Non-Market Analysis of British Petroleum - Research Paper Example

Non- Market Analysis of British Petroleum Introduction  Market as well as non- market forces have a role to play in the business world. But often non- market forces are not considered by the companies to be effective in shaping the market environments. Non- market forces are taken for granted and actions to control them are often unplanned resulting into huge control costs as well as damage to company’s market forces. British Petroleum Plc (BP), a leading energy company, is facing these days a non market happening of oil spill in the Gulf of Mexico. In order to understand theses impacts of non- market events, the recent oil spill happening pertaining to British Petroleum (BP) is studied here under in detail. Also, an analysis of costs involved in non- market happenings and their repercussions have also been discussed in this paper.     Analysis of BP’s non- market environmental effects on its market environments:  Non- market environments involve variety of issues, interests, informational, and institutional affects that invariably impact the market environments of any public corporation. David Beach and David Bruce Allen (2010)i have rightly stated that “non market strategies recognize that businesses are social and political beings, not just economic agents. Because companies create a distribute value, a plethora of actors seek to influence them – formally through laws and regulations, and informally, through social pressure, activism, and efforts to shape the public perception of business. Companies cannot escape this. Smart executives, therefore, engage with their social and political environments helping shape the rules of the game and reducing the risk of being hemmed in by external affairs.”  British Petroleum is no exception to this norm. Therefore, the non- market environments that BP faces also impact its market environments. Take the recent non- market happening of oil spill on the shores of US Gulf of Mexico, BP is responsible for operational errors for the disaster. The company is responsible to bear non- market cost for cleaning the oil spill. These costs are stated to surpass $20 billion, and will drastically impact the financial statements of the company. “The company is presently debating the issue of dividend distributions. Any impact on dividend is bound to carry uncontrollable and far reaching consequences on market forces, and thereby on the share prices of the company. The market for the shares of BP has crashed down because of the public and political hue and cry against BP. Accordingly, the market and non market forces are interrelated. A firm’s activities in its market environment can generate non- market issues and change in its non- market environments” (David Baron 2010)ii Non- market institutional environment involves all activities occurring within or outside the institution. It may be noted that non- market environments also include non- governmental institutions as well. Following the oil spill non- market happening, the British PM David Cameron (2010)iii issued a statement concerning distress of BP stating specifically that “this is a vital company for all our interests. The view I take is that BP itself wants to cap the well and clean up the spill and compensate those who have had damages.” Such a statement, coming from one of highest authorities of an institution, is bound to make an impact on market environment even though it is created a non- market environment. This is a situation where institutional non market happening (i.e. statement of British PM) is making an impact on another non market happening (i.e. oil spill in the Gulf of Mexico). Assuming the share prices of BP stop declining due to the statement of British PM, then the statement, a non- market happening, will have an impact, though indirectly, on market forces of BP. Corporations are supposed to execute their business in accordance with applicable laws and regulations. Every company is involved these days in ‘corporate social responsibility’ (CSR) movement, but at what cost? CSR movement is using resources of the company or other people money. Millions spent by BP for holy pictures with the likes of Greenpeace are of no use to investors. This CSR movement is a non- market environment through which shareholders money is wasted for creating virtually nothing. Spending for CSR movement impact the balance sheets of BP, and thereby the market prices for its shares. In the past as well the non- market issues affected market factors of British Petroleum Plc when old European empires were liquidated and a host of newly decolonized countries were created on the global map. But the current issue of oil spill has been exposed heavily by the press media. The tussle among internationalism and nationalism exposed BP to political risks, and thereby to several markets’ environmental issues. Oil spill in the Gulf of Mexico Oil spill disaster in the Gulf of Mexico started on 20 April 2010. It is reported that 11 persons died and 17 persons injured in the initial explosion. More than 40 million gallons of oil have so far been spewed away, but it has been capped on this 16 July 2010. This spillage is dangerous for wildlife in the Gulf of Mexico. BP’s image has certainly taken a beating because of its non-owning the responsibility of its own misdoings. It took a long time for BP to admit the really hazardous affects that would be caused by the spill. It is only after President Obama accused BP for being responsible of the disaster that BP declared that it would do whatever possible under the circumstances to cap the spill. Still BP did not take the responsibility for the spill, perhaps because of legal advice given by its legal consultants. Also it might not have been possible for the company to answer all that what happened for such an unprecedented disaster. But initial admissions might have saved the reputation of BP. Interestingly, the company began its networking campaigns one month after the beginning of spillage in the Gulf of Mexico. “The company forgot the principles of accountability, transparency, and relevancy that are the basis of any sustainable strategy; instead BP opted for carefully measured responses that were seen insincere and quickly depleted the equity it had built as a good company” (Sarah Sorensen 2010)iv. But even after that, the company seemed to have been guided by consultants not to admit any responsibility other than accepting the responsibility for fixing the things. Perhaps initially the company was bothered about saving its untainted image. The advertisements of the company are being targeted as misleading the consumers. In one of the advertisement workers in yellow boots are shown as cleaning the untainted beach under sunshine in front of blue waves. Why not the images of oily sea birds passing the beach shown in such advertisement? It appears that the main concern of BP is to save its image and not to clean the oil spill. If the company would have owed the responsibility in April itself, the repercussions of unprecedented oil spill would have been different. Early action by the company would have saved some of the cost of cleaning the mess as well. At least litigation cost would have been much less as the company would have established the disaster was not the result of its misdoings. Now everything is crystal clear. Everyone is accusing BP for the disaster. Court cases seeking damages are being filed by dozens. Company’s litigation cost is soaring. It is reported that so far BP has spent more than $3 billion on different types of costs from cleaning up mess to litigation expenses. The company has reportedly set aside $20 billion for meeting cleanup and litigation costs. It was declared by Bob Dudley, the MD of BP, that spill would be capped sometime between July 20 and July 27, 2010. The company has of now accomplished the task and capped the spill on 16 July 2010. This entire issue will now be directly affecting BP market forces because of the costs incurred in cleaning the mess. News Media and BP’s non- market tactics News media have always reacted strongly to BP’s non- market issues. BP is considered pioneer in maneuvering the non- market strategies to influence the market forces that affect its business directly. Take the case of the issue of global warming and future climate, a non market environment. “BP decided to turn what would undoubtedly become a major challenge into an opportunity and source of differentiation. BP was the first major oil company to acknowledge publicly the reality of global warming and to take steps to curb CO2 emissions. This non- market repositioning is now driving much of BP’s overall strategy as the company has become the world’s largest producer of solar energy.”(David Beach 2010)v In shaping non- market strategy into a market force, news media has played a determining role for BP. Without news media’s role nothing was possible to happen. The issue of global warming would never have come to the fore. This great non- market issue of global warming was certainly floated by BP but it was cherished into a driving force by the news media. The current issue of spillage in the Gulf of Mexico has been taken up by the news media like an issue parallel to election of the US President. Every minute detail is being reported. The result is that news media has made the spillage issue an issue that is being discussed in every household. Press reporting has affected the market image of BP to great extent. Market prices of its shares have gone down. Few current examples of news reporting of these issues are as under: “ Oil firm BP is awaiting test results from the well in the Gulf of Mexico, a day after stanching the flow of for the first time since April.” (BBC Mobile News, 16 July 2010 at 07.27 GMT)vi “Oil Flow Stopped as Cap Is Tested: Oil stopped gushing into the Gulf of Mexico on Thursday, for the first time in nearly three months, as BP began testing the cap atop its stricken well, a crucial step towards sealing the well permanently.” (The New York Times, US, July 15, 2010)vii A careful thinking will reveal that in case of BP the news media always played a role of glorifying the non market environments of BP. The same media that issued all sorts of nagging things accusing BP for not accepting the responsibility of oil spill in Gulf of Mexico will now start praising the great efforts made by BP to cap the spill. The result will be that this non market issue will become a market issue and BP will start popularizing its skills displayed in capping the oil spill; and eventually BP will take commercial advantage of any such mishap occurring in the future by any other company. It is now very clear that news media plays a dominating role in BP’s non- market strategies, whether consciously or otherwise. Recommendations to deal effectively with the non- market strategies to have the positive impacts on BP’s market environment There are differences between the ways market and non- market environments react to one another. Non marketing strategies are perhaps more effective than the impacts of market strategies, as non market environments can be manipulated to create opportunities in market environments. Occurrences of non- market events are generally not the result of a planned strategy. Something occurs naturally or the issue is already there for company to deal with. The effective dealing of non- market issues or information depends on the efficiency of the company. Planning the action under non- market environment is the most important step to coordinate the non- market issue with market strategy. In recent oil spill issue BP received general criticism from its advertising approach, though after the spill BP never indulged in fresh advertising based on such issue. These are old advertisements that were under criticism of the public at large. Investigation of non- market consequences often lead to change the environments towards market strategies. BP should always investigate the non- market environments to arrive at techniques, called revealed preference techniques. In an earlier non- market issue of global warming, the greenhouse gas emissions of BP were considered harmful even though greenhouse gas emissions were minor, or even trivial of the total emissions. But BP manipulated this non- market for positively impacting its market forces. The production of fuels that produced dangerous gases was stopped, and that ultimately affected the market value of the company. BP should undertake researches on information made available during disasters like oil spill in the Gulf of Mexico in order to create positive impact on market forces... John Deutch (July 16, 2010)viii in his article stated that “even energy experts tend to forget the enormous impact unanticipated events can have on the markets and public policy. Today there are two developments that have the potential to cause dramatic change: the existence of enormous reserves of natural gas and the oil spill.” John further explains that the positive development is revelation of the existence of natural gas resources in unconventional energy likes coal seams, tight sands, and shales. The negative development is that the global public has turned against the oil and natural gas exploration. BP should exploit this non- market information of two developments and turn them into a real market force by getting hold of major unconventional energy for natural gas resources. BP’s non- market costs Non- market costs of non- market issues cannot be predicted accurately. Sometimes the cost becomes irrelevant when compared with the issue involved. However, various techniques are used to measure the non- market costs like hedonic methods, contingent valuation, control costs, precedents, and travel costs. “Hedonic method (also called Revealed Preference) is a common strategy to analyze impacts on property values and wages. Contingent valuation involves surveying a representative sample of society to determine how much they value a particular non- market well. Under control costs, a cost can be estimated based on existing control, prevention, and mitigation expenses. Precedent uses the policy and legal judgments as a reference for assessing non- market costs. Travel cost uses visitors’ travel costs to measure consumer surplus provided by recreation site such as park or other public land.” (K. Puttaswarmaiah, 2002)ix Whatever might have been the method of calculations, BP has always treated the issue on priority basis than because of cost considerations. That is why total cost to be incurred at recent oil spill disaster is estimated to be more than $20 billion. The cost is a volatile issue whenever BP face non- market environments. When costs are within affordable range of company like BP the cost issue takes a back seat. But for the issue like present oil spill “some analysts have put BP’s likely costs at $20 billion to $40 billion but estimates have gone as high as $100 billion. Speculation is running high that BP is approaching several sovereign wealth funds for cash to ward off a takeover and help pay for the spill” (Reuters, 11July 2010)x The capacity for BP to absorb the non- market issue cost is large. But Gulf Mexico Spill is one of those rare cases where even companies like BP show their complete inability. These issues are like natural disaster and its control costs are beyond the ability of BP to borne. Naturally assistance from various funds is inevitable. Conclusion Non- market environments have always played a definite role to affect the market environments for a company like BP. Sometime the effects of non- market issues are positive on the market forces, as happened in case of global warming issue. At other times these non- market issues create negative impacts, as has happened during the course of oil spill issue. Whatever may be the effects of non market forces, the costs to control the issue remains unpredictable. Only estimates or predictions help in analyzing the costs of happenings that are non- market affecting the market issues directly or indirectly. The approach to deal with non- market issues should be positive to avoid public outcry that happened in issues like Gulf of Mexico spill. Word Count: 2839 References Read More