Strategic Report for British Petroleum

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Executive Summary

British Petroleum is an international oil and gas company. The operations of British Petroleum comprises of research, extraction, refining and marketing of petroleum products. The key strength of British Petroleum is the large size of the operations of the company. BP is present in over one hundred countries and employs about one hundred and fifteen thousand people. The brand equity of the company has reduced due to a major accident and allegations of human rights violations. The second weakness of the company is the presence of its exploration projects in conflict zones around the world. The major opportunity for BP is the emergence of alternative fuel segments. There is an opportunity to launch a flexible pricing policy to improve competitiveness in the consumer segments. The threats to British Petroleum lie in growing awareness regarding detrimental effects of hydrocarbon fuels. Oil prices have decreased significantly in recent years due to the shift in the global patterns of commodity prices. There is an increasing awareness about the negative environmental impact of hydrocarbon fuels on the environment. Recent technological developments have helped improve the recovery rate during the extraction process. Environment regulations on the petroleum industry have become very strict. The development of shale gas in the US has greatly contributed to the dynamic of increased supply and reduced prices. The first alternative for British Petroleum is to create a subsidiary for commercial development of renewable energy. The second strategic alternative for British Petroleum is to engage in corporate social responsibility projects to overcome negative associations with Gulf of Mexico’s explosion. The recommended strategic alternative for British Petroleum is to invest in renewable energy sources.
 
 

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Table of Contents


Table of Contents. 3
Introduction. 4
Evaluation of the Internal Environment. 4
SWOT Analysis. 4
Balanced Scorecard. 6
Evaluation of the External Environment. 7
PESTLE Analysis. 7
Porter Five Forces Model Analysis. 8
Strategic Alternatives. 10
1. Investment in Renewable Energy Sector. 10
2. Engage in Corporate Social Responsibility Endeavour. 10
Recommendation and Conclusion. 10
References. 11
 
 
 Introduction
British Petroleum is an international oil and gas company headquartered in London, United Kingdom. Founded in 1909, British Petroleum is the second-largest publicly traded company in the oil and gas sector in the world (British Petroleum, 2015). British Petroleum is chosen for this report due to the influence of the company on the global economy and the huge size of its operations. The objective of the paper is to evaluate the impact of external environmental factors on British Petroleum and to then device a strategy for the company.

Evaluation of the Internal Environment

The operations of British Petroleum comprises of research, extraction, refining and marketing of petroleum products. The extraction activities of British Petroleum for hydrocarbon fuels are distributed globally. Both off-shore and on-shore extraction is carried out by the company (British Petroleum, 2015). Two models of strategic management are used for the evaluation of the internal environment of British Petroleum; namely, SWOT Analysis and Balanced Scorecard.

SWOT Analysis

The key strength of British Petroleum is the large size of the operations of the company. After its merger with Amoco, Atlantic Richfield (Arco) and Burma Castrol, British Petroleum has become the largest company of the UK. BP is valued at about fifty billion dollars which provide the company with the financial resources to engage in new ventures (Donegan, 2010). The size of the operations of the company also imparts competitive strength to the organization due to economies of scale. BP is present in over one hundred countries and employs about one hundred and fifteen thousand people. Experienced management of British Petroleum is the strength of the company (Lowe and Harris, 2008).
The sizeable equity of the brands owned by British Petroleum is also an added strength. BP has bought recognized brand like Arco and Burma Castrol. These brands are widely known in their respective markets and command a high sale at premium prices. BP sells branded gasoline with BP Amoco brand name which has been recognized as the best-marked petroleum product for 16 consecutive years (Donegan, 2010). The brand has also received one of the three highest brand loyalty reputation awards for gasoline market in the United States. The corporate branding of the company as BP plc and the slogan "Beyond Petroleum" has created a favourable impact on the consumers (Ulph, 2010). The sources of revenues are diversified for BP, and it is not entirely dependent on the sale of fuels. With the acquisition of Castrol, BP has also become the world's leading manufacturer of lubricants (Lowe and Harris, 2008).
Strengths Weaknesses
Renowned brand names, like ARCO, Castrol, etc. Drilling operations in various conflict zones
Worldwide distribution network Unstable petroleum prices worldwide
Extensive drilling operations Public criticism on financing controversial regimes
Experienced management in the petroleum industry Oil spill tarnished the image of the brand
Large resources to invest in net projects Low production in certain oil wells
Opportunities Threats
Research in alternative fuels Growing awareness regarding detrimental effects of hydrocarbons
Exploration of new oil wells in Russia Corrosion in pipelines
Acquisition of reserves in North Sea area Competition from Shell and Chevron
Launch a flexible pricing policy to improve competitiveness Governmental restrictions on operations
The brand equity of the company has reduced due to a major accident and allegations of human rights violations (Sekeris & Bove, 2015). Since 2010, the company's image has suffered from bad publicity due to the explosion of one of its oil platforms. The explosion is considered one of the largest environmental disasters related to oil operations in history. The explosion also cost BP a record fine of $ 4.5 billion. After Deepwater Horizon oil spill, the share value of BP fell by 52% within 50 days (Sekeris & Bove, 2015). The share price went from $ 60.57 to $ 29.20 which eroded the market value of the company (Sekeris & Bove, 2015).
The second weakness of the company is the presence of its exploration projects in conflict zones around the world. BP has also been accused of serious human rights violations. These accusations also include financing of civil war, arms trafficking, destruction of livelihoods in oil-producing regions and cooperation with military regimes (Vijayakumar, 2010). The reduction in the production of several oil wells operated by the company is yet another weakness of the organization (Bamberg, 2004).
The major opportunity for BP is the emergence of alternative fuel segments. Solar energy is the most prominent segment of renewable energy. Exploration of new oil wells in Russia is another opportunity in the sector. BP has the option of acquisition of reserves in North Sea area to increase its share in the petroleum industry (Johansen and Rausand, 2015). There is an opportunity to launch a flexible pricing policy to improve competitiveness in the consumer segments. The threats to British Petroleum lie in growing awareness regarding detrimental effects of hydrocarbon fuels. The corrosion in pipelines is a threat to sustained petroleum production by the company. The competition from Shell and Chevron is getting intense while the governmental restrictions on operations of the company have intensified during the last five years (Cannizzaro and Weiner, 2015).

Balanced Scorecard

Balanced scorecard analysis of British Petroleum shows that the strongest element of the company is its financials. The company has large financial resources and excess liquidity to invest in new projects and initiatives. The internal business processes of the British Petroleum are well-defined from exploration to refining and marketing of the petroleum products. There is a high emphasis on the learning and development within the company (Bamberg, 2004). The corporate culture at BP places a high degree of emphasis on investing in improved performance. The customers of British Petroleum are sceptical towards the company’s policy towards environmental protection (Johansen and Rausand, 2015). This last element of the Balanced Scorecard identifies an important segment for British Petroleum to improve its performance.

 Evaluation of the External Environment

External environment of British Petroleum is highly volatile and presents a number of challenges. Two models of strategic management are utilized for evaluation of the external environment of the company; namely, PESTLE analysis and Porter’s Five Forces Model analysis.

PESTLE Analysis

The political factors are unfavourable for the petroleum industry. Due to political instability in several petroleum producing countries, the production of crude oil has been compromised. The economic variables are presently unfavourable for the oil industry (Cannizzaro and Weiner, 2015). Oil prices have decreased significantly in recent years due to the shift in the global patterns of commodity prices. The decrease in the oil prices has reduced margins of the petroleum industry.  The major oil producers in the industry have already announced scaling back their exploration and production operations. There is an increasing awareness about the negative environmental impact of hydrocarbon fuels on the environment (Zavaleta, Walls and Rusco, 2015). Public perception of petroleum companies has become negative following recent oil exploration accident. The technological factors are highly favourable for the industry. Recent technological developments have helped improve the recovery rate during the extraction process. These technological improvements comprise of hydraulic fracturing, acidification, cleaning sand accumulates gradually near the tubing and horizontal drilling in the deposit (Parast and Adams, 2012).
PESTLE Analysis
Political Variables Unfavourable
Economic Variables Unfavourable
Social Variables Unfavourable
Technological Variables Favourable
Legal Variables Unfavourable
Environmental Variables Unfavourable
Legal variables are unfavourable for the industry. In recent years various legal restrictions have been placed on oil exploration activities. These restrictions exploration programs have a direct impact on the productivity of the exploration activities of oil companies. Some of the legal restrictions have eliminated more than a thousand jobs at oil exploration sites (Falola and Genova, 2011). Environment regulations on the petroleum industry have become very strict. Implementation of newer exploration methods which comply with environmental regulations requires a significant financial investment and is capital intensive (Robinson, 2014). Environmental factors have had a negative impact on the petroleum industry due to the harmful impact of extraction and burning of hydrocarbon fuels on the environment (Lowe and Harris, 2008).

Porter Five Forces Model Analysis

The Porter Five Force Model analysis of the petroleum industry has revealed key insights about the changes in the external environment of the industry. The degree of competitive rivalry in the industry is very high. There are multinational companies in the industry – such as, Exxon Mobil, Shell, BP, Total, Chevron, etc. – that compete aggressively with each other (Johansen and Rausand, 2015). Almost all of these companies are vertically integrated from exploration to refining distribution. In addition, there is competition from national companies – such as Aramco (Saudi Arabia), NIOC (Iran), Cnpc (China), PDVSA (Venezuela), Petrobras (Brazil), Petronas (Indonesia), etc. – which receive support from their respective states (Johansen and Rausand, 2015).
The bargaining power of suppliers is quite high. Oil companies need approval from the states for drilling rights in the region. The states retain rights to permit applications. Often long negotiations are carried out with host countries. Suppliers of the industry also comprise of specialized companies that provide services to study the exploration area and provide provision of drilling equipment (Parast and Adams, 2012). The bargaining power of these suppliers is very low. The degree of competitive rivalry is also termed as high in the perspective of the wave of mergers and acquisitions in the industry. These mergers and acquisitions have marked the industry between the years 2003-2014 and have increased the degree of competitive rivalry in the industry. The bargaining power of customers is high due to excess supply in the industry. This phenomenon has also led to a very sharp drop in the price per barrel of oil and has created an imbalance that has reduced the profitability of the petroleum industry (Falola and Genova, 2011). The development of shale gas in the US has greatly contributed to this dynamic of increased supply and reduced prices. Consumers can choose between competing suppliers of gasoline products, and their bargaining power is high. The oil marketing companies now face liquidity problems, and falling prices requires them to be much more selective in their investments (Vinnem, 2014).
Threat of new entrants in this industry is very low. The capital investment required for setting up oil exploration projects is quite high. This creates a barrier to entry in this industry. Threat of substitute products in this industry is currently low (Parast and Adams, 2012). However, it is expected that alternative renewable energy will become feasible in coming years. The net outcome of this development will be an increased threat of substitute from renewable sources of energies. The global energy industry is undergoing a major shift. Renewable energy is anticipated to replace hydrocarbon that is likely to have serious implications for oil exploration and marketing companies (The Guardian, 2015).

Strategic Alternatives

1. Investment in Renewable Energy Sector – The first alternative for British Petroleum is to create a subsidiary for the commercial development of renewable energy. The implementation of this strategic alternative will increase the competitiveness of the company against the threat of the substation from renewable energy sources. The drawback of this strategic alternative is that the development of renewable energy will cannibalize the existing business of hydrocarbon fuels.
2. Engage in Corporate Social Responsibility Endeavour – The second strategic alternative for British Petroleum is to engage in corporate social responsibility projects to overcome negative associations with Gulf of Mexico’s explosion. The benefit of this strategic alternative is that consumers will perceive the company as a responsible corporate citizen. The drawback of this strategic alternative is that the impact on the sales will be too slow of this approach.

Recommendation and Conclusion

The recommended strategic alternative for British Petroleum is to invest in renewable energy sources. British Petroleum should incorporate a separate corporate entity for the commercial development of renewable energy sources. The creation of a separate corporate entity will minimize the apprehensions pertaining to conflict of interest of the two competing business. The reason of choosing this strategic alternative is that it will prepare the company against the threat from renewable energy sources, as well as, improve its brand image.
 

References

Bamberg, J. (2004) The History of the British Petroleum Company, Cambridge: Cambridge University Press.
Cannizzaro, A. and Weiner, R. (2015) 'Multinational investment and voluntary disclosure: Project-level evidence from the petroleum industry', Accounting, Organizations and Society, vol. 42, pp. 32-47.
Donegan, J. (2010) 'The learning organization: Lessons from British petroleum', European Management Journal, vol. 8, no. 3, pp. 302-312.
Falola, T. and Genova, A. (2011) The Politics of the Global Oil Industry: An Introduction, New Jersey: Greenwood Publishing Group.
Johansen, I. and Rausand, M. (2015) 'Barrier management in the offshore oil and gas industry', Journal of Loss Prevention in the Process Industries, vol. 34, pp. 49-55.
Lowe, E. and Harris, R. (2008) 'Taking climate change seriously: British petroleum's business strategy', Corporate Environmental Strategy, vol. 5, no. 2, pp. 22-31.
Parast, M. and Adams, S. (2012) 'Corporate social responsibility, benchmarking, and organizational performance in the petroleum industry: A quality management perspective', International Journal of Production Economics, vol. 139, no. 2, pp. 447-458.
Ulph, C. (2010) PR Analysis of British Petroleum, New York: GRIN Verlag.
Vijayakumar, H. (2010) British Petroleum Oil Spill Crisis and Aftermath, New York: GRIN Verlag.
Vinnem, J. (2014) 'Uncertainties in a risk management context in early phases of offshore petroleum field development', Journal of Loss Prevention in the Process Industries, vol. 42, pp. 367-376.
Zavaleta, A., Walls, W. and Rusco, F. (2015) 'Refining for export and the convergence of petroleum product prices', Energy Economics, vol. 47, pp. 206-214.

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