BP’s COMPETITIVE STRATEGY: LEADERSHIP AT WHAT COST?

By Feso Bright

2nd article in  a 3-part series on BP. 

Competitive outcomes and processes

Businesses exist for a variety of reasons; some exist as profit-making concerns while some are non-profit making or not-for-profit concerns (Needle, 2009, p. 2). The corporate culture, corporate governance, risk management practices and stakeholder relationships of BP will be driven by its corporate strategy, which in turn is influenced by the outcomes and processes desired by the management of the company.

The Whittington Matrix

The Whittington matrix encapsulates the various theories of action (Argyris, 1977, cited in Whittington, 1993, p. 10) on what processes and outcomes firms do pursue, in order to achieve competitive advantage; these are the classical, evolutionary, processual and systemic perspectives on strategy (Whittington, 1993, pp. 2,3).
The classical perspective holds the view that profitability is the desirable outcome of strategy while rational planning is the means to achieve it (Whittington, 1993, p. 11). According to Alfred Sloan (1963: 49) “the strategic aim of a business is to earn a return on capital, and if in any particular case the return in the long run is not satisfactory, the deficiency should be corrected or the activity abandoned”. This predominantly Anglo-Saxon (Whittington, 1993, p. 30) perspective also promotes the idea of a rational economic man (Hollis and Nell, 1975, cited in Whittington, 1993, p. 16) who is very prudent and maximizes his economic advantage at all times (Whittington, 1993, p. 16).

The evolutionary perspective views profit maximization as a desirable outcome however; rational planning is futile because markets and not managers dictate strategy; this is what Alchian (1950, cited in Whittington, 1993, p. 18) terms the environmental fit based on natural selection. Strategy is viewed as expensive and competitive advantage is derived from focusing on efficiency and a focus on costs for short term survival (Whittington, 1993, p. 20). The processual perspective focuses on more pluralistic outcomes than profit-maximization and does not promote strategy making as the rational economic man is limited in his rationality (Whittington, 1993, pp. 22,23). A process of internal bargaining between groups of individuals within the firm determines its goals; furthermore, strategy is about trial and error as well as satisficing (Whittington, 1993, pp. 23,24).The firm thus relies on its resources for competitive advantage (Grant, 1991b, cited in Whittington, 1993, p. 26).

The systemic perspective holds that rational planning and other objectives allow firms to become effective within their environments (Whittington, 1993, p. 28); business is seen as socially embedded (Granovetter, 1985, cited in Whittington, 1993, p.28). Thus different economic systems result in different outcomes pursued by a firm. It is  entirely possible that desired outcomes in Anglo-Saxon environments such as the United States and the United Kingdom will be different from those of business in Asian market contexts (Whittington, 1993, p. 32). As such, based on its stakeholders a multinational firm is able to attain a local focus (Whittington, 1993, p. 30). The four perspectives provide the building blocks for any corporate strategy; sometimes they may overlap however the broad direction of each perspective enables a distillation of each company’s corporate strategy thinking.

In the case of BP, it is possible to infer that its corporate strategy is influenced by a strong focus on rational planning and profit maximization; this is because BP originates from and is headquartered in an Anglo-Saxon style economy (Whittington, 1993, p. 30) and is heavily influenced by the need for shareholder value maximization (profits). However, the company is also cognisant of its wide range of stakeholders- as it is a global transnational- as well as its resources and areas of competitive advantage. Thus, some influence from the systemic perspective and the resource based aspect of the processual perspective overlap with its predominantly classical views.

What, then, is BP good at?

According to its erstwhile CEO Tony Hayward (British Petroleum, 2010), “our direction is clear: the unrelenting pursuit of competitive leadership in respect of cash costs, capital efficiency and margin quality”. Consistent with this objective, the company has been able to establish a 5-year industry leadership with the lowest finding and development costs of $12 per boe (barrel of oil equivalent) as at 2009 (British Petroleum, 2010); as figure 7

Figure 7: BP Production costs $/boe

Source: (British Petroleum, 2010)

shows, the rate of production costs have significantly reduced since 2007. Also the company is able to pay out consistently higher dividends despite the global economic downturn from 2007- as shown in figure 8. Furthermore, as figure 9 suggests, BP has a core competency in exploration and production (E & P) with a more than 90% of the company’s RCPBIT (Replacement Cost Profit Before Interest & Taxation) sourced from that business category. In order to achieve these results BP must effectively manage its stakeholders as well as its results.

Figure 8: BP dividends per ordinary share

Source: (British Petroleum, 2010)

Figure 9: BP Replacement Cost Profit Before Interest and Taxation (RCPBIT)

Source: (British Petroleum, 2010)

Stakeholder Management and Resource based view

BP has been able to fashion out a balance (not necessarily effective) of pro-active (P), reactive (R) and accommodative strategies (A) which may have contributed to its current competitive leadership position; these strategies evolve and compete with the strategies of other competitors in order to deliver successful outcomes (Fuller, 2010); figure 10 depicts stakeholders in a strategic domain; with various strategic options within the competitive space. However, not all stakeholders may be satisfied (Hitt, Freeman, & Harrison, 2005, p. 195).

Figure 10: A taxonomy for categorizing business level strategies

Source: (Fuller, 2010, p. 8)

Others will adopt the view that the competitive leadership achieved by BP is as a result of leveraging on its skills and resources (Fuller, 2010, p. 8). This resource based view (Hitt, Freeman, & Harrison, 2005, p. 131) focuses on corporate learning and the ability of the firm to channel this learning into resources and capabilities which are the difference between successful outcomes and failure (Prahalad & Hamel, 1990, p. 82). The resources BP has at its disposal will include the oil in the ground, its money in the bank and its people (Cavenagh, 2005); with its corporate strategy aimed at developing core competencies around its efficiencies on costs and performance, skills and capabilities of its people as well as safety and compliance (British Petroleum, 2009, p. 14).

Porter’s generic strategies

In order to secure competitive advantage it may be practical for a business to consider cost leadership, differentiation and a focus on either cost leadership or differentiation within a limited scope (Porter, 1985, cited in Wit & Meyer, 2004, p. 262). These generic strategies, when employed successfully, will reflect the ability of the firm to control the Porter’s 5 forces better than its competition (Porter, 1985, cited in Wit & Meyer, 2004, p. 262). Cost leadership focuses on being the lowest cost, no-frills leader in the market; differentiation leadership involves being unique in the market place and being able to charge a premium while cost or differentiation focus entails being the cost leader or the unique firm withing a niche or smaller scope market (Porter, 1985, cited in Wit & Meyer, 2004, pp. 263,264).

One may be tempted to suggest that BP has been more inclined to follow the path of cost leadership; as earlier mentioned it is an industry leader in finding and development costs (British Petroleum, 2010); however, there may be evidence to suggest that BP is aggressively pursuing a differentiation strategy. The Beyond Petroleum slogan embodies a strategic and determined effort to “reinvent the energy business” market space (Browne, 2002); the company has endeavoured to redefine its market space by laying claim to activities beyond oil and gas such as alternative energy and a lower carbon future (British Petroleum, 2010). However, the pursuit of more than one generic stategy could be risky as this usually involves inconsistent actions by an already successful firm; a compromise which may have negative consequences for its generic strategy (Porter, 1985, cited in Wit & Meyer, 2004, p. 265). A firm may thus become ‘stuck in the middle’ (Porter, 1985, cited in Wit & Meyer, 2004, p. 265); is BP stuck in the middle and at what cost is the company prepared to sustain competitive advantage?

Onset of BP’s major corporate challenges: Texas Refinery and Lord Browne

In 2005, an explosion at BP’s Texas refinery killed 15 people and injured scores. Various panels of investigation were set up to analyze the safety measures and risk management of the plant; the Baker report (2007), U.S. (United States) Chemical Safety and Hazard Investigation Board (CSHIB) report (2007) both indicted the safety culture and risk management practices of BP as complacent and tolerating serious deviations from safe operating practices (Baker Panel Report, 2007, p. 13) while maintaining an undue focus on cost reduction and production efficiency without commensurate investment (U.S. Chemical Safety and Hazard Investigation Board, 2007, p. 20).

NUTSHELL: 

In part 1 of this series, I laid a background to the competitive environment of the European oil and Gas industry with a view to establishing a sense of the competitive environment forces which BP is faced with on a day to day basis. This part has focused on a theoretical exploration of the rationale behind the competitive behaviour of BP in its drive for competitive advantage or market leadership and the attendant strategic implications.

As observed more recently, BP has experienced yet another accident in the form of the Gulf of Mexico deepwater horizon disaster and has had to deal with other accidents along the way (Mouawad, 2010). The leadership of BP has also not been without its challenges as well. Lord Browne had to resign his appointment, as earlier mentioned, due to a scandal which had raised a few questions about the leadership and corporate governance of the company. More recently Tony Hayward (who has since been sacked) has been criticised for leading BP into its current situation with the deepwater horizon rig and for a dismal handling of the crisis after the accident (Goldenberg, 2010). As mentioned earlier in this study, companies which are unable to adapt to their competitive environments risk demise (Meyer, 2003).

The concluding part of this series on BP (Part 3) will examine the company's corporate governance structures, corporate culture, risk managment practices and reveals that BP's recent actions may indeed have put its corporate existence at risk.  Kindly bookmark this blog; that article will be very interesting.