of Rosneft’s superior rated stocks (Schiller, 2012). However, the stock swaps would dilute the earning per share of BP in the short-run. In addition to this, BP also has to incur the expenditure for the development of oil and gas reserves in Russia on Kara Sea. BP has invested about $7 billion for the research and development of alternative sources of energy. These alternative sources include wind, bio fuels, carbon capture, solar energy and sequestration. BP has opened a Cedar Creek II of $475 million in Colorado which would be utilizing around 250 megawatt of wind energy for supplying power to 75,000 houses. This division of alternative energy source employees around 6000 people. This can be considered to be one of the major competencies or competitive elements of BP. BP has extended its business to the field of alternative sources of energy, because they have anticipated that a dramatic increase in the demand for renewable energy can be seen in the next 10 to 20 years (Proctor, 2011). The company has started investing in alternative sources since 2005, so that this can be made as its core competency in future. Other competitive elements of BP are its other products such as bio fuel and microbes that would support in enhancing the recovery of oil. In response to the oil spill that occurred, BP has started taking greater risks and safety measures. New risk management system has been developed by the company, which is consistent and fast. The upstream business has been restructured into three major divisions, namely exploration, developments and production. All these elements have developed the core competencies of the company strongly after the setback in 2010 (BP Plc, 2013b). Of all the strategies and competitive elements that BP has undertaken or is working towards, the most significant is its initiative towards the development and growth of its division for alternative energy. The oil and gas industry depends on natural resources and the time is coming when excavating excessive natural resources would be harmful for the world. So the long term planning of BP is to utilise the natural resources which are easily available, such as wind and solar power that could become its unique selling proposition (BP Plc, 2013c). Question 2: Identify the stock of internally developed assets, resources and competences in the company of your choice. In your view, how do these compare with the company’s most immediate (maximum 3) competitor firms in the industry? Do they or do they not allow your firm to achieve a sustainable competitive advantage, and in which areas? Answer 2: This section of the study would be evaluating the internally developed assets or intangible assets, its resources and competencies that BP has. This would assist in estimating the strengths of BP and identifying the inputs which support the company to generate good business. After this, a comparative analysis of BP with its competitors would be done, in order to highlight the competitive advantage which BP enjoys in the industry. BP is associated with a rich history and has achieved numerous landmarks on its way to become a large multinational company as it stands today. BP is committed towards becoming the industry leader and maximising the wealth of its shareholders through energy supply to its customers in a responsible and safe manner (Lasserre, 2012). The internal developments and intangible assets of BP can be identified by analysing the internal audit reports of the company, as it focuses on the management, major risks, and internal control of the company. Apart from this, the intangible assets such as goodwill of the company also indicate the internal sustainability. The developments of BP have been recorded in every aspect or function ranging from refining to IT system of the company. The future plans such as establishing alternative energy department as the most competent business line is also an internally developed asset since 2005 (Barnett, 2008). The efficient management of the operations assisted the company to maintain a sustainable position in the oil field at Alaska, or in the Stock Exchange of London. The internal assets of BP are its strong process, efficiency of workforce and improved internal control system (Porter, 1991). The requirement of energy is growing daily and BP offers energy to the world. They convert the energy sources into various products. They maintain high standards in whatever they do and strive hard to attain safety. When it comes to discussion of internally developed assets of the company, BP puts forward that safety, respect, excellence, courage and team work are their greatest assets (Carter Clegg, and Kornberger, 2008). Everything that companies in this industry do depends on the safety of communities, environment and employees. Therefore, safe management plays a critical role in the company and in its day to day operations. BP respects its customers and the environment in which it works. This asset assists BP to win the trust and respect of others. So it can be said that, the company cares about the consequences of their operations, on the environment and the stakeholders. Achieving the outcome in the best possible way is another asset of the company (Porter, 1980). The company aims for enduring legacy in spite of the short term priorities. Dealing in oil and petroleum requires great courage because the operational functions are quite risky; so it can be assumed that courage in achieving the best and courage to explore new avenues of resources is there in the workforce as well as in the management of BP. Finally, the biggest asset is its team strength, as without the trust and team work, organisations do not exist and cannot compete with the top players at an international level (Porter, 1985). British Petroleum Plc operates business with the help of three operating divisions, for example marketing and refining, production and exploration and other businesses. Production and exploration division perform activities like oil and natural gas exploration, field development, midstream transportation, crude oil production, etc. British Petroleum Plc also promotes and markets liquefied natural gas (LNG) and natural gas liquids (NGLs). It mainly focuses on three aspects of business such as managing risk associated with oil exploration process, delivering standard performance and developing personnel and technological capability. Multinational oil companies need to outsource certain activities such as technology integration, sourcing the supply in order to decrease overall operational cost. The major resources that BP considers are its human resources, oil wells, technology and equipments and its natural gas reserve. Organizing the human resource and technological capital in profitable manner is also the key success criteria for BP (British Petroleum, 2008). The Company emphasises on backward integration of operation and third party sourcing in order to increase business efficiency. Apart from this BP takes adequate care of human resource policy of the country, government policies regarding oil and gas exploration and technology up gradation in order to be successful in the long run. They have adequate material reserve in order to maintain flow of operation in contingent periods (BP, 2011). Different companies in the same industry have different competencies, based on their areas of expertise. BP is always known to have competency in exploration skills. BP developed forties field in the North Sea and in the northern cost of Alaska. Reduction of greenhouse gas emission and development of alternative sources of energy is another competency of BP. The corporate strategies of the company revealed certain other competencies of BP, such as the ethical conduct, environmental performance, finance and internal control, health and safety. The company operates with the help of diversified and talented human resource. For example, it recruits and selects highly qualified local and foreign engineers in order to ensure quality in production and exploration activities. Brand equity and intellectual property are the biggest intangible resources of BP (BP, 2011). Barney (1986) has stated that competitive advantage for any firm depends on its resource capability. The competitors of BP chosen for this study are Exxon Mobil, Royal Dutch Shell and Chevron. Every company has diverse competencies and this does not mean that the competitors hinder the sustainable growth of BP. All these companies are the market leaders in international oil and gas industry. Each of them differs in size, in term of their profitability and market capitalization. However, the internally developed assets and the resources are almost similar because in this industry there is not much variation available in terms of products and services, equipments, technology or strategies. Nevertheless, difference in human resource management, strategic framework of the company, and choices in areas of operation would differ depending on the company size. Disasters like oil spill has occurred with each of these competitors like BP and every oil and gas company face innumerable amount of lawsuits when they break the environmental laws. It can be said that BP has its own identity and fixed sets of customers who are not driven away by its competitors (BP, 2011). BP competes with the global players like Exxon Mobil, Royal Dutch Shell, Chevron, Valero Energy, ConocoPhillips, Sunoco and LUKOIL Petrobras. However, three of its competitors, namely, Exxon Mobil, Royal Dutch Shell, and Chevron are chosen for conducting a comparative analysis with BP. The parameters on which these oil and gas companies would be compared are the intangible assets of the company, resources and competencies. Parameters Companies Internally developed intangible assets Resources Competencies Exxon Mobil High brand recognition assists the company to reap profits. It also maintains an industry leadership through economies of scale, strong research and learning segment, vertical integration, product diversification and sustainable financial position. Leadership in terms of excellent operational performance is also enjoyed by Exxon. The company possess a strong human resource, latest technological equipments for research and development, and utilises it to unearth the raw materials or natural resources for further refining. Metallocene catalyst process Organic and inorganic assets acquired by the company technological innovation, towards achieving cost economies and process improvement Financial expertise, in the crucial and highly speculative market Development of new fields Portfolio Quality Long-term Perspective Value Maximisation (Exxon Mobil, 2010). Royal Dutch Shell The internally developed assets for Shell are its workforce and strategic framework. Apart from this, intangible assets such as goodwill, trademarks, software, and high recognition are also the result of internally developed competencies, so they also form the assets of the company. Shell utilises open resourcing method for recruiting workforce or human resource. Performance management cycle of the company consist of tools like competency framework, appraisal tools etc. Other resource includes the IT framework of the company, oil wells, and the financial strength. Commercial and technical expertise Distribution and Production of Natural gas Skilled Employees Managing decentralised and globally diversified business (Royal Dutch Shell Plc, 2011). Chevron Chevron has strong employment branding strategy. The turnover rate is effectively managed by the human resource and policies are incorporated pertaining to employees’ safety and satisfaction. It is the second major oil and gas company after Exxon Mobil. Due to its vertically integrated framework, Chevron’s operational function ranges from mining, oil production, to manufacturing of petrochemical. The intangible assets and goodwill of the company was 1.9 percent of its revenue generated in 2012. Chevron has ample amount of natural resource in different continents to manufacture quality products and offer value to customers. Other than that, team of skilled workforce is also there in Chevron. The company has the largest reserve of natural gas. Technological Infrastructure Capabilities and skills possessed by human resources Managerial skills Distribution channel (Chevron Corporation, 2013). Conclusion This study includes the strategic framework in which BP function. It was found that BP performs various functions like exploration, refining, manufacturing, etc, but its core competency lies in exploration. Though BP is facing a negative growth trend since the last two years because of the oil spill that occurred in Gulf of Mexico in 2010, yet the company is picking up its growth and development speed by divesting in alternative sources of energy, which is a prospective plan of BP for future. The major competitors of the company are Exxon Mobile, Chevron, and Royal Dutch Shell. All these companies are the market leaders and have several competencies, but this does not mean that the competitors act to be barriers for BP. References Barnett, W. P., 2008. The Red Queen Among Organizations: How Competitiveness Evolves. 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