British Petroleum is one of the largest oil and gas companies in the world. This paper will analyse BP’s business strategy by critically analysing its strategic position, strategic choice and success criteria. Based on the results of the analysis, recommendations will be provided. ‘Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.’(Johnson & Scholes, 2008) In other words, strategy reviews ‘what we have’, ‘which direction we are going’ and ‘how we are going to get there’. In order to understand and evaluate an organization’s future strategy, it is important to start with evaluating ‘what we have’ by analysing its strategic position which includes internal and external environmental influences on the organization, and also its capabilities. After knowing ‘what we have’, analysing strategic choice will answer the question of ‘which direction we are going’ and ‘how we are going there’.
British Petroleum Plc.
With its headquarters based in London, British Petroleum Plc.is one of the biggest oil and gas companies in the world. BP operates in over 80 countries around the world. BP Plc. has 79,700 employees as at December 31, 2010, and its sales and other operation revenues reached $297,107 million in 2010. (BP Plc, 2010) Together with six different co-brands in the world, BP’s business is exploration, production, refining, marketing, trading and distributing of energy. BP also has other renewable energy products, such as biofuels, hydrogen, solar power and wind power. Since the Gulf of Mexico accident of 2007, BP has had a new CEO, but its negative effects on the company’s business operations are still being felt today.
‘The strategic position is concerned with the impact on strategy of the external environment, the organisation’s strategic capability (resources and competences), the organisation’s goals and the organisation’s culture.’ (Johnson, Whittington & Scholes, 2011)
These refer to the influence of government policy affecting business. Political decisions of oil-producing countries can affect many vital areas for business, such as the quality of infrastructure of the economy and workforce education. Government policies on taxation and licensing impact oil industry’s day-to-day activities. Political instability hampers oil production, as well as its distribution (Colin, 2004).
These include economic growth, inflation rates, taxation changes, interest and exchange rates. Inflation follows the trend of oil prices and may provoke wage increment demands from employees, thus increasing costs. Demand for increased oil requirements is a major factor for spiked employment rates. Strong income growth may boost a country’s demand for oil. Thus, economic changes can have a great impact on the industry’s behaviour.
Changes in social trends greatly affect demand for oil as well as willingness and availability of people to work.
Advanced technologies create new products and processes in the oil industry, such as deep-water exploration of oil. BP is committed to research for the purposes of improving quality and innovation of efficient ways of oil production.
Environmental protection laws are now becoming a requirement. Climate destabilisation resulting from carbon dioxide emissions is leading to governments encouraging more sustainable forms of energy.
Carbon funds (World Bank, 2004) and emission trading (EU, 2004) from the Kyoto protocol Agreement are becoming a mandatory requirement in Europe and around the world. Companies are forced to take consumer protection and fulfil their legal obligations towards the society by the oil pollution act of 1990.
Porter’s Five Forces
Barriers of Entry
Technological focus on alternative energy industry leads to a high proprietary learning curve. Advanced technology and high level of technical knowledge is necessary. Stringent government and high capital requirements have also created a high barrier for new entrants.
Threat of Substitutes
There is a growing inclination to switch to alternative energy sources due to high cost. This leads to a high price-performance trade off between alternatives such as solar energy, nuclear energy and electricity.
Bargaining Power of Buyers
Low bargaining power and low buyer volume affect the industry greatly since market price of oil is determined by its demand. The day-to-day use of products and a high switching cost contribute to demand for oil.
Bargaining Power of Suppliers
BP is supplied by countries with oil reservoirs and oil fields. These suppliers have a high bargaining power and they can choose a contractor. The concentration of alternative energy suppliers is low and the cost of switching in the oil industry is quiet high (BP PLC, 2011).
The oil industry has high fixed costs in terms of high investments requirements in capital equipments and initial research. Rivals are diverse and very diverse in rationale to enter the industry and this may result in price wars. Due to these factors, the number of main oil industries who can explore and produce oil is limited.
This is a framework used to determine whether a resource is a source of sustainable competitive advantage to a firm. o accomplish this, BP’s qualities are;
Value - the value of the products has created consumer demand, thus maintaining sustainable competitive advantage for BP.
Rarity - BP is committed to innovation and creativity, as is its code of conduct.
Inimitability - Patent right, such that imitating the products is difficult. Example - BP Solar power refrigerator
Non-sustainability - crude oil cannot be substituted.
Value chain and value network
In order to maintain its competitive advantage, BP has made substantial investments in order to improve the industry’s infrastructure. Employees are given proper training and rewards to remain motivated. The company has also invested in research and development programmes to improve its operations. Supplying marine fuels, lubricants, LPG has also helped in maintaining sustainable competitive advantage of BP (Bamberg, 2000).
SWOT & TOWS
Based on the SWOT analysis above, some conclusions can be drawn in order to forecast the future strategy of the company. For this purpose, a SWOT/TOW matrix is important to help the company follow the available opportunities, minimize weaknesses, take advantage of its strengths and minimize market threats. The matrix is provided below.
‘Strategic choices involve the options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued.’ (Johnson, Whittington & Scholes, 2011) Based on the influences of the environmental impacts on BP and also its capabilities, BP is faced with a number of choices. Since strategic choice is referred to as the selection of direction or methods for implementation, a good strategic choices is crucial to an organization for its success in the future. However, appropriate methods should be used for putting the choice in to action. Therefore, ‘good strategic choices have to be challenging enough to keep ahead of competitors but also have to be achievable.’ (Macmillan & Tampoe, 2000).
With the help with Bowman’s Strategy Clock,
In the oil industry, there is not too much room to compete on price in two senses:
Oil markets determine the price of crude oil, and this price cannot be differentiated.
However, it is advisable for BP to focus on deep-water exploration since it is the best company in deep-water exploration.
Corporate Level – Strategy Directions
Ansoff’s Growth Matrix: 200
The Ansoff’s Growth matrix is a tool that assists businesses in deciding on strategies for their products and market growth. This matrix suggests that the attempts of a business to grow depend on whether its products are new or old in the new or existing markets. The output of this matrix is a number of strategies that give the direction for the business strategy.
This means that the company focuses on selling existing products to existing markets. In the case of BP, continuing with deep-water exploration is recommended. Based on the analysis of the company in the previous sections, continuing with the application of this marketing strategy is recommended.
This means that the company focuses on selling its existing products in new markets. With its competitive advantage in deep water exploration, trying to enter other countries market can work well for BP. Expanding CNG (compressed natural gas) markets to Russia, Africa and Europe can help BP gain a good market share.
This means introducing new products into existing markets. BP can introduce biofuel and other products in the US and other markets.
Diversification is the growth strategy where a business takes its new products to new markets. This strategy could be inherently risky, and such that requires careful assessment of the risks. Use of diversification strategy by BP in investing in sources of renewable and alternative energy will help the company regain losses incurred in the recent oil spills.
BP needs to manage its SBU well using the right strategy to maintain the high profits. This is because the company has a well-established market share in different countries and the room for growth is small since it is a mature market.
The company is well-established in most countries where it operates. However, there is still room for growth since it is the fourth largest oil company in terms of revenue.
BP is investing in sustainable and renewable energy resources because of expected growth of these markets. Its CNG products, which can be replaced by petrol in the developed countries, is another question mark.
Electrifying railroads in third world countries where BP is operating can affect BP’s business greatly. Diesel market’s growth is relatively low and its small market share is likely to vanish soon. Therefore, BP can continue with the present SBU, since it does not have any impact on other SBUs.
British Petroleum, one of the major players in the oil world, shows successful trends in different countries. BP has a rapidly growing market and possesses a strong and competitive position. Based on this, it can use such strategies as market penetration, market development, product development, forward integration, horizontal integration, backward integration and related diversification.
Focusing on green advertising campaigns Try to create a better image (social factor) by providing consumer protection and compensation Environmental conservation (environmental factors) Increasing efficiency in operational management and product chain Expanding business prospects to gain competitive advantage in the industry
BP operates in a very competitive industry that is closely regulated by government policies and international regulations. Following this analysis, we can conclude that it has a strong internal base, and the Gulf of Mexico accident helped the company develop their risk management strategies. BP also has an advantage of avoiding and overcoming their threats and weaknesses to explore new types of resources and expand in new markets, creating new opportunities in the long term.