This coursework is about identifying and analysing the key issues BP had to face from 1989 till 2007 and subsequently make an appraisal of the company’s evolving strategic management approach over time, highlighting the relationship between leadership style and strategic orientation.
This essay consists of two main parts. It will begin with the analytical analysis of BP between 1989 and 2007 using PESTEL, SWOT and a 5 Forces assessment to have a clear view of the strategic context. Only then we can have an appraisal of BP’s evolving strategic management approach over time highlighting the relationship between leadership style and strategic orientation and a conclusion.
De Wit and Meyer (2010) state that a strategy can be seen as an answer to a problem or an issue. This means that the first step is to first identify the issues BP is facing. In order to evaluate the issues at play in the BP case and discuss its strengths and weaknesses in responding to key strategic paradoxes, it is necessary to apply different techniques to assess both internal and external factors shaping BP strategies.
The PESTEL framework, even if it is an aid to identify factors and not a rigid “tick in the box” exercise, will help analyse the external factors generating changes in the industry or the environment of a company. In the appendices, we have categorised the environmental factors based on the case study, independent readings like Johnson, Scholes and Whittington (2008) and personal experience being in the industry for almost 25 years. It clearly shows that multiple external forces have impacted the management of the company over time. Some major historical events like WWII and the early 1970’s oil crisis even pushed the company to re-invent itself to the point that they even changed its name. While after having been booted out of the OPEC countries, BP re-orientated itself to mainly US and North Sea areas. In the early 1990’s with the opening of the former eastern bloc, new opportunities have risen like in Russia and further in China and this opened a new horizon to BP and therefore drove some reshaping of the strategy. BP also showed some ground-breaking behaviour when Browne started to develop strategies around greenhouse gas and CO2 emissions based on the global warming warnings and so drove other companies in the industry to be more active in this space. The PESTEL data demonstrates that BP being a global company has been influenced by major global factors and therefore major changes had to take place internally and externally. Regester and Larkin (2008) show how sustainability reporting (CSR) has influenced companies’ strategies and specifically BP, as when in 2000 with the “Beyond Petroleum” motto from Lord Browne, shaping the new strategy putting the company into the world of cleaner energies and opening to new markets. This thus set the scene of the external factors from which we can highlight main themes as global economy and politic factors but also an important ecological influence on the company.
In their guide to Project Management (2008), Fox and van der Waldt state that while a PESTEL analysis measures the market through external factors, the SWOT analysis will measure a business unit, a proposition or an idea. The goal of the SWOT analysis with PESTEL as input for Threats and Opportunities is to generate strategies for improvement (Basu 2008). The identified external factors have therefore helped to generate opportunities to be seen as a ground breaking company having a first mover advantage on the market by consolidating relationships with strategic governments, helping them to develop new options and businesses in emerging areas of the world e.g. Russia and China knowing that Oil and Gas become increasingly scarce leading to higher prices. On the other hands global warming may lead authorities to ban fossil energy in some places and by being the first mover in some regions, working in an unstable environment may threaten BP assets. The indentified threats consolidate the main themes we stated from PESTEL and highlight more specific strategic issues in terms of risks dealing with politically unstable countries, financial challenges in the early 1990’s and under ecological pressure. It is also key to see the impact of the external factors on the organisation by analysing the strengths and weaknesses. BP built different strategies over time to deal with the different main identified influences to reach a best fit between the environment and the organisation (De Wit and Meyer 2010) leading to different strategies that may be seen as a paradox as it went from focusing on the BP core business during the Simon era to major mergers and acquisitions with Lord Browne and deep transformations with Horton. Consequently, the image and the culture of the enterprise also changed a lot over time to move from a “civil service” mentality to a truly global performance orientated diverse group and this transformation has been the red line over time to get the right culture in the enterprise to be market relevant. These strengths came at a cost as to change the culture in the company, global programmes have taken place to “mould” the management into the new culture and costly rebranding activities have been implemented to enhance BP’s reputation on the market and retain it.
The other major theme here will be that to finance all these changes while assuring a good financial revenue to the shareholders by e.g. downsizing and sweating assets, BP had to compromise in terms of Health Safety and Environment (HSE) which lead to major ecological catastrophes. This will help to or consolidate strengths by using opportunities or transform weaknesses into strengths or even mitigate the risks identified in the threats. This will then enable to highlight the main strategic issues coming from both internal and external forces and force BP to review the group strategies. Let us summarise the main themes: political instability, global warming, financial constraints and safety. As the appendices show, BP reacted to these issues by adapting their strategy over time by acquiring or merging with other companies, focusing on lower maintenance costs properties and rebranding the company to enhance image and reputation. Unfortunately it appears that the HSE consequences lead to major impact in the company including the resignation of 2 CEOs. That also validates what De Wit and Meyer (2010) state i.e. that “fitting internal strengths and weaknesses to external opportunities and threats is often frustrated by the fact that the two sides pull in opposite directions”. We analysed that the shareholders expect revenues leading to drastic plans to cut costs. But on the other hand, sustainability requirements are requesting investments in all kind of resources and this balance may not have been found as when, in 2006, BP recorded a turnover of about $262 billion, major HSE events happened the same year and this can be seen as a picture of that paradox. Another sign of tension is also the advantages you gain being a ground breaker by e.g. investing in China and Russia but these risky deals may lead to ambiguous positions on sensitive questions like drilling oil in the Arctic National Wildlife Refuge or BP’s stake in Petrochina that was building a contentious pipeline across Tibet. These positions generated damages to BP’s image and reputation.
BP’s evolving strategic management approach over time
On the basis of the analytical analysis, it is feasible to make an appraisal of BP’s evolving strategic management approach over time, highlighting the relationship between leadership style and strategic orientation in the three dimensions of strategy process, content and context. De Wit and Meyer (2010) explain that these 3 dimensions are the ones recognised in all real-life strategic problem situation. The analytical analysis will be the input into the process, the Why. The process is dealing with the How, the When and the Who of the strategy and the content will be the result of the process (the What) and the Where i.e. the context or environment in which the content and the process are determined. The case is basically determining three main eras of the company from 1989 till 2007 where in these 18 years major changes impacted the company and it is clear that, based on the different leadership styles, different strategies have been implemented even if we can see recurrent theme i.e. adapt the company to its global context to get a dominating position without damaging the financial structure or the impact of the leadership style on the implementation success of the strategies. The first dimension to be approached here will be the context of the different strategies over time and so before going through the timeline of events (the Why) it is also key to define the impact of the leadership style on the strategy. Leavy and Wilson (1994) state that “the leadership is just one important element in a model of strategy formation. History and context are the other two. What is needed is the examination of how leadership, history and context interact in the formation of an organisation strategy and how this changes over time.”. This relationship definition is key to understand the influence of the leadership to set-up and implement strategies.
The Porter five forces analysis in appendix 3 also paints the bigger picture of the environment BP has to evolve in and adapt to. It also substantiates the different tensions defined in the analysis between the shareholders and the stakeholders but it also adds in this context the difficulty to change the position of the company from a oil and gas company into an energy company i.e. enabling to have a greener image and also invest in renewable energies. This means that the type of competition has also changed as major players had to raise their game here and follow BP who had a first mover advantage. The scene being set by providing more data to the overall context, the point is to analyse the three different stages between 1989 and 2007 and derive the process followed and also the content of the strategies developed to respond to the main themes identified in the analysis.
The first theme will be Horton’s cultural change brought to BP in a context of financial difficulties due to a lack of responsiveness from the unstable business environment of the 1980’s. “The whole issue was to take a behavioral process into a performance process” (De Wit and Meyer 2010), Horton made the decision to force a top-down approach to implement Project 1990 in order to change the structure of the company and so a deep change of the culture was also needed. The content level to respond to the Why is at corporate level and impact all levels and businesses in the group. To flatten the structure of the group then means that decentralisation will have to be implemented to decrease the headcount in the centre and increase empowerment for the strategic business unit. As described by Campbell and Goold (De Wit and Meyer 2010), BP looks at a model that looks like what Mars and Unilever implemented i.e. to preserve business unit autonomy and leave business decision at that level as this will therefore empower the managers and consequently drive the cultural change Horton wants to see happening. Horton having an “abrasive” style of management coming from his US cultural background, it led to a change that can be seen as disruptive, frame-breaking, revolutionary or radical depending on the author we refer to. This decision to use such a process is made in order to have a strategy that brings the organisation closer to its environment (context) which is at that moment financial downturn and lack of organisational responsiveness to the changes of the previous decade. The leadership style perceived as autocratic and arrogant of Horton generated this top-down strategic process that successfully modified the anatomy, the physiology and also the psychology of the organisation (De Wit and Meyer 2010) i.e. its DNA to get the desired flatter structure and a culture moving from “civil service” to a performance driven mentality. The cultural shock between Horton and the rest of the company meant that his structure never really trusted him and in 1992, he had been asked to step down. On the other hand his successor, David Simon, who said ‘This is about the style of running the company at the top. It is not about changes in strategy.’ continued the same strategy and proved it successful. This proving that the content of this strategy was the right one but that the leadership style jeopardized the process in place and that by changing it, the success was at the corner. The change in the company’s culture and structure initiated by the 1990 programme did enable other strategy changes during David Simon’s days as CEO.
The main theme during the David Simon’s time as CEO was to recover group financial health and build a structure ready for the future. The context at that time is still the same that the one described during Horton’s days but there is a new challenge as Simon will also have to improve trust with the management and keep implementing the continuity of programme 1990 but using his leadership style to enable the change. One of many advantages Simon had over Horton is the fact that he is in BP since the start of his career and shares the same company and also socio-cultural background than the group management. The cultural aspect has been key to help to re-establish the trust. As described in her cultural notes (2009) Dr. Y Turner states that “Geertz began to popularize the idea of culture as a kind of social programming process which acts as a basic building block for all social groups”, it appeared that not having this building block in place impeded the delivery of programme 1990. Using this advantage, the new CEO kept using the same strategy process i.e. to state the (revised) objectives, cut costs and better focused investments, then he installed the 1-2-5 programme to deliver this to cope with the monitoring and necessary control to achieve these. The content of the strategy has been multiple as not only Simon refocused the group on its core business as mentioned in the case, “finding it, extracting it, shipping it, refining it, converting it and selling it” but the centralisation also helped delivering to cut debt by $1 billion per year, build annual replacement-cost profits to $2 billion per year and keep capital spending below $5 billion per year ahead of plan by selling businesses outside the agreed new portfolio but it downsized the company by 50% with a large proportion in middle management.
During Lord Browne’s years (1995 – 2007), different themes emerged like global warming and political instability of new business partners. The context for the new strategy orientation evolved a lot since BP recovered financial health and its portfolio had been rationalised, group structure had been flattened and re-focused, business deals were now possible with emerging countries coming from the former eastern bloc and early global warming warnings were also emerging. The new CEO was like his predecessor: a group long-timer and a European. Now that the environment is set (the Where), the strategy process has been defined by the vision Lord Brown stated i.e. “What’s important to us is that whatever business we’re in, we focus on getting a position which is as close to dominating as possible. But we’re going to do it in such a way that we don’t imperil the financial structure of the company again.”. He developed a new strategy process to handle the different themes by changing in the continuity of what his predecessors successfully built. Firstly, as written in the 1995 BP’s annual report, he further decentralised the organisation to develop even more the creativity and the empowerment and to ensure that “BP’s total competitive strength is greater than the sum of its parts” also fostered a learning organisation sharing best practices. Secondly, having this in place and using his “visionary” leadership helped reacting to the different waves of strategic issues by using the first mover advantage. BP changed its image and even created a new company to deal with global warming and therefore even shaped the future of the Oil & Gas industry into an Energy industry then including major investments into wind farms, solar energy, bio-fuels, etc… This strategy equates to getting the market to start your way and your competitors to play catch-up (De Wit and Meyer 2010). This strategy has also taken place with BP to enter new emergent markets like China and Russia and also to go for mega-mergers. Being the first in these area led BP to a brand new strategy context. The group image, structure and portfolio deeply changed due to the mergers and acquisitions and also the selling of high maintenance assets in the profit of less mature ones providing higher short-term profitability. The result of this strategy is generating two new strategic issues, corporate culture to be transformed and also major HSE issues. BP delivered a process to implement the new culture, engaging all their new middle-management coming from the different entities and ensure they all receive the same message about the overall group strategy and the rationale behind it. It has been supplemented by a coherent HR strategy to blend the management from the different entities in the organisation. This process delivered a more cohesive and empowered flat organisation driven by performance which is aligned with the overall BP strategy. The HSE strategic issue is not treated in the case and there is no sign that this had been part of a specific strategy but is more likely the result of previous strategies. This 12-year journey in overall improvement of BP in the continuity of the previous CEOs’ strategies but updated to handle new contexts could only be done with a leader that was respected not only for his visionary skills but also for his leadership skills to drive the whole company in one direction. As he once said “The most important thing a leader can do to communicate is to keep the bigger picture in focus, to set the context… to explain or reconcile the complexities that cloud the overall picture of what’s important and why.” (Gill 2006).
In conclusion, reading the different analyses, it appears that BP has been through major changes in strategy contexts and could put the right processes in place to generate the right strategic content. It is also obvious that having the right leaders in place at the right moment is a key to success as it has been demonstrated that even if you have the same context with the same process, one can fail and one can be successful. It is thus key for an effective leader to “develop, get commitment to, and ensure implementation of rational and intelligent strategies that both enable people to pursue the vision and mission and reflect the values they share.” (Gill 2006).
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Appendix 1 PESTEL analysis
o Booted out of OPEC in 1954.
o Stop the US operations from making political contributions.
o Lobbying Chinese government.
o Strategic deals in Russia.
o 1973 oil industry upheaval.
o Re-orient to US and North sea oil fields.
o Unstable business environment in the 1980’s impacting 1990’s financial results.
o Opportunities in Russia and China’s market is growing.
o Companies consolidations.
o The willingness of the market to accept certain risky deals.
o Rareness of oil and gas and demand from emerging markets (e.g. India, China) increases the market price.
o Equal benefits within BP for partners in same-sex relationships.
o Health Safety and Environment lapses.
o Importance of sustainability.
o In the 1990’s, improved technology helped slashing oil production costs.
o Oil and gas are currently more expensive to produce, so new technology permits to extract more in existing places and also discover new resources.
o Global warming, greenhouse gases and CO2 emissions.
o Other companies had to follow BP in a move to more consciousness of the ecological impact of the Oil and Gas Industry.
o Endorsed an anti-corruption policy and banned employees from making the ‘facilitation’ payments that ensured contracts were won in developing countries.
Appendix 2 SWOT analysis
o Horton changed the culture from “civil service” to objectives and transformation (Project 1990 implementation).
o “1-2-5” David Simon’s plan to recover financial health.
o Focus on core business during David Simon’s time, ‘finding it, extracting it, shipping it, refining it, converting it and selling it,’.
o Culture changed to continuous performance improvement.
o ‘Targeting is fundamental to achieving. If you do not target, you do not measure and you do not achieve.’ Became a new motto in BP.
o Simon’s continuity in Horton’s transformation plan.
o Corporate rebranding.
o Creation of BP Alternative Energy.
o Creation of a “Reputation team” to assess image change on the market.
o Strategy to divest from fields with high run & maintain costs to reinvest in properties with lower costs and higher margins.
o Task force to develop programmes to transform corporate culture.
o hierarchical, bureaucratic structure.
o Horton’s abrasive management style.
o Cultural shock between US CEO in a conservative UK environment.
o Cost cutting exercises and downsizing.
o Ambiguous position on sensitive questions like drilling oil in the Arctic National Wildlife Refuge, or BP’s stake in Petrochina – the Chinese state-owned firm – that was building a contentious pipeline across Tibet.
o Major oil spills due to HSE lapses (Texas city refinery explosion, Prudhoe Bay Oil in Alaska and Horizon in Gulf of Mexico).
o CEOs resignations like Lord Browne and Tony Hayward.
o Diversity of cultures in the company after mergers and acquisitions.
o 1st mover advantage on multiple fronts e.g. ecology, Russia, etc…
o Engagement on greenhouse gas and CO2 emissions.
o Relationships with governments e.g. US, Russia.
o Companies mergers and acquisitions.
o Instability working in Russia, Angola and China.
o Loss of focus and risk of growing too fast leading to lack of coherence in the company.
o Risky deals and asset sweating leading to HSE exposures.
Appendix 3 Porter’s 5 forces analysis
According to Porter, the 5 forces analysis will determine the level of competition in an industry and so its potential benefits.
• Threat of new entrants:
o The investment to enter the Oil & Gas market are so high that it protects the easy entrance of eventual major players.
o Government supports are needed to have exploring and production opportunities.
• Threat of substitutes:
o Major players are also involved in substitutes like wind farms, bio-fuels, solar, etc…
o Major players are now profiling like energy companies more than oil and gas companies.
o Major players try to keep control of the energy market as a whole instead of focusing on fossil energy only.
o Renewable energy is now important for the sector as the petrol is getting more and more expensive to detect and extract.
• Bargaining power of suppliers:
o Concentrated suppliers as these are mainly countries where to extract oil and gas and specific contractors.
o High switching costs due to geological dependence and size of operations.
o Partners (contractors) are highly skilled.
• Bargaining power of buyers:
o Importance of image and reputation.
o Buyers have the power to boycott based on ecological damages.
o Limited in terms of pricing as the main components are international market and taxes.
o Multitude of little buyers forming most of the customers.
o Low switching costs.
• Competitive rivalry within the industry:
o In the 80’s the industry as a whole was slow to react to unstable environment and diversified operations instead of transforming.
o BP’s leading role in shaping industry’s behaviour.
o Heading Mega-mergers activities e.g. Amoco, Arco, etc…
o Key relationships with governments.
o Risk of collusion.