Strategic Management for British Petroleum Plc - Essay Example

Strategic Management for British Petroleum Copyright Strategy and strategic management are important concepts for British Petroleum because it is only by paying attention to strategy that this company can hope to grow and to remain ahead of its competitors. British Petroleum is now amongst the largest of the international oil companies and it is a well known name around the world. This company started off as the Anglo-Persian Oil Company in the early 1930s and was involved with the development of the oil sector in Iran, prior to the nationalisation of the oil interests. The Oil, gas and energy business in which British Petroleum is a leading name requires expenditure of large sums on huge projects that are technically sophisticated and demand a certain managerial depth. Thus, British Petroleum has achieved its growth as a result of sound managerial decision making over the years in all facets of its business. This brief essay presents a discussion of some of the more interesting strategy aspects that confront the company in the present global business environment. Declaration I certify that, except where cited in the text, this work is the result of research carried out by the author of this essay. The main content of the dissertation contains original ideas. _____________________________________________ Name and Signature of Author June 2008 This write - up is for Strategic Management for British Petroleum. Biographical Sketch Acknowledgements Contents Introduction 1 The Standard Strategic Model and British Petroleum Plc 2 The Key Drivers for Change for British Petroleum Plc 6 The Key Strategic Decisions faced by British Petroleum 8 Strategic Options 10 Conclusion 12 Bibliography/ References 14 List of Figures Figure 1: The Strategic Management Model for an Organisation 3 (This page intentionally blank) Introduction British Petroleum Plc, or BP, had its origins as the former Anglo – Persian Oil Company in the early 1930s (Encyclopaedia Britannica, 2008, “BP PLC”). The name of the former Anglo – Persian Oil Company was changed into British Petroleum in the year 1954 and later in the year 1998, BP merged with the Amoco Corporation of the United States to join the ranks of the largest oil companies in the world. Clearly, British Petroleum has a long history and much experience in the petroleum business. However, the economic environment in which BP has to operate is constantly changing and this means that this company has to have the right approach to strategy if it is to remain at the leading edge in its industry sector. Operating profits for British Petroleum exceeded US$ 20 billion in the year 2007 and this means that the firm not only applied a very substantial amount of capital in its operations, but also generated substantial profit in an industry that can be exposed to substantial operating risks (British Petroleum, 2008, “Financial Report – 2007”). Although profits look healthy for British Petroleum and the world has witnessed record prices for crude oil in the year 2008, it has to be appreciated that this company also encountered some problems which had a negative impact on its operations and safety record in the year 2007 (British Petroleum, 2008, “British Petroleum Strategy Presentations”) and (Wikipedia, 2008, “BP). The company faces new challenges as a result of sector inflation, rising government take and competition for new access. The previously mentioned challenges have been responded to by attempts to increase exploration, secure better access and to utilise the latest technology for BP operations. In the recent past, the focus within British Petroleum has been towards containing costs, enhancing reciprocity and developing new low carbon options for fuels (British Petroleum, 2008, “BP Strategy Presentation – 2008”). Clearly, strategy formulation and implementation is an ongoing activity at British Petroleum and this will have to continue with changing times and a new emerging business environment. In this brief essay, an attempt has been made to try to examine various strategic management issues related to British Petroleum. The next section presents an examination of the strategic management model for the company and this is followed by a discussion of the key drivers for change and the key strategic decisions that confront BP. A discussion about the strategic options that are available to BP about one of its key strategic decision is also presented prior to the conclusion. The Standard Strategic Model and British Petroleum Plc The standard strategic management model for an organization and a discussion about strategic management has been presented in (David, 2007, Slide 41) and (David, 2007, Chapter 1). The diagram which has been presented below summarises what a strategic management model is and the chapters indicated in this diagram indicate the relevant chapters in the previously mentioned book. Figure 1: The Strategic Management Model for an Organisation (David, 2007, Slide 41) All organisations must have a mission statement and a vision which they must strive to achieve. In the case of British Petroleum, probably an appropriate mission statement is to strive to become the most profitable, environmentally friendly and sustainable energy company. However, an organisation has to be able to optimally utilise its available resources in the most appropriate manner to try to achieve the organisational vision. Thus, an external and an internal audit provides an indication of the resources that are available to an organisation and these have to be reconciled with the long – term objectives and the requirements of the external business environment in which the organisation has to operate to provide a set of strategy options that can be implemented with reasonable provision for risks to try to achieve the corporate vision and its long-term objectives. An audit of the external environment provides an indication of what is likely to be needed to succeed in the prevailing business environment and within external constraints, while an internal audit provides an indication of the strengths, weaknesses and the resources that are available to an organisation. Strategies that are formulated should identify how best an organisation can exploit external opportunities and counter any threats in order to meet the long-term goals that have been formulated to support the corporate vision. Those strategies which have been recognised have to be implemented in a manner that will provide the maximum benefit, with the lowest possible risks for failure. Thus, the right way for implementation of selected strategies will require implementation plans and as these plans are executed the corporate performance will have to be monitored and evaluated to determine if plans are producing the desired results (Hitt, 2001, Chapters 1 – 3). It is possible for the actual performance results for an organization to result in the modification of the vision, long-term objectives and have an influence on strategy formulation, especially when new information about the external and internal environment becomes available. For British Petroleum, the increasing cost of crude oil may provide an interesting opportunity that can result in higher profits and a better chance for the realisation of its vision to become the largest and the most successful energy company. However, natural resources are increasingly being regarded as being highly precious by sovereign governments and this means that energy multinationals, like BP, can expect far tougher negotiations when discussing issues related to exploration, exploitation and processing of fossil fuels (Valdo, 2008, Chapter 1). Increasing costs associated with operations and concerns for the environment will require that BP invests in more efficient technologies and also try to tap alternative energy sources. However, demand for fossil fuels will require that BP continue exploration and try to connect any successful finds to the global markets. With increasing prices for fossil fuels, alternative sources of energy may become more attractive and it is possible that a traditional oil company, like BP, will try to seek alternative energy investments for profit and for consumer satisfaction. Thus, the way in which things shape up may result in BP modifying its vision from becoming a most profitable oil company to becoming a highly successful energy company, which may have a portfolio of energy interests. The next section presents a discussion about the key drivers for change for BP. The Key Drivers for Change for British Petroleum Plc As a major global energy and fossil fuel company, British Petroleum is being presented by the following drivers for change within its global business environment (British Petroleum, 2008, “2008 Strategy Presentation”) and (British Petroleum, 2008, “Statistical Review of World Energy-2008”): New markets in countries such as China have emerged within the recent years that have a great need for crude oil and refined products. China has insufficient domestic capacity and production for meeting its domestic requirements and a significant proportion of nation’s requirements have to be imported. Thus, BP has an opportunity for investment and profit in China and other new markets. China is a country which has opened up o the world relatively recently, but which is likely to have a significant demand for energy in the future. Chinese share of world energy consumption growth was 52 %, which was the highest in the world. Although the demand for oil and energy continues to increase along with the price for oil, a multinational oil companies are now witnessing a weakening in their bargaining position with oil exporting countries. This means that it is likely that the cost of operations for all those associated with the petroleum industry will increase. Competition within the petroleum industry has intensified and large oil firms are becoming even bigger as a result of mergers and acquisitions. This means that supply change strategies have assumed a far greater importance today. Large international oil companies, such as BP, have to try and cater for the market requirements and increased demand in the future. This means that they have to continue with exploration efforts and try to develop supply chains by integrating and managing huge projects that require financial sophistication and management depth (Cobb, 2008, Pp. 16 – 18). Shortage of skilled professionals who can work with the sophisticated technologies required for the petroleum sector of today will mean that special efforts are required for training and manpower is likely to be more expensive. Governments all over the world are getting more interested in alternative energy sources and this means that energy firms should also try to have a diversified portfolio for the future. It is important for an energy company to be able to consolidate after having invested in huge projects that provide for energy requirements. Requirements for efficiency and protection of the climate demand that international oil firms develop and acquire more efficient and safer technology. Safer and low carbon fuels are now more important. New exploration and expansion of production have to be undertaken on an ongoing basis to meet with the constantly increasing energy demand. A discussion about the key strategic decisions that are currently being faced by British Petroleum is presented in the next section. The Key Strategic Decisions faced by British Petroleum Three of the key strategic decisions that are faced by British Petroleum today are the following (British Petroleum, 2008, “Strategy Presentation-2008”): To determine the most promising areas for expensive exploration efforts and to identify new and promising leases that fit in with the British Petroleum production and market strategy. BP has to be able to maintain its reserve capacity for the market and to build on it. To decide about the most promising oil firms that can provide British Petroleum with a competitive edge in the long run and to decide about what business arrangements can be entered into with these firms for the best benefit of BP. As an example, BP had to decide about how best to secure access to the very promising Canadian oil sands, which are said to have more oil than Saudi Arabia. To gain access to the Canadian oil sands, BP entered into a deal with an oil firm Husky which has made it possible for BP to utilise Husky’s upstream assets without having to pay a premium for access and Husky can depend on BP’s downstream processing and refining capacity. BP also has to determine how best to approach the China market which will continue to have a demand for oil in the future. British Petroleum has to decide about how best to allocate its profits for sustained and optimal growth of its future operations. All BP activities require funds and it is important to decide about what share of cash reserves should be allocated for what activities. Thus, it is important to decide how best to invest in alternative energy projects, what allocation for exploration is likely to be optimal and what investment should be made in new technology for aging refineries etc. Clearly, several options are available for each of the abovementioned strategic decisions and implementing an option can bring about certain costs together with certain benefits. Thus, it is important for senior BP managers to decide about what is the best option for each key strategic decision. In the next section, a brief discussion is presented about the strategic options that are available to BP for its exploration efforts. Strategic Options When BP management thinks about exploration options to maintain the company reserves for future production, it has a very large area to consider all over the world in which geological survey data may have indicated that a certain promise exists for a successful drilling for oil or gas. However, it is unlikely that even BP resources will permit that all promising areas be explored. Thus, BP has to be able to decide what is likely to be able to provide a best return for its expensive exploration program. In this regard, the following three strategic options are available to BP for deciding about how best to carry on with exploration of new finds. BP can decide to only consider promising exploration areas that are near existing oil and gas production or refining facilities. This option has the advantage of being easier to manage and being less expensive because those production or refining facilities that are already working can be used as platforms for logistic support for new explorations. Also, if a find is made near an existing working facility, then it is likely to be far less expensive to connect the new find to the existing supply chain and to bring a new discovery to production quickly. BP can decide that it wants to explore the most promising areas for exploration all over the world, but that it will only invest in those areas which are likely to provide very substantial finds and add to the reserves in a big way. However, the drawback with such an option is that it is likely that substantial finds in remote and far off regions of the world will be very expensive to connect to the existing supply chains for world oil and gas. Thus, unless evidence exists that a truly huge discovery is very likely, BP will probably not want to carry on with such exploration efforts. It is possible for BP to decide that it will only work with other firms that have made a find to develop new fields. This is likely to save on exploration costs, but it is likely that BP will have to compete in the market with other international oil companies to secure development and operating rights to finds and this can lead to even higher costs and a loss of control on the development of new reserves for the company. It is very unlikely that any firm that has invested in its exploration efforts will provide BP with cheap access and in fact it may not provide any access at all, preferring to develop new finds with its own resources. In practice, it is likely that the manner in which exploration for new reserves is carried out by BP will be a judicious combination of all of the three abovementioned options. Each case with a certain promise will have to be decided on its own merits and the economics of exploration and production will have to be carefully considered prior to making a decision. However, it can only be hoped that new technology will make it possible for exploration for oil to be possible with a higher level of certainty associated for a find in all areas, including all ocean depths and remote terrain. Conclusion The previous discussion clearly suggests that strategy is important for a major international oil company, like BP and that well thought out and well considered decisions have to be made in all areas of corporate operations. It is important that the right decisions are made because the amounts that have to be invested can be very substantial and these allocations have to be recouped from future earnings. It is unlikely that British Petroleum will have been able to transform itself into a giant of today without proper attention to strategy and strategic management practices. (This page intentionally blank) Bibliography/ References 1. Adams, I. & Great Britain. Parliament. House of Commons. Select Committee on Scottish Affairs. 2005. 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