CNOOC & The Three Wicked Problems

Strategic Imperatives for International Collaboration by the Chinese National Offshore Oil Corporation

 By Deji Awodiji

The importance of crude oil to modern day society became even more prominent after the First World War as it was arguably a major catalyst which also influenced victory of the allied forces over Germany (Yergin 2008).Today crude oil is indispensable to civilization as most forms of energy are driven by its by-products (Yergin 2008). The aim of this article is to examine the strategic issues which arose from CNOOC’s  (China National Offshore Oil Corporation) quest for the attainment of self sufficiency in the oil industry versus the need for international collaboration due to resource gaps; these paradoxes shall be examined with due regard to the influence of the environmental and cultural context.

According to De wit and Meyer (2008) strategic issues are wicked problems with three dimensions, an attempt will be made to highlight these issues, their linkages and  potential strategic implications for CNOOC.

ORGANIZATIONAL PURPOSE AND CHINESE CULTURE

Strategy formation in itself is not an end but a means for achieving particular organizational objectives (De wit and Meyer 2008), a review of literature indicates that organizations are established for a variety of objectives such as profit maximization, maximizing shareholders’ wealth or even social objectives (Sloman and Hinde 2007). Strategy is basically employed to ensure that organizational purpose is realized.

China’s offshore oil and gas industry suffered a huge set back between 1967 and 1978 largely due to resource gaps, however this setback may also be attributed to the cultural revolution which occurred during the same time frame as emphasis was placed on self reliance and a complete divergence from western ideologies (Fletcher and Fang 2006;Pearson 1991). Huge capital requirements and offshore exploration risk have led to the entrenchment of the network level paradox of both competition and collaboration among the major players in the international oil industry (Tordo, Johnston and Johnston 2010). It can thus be inferred that China suffered huge financial loses between 1967 and 1978. It was against the back drop of this coupled with the resource gaps and the strategic importance of oil as a resource which led to the opening up of the Chinese economy and the establishment of CNOOC in 1982 as a monopoly in offshore exploration and production but with the option of foreign cooperation. The most powerful stakeholder in CNOOC was the Chinese government which established the company and also owned the resources which were to be exploited. In China the factors of production are controlled by the state for the common good of the people i.e. socialism thus it can also be assumed that underlying organisational purpose of CNOOC was to fulfil social objectives in line with Chinese culture and societal values (Fang et al 2008; Pearson 1991).

Chinese culture was influenced heavily by the ideologies of socialism and confucianism which encouraged collectivism, loyalty, harmony and a long term orientation. According to research carried out by Hofstede (2001) the Chinese people are long term oriented with a high power distance, low uncertainty avoidance and  low  individualism. Strategic thinking is heavily influenced by cultural orientations (De wit and Meyer 2008)

STRATEGIC THINKING

Hofstede (2001) views culture as the collective programming of the mind which distinguishes one set of people from another; this suggests a strong link between culture and strategic thinking. The bureaucratic and central power figure nature of CNOOC along with the Chinese culture which imbibes collectivism over individualism and high uncertainty avoidance are unlikely to have encouraged creative strategic thinking. The implication of these factors is a tendency to suppress non conformist ideas and behaviours while laying down rules for everyone to follow (Hofstede 2001). Pointers to a suggested lack of generative reasoning perspective from this analysis of CNOOC are apparent in the use of phrases (by Hofstede) such as- outdated mindset and narrow minded people stuck in their tracks- to describe employees .The weakness with the largely rational reasoning perspective to strategic thinking of CNOOC is that the employees’ view of the world ie cognitive maps became cast in stone (fixed), thus making the firm less adaptable to strategic changes (Sminia 2009). Zhong yiming identified the need for a balance between the rational and generative perspective- in 1995- and incorporated encouragement of innovation and strength of internal management into his strategy. The attempt to induce innovation in CNOOC would have created a tension between their (employees’) need for a sense of security and community and the need to respond swiftly to changes in the environment (De wit and Meyer 2008).

STRATEGIC FORMATION

According to De wit and Meyer (2008) rational reasoning will usually be linked with strategic planning, it appears that CNOOC adopted more of a deliberate than emergent approach to strategic formation and this is consistent with the Chinese culture of long term orientation . Thus strategic planning was employed in the creation of three sets of strategies between 1982 and 1998. This deliberate approach to strategy formation may have been suitable due to the controlled nature of the Chinese economy and the monopoly status of CNOOC between 1982 and 1998. Mintzberg (1994) argues in support of an incrementalist approach to strategy formation while recognizing that strategic planning should play a supporting role (Mintzberg 1994). A pointer to an emergent approach by CNOOC is the switch from a tenure based employment system to a performance and reward driven contractual system which was a clear departure from Chinese culture at the time. Perhaps this was in response to the problem of overstaffing and the bureaucratic organizational culture. These changes would have a profound impact on the psychological contract which was dominant at the time thus triggering resistance to change (Torrington, Hall and Taylor). A clear departure from the norm was required in order achieve CNOOC’s ambition of international competitive advantage (Burnes 2004)

STRATEGIC CHANGE

Changing people’s cognitive rigidities is a complex process which requires learning and unlearning (De wit and Meyer 2008; Swan 1997); in other words, to get people to think and act differently from defined boundaries of culture and society is particularly difficult in socialist countries like China (Fang et al 2008).

The major drivers of change were are a complex interplay between the influence and power of the key stakeholders in CNOOC i.e. the Chinese government, the impact of the external environment such as the wave of mergers and acquisitions among the seven sisters led by BP in 1998 and the resource (Capital, skilled man power and modern technology) gaps (Fang et al 2008;Yergin 1992,Pearson 1992). In reaction to these triggers of change the Chinese government induced the restructuring of the Chinese petroleum industry thus spurring the corporate transformation of CNOOC from an undiversified monopoly in a planned economy to an integrated energy company operating in a competitive and more liberalised environment in 1999.This revolutionary change in CNOOC was a clear departure from business as usual and perhaps also signalled the change to a more profit driven organization rather than one with largely social objectives(Burnes 2004). A strategic option overlooked by the Chinese government before this process was the merger of CNOOC with CNPC (Chinese National Petroleum Corporation) and Sinopec who already had competencies in the mid stream and downstream (Stacey 2004)- perhaps the poor financial condition of CNOOC at the time was a hindrance to this.

Change in corporate culture and thinking is a complex process and there is no clear consensus in literature about the superiority of the revolutionary and evolutionary approach to strategic change (Burnes 2004).Wei embraced this paradox by identifying both the need for revolutionary change in the establishment of a new entity free of historical burden and the acceleration of corporate restructuring while consolidating on core assets such as oil and gas production while divesting bad assets (De wit and Meyer 2008). This approach was observed in this instance in order to change the outdated mindset of employees and to create a new market driven culture in CNOOC as its very existence was threatened by the old organisational culture(De wit and Meyer 2008;Swan 1997). Wei however also realised a change in a planned economy is a slow rigorous task (Hofstede 2001), thus he also adopted an evolutionary approach to change  evidenced by a gradual  approach to international expansion; this cautious approach may also be due to the lessons learnt from the first failed attempt at international expansion in 1994.

STRATEGIC ORIENTATION AND DEVELOPMENT

The major schools of thought on strategic orientation are the market driven approach  and the Resource based view(RBV) . It may be argued however that at the inception of CNOOC none of these views was required as competitive advantage was not an objective of a monopoly operating in a planned economy (Lado et al 2006). However there are early indications of traces of the RBV in that CNOOC gained self sufficiency in offshore exploration after only three years of operation highlighted by a clear improvement in human capital which had become a backbone of the firm, by 1989 CNOOC had acquired core capabilities in independent functioning. It can be inferred over time that the paradox of self sufficiency and cooperation along with interference from government caused CNOOC to lose most its early competitive edge which was based on core capabilities achieved up to 1989.This culminated in the failure of its international expansion attempt in 1994. It can also be argued that the only unique and difficult to imitate  core competencies in the oil industry are technological capabilities and highly skilled manpower (Lado et al 2006;Yergin 2008). As at 1994 CNOOC was weak in both areas, this may be due to a lack of cooperation between 1989 and 1994 along with dwindling investments in research thus implying an unsuccessful implementation of the five point strategy of CNOOC .The fact that under-nourishment was still a problem in 1999 is also a pointer to the lack of effectiveness of the ninth five–year plan. 

An appraisal of  both strategic plans reveals that they had lofty expansion and integration plans but were flawed by a silence on sourcing of external financing which was particularly fundamental for CNOOC since the government funding was very negligible. Perhaps the two strategic plans were unrealistic in the light of CNOOC’s capabilities and constraints at the time or maybe government meddling and social objectives were preventing CNOOC from focusing on its core business (Pearson 1991).  Wei adopted a more market driven orientation of strategy perhaps due to his wealth of experience and in-depth knowledge of the company. Wei’s six point strategy took into account major structural issues of CNOOC including bureaucratic culture, narrow mindedness and poor financial health while adopting a seemingly selective approach to strategy implementation (De wit and Meyer 2008). Wei’s strategy had an urgency about it with clear indications of both short term and long term goals and thus has potential for success largely because Wei has a clear understanding of the core capabilities and weaknesses of CNOOC, the influence of stakeholders and the impact of culture in relation to the dictates of the external environment (De wit and Meyer 2008). Wei’s strategy has some elements of an outside-in perspective; an indication of this is the objective to make CNOOC an international integrated competitive energy company; this objective was in compliance with current market trends of integration especially amongst the seven sisters which started in 1998( De wit and Meyer 2008).On the other hand Wie’s strategy will  require the rapid training of human capital in order to develop relevant skills required immediately and in the near future. These efforts would need to be complemented by the cultural reorientation which Wei has already started (Torrington, Hall and Taylor 2006). Some employees may also need to be retrenched due to current overstaffing and inability to be trained; this will lead to a resistance to change due to high uncertainty avoidance of the Chinese people (Burnes 2004).

Even though diversification is seen as a potential mitigant to oil price volatility the restructuring of CNOOC will also pose challenges for supply chain management as the corporation is inexperienced in the downstream and midstream; capabilities will have to be developed quickly along these lines for successful implementation of Wei’s strategy(Stacey 2004). Related to this is the management structure of the new CNOOC; there will be tension between central control and planning and the need for a flatter, more generative structure among business units in order to respond swiftly to competition(Stacey 2004).

 The fact that the government is still a stakeholder in CNOOC will create tensions between public interests versus private investment, as the aim of the government is social welfare- while avoiding the infiltration of foreign cultures and spiritual pollution but at the same time courting required foreign investment(Pearson 1991) .

The strength of a good strategy is in its realization, thus highlighting the importance of environmental scanning in relation to internal capabilities in order to achieve organizational purpose (De wit and Meyer 2008).

NUTSHELL

According to Deji, it is evident that there is no one size fits all approach to strategic management in CNOOC, rather one must embrace the paradoxes that occur as a result of strategic tensions and possibly find a middle ground. In the final analysis, he states that CNOOC was faced with several strategic issues centered on culture, stakeholder influence, undernourishment and change management; that this made it difficult for CNOOC to fully implement previous strategic plans, perhaps the plans were a little ambitious or unrealistic (Pearson 1991). As such, it took an experienced leader with a clear understanding of the internal and external environment to move CNOOC closer to the realization of their objectives.