Strategic Management

1. Introduction:
In 1998-2001, the structure of the industry has changed dramatically with the emergence
of a wave of merger activity. Set at the end of 2001, BP chief executive, Lord John Browne,
looks to the future of the company. BP went merger activity in 1998, with its combination
with Amoco. Other major oil concerns quickly followed suit. Several large and dominant
firms, called supermajors, separated from the other competitors. Despite the large
number of independent firms, there are also a specialty, super major firms do not consider
them direct competitors.
Key Person: Lord Browne, BPs Group Chief Executive; John Buchanan CFO of BP

2. Analysis

Strengths Opportunities
Human Resources Technological Advances
Entry
Technology Emerging Markets Threat
Mutual Advantage (Asia/Pacific) LOW
Upgrading Refineries Oil remains main source
Infrastructure/Leadership of energy
Fuels in Europe
Improving Operational
Efficiencies
Weaknesses Threats
Supplier
Power
Rival Buyer
Recovering from large Environmental MODERAT
ry Power
LOW
debt Regulations E HIGH
Weak market outside of Substitute Products
Europe Power of OPEC
Less upstream investment Overcapacity in mature
to replace production in markets
long run Supermarkets gaining Substitute
Dependent on small no of market share s
gas fields European Economic woes MODERAT
Producing more than it Commoditization no E
needs for its operations brand equity in Europe
Tight oligopoly, mature
market, cutthroat
competition

Upstream Midstream DownStream

Finding Developing And Transportation Marketing and

Manufacturing
Exploration Extracting and Trading Sales

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Strategic Management

The upstream sector involves the processes of oil exploration4 and drilling.
Exploration of oil is conducted both on land and on the continental shelves
across the world.
The downstream sector involves refining, transporting and marketing of oil
and oil products. After the crude oil is extracted from oil wells, it is transported
to the production units through pipelines, train cars, large oil trucks, etc. At the
production unit, it is processed and refined into different products that include
liquefied petroleum gas (LPG), gasoline, jet fuel, kerosene, middle distillates
including heating oil and diesel fuel, residual fuel oil and asphalts.
Both the upstream and downstream sectors are subject to stringent operating
criteria such as environmental and safety regulations, and product
specifications
Midstream Efficient Bridges from Production to Refining
To connect the production locations of gas and oil with the refineries, the
hydrocarbons need to be transported. This is done via different transport
mechanisms, often pipelines. Such pipelines are huge projects, often running
across different countries and of high economic and political relevance to these
countries.
3. Key Challenges
Increasing government regulations; tighter emission standards; requirement for
cleaner burning gasoline and rules for underground storage tanks is having
significant impact on downstream business.
Limited capacities can be increased by increasing existing refineries, efficiency
gains and potential ban on additive is increasing costs.
Inclination towards sustainable energy sources is demanding technological
advances.
Now, BP is struggling to formulate its strategy based upon the challenges it is
facing.
4. Solution evaluation
Why did BP integrate?
(i) Higher dependencies on oil suppliers led to price fluctuations. Upstream
integration helped to control quantity and quality of oil.
(ii) Avoidance of new entrants:
Since the supply chain of oil is quite complex and requires big companies to
be vertically
integrated, it takes a great financial effort to enter the market to compete o
n a same level.
(iii) Increase of profitability:
Improvement of coordination of upstream (production) and downstream (di
stribution) will
lead to synergies and an increase of profitability.
(iv) Upstream and downstream integration helped to take network advantage
of oil supplies and distribution channel which not only increase capital
through acquisitions, but also increase revenue manifold times.
Strategy for a bigger firm involves striking a balance between the exploitation of
existing resources and the development of new ones. Risk associated with this
business is getting higher. Considering the life cycle of the product and industry, it is in
matured stage. So, we will directly try to find out key points required for strategy
formulation through balanced score card.

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 Strategic Management

Financial: M ergers
and Acquisitions has
he lped B P to
sustain,s urvive and
prosper in the
business b ut Ne eds
to focus on
operational
e ffi ciencies to
re du ce cost .

C ustom er Internal
perspectiv e : Business
D em and for
sustainable e nergy Strategy processes:
H igher inertia
sources is
increa sing. due to its' size

Learning an d
G row th: B P can grow
if it has ability to
apply innovative
te chnology.

Criteria Acquisition-based Internal- Divestiture Diversification

strategy growth-based based strategybased strategy
strategy
Definition Agreements among firms in By growing its Decision to Diversify Business into
the same industry including existing business withdraw from therelated and unrelated
supply agreements, joint with its industry based areas
ventures and cross-licensingown finances upon lower
profitability

Technology Technology can be acquired Time consuming Not Applicable Technology can be
through acquisitions factor through this acquired though
route unrelated
diversifications
Cost Deep pockets can extend Stringent targets Not Applicable Deep pockets can
economies of scale further must be taken to extend economies of
reduce cost scale further
Profits Deep pockets can extend Not much Increased profits Not applicable
economies of scale further effective through this
strategy
Regulations Would still be a hindrance Would still be a Would still be a Can help in corporate
hindrance hindrance governance
Operational Concerned area A focussed area A focussed area Depends on business
Efficiency
Operational Increased Same Same Reduced
Risk
Management
Profitability May or may not improve Will improve Will improve Will improve in long
term
Networks and Global presence will be beneficial
Supply chain

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Strategic Management

5. Recommendation
(i) Diversification based Strategy: It can opt this strategy to take leverage of
its human resources and global supply chain and can diversify its business
into related like Trading other goods, Transportations, Research and
Development and diversify into Alternative sources of energy due to its
deep pockets.
(ii) Divestiture Strategy can be chosen to maintain its deep pockets.
(iii) Internal Growth Strategy: Focus upon operational efficiencies and strengthen
its core processes and invest in technology to maintain its running business.

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Back-Up

RIVALRY: BUYER SUPPLIER ENTRY SUBSTITUTE

High POWER: POWER: THREAT: S:
Saudi Arabian Low Moderate Low Moderate
Oil: $345B Gas Refining License to Top 4 = 45% Nuclear
National & Marketing explore of revenue Coal
Iranian Oil : Petrochem Government Regulations Hydropower
$154B Manufacturing regulations Investment in Solar Energy
PetroChina: Gas Utilities finding Wind
$300B Electric resource Biofuels
Exxon Mobil: Utilities License :
$467B Consumers explore &
Gazprom: produce
$231B Downstream:
Shell: $451B refining
BP: $379B /marketing

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