In Particularly the main relevant Business challenges faced by BP right now are:
BP has extensive offshore exploration operations in the North Sea whose reserve potential is declining significantly. The saturation of reserves in this region is a key challenge for BP; especially as newer exploration activity in other parts of the world is far more localized and entails significantly higher investments.
With the increase in global warming, environmental regulations have become more rigid in recent years. The Kyoto protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5.2% on an annual average during 2008 to 2012, as compared to the emissions level in 1990. BP already has a weak record in environmental matters and a further introduction of these stringent regulations may impose new liabilities or increase operating expenses, either of which could result in a material decline in profitability.
BP has exploration and production interests in 29 countries. Many of these regions, including Africa, the Middle East, and South America, are prone to political instability, particularly Middle East which controls 61% percent of world’s total oil reserves. Much of the geo-political risks are outside its control, failure to anticipate some of these events or the inability to mitigate risks in these regions could seriously impair its operations and disrupt the flow of output.
SWOT ANALYSIS
SWOT analysis describes the factors that are helpful or harmful to the company and internal and external. Strengths and weaknesses are internal where as opportunities and threats are external.
SWOT analysis of BP is described in the following headings
Strengths
- BP has established a robust brand image even after the incidents in U.S and Alaska. Brands like BP, AM/PM, Aral, ARCO and Castrol are well established brands.
- BP has a strong market position in production in natural gas in the U.K based on volume, and in U.S based on sales volume. It also enjoys a strong market share in the aromatics and acetyls business.
- Air BP is one of the world’s largest suppliers of fuels to the aviation Businesses, supplying aviation fuel to the airline, military, and general aviation sectors. It supplies customers in approximately 80 countries and has annual marketing sales of 27.4 billion liters.
- BP is one of six super major vertically integrated companies who control most of the oil resources and almost all of refining and marketing business. Vertically integrated operations provide control over the entire value chain, which enable the company to produce products, which are used at different stages in the entire value chain. It gives competitive advantage.
- BP has a presence in over 100 countries across all major energy markets like US, Middle East, and China, among others. Over a period of time the company has developed diverse revenue streams and is not overly dependent on any one market. The company has a large consumer base and widespread source of revenues. This helps in reducing the impact of market volatility and provides economic stability.
Weaknesses
- Poor management led to incidents in Texas and Alaska environment disaster. Such failures in operations should be addressed, otherwise it can lead to overall going concern problem.
- BP’s crude oil and natural gas production have declined over the years. Its crude oil production declined from 2,562 thousand barrels per day (mb/d) in 2005 to 2,414 mb/d in 2007, representing a decline of 5.8%. However its decline is lower than the industry average decline and lowers than most of its peers. This decline, even some of it due to natural causes are major cause of BP’s poor BP’s operating and financial performance.
- BP fluctuating cash from operations (which has decreased by 12 %) would impair the liquidity position of the company thereby leading to unsure future expansion plans.
Opportunities
- The WTI crude oil prices have been increasing at an alarming rate over the years. Supply uncertainties in several oil exporting regions, coupled with increasing demand growth in the emerging market countries, continued to pressure oil markets. The real picture of strong demand and tight supply is expected to continue. WTI prices, which averaged $72 per barrel in 2007, are projected to average $122 per barrel in 2008 and $126 per barrel in 2009. Oil is BP’s core competency. BP derives most of its revenues from the sale of oil and its derivatives. A increase in oil prices could enhance BP’s top line growth.
- The natural gas demand, driven by the demand for LNG and high fuel prices, is expected to grow significantly. Global consumption of natural gas is projected to increase by nearly 70% between 2002 and 2025, to reach 156 trillion cubic feet in 2025. BP has substantial operations in the North American region and strong upstream positions around the Gulf of Mexico, the midcontinent, the Rockies, Canada and Trinidad & Tobago, North Sea, the Caspian and North Africa. It has significant gas sales via pipeline and LNG in Asia. With a strong market position and company’s focus on natural gas and LPG, it is well positioned to tap into opportunities in the growing LNG market worldwide.
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The demand for refined petroleum products and petrochemicals in China is expected to rise sharply in the coming decades. China, despite substantial additions to refining capacity over the next three decades, is expected to remain a net importer of refined products in 2030.BP already has a manufacturing base in China, and is well positioned to tap into opportunities in the growing petrochemicals market especially in polyethylene, propylene and ethylene.
Threats
- BP has extensive offshore exploration operations in the North Sea whose reserve potential is declining significantly. The saturation of reserves in this region is a key challenge for BP; especially as newer exploration activity in other parts of the world is far more localized and entails significantly higher investments.
- With the increase in global warming, environmental regulations have become more rigid in recent years. The Kyoto protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5.2% on an annual average during 2008 to 2012, as compared to the emissions level in 1990. BP already has a weak record in environmental matters and a further introduction of these stringent regulations may impose new liabilities or increase operating expenses, either of which could result in a material decline in profitability.
- BP has exploration and production interests in 29 countries. Many of these regions, including Africa, the Middle East, and South America, are prone to political instability, particularly Middle East which controls 61% percent of world’s total oil reserves. Much of the geo-political risks are outside its control, failure to anticipate some of these events or the inability to mitigate risks in these regions could seriously impair its operations and disrupt the flow of output.
2. Consider the implications and impact of different ways of tackling these
Challenges and recommend the most appropriate routes to meet strategic needs.
For tackling the challenges currently facing BP, it is imperative to review the strategic need of BP organization as a whole.
“Restoring revenues and reducing complexity The unsatisfactory financial performance was primarily a result of two things: missing revenues, principally from delayed projects and poor reliability in some of our US refineries; and excessive complexity in the way we manage the business, which has added to costs.” Tony Hayward, Feb 22, 2008, CEO Review on Annual Report.
BP has various stakeholders, and most important and primary are the shareholders who are primarily concerned about the financial health of the company. BP strategy hence primarily is focused on making more profits with more cost cutting strategy. However BP has also to take in other stakeholders as Government, Environment and employees in its strategy formulation for a balanced view.
Hence various ways to tackle the challenges faced by BP and the implications are:
Technology and Re-Organization of its Business Structure
BP should invest more in improving its technology in oil technology, particularly from those producing fields whose reserves are saturating. On average, using current techniques, about two-thirds of the oil in an oil field gets left behind, says Richard Sears, a vice president at Shell International Exploration and Production.
Such improved technology will reduce cost and should incorporate decommissioning the saturated fields as well. More investment should be made on research and development in the oil –technology particularly in high cost technology in deep sea. However, such policy would bring redundancy in employees and should incorporate the human cost as well. Such technology should also be environment friendly such that it follows the current pollution guidelines (Kyoto Protocol) in areas that it operates.
However using such newer production technology needs more financial investment and such investment decision would require many factors to consider as making obsolete the existing technology, more depreciation costs, more dent to the Balance sheet in already existing weaker state of financial position.
BP should also try to simplify its organizational structure so that it could have greater control on its operation and as a whole on the business process. Its operation and activities are divided into many sub-activities like refining, marketing, producing, exploring, petro-chemicals, fuel aviation, chemicals, trading, transportation, etc. Its operation covers almost all part of the globe and hence it requires more investment in re-organization and disposing off un-productive assets and investing more resources in profit-making centers. Here, again the various cost should be evaluated in terms of cost-benefit analysis, and bring in all the stakeholders interest into account.
Reducing complexity would result in greater control of its operation and would have more quality management of the company.
Risk Management
BP should embed risk management culture in its operations. Much of the oil-fields its operates are prone to various risks as environment risk related to contravening local laws and other international laws as the Kyoto, there are also other natural risk as hurricane in the gulf of Mexico and North American oil-fields, political instability in oil extraction countries particularly in the middle-east and African countries. There have already been human errors as the 2005 Texas Refinery Disasters, Alaska Prudhoe Bay environment accident which significantly dented BP image and its operation throughout its North American Operation. These could have been prevented if there was a proper risk management structure has been place. BP now have to put recommendation of former US Secretary of United State James A Baker, III of safety culture in refineries which could have been avoided. Such risk management structure should be prevalent in its global operation. However such decision should take in to factor the financial cost involved and the benefit it would bring as compared to billions lost in accidents. Risk management would require identifying risk early, mitigating risk, and giving importance to those risks which would have significant impact on the company’s operation.
Alternative Source of Revenues
BP should also bank on its strength of growing demand for Gas and Petro-Chemicals market particularly in Asian Markets where there are high-margin and markets are still in early stage of growth. This would entail more strategic thinking from top level management and more shifting of resources. BP should also invest more in alternative sources of energy and other growing and stable energy sector like hydro-electric power, wind power, solar power , fuel from renewable bio-crops. This strategy would certainly require a shift away from company’s core activities, but however such actions are required for the long term survival of the company. The oil-platforms are depleting every year and soon BP would be out of business if it doesn’t find other viable products and market and it should invest more and early in such products.
Linking Financial Performance with Operational Performance
BP could also manage the challenges by managing its operational performance vis-à-vis its financial performance. These would certainly imply taking harsh decision but would certainly give favorable financial position and more investment opportunity as more capital is available. Projects with favorable financial outcomes should be accepted while that of delayed and negative outcomes should not be taken. This would imply trading future gains for present immediate results but this would be a good strategy in the current times of economic crises where only the best current productive asset are valued most.
The recommended strategy cannot be implement if the organization cannot put into practice for lack of money or skills, or that will be rejected by powerful stakeholders.(Haberberg & Rieple,2001).
The RACES framework could be applied in choosing best strategy namely:
Resources needed to implement the option must be available
It must be Acceptable to powerful internal and external stakeholders.
It must be consistent with other proposals and existing strategies.
It must be Effective in resolving the issues that it is intended to address.
Also the strategic option should contribute to the Sustainability of the organization’s competitive advantage, by contributing some element of uniqueness to its future strategy.
All of the recommended ways of tackling the challenges have their own advantages and disadvantages. However what BP should incorporate is a mix of these depending upon the situation. Price of Oil is a major factor for level of production of oil and investment in oil technology. Now there has never been a time of more fluctuation in oil price than never and BP no longer can afford to bet on the price of oil as it has always done. It should cut out those parts of business which no longer serves its strategic need and consider outsourcing its non-core activities which might save cost and focus on main activities like exploration and production and developing alternative sources of energy and penetrating other growing markets. It has a global operation and would require different approach in different situation; however risk-management should be part of all the decisions considering the dire consequences BP have already been through.
3. Plan and control the implementation of the changes required to achieve the recommended strategy.
One important criterion for implementing the recommended strategy is to plan the changes properly. Also, control of the strategy is an important element for the success of the recommended strategy.
Most strategic decisions imply major changes in direction, values and changes in organizational structure and organizational competencies. The recommended strategy is very rare and as such the plan should also incorporate all the changes that will affect.
Implementing new strategy requires a detail change management. The forces which influence an organization change would be:
Forces for Change: Forces Against the Change:
New Management Organization’s cultural Web
Declining Performance Organization Capabilities
Legislation Power Structure
Social Changes Complacency
Economy Change of New
Competition Change Fatigue
Threat of Takeover External Stakeholders
Changes to Markets Internal Stakeholders with deemed
interest.
BP Should first has a detailed change management program so that it could deal with the obstacles confronted with the changes. The recommended strategy involves change in organizational structure and as such implementing that change involves huge change in use of resources of BP.
The role of leadership is of outmost significant to properly implement the plan. The instigator of significant change is usually Chief executive or the managing director, but in organization as large and complex as BP, there ought to be many ‘change agents’ at all level and in all countries adapted locally. Such ‘champions of change are known to share many of the characteristics of ‘transformational leaders’ (Howell and Higgins, 1990).
As such for implementation, strategic development methods could be used in view of the obstacles in change and that method which would contribute most to the fulfilling of the strategic needs.
Such Strategic methods could be internal development as bringing in newer and better technology to extract more oil from oil platform. Innovation in product and exploring newer growing market like China and India.
Strategic alliances with partners in those countries where proper control could not maintained over operation and there is much uncertainty over the business like in the Middle East countries and some African countries .Such alliances would maintain the business and transferring much of the local risk to the local partners.
Merger and acquisitions could also be done in those countries where newer exploration activity is localized and entails significant higher investment costs.
To control the implementation phase, a detail information system should be in place so that the people who are in charge on the change are regularly informed about the developments and any deviation from the plan can be monitored and rectified as soon as possible.
Such information system should also have quality monitoring phase and information and feedback and ideas should be flowing in all directions.
Review system should also be place locally and at strategic level so that the change is complying with plan. Such information and review system will bring the plan near to the strategic need and would generate evidence for further action as to divestment or trade-offs between strategic development methods.
References :
Adrian Haberberg, Alison Rieple ‘The strategic management of Organisations,, FT/Prentice Hall, 2001.
BP Press Releases
BP remains bullish as it hints that the worst may be over, Dino Mahtani, Financial Times Published: October 24 2007
BP settles TNK dispute with Russian partners Carola Hoyos & Catherine Belton, Financial Times, Published: September 4 2008
BP seeks to refine its performance, Ed Crooks, Financial Times, Published: April 28 2008
BP Statistical Review of World Energy June 2008, http://www.bp.com (Accessed 17 August 2008)
BP goes back to its carbon roots, Terry Macalister, guardian Daily, Wednesday February 20 2008
BP, Shell and oil prices, Financial Times, Published: November 7 2007
Britannica Encyclopedia (2007), CD-ROM Database
Feigenbaum, A.V., (1983), “Total Quality Control”, Mc Graw-Hill, New York, NY.
Organizing for performance-How BP did it, John Roberts
http://www.gsb.stanford.edu/news/bmag/sbsm0502/feature_bp.shtml, (Accessed, January 19 , 2009)
Over a barrel, www.economist.com Nov 8th 2007
Slack Nigel, Chambers Stuart and Johnson Robert (2004), “Operations Management”, Fourth edition, Prentice Hal
Strategic Change, Colin A. Carnall,Butterworth-Heinemann, 1997
Wikipedia (2008) .BP PLC [online]
http://en.wikipedia.org/wiki/BP (Accessed January 20,2009)
