Strengths and Weaknesses of the Innovation Strategy Adopted by BP in the Pursuit of Competitive Advantage in the Volatile Business Environment.

Table of Contents

TABLE OF CONTENTS

Introduction and Background 3

The Organisational Analysis………………………………………………………………8

Summary Conclusion/Reflection………………………………………………………..13

Bibliography…………………………………………………………………………….15

Appendices………………………………………………………………………………17

Introduction and Background

The context and the company

BP, formerly known as British Petroleum, is an oil and gas company with global operations and a headquarters in England. BP is a giant in the modern, global energy market, with operations in all major areas of the gas and oil industries. BP is among the largest oil and gas companies in the world in 2014, in terms of production, revenues and market capitalization. BP’s annual report for 2013 (BP 2013, p.4) indicates that the company was operating in some 80 countries worldwide, with an oil-equivalent production of approximately 3.2m barrels daily. BP had nearly 18,000 service stations operating in 2013 (BP 2013, p.34). According to BP’s annual report for the most recently-available year, the company describes itself as follows:

‘BP is one of the world’s leading integrated oil and gas companies. We aim to create long-term value for shareholders by helping to meet growing demand for energy in a safe and responsible way. We strive to be a world-class operator, a responsible corporate citizen and a good employer. Through our work we provide customers with fuel for transportation, energy for heat and light, lubricants to keep engines moving and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. Our projects and operations help to generate employment, investment and tax revenues in countries and communities around the world. We employ more than 80,000 people, mostly in Europe and the US. As a global group, our interests and activities are held or operated through subsidiaries, branches, joint arrangements or associates established in – and subject to the laws and regulations of – many different jurisdictions. The UK is a centre for trading, legal, finance, research and technology and other business functions. We have well-established operations in Europe, the US, Canada, Russia, South America, Australasia, Asia and parts of Africa’ (BP 2013, p.i).

As a company, BP has a long and varied history. The precursor to BP was the Anglo-Persian Oil Company, founded in 1909 (Stevens, 2008). The purpose of the Anglo-Persian Oil Company was the exploitation of oil that had been discovered in historic Persia, modern-day Iran. Before the Second World War, the company’s name was changed to the Anglo-Iranian Oil Company; the name British Petroleum was used from 1954 onwards (Stevens, 2008). By 1960, BP’s operations grew globally, so that the company was working in Alaska as well as the Middle East. In 1965 BP was an innovator in that it was the first company to commence oil operations in the UK North Sea; in the 1970s BP began operating in the continental United States, via a controlling stake in Standard Oil of Ohio. BP had been a nationalized asset in the United Kingdom; during the Thatcher era the company was gradually made private. By 1987, BP was fully privately owned. A 1998 merger with Amoco saw the company’s name changed to “BP Amoco plc”; this was reduced to “BP plc” in 2001 after further acquisitions (BP 2013; Stevens 2008).

In recent years, BP has suffered negative outcomes in terms of public relations following several significant accidents, environmental problems such as oil spills and safety issues. Globally, at the time of writing the name “BP” remains strongly and negatively associated with the 2010 Deepwater Horizon oil spill, in which the largest-ever accidental spillage of oil into ocean waters occurred. The environmental, economic and overall health effects of the Deepwater Horizon spill were huge; BP continues to face legal and public-relations consequences of the spill. Other major safety incidents and accidents involving BP in recent years include the 2006 oil spill in Prudhoe Bay, Alaska, and the 2005 explosion at Texas City Refinery. The latter incidence cost the lives of 15 BP workers (Lei & Hong, 2011).

What is the problem or the innovation or growth opportunity?

Broadly speaking, the problem to be considered in the present report is the negative public-relations fallout from the Deepwater Horizon spill. Particularly in the United States, BP’s corporate name and image remains strongly associated with this recent disaster, and with negative environmental impact of the spill. To retain its position as a leading company in the oil and gas sector, BP needs to address this negative public relations situation. Specifically, the problem seems to focus on environmental issues – the Deepwater Horizon spill was environmentally devastating to a broad area of the ocean and the U.S. Gulf shores. To address broad-scale environmental concerns at a meaningful and sustainable level, BP will need to innovate and grow in this area of operations and public-relations strategy (Saunila & Ukko, 2012).

- What is the purpose of innovation strategy within your chosen company?

The purpose of innovation strategy within BP has always been, and continues to be, the continued economic growth of the company in an increasingly globalized marketplace (Lei & Hong, 2011).

- What is the background of strategic innovation within the company?

Since the early days of operations as Anglo-Persian Oil Company, BP has been an innovative company. It was the first to enter North Sea oil operations, and one of the first oil and gas companies to expand operations into the U.S. and globally, from beginnings in the Middle East (BP 2013, n.p.).

- What are your sources of information?

Sources of information used for this report include extant scholarly literature published in peer-reviewed journals, books and online sources. In the scholarly realm, literature will be sought that was published by an academic publisher, a university, or a major publishing house. Self-published literature will be avoided; likewise, pieces from commercial online publishers, Wikipedia or online “content mills” will be avoided. Literature from the fields of innovation strategy and organisational analysis specifically will be used to underpin the discussion of BP’s innovation strategy in recent years and in 2014. Finally, corporate publications from BP itself will be used to glean information and data regarding the company’s recent operations, public relations and innovation strategy. Many of BP’s official reports and data are available through the company’s website.

- What is the scope of your analysis and research?

The analysis and research involves a narrative literature review, and a review of secondary data. Secondary data is a popular method for data collection in such an investigation situation. The researcher will utilize information already available in review journals, textbooks, article databases, reviews of articles on the Internet along with other resources in order to seek the theoretical as well as evidenced-based insight into strategic innovation in the context of modern BP operations. The research methodology is based on a secondary data analysis following a broad literature review. A literature review is a critically-conducted analysis of a defined and limited section of the published knowledge relating to a specific topic or area of research. The literature review may compare and discuss controlled studies, previous literature reviews and articles relating to the theory of the field being considered. Therefore, a literature review can understand and synthesize both sides of any argument or situation under consideration. The different types of literature review include a “traditional” or narrative literature review, a systematic literature review, a meta-analysis or a meta-synthesis (Greenland et al., 2008). The traditional narrative literature review both summarizes and critiques the extant literature in the field, and uses this summary and critique to draw specific conclusions about the topic. This kind of literature review also seeks to identify any gaps, paradoxes or inconsistencies within the extant literature. The literature to be used in the present literature review will be selected for its qualities of being relatively recent (published no earlier than 2000), and also through being published in scholarly, peer-reviewed journals or officially through online channels such as BP’s own website. The reader will consider potential bias in published materials.

The Organisational Analysis

In terms of innovation, BP has made a move towards biofuels and a lower carbon footprint (BP, 2013; Bowen, 2011). This has happened largely in response to broad public concern about the sustainability and safety of oil and gas production in general. The Deepwater Horizon incidence, naturally, compounded these public concerns, specifically in relation to the BP brand and name. In a 2013 speech to the World Biofuels Markets Conference, BP Vice President of Biofuels Phil New described BP’s innovation strategy in terms of biofuels specifically. New stated that “innovation is one of the wellsprings of human progress, the creative force driving growth and solving problems” (New, 2013, n.p.). New noted that public criticism of oil and gas companies generally remained high; therefore, the focus on biofuels and innovation in that area can be seen as part of BP’s innovation strategy – and public-relations efforts – in the volatile business environment of 2014.

According to New (2013, n.p.) the current innovation strategy of BP has been fomented, at least in part, by recent difficulties and adversity: “Adversity is a great prompt to inventiveness and resourcefulness” (New, 2013, n.p.). According to New, in the face of such adversity the organization’s strategy needs to be one involving increased reliability overall, and a willingness to think on a small, steady, sustainable scale. This is an organisational challenge for a vast, multinational company such as BP. However, New (2013) indicates that making small and steady steps in terms of innovation strategy is the best way for BP to move forward in the modern market-place. This is referred to as an “incremental innovation strategy”, and is supported in scholarly literature (Davila, Epstein, Shelton, 2012; Bowonder, Dambal, Kumar, & Shirodkar, 2010). Further, New advocates for a continuing and increasing organizational focus on engineering and technological development, particularly in relation to the development of biofuels (Lei & Hong, 2011).

Overall, New outlines an innovation strategy that is mosaic-like. It is comprised of many small details, small steps and incremental strategies that, ideally, will add up to a sum of significant innovation, growth and development (Ganter & Hecker, 2014). New advocates for ground-level work on the part of the organization, so that BP can fully know and understand its customer base, its business operations in all regions and markets, the modes and functioning of diverse and varied production facilities. Further, New takes a micro view of innovation strategy, particularly as it relates to profit margins. New (2013, n.p.) advocates for very tight control on the small scale, so that BP can leverage the maximum possible profit margin – down to the last penny or percentage point. In a massive, globalized company, such a micro scale of thinking is innovative in and of itself (Sloane, 2011).

Safety is, of course, a part of BP’s ongoing strategy in the aftermath of the Deepwater Horizon accident and other accidents in recent years. Safety protocols and culture are of course an important element of organizational strategy and culture in terms of protecting the lives, health and safety of BP’s workers. Further, the safety culture and corporate culture need to be flexible and innovative (Bock, Opsahl, George, & Gann, 2012; Chenhall, Kallunki & Silvola, 2011). Additionally, public and industry perception of BP’s safety-related strategies and development is a vital component of BP’s public relations strategy and delivery. Since the Deepwater Horizon accident, BP has increased and buttressed its safety strategies to include inspections, equipment testing and regular inspections of facilities and operations (New, 2013, n.p.) Specific metrics and incentives have been established within BP in recent years, as part of this strategy to improve safety culture and associated public relations efforts.

In considering BP’s organizational structure and innovation strategy, several key questions must be considered and answered:

WHAT KIND OF BUSINESS ARE WE IN:

BP is in the business of sourcing, extracting, refining and marketing oil and gas related products in the global market.

WHAT MARKETS SHOULD WE FOCUS ON:

BP should continue its global focus on markets, with emphasis on the U.K. and U.S. markets. In these markets particularly, BP should focus on biofuel and low-carbon options, as public opinion turns against the traditional oil and gas companies and high-carbon means of production and distribution (Bowen, 2011).

DIRECTION OF FUTURE INNOVATION:

Future innovation should focus on sustainable energy, and innovation beyond simple gas and oil production. BP is already involved in developing increased biofuel capacity in the market; however, this needs to be a greater focus of future innovation. In this way, it may clearly be seen that BP’s innovation and commitment lies with sustainable, low-carbon energy sources.

CODE OF ETHICS TO ADOPT:

The code of ethics should be focused on two things: employee health and safety, and environmental responsibility. Greater transparency and accountability in terms of safety protocols and practices would make for a stronger safety culture within the company, while being also good public relations in the wake of the Deepwater Horizon incident.

WHAT RESOURCES TO ALLOCATE TO OPPORTUNITIES:

Human resources should be allocated to new opportunities, particularly in the development of new technologies associated with sustainable energy production. Further, management resources should continue to strengthen BP’s corporate structure and innovation strategies.

RISKS TO TAKE IN THE FUTURE:

For a company founded on oil and gas production, a decisive move towards sustainable energy would be a significant risk. Traditionally, sustainable energy and low-carbon fuel sources have been seen as a market threat to oil and gas. However, by diversifying the product base of BP, the company can take a risk that should lead to long-term sustainability in terms of products and innovation.

STYLE AND STRUCTURE OF THE ORGANISATION:

BP is a vertically-integrated company, with an established corporate structure. The CEO oversees the CFO, COB, HES and Chief Exec. Oil. There are three main divisions of the company, covering exploration, production and refining; BP Chemical is a separate division of the company. BP Exp/Prod has subdivisions in the Americas, Africa and Southeast Asia; BP Mark/Refining has subdivisions in Europe, USA and Australia; BP Chemical has divisions in Asia, Europe and South America. Interestingly, there is no North American division in BP Chemical.

Different brands are differentiated under the umbrella of BP plc. The main brand is BP itself; the Aral brand sells BP fuels in the German market. BP owns the Castrol brand of lubricants, and two petrol-station food and drink concessions – AM/PM in the United States, and Wild Bean Café in Europe, Australia and South African markets. (BP, 2013).

Summary Conclusion / Reflection

At the time of writing, BP is facing strengths, weaknesses, opportunities and threats. These can be outlined, followed by recommendations for the future.

BP’s strengths include its position as the third-largest energy company in the world, by revenue (behind Royal Dutch Shell and Exxon Mobil). Through multiple retail brands and market regions, BP has a massive, global petrochemical business that is well-established in many different countries and regions of the world. BP’s longevity as a corporation – dating back to the early 20th century – is also a strength. Participation in the major stock exchanges – the FTSE 100, the London Stock Exchange, and the New York Stock Exchange – is another well-established strength of BP. BP’s profits are currently on the increase, as oil and gas prices continue to climb worldwide.

In terms of weaknesses, BP is weakened by a lack of genuine product diversity. Although the company is making efforts to diversify into biofuel, green energy and other endeavours such as BP Solar, the core of the company’s business remains the oil and gas industry. Broadly speaking, this industry does not appear to be sustainable in the long-term, and BP will need to invest meaningfully in alternatives to oil and gas as worldwide reserves of these fossil fuels become depleted and exhausted in future years. The Deepwater Horizon oil spill of 2010 has been a public-relations disaster for BP, and represents a major weakness going forward in the business environment of 2014.

Opportunities for BP in 2014 and beyond include technological development and research relating to alternative and sustainable energy sources. There is a significant opportunity to invest in, and to further develop, technologies associated with wind and solar power, and with hydrogen, natural gas and biofuels. Politically, the formerly-closed regions of the former Soviet Bloc have now opened up for business with BP and other companies – these represent new territories for exploration and development, and potential new markets for products. However, BP’s development of infrastructure such as pipelines in these new regions may be controversial, and is already meeting with public resistance.

Threats to BP’s ongoing innovation and development include several factors inherent in the oil and gas industry. In dealing with a flammable, potentially explosive product, there is an inherent threat of explosions and fires at production facilities and refineries. Oil spills such as the Deepwater Horizon accident have uncovered the threat, to BP, of unsafe or unsound policies in relation to the environment. As oil and gas reserves are depleted, exploration and extraction is pushed further into deep-water drilling sites, which are inherently more expensive, dangerous and difficult to operate. Further threats include the decay of BP’s infrastructure such as rigs and pipelines – rigorous maintenance and development is necessary to preserve and improve such infrastructure.

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