How to Govern Corporations So They Serve the Public Good - Essay Example

Table of Contents: Executive Summary……………..3 Analysis of the oil & petroleum industry………5 1 Macro-Level Influences on the Oil & Petroleum industry……5 1.2 Five forces analysis of the oil & petroleum industry…………..8 1.3 Industry Structure of the Oil & Petroleum Industry………….9 1.4 Critical factors of success for the major oil companies…………9 2. Internal Analysis of BP………..10 2.1 Company Overview………..10 2.2 Analysis of the business model of BP……..10 2.3 Organizational processes of BP …………10 2.4 SWOT analysis………………11 2.5 Strategic Capabilities of BP……….12 3. Corporate Responsibility, sustainable development and ethical issues confronting BP…………….13 3.1 Recommendations on How BP can manage its stakeholder relations and expectations…………………..15 4. Recommendations on Strategies…………….17 4.1 Corporate Strategy………………17 4.2 Business strategy………………..17 4.3 Functional Strategy…….18 4.4 Network level strategy…….18 5. Conclusion……….19 Executive Summary: The report studies the global oil & petroleum industry. It conducts the macro-level analysis and industry analysis. It also identifies the critical factors of success for operating in this industry. In the second section of the report, internal analysis of BP is done. The major weakness of BP lies in its egregious environmental record. This culminated in the Gulf of Mexico disaster of 2010 that almost pushed the company to the brink of extinction. It is recommended that BP should immediately embrace the objective of stakeholder value creation. The company has until now focused solely on shareholder wealth maximization at the cost of other stakeholders of the company. The corporate level strategy of BP should focus on having all kinds of oil & petroleum assets. It should not concentrate solely on deep-water assets. The asset portfolio of the company should be diversified. It should have onshore assets, off-shore assets, natural gas assets, shale gas assets etc. The business level strategy of BP should combine its cost leadership with product or process leadership. The process leadership can be achieved by having the most sophisticated technological processes in place. The marketing strategy of the company should focus on improving the battered brand image of BP in the minds of the consumers and other stakeholders. The corporate and brand image of the company have become unfavorable after the Gulf of Mexico disaster. The network level strategy of BP at this juncture should be one of cooperation and not of competition. BP should also pursue inorganic growth through mergers with smaller firms in the industry. Recently it bought a stake in the reserves of Reliance industries of India. Such a cooperative network level strategy will be suitable for the company. 1. Analysis of the oil & petroleum industry: The oil & petrol industry supply chain is composed of the following activities (Matthew Yeomans, 2004): i) Exploration of oil. ii) Drilling & recovery. iii) Movement & transportation. iv) Refinement. v) Marketing & Distribution. The oil & petroleum industry includes all those firms and corporations that are involved in the exploration, drilling, movement & transportation, refinement and, marketing & distribution of oil & petroleum. The importance of the oil & petroleum industry lies in the fact that oil accounts for a large portion of the world’s energy consumption. This proportion amounts to as high as 53% for the oil rich Middle Eastern nations, 32% for the nations of Europe and Asia, 44% for south and Central America, 41% for Africa and 40% for North America (Matthew Yeomans,2004). Proportion of the energy needs of the different regions fulfilled by oil The population of the globe consumes more than 30 billion barrels of oil per day. In terms of the dollar value of the turnover of all the companies involved in the various stages of the oil & petroleum supply chain, this industry is the largest in the world. 1.1 Macro-Level Influences on the Oil & Petroleum industry: The current major macro-level influences on the oil & petroleum industry are: Political factors: The ongoing political unrest in the Middle East and Western Africa will have an adverse impact where a significant proportion of the world’s oil supply is produced. The civil war in Libya has gone into a kind of stalemate and has caused the price of oil to cross the psychological $ 100 per barrel mark. The unrest may spread to Saudi Arabia also which is the world’s largest producer of oil. Further political instability in the region will exacerbate the situation and produce an adverse supply shock. This will adversely affect the global GDP growth. Economic factors: The global GDP growth slowed down after the financial crisis of 2007-08. However, the high growth rate in large developing countries like China, India and Brazil maintained the demand for oil & petroleum products (Economist, 2008). As the economies of developed world recover, the demand for oil & petroleum may go up further. Social Factors: The per capita consumption of energy from oil is going up in developing countries while it is coming down in developed countries. Global warming has captured the social consciousness like never before (Visser, W., D. Matten, M. Pohl, N. Tolhurst (eds.),2008). This consciousness about the negative impact of global warming and the role of fossil fuels like oil in accelerating global warming has translated into social effort at every level to cut down the consumption of them. An example of this can be seen in the deteriorating demand for fuel guzzling SUVs in countries like United States of America( Economist, 2010). Technological factors: The oil & petroleum industry is a technologically intensive one. The latest technological bastion for the industry is deep water oil drilling. Deep water oil drilling is offshore drilling that takes place at depths of around 1000 feet (Matthew R. Simmons, 2005). The proven reserves of oil at the beginning of 2009 were approximately 1.34 trillion barrels. Of this 10% was estimated to be in deep water reserves. Deep water oil drilling is however a technologically challenging task and poses significant ecological and environmental hazards. The Macondo well where the oil spill of 2010 in the Gulf of Mexico occurred was one such deep water well of BP. This oil spill was one of the worst environmental disasters in the history of human civilization. It caused irreparable damage to the environment and marine life (Robertson, Campbell; Krauss, Clifford, 2010). Another technological challenge (though still not very significant) comes from the emergence of renewable sources of energy like wind, power, solar and nuclear energy. However it will still take some time before these cleaner sources of energy can prove to be a viable substitute for non-renewable sources (Matthew R. Simmons, 2005). Legal factors: After the Gulf of Mexico disaster, regulatory environment in the oil & petroleum industry has become more stringent. Penalties for breaking environmental laws have been increased greatly. The legal risks have now become very significant especially in the United States of America. Environmental Factors: Environmental factors have increased in importance like never before. Not giving priority to the environmental factors will mean crises like the Gulf of Mexico, which almost brought a company like BP to the brink of extinction. Environmental factors have become one of the critical factors of success for operating in the oil & petroleum industry now. Environmental friendly sustainable sources of energy are being promoted over conventional sources like oil & petroleum (Matthew R. Simmons, 2005). 1.2 Five forces analysis of the oil & petroleum industry (Porter, M.E.,1979): i) Barriers to Entry: There are very high barriers to entry in this industry. These barriers to entry come from the capital intensive nature of the industry. ii) Bargaining power of the customers: The bargaining power of the customers in the short run is not high. However in the long run, bargaining power of the customers can be high because of their ability to shift consumption patterns. iii) Bargaining power of Suppliers: The suppliers are the various national governments who own the oil reserves. There bargaining power is high because of their power base. iv) Threat of substitutes: The threat of substitutes come from natural gas, shale gas and other renewable sources of energy like solar, wind and nuclear energy. However given the demand for energy, the threat of substitutes has still not been significant so as to make a dent in the profitability of the oil & petroleum industry. v) Intensity of Competitive Rivalry: There are some very large players in the oil & petroleum industry. These include the likes of Exxon-Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips etc. In spite of the presence of these very large players, because of the huge global demand, the intensity of competitive rivalry is not that high and the profitability of the various companies are very high. 1.3 Industry Structure of the Oil & Petroleum Industry: The petroleum industry value chain has been divided into the following activities by the American Petroleum institute ( American Petroleum institute, 2010): i) The upstream activities which include exploration, production and development of oil. ii) The downstream activities that include the refining, retailing and marketing activities. iii) The movement and transportation activities between the upstream and downstream activities i.e. the pipeline activities. iv) Service and supply activities. 1.4 Critical factors of success for the major oil companies: The critical factors of success for major oil companies are (Visser, W., D. Matten, M. Pohl, N. Tolhurst (eds.),2008): i) Safety on the environmental front. They should insure that the adverse impact on environment from their activities is minimized. ii) Cost control and efficiency of operations. iii) Identification and acquisition of strategic oil & petroleum assets. iv) Use of the state-of-the-art technology for exploration and drilling activities. 2. Internal Analysis of BP: 2.1 Company Overview: BP is a global oil & gas corporation. It is headquartered in London, United Kingdom. BP is the third largest oil & gas corporation in the world. In terms of turnover, BP continues to be the fourth largest company in the world (BP, 2010). 2.2 Analysis of the business model of BP: BP is a vertically integrated company. It is into exploration and production, refining, distribution and marketing, power generation and trading of petrochemicals. The company also has investments in the renewable energy sector (BP, 2010). The business model of BP has been lately focusing on deep-water offshore drilling. Deep water oil drilling takes place at ocean depths of 1000 feet or more (Power, Stephen, Gold, Russell,King, Neil Jr, 2010). The deep water drilling efforts of BP received a severe set back after the oil spill at the Macondo deep water well in the Gulf of Mexico. 2.3 Organizational processes of BP: The mission statement of BP says that BP helps the world meet its growing need for heat, light and mobility. It strives to do so by producing energy that is affordable, secure and doesn’t damage the environment (BP,2010). The fact is that among its peers, BP has the worst environmental and safety record. The Organizational culture of BP has been one that focuses more on shareholder wealth creation rather than on stakeholder value creation. For the purposes of management BP is divided into various country units. Each of the country units are headed by the country heads. The country heads report directly to the BP headquarters in London. The management team of the company is headed by the Chief Executive Officer who is accountable to the board of directors of the company which represents the interests of the shareholders of the company( BP,2010). 2.4 SWOT analysis: Strengths: The strength of BP lies in its core competency and dynamic capabilities. The company operates in every activity of the oil & petroleum value chain. It is a vertically integrated company. The company enjoys extensive geographical presence in countries around the globe. The company has operations and assets in more than 80 countries of the world. Its daily production of oil is around 3.8 million barrels. Weakness: The biggest weakness of the company comes from its egregious environmental and safety records. After the Gulf of Mexico disaster at its deep-water drill, the brand and corporate image of the company has turned negative in the minds of the consumers and regulators. Opportunities: Future opportunities may come from the presence in renewable energy sectors like that of solar. The company has an expertise in deep water drilling. If it ensures their safety ,regarding environment and operations, the company can get a competitive advantage over its competitors in exploiting deep water oil reserves. Threats: The imminent threat for the company comes from the liabilities relating to the Gulf of Mexico disaster. BP has already paid in excess of $ 20 billion as part of fulfillment of these liabilities. These liabilities are expected to rise further as the legal process unravels. The oil spill liabilities had caused Standard & Poor’s to downgrade BP’s credit rating from “A” to “AA-minus”(Standard & Poor’s, 2010). The regulatory environment in many countries has turned hostile after the Gulf of Mexico oil spill. The stock prices of BP also took a severe beating. It will be a big challenge for BP to restore the confidence of its various stakeholders (Robertson, Campbell; Krauss, Clifford , 2010). 2.5 Strategic Capabilities of BP: The strategic capabilities of BP are severely hampered by its inability to implement processes that can enhance safety and check environmental hazards. This is probably the only – but the biggest- chink in the strategic armor of BP. The company has dynamic capabilities in every aspect of the oil & petroleum value chain. It has assets that are spread around the globe. These dynamic capabilities and strategic assets give it great strategic capabilities except on the safety and the environmental front. Another disaster like the Gulf of Mexico and the company will be definitely pushed over the brink of extinction (Economist,2010). . 3. Corporate Responsibility, sustainable development and ethical issues confronting BP: British petroleum, a few years ago, changed its name to BP, and launched a hugely successful image-building campaign. It labeled itself as “Beyond Petroleum”. The campaign showed BP as a green activist with a new logo of a green and yellow sun (S.A.Aiyar, 2010). In its corporate social responsibility promotional materials BP promoted itself as one of the biggest producers of clean and green energy sources like solar panel and wind power. However, the reality was that the renewable energy businesses accounted for only 3% of the total revenues of BP. The PR week rewarded BP with two “Campaign of the Year” awards for this campaign. The American Marketing Association was also not far behind. It rewarded BP with a gold “Effie” award (American Marketing Association, 2010). BP also won laurels from the Fortune Magazine. It topped the Fortune list of the most socially responsible companies in the years 2004, 2005 and 2007. Its Chinese subsidiary, BP China, won the award for the “Most Responsible Corporate Enterprise”, from China News weekly and China Red Cross Foundation. While BP was sweeping all these corporate social responsibility awards , Greenpeace was going hoarse shouting that it was nothing but “greenwashing” by the company. And “greenwashing” it was. Just take a look at the egregious, outrageous and horrendous corporate social responsibility record of BP (Greenpeace, 2010). In the year 2005, an oil refinery in Texas that belonged to BP exploded. This explosion killed 15 and injured another 200. Cause of the explosion was adjudged to be poor maintenance by BP. In the year 2007, a BP oil pipeline leaked. This leakage seeped more than 200,000 gallons of crude oil in the environmentally pristine wilderness of Alaska. Cause of the leakage was adjudged to be corrosion because of poor maintenance and neglect by BP (Douglas, Will ,2010). A year later a fine of $ 300 million was imposed on BP when the allegations relating to manipulation of the prices of propane gas were found to be true. The company got away by paying the $ 300 million fine (Borenstein, Seth ,2010). In a report of Washington based institution , Center for Public Integrity, it was found that during the period of 2007-10, BP refineries in Ohio and Texas were found to have 760 egregious, willful safety violations (Center for Public Integrity,2010). The same report found that rivals of BP had extremely less safety violations in comparison to BP. Sunoco and ConocoPhillips had only eight such violations, Citgo had two and Exxon Mobil had only one (Center for public integrity,2010). There should therefore be no surprise that one of the worst environmental disasters in history- the Gulf of Mexico oil spill- happened at one of the deep sea wells of the socially irresponsible company BP (Borenstein, Seth ,2010). 3.1 Recommendations on How BP can manage its stakeholder relations and expectations: BP has failed in its ethical responsibility. It has used corporate social responsibility as nothing more than a PR tool. The company has only focused on creating value for the shareholders and has complete ignored the interests of the other stakeholders (Douglas, Will 2010). This has cost the company dearly. It is recommended that, if it wants to sustain itself, BP should focus on stakeholder value creation. Only then will it be able to create sustainable wealth for the shareholders also in the long run. The Gulf of Mexico disaster destroyed nearly half the wealth of the shareholders of BP (Borenstein, Seth ,2010). Source: (www.googlefinance.com) The stakeholder value maximization at BP should focus on balancing the interests of the following key stakeholders of the company: i) Community ( the environment). ii) Customers. iii) Employees. iv) Shareholders & investors. v) Suppliers. vi) State. Corporate Social responsibility is not a PR tool (Sun, William (2010)). Corporate social responsibility means observing highest standards in the core business operations of the company. It means observing highest standards in dealing with the stakeholders and the communities in which the corporation operates( S.A.Aiyar, 2001). The immediate objective of BP should be to evolve into such a socially responsible company. 4. Recommendations on Strategies: 4.1 Corporate level strategy: The corporate level strategy of BP should focus on having all kinds of assets. It should not concentrate only on deep-water assets. The asset portfolio of the company should be diversified. It should have onshore assets, off-shore assets, natural gas assets, shale gas assets etc (Robertson, Campbell; Krauss, Clifford ,2010) . The corporate level strategy should continue with the initiatives in the renewable energy sectors like solar and wind power. These are the sectors where a lot of future growth is bound to happen. Such a diversification will also decrease the risk of BP and improve its battered brand image. 4.2Business level strategy: The business level strategy of BP should combine its cost leadership with product or process leadership. The product or process leadership can be achieved by having the most sophisticated processes in place. The business level strategy should focus on improving the egregious safety and environmental record of BP. It should absolutely ensure that disasters like the Gulf of Mexico one are not repeated. The business level strategy should stop cutting corners at the cost of environmental safety. Adequate safety processes should be put in place to prevent future oil spills. 4.3Functional level strategy: The marketing strategy of the company should focus on improving the battered brand image of BP in the minds of the consumers and other stakeholders. The corporate and brand image of the company have become unfavorable after the Gulf of Mexico disaster (Robertson, Campbell; Krauss, Clifford ,2010) 4.4 Network level strategy: The network level strategy of BP at this juncture should be one of cooperation and not of competition. BP should also pursue inorganic growth through mergers with smaller firms in the industry. Recently it bought a stake in the reserves of Reliance industries of India. Such a cooperative network level strategy will be suitable for the company (BP,2011). 5. Conclusion: The recommendations made by me are justified on the grounds of the present state of BP. The company still has to recover from the Gulf of Mexico disaster. It had become an acquisition target itself after its shares were battered in the wake of the oil spill in Gulf of Mexico. Every aspect of its strategy-from corporate to business, functional and operational- should work in tandem to bring the company out of the mires of this disaster. The oil & petroleum industry continues to be a very profitable industry because of the economic growth in the developing countries like Brazil, Russia, India and China. Another reason for its profitability lies in the lack of substitutes that can majorly replace its usage. But this may not be the scenario in future, when the production of alternative, cleaner fuels will become cheaper and will become a viable substitute for oil & petroleum. Till then the industry will continue to have its heydays. References: S.A.Aiyar, 2001, CSR can cloak irresponsibility, Times of India. 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