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British Petroleum Industry Report

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Updated: May 28th, 2020

Introduction

British Petroleum Company (BP) is the third largest energy supplying company in the world based in London and with operations in over 80 countries around the world. The company supplies over 22,400 stations with 3.8 million barrels of oil in one day.

It also provides petrochemical products and retails services to over 100 countries around the world. Before the company came to be known as BP in 1954, it operated under the name of Anglo-Persian Oil Company after it was founded in 1909. The company’s total revenues for the 2009 amounted to $246.1 billion dollars while its total assets for the same year amounted to $ 236 billion dollars (BP PLC 2010).

BP products include Castrol motor oil, Bp service stations, Air BP aviation fuels, ARCO gas stations, Aral service stations solar panels and BP petroleum products.

The corporate brands that fall under the company’s logo include BP, ampm which is a convenience store chain located in several countries, ARCO which is the company’s retail brand in US west coast states such as Oregon, Washington, Nevada, Ohio and Arizona and Castrol oil. Apart from these corporate brands, the company is involved in the provision of safer energy fuels to its customers (BP Global 2010).

The company is committed to providing suitable energy alternatives within the oil industry and it has demonstrated this by investing $80 million dollars in energy alternatives such as wind, solar power, natural gas and biofuels. The investment has also been used in developing energy technology that is used in locating new energy sources.

An example is the BrightWater technology which is designed to increase the recovery of oil in the oil fields. Other technologies used by BP include carbon capture and storage technology (CCS) that is used in dealing with carbon emissions into the atmosphere (BP Global 2010).

The exploration and production segment makes up the upstream activities of BP while transportation of oil through pipelines, shipping and railroad makes up the midstream activities. Marketing activities conducted by BP include the advertising and selling of natural gas and oil products (Company and Markets 2010).

Evaluation of BP’S Competitive Environment

Potential Industry Entrants

According to Porter’s Five Forces analysis, the company’s competitive environment is made up of potential industry entrants, power of buyers, and competitive rivalry from companies such as Exxon Mobile, Chevron, Shell and Total, power of suppliers and substitute products.

An analysis of BP’s potential industry entrants will involve assessing the barriers to entry which are economies of scale, capital expenditure requirements, and access to industry distribution channels, government policies, high taxation and low switching costs (Grunig and Kuhn 2008).

The economies of scale in the petroleum industry are very high because of the capital intensive nature of the industry’s operations which make it difficult for any oil producing company to enter the industry. The high government taxes as well as government policies when it comes to the petroleum industry also create a barrier to entry (Research and Markets 2010).

Capital expenditure requirements are very high in the oil industry because of the nature of operations that require a huge amount of investment in oil exploration, refinery and transportation activities. Governments require companies wishing to enter the market to have the appropriate capital to finance these activities. These high expenditure requirements make it difficult for new companies to enter into the industry.

The switching costs also pose a barrier to entry within the industry as they increase rivalry between companies in the same industry. When customers have the option of switching to much cheaper petroleum products, companies within the industry usually struggle to capture customers and maintain their existing customers.

The access to industry distribution channels creates a barrier to entry into the oil industry given the high costs that are incurred while transporting and supplying oil to the various distribution stations around the world (Hill and Jones 2008).

Threat of Substitutes

Porter’s five forces model identifies the threat of substitutes in any industry as the products or services that pose a threat to the company’s products or services. The model describes the demand for substitute products as: “Substitute products in the oil industry will exist if the demand for petroleum products is affected by price changes in the industry” (Porter, 2004).

The increasing environmental awareness and conservation activities have created a demand for substitute products other than oil. Companies are now looking for products that do not emit any dangerous gases or chemicals into the atmosphere while at the same time ensuring that the natural resources available in the environment are conserved (Research and Markets 2010)

The substitutes for oil that are available in the current market include wind generated power, hydro electricity, nuclear power, bio fuels, solar power and coal. These have been considered by most environmentalists to be safer alternatives to oil. The performance of these substitute products in the BP and petroleum industry has therefore been of no threat whatsoever during periods of high oil prices.

The cost of switching to these alternative products is also substantial which makes it difficult for industry players to switch from selling oil to coal, bio fuels, of hydro electric power. (World Energy Research 2009).

Competitor’s Rivalry

Competitor’s rivalry in the five forces model involves aspects such as diversity of rivals, industry concentration, high fixed costs, high exit barriers, low switching costs and brand differentiation. Such factors affect oil industries as well as other industries in the economic market as every company strives to achieve a competitive advantage.

The intensity and diversity of rivalry that exists between firms usually depends on the type of industry or economic market. The main rivals of BP in the oil and gas industry include Chevron, Shell, Exxon Mobile, Conoco Phillips and Total (World Energy Research 2009).

In pursuing a competitive advantage, BP has been involved in various competitive moves such as adjusting its oil and petroleum prices to be different from those of its major competitors (Exxon Mobile and Shell), improving its product differentiation activities by improving its retail brands to reflect the BP logo( BP 2go, BP connect and BP Travel Centre) and creating channels of distributions that are different from those that exist in the oil industry such as oil pipelines and transportation trucks.

High fixed costs increase rivalry in the petroleum industry when the total costs become the fixed costs of a company, forcing the production unit of the company to manufacture more goods to achieve lower unit costs. Because the firm has to sell these large amounts of products, high levels of production lead to rivalry in market shares increasing the level of competition within the industry (Grant 2005).

Low switching costs in the petroleum industry have allowed customers to freely switch to the competitor products. This has increased rivalry within the industry as BP struggles to be the number one supplier of petroleum products and services.

High exit barriers have also contributed to competitive rivalry in the oil and gas industry as the high costs placed by the government in abandoning the product prevent most companies from leaving the industry. High exit barriers imposed by most governments around the world on the oil industry have prevented most oil companies such as BP from leaving the industry.

The type of assets a company possesses has been viewed to be the most common exit barrier especially in the oil industry. The equipment used in manufacturing and producing oil are highly specialised making it difficult for them to be sold to other buyers in other industries (Porter 2004).

Power of Buyers and Suppliers

Porter (2004) described the power of buyers as “the impact that consumers have in products produced by a company or an industry”. The impact that consumers have over a company’s products usually increases when the industry’s market has many suppliers and only one buyer.

In such a scenario, the consumer of the product sets the price of the commodity creating a market known as a monopsony but in reality these markets rarely exist especially in the oil industry. The power of buyers in the oil industry is relatively low as the oil prices are determined by substitutes, barrel prices, oil availability, low product differentiation and few oil suppliers.

The power of suppliers is relatively high in the oil industry. Oil suppliers determine the prices of oil and petroleum products based on the availability of the oil raw materials. Supplier power in the oil industry is evidenced when oil and oil based products are sold at a higher price than their original retail price so as to capture industry profits.

The power of suppliers has been increased by factors such as high demands for natural gas and oil, few oil suppliers, the low switching costs that exist in the petroleum industry and the uniqueness of the oil raw materials (Porter 2004). The major oil suppliers in the world include Nigeria, Kazakhstan and Azerbaijan.

Industry Life Cycle of BP

The industry life cycle of the oil and gas industry is similar to that of other industries but it is different from the product life cycle as it represents the supply side of the product’s life cycle. The industry life cycle is made up of four stages that are used in determining the extent that an industry produces a range of products.

These stages include the introduction/emergence stage, the growth stage, the industry maturity stage and the decline stage. The two factors that determine the life cycle of an industry include demand growth and production. The growth rate of an industry defines the changes that will take place within that industry.

The production factor determines whether the company’s products will improve the life cycle of the industry through sales and promotion activities (Grant 2005).

In the introduction stage, the sales of the product and the rate of market penetration is usually low. This is because the industry’s products are not that well known and the customers are few. The small scale production of the products is usually low as the products are introduced into the market.

The second stage of the industry life cycle is the growth phase where the company launches into full scale marketing and promotion activities to take advantage of the emerging industry and market.

The value of the industry increases during this stage as customers begin to take notice of the company’s products and services. The industry experiences an upward growth during this stage as sales continue to pick up (Baum and McGahan 2004).

The maturity stage is usually marked by a flat growth curve that demonstrates the slowed growth of the company. The maturity stage is also marked with aggressive competition especially from late entrants into the market. The marketing effort during this stage is relatively strong as companies strive to create unique and differentiated products.

In the maturity stage, there are fewer firms that exist in the industry as the weak firms are eliminated from the industry while the strong firms become even stronger. The decline stage which is the last industry life cycle stage is inevitable in any industry as companies that have been unable to maintain their profits and product sales become obsolete.

This phase is usually characterised by declining sales that are demonstrated by a downward curve. The industry experiences a huge shakeout as those competitors who did not leave during the maturity stage exit the industry (Baum and McGahan 2004).

Key Business Strategies

According to Porter’s generic strategies, companies within a particular industry usually position themselves for profitability and competition in that industry by leveraging their strengths to achieve cost advantage and product differentiation. The three generic strategies developed by Porter include differentiation, focus and cost leadership.

For a company to achieve differentiation, it has to develop products and services that are unique and novel into the industry. These products have to be viewed by the target market to be more superior and higher in quality when compared to those of the competitors (Griffin 2008).

BP has successfully achieved differentiation in its product development strategies as it incorporates the use of scientific research during the exploration and production of oil.

It has also achieved differentiation through the use of its marketing and refining segment that promotes its products to the various markets around the world. The company has also invested in research and development in alternative energy sources as well as alternative energy technology (BP Strategy 2010).

The cost leadership strategy according to Porter requires that the producing company should be the one to offer average or low product prices within its industry. This is usually done to achieve higher profits and also to gain a higher market share within the industry.

The approaches that are normally used by companies that want to achieve cost leadership within an industry include gaining access to cheaper raw materials and suppliers, cost cutting, improving business process operations and incorporating the vertical integration decision making method (Griffin 2008).

BP has been able to achieve the cost leadership strategy as it has efficient distribution channels used to transport crude and refined oil to various destinations.

The company has also incorporated the strategy of energy production that is less harmful to the environment as part of its cost leadership activities. This has seen the amount of gas emissions emitted by its facilities decreasing considerably. It also has low production costs when compared to those of its competitors in the oil industry (BP Strategy 2010).

The focus strategy involves a company focusing its business efforts and activities on a particular market or production segment. The focus strategy is usually incorporated into a company’s business operations so that it can achieve either differentiation or cost leadership within an industry (Griffin 2008).

BP has not incorporated the focus strategy into its key business strategies as they have mostly focused on providing oil and petroleum based products to BP stakeholders and clientele in the various segments of the oil market (BP Strategy 2010).

Resources and Capabilities of BP

The strategies that are used by a company in achieving its goals, objectives and mission are usually formulated from matching the company’s resources and capabilities to the opportunities in the external environment.

A company’s resources and capabilities therefore play an important role in formulating the business strategies that will be used by the company. Since the external environment of a business is usually unstable and uncertain, the internal resources and capabilities of a company are usually considered when formulating business strategies.

The resources of a company are different from the capabilities of a company in that resources are the productive assets owned by the company while the capabilities of a company are what the company can be able to do. The resources of a company are divided into three categories which include the tangible resources, intangible resources and human resources (Johnson and Scholes 2002).

Tangible resources include financial assets such as cash securities, capital, and borrowing capacities as well as physical assets that include equipment, land, and mineral resources. Intangible resources include aspects such as brands, corporate logos, patents, trade secrets, trademarks while human resources refer to the skills and knowledge needed to perform business operations.

The capabilities of an organization are the capacity and ability of the organization to use its tangible, intangible and human resources to achieve a desired outcome.

“The approaches that are used in knowing a company’s capabilities include practical analysis where ability are identified according to the principal functional areas of the business and the value chain analysis where the activities of the firm are divided into a sequential chain” (Helfat 2003).

The resources of BP have been divided into the threshold resources and the unique resources. The threshold resources that are owned by the company include its strong financial resources which include its ordinary shares that have a value of $136.20 as of 2008 and its American depositary shares which have a value of $8.17 as of 2008.

The company also has strong financial resources as a result of its profits and revenues which have been increasing since 2005. As 2009 the company had made revenue of $246.1 billion dollars with the net income amounting to $ 16.58 billion for the same year.

Such high earnings enabled the company to acquire equity resources that amounted to $101.6 billion for 2009 as well as company assets that amounted to $236 billion for the same year (BP Financial 2010).

Other threshold resources that are held by the company include its many oil rigs and oil fields that are scattered in 100 countries around the world. These rigs are managed by the company’s drilling corporation which is known as BP Drilling Corporation. The company has various oil fields and deepwater oil rigs that are based in the Gulf of Mexico and the Plutonio region in Angola.

Other deepwater oil and natural gas well that the Company owns include Atlantis Phase 2, Tiber deep water oil rig and Dorado (BP Financial 2010). Apart from owning various oil wells and deep water oil rigs the company also owns several gas and service stations around the world.

Such service stations include BP gas stations, BP express service stations, Aral gas stations which are the operating chains of BP in Germany and other parts of Europe, ARCO service and gas stations which are found in the western parts of the United States and BP Connect service stations which have operations in various continents around the world such as Europe, Australia and the UK (BP Global 2010).

The company also has threshold resources in the form of renewable energy that are used as alternative energy resources to oil. These renewable resources include solar energy and photovoltaic energy. The company has established a solar power company known as BP Solar that mostly deals with production of solar energy in the form of solar panels and solar cells.

The photovoltaic division of the company deals with the production of solar cells that are used to convert natural light into electricity. This division was developed as part of the company’s activities to practice green technology (BP Global 2010).

BP’s unique resources which are also the intangible resources of the company include intellectual capital and property. The company’s intellectual capital and property includes its patents and trademarks, its copyrights, product formulas (petrochemical ingredients and photovoltaic cell formulas) and business strategies as well as business ideas and proposals that are used in the development of the company’s products (BP Web 2010).

The human resources of the company are the skilled employees who work in the various divisions of the company. As at 2009, the company had a worldwide employee base of 80,300 in its various offices around the world after the restructuring of the company’s personnel (BP.Com 2010).

Half of the company’s employees work in the deepwater drilling oil rigs that are owned by BP. These workers are highly skilled and trained in the management and maintenance of deepwater drilling sites as well as the various oil wells and fields found in various parts of the world.

These skills have been acquired through the various exploration and production programs that the company has for its employees working in these sectors.

The company has established a state of the art learning centre for its employees involved in the deepwater exploration and production of oil and natural gas in Houston, Texas so that they can receive additional training on natural gas and oil exploration, extraction and production (BP. Com 2010).

The capabilities of the company include threshold competencies such as research and development into renewable energy, oil exploration and production equipment and technology, refining and distribution of oil through distribution channels such as the oil pipelines and the implementation of renewable energy strategies.

The company also the capability and technical know-how to implement renewable energy strategies in the oil industry. It has the technical capability of storing carbon gases and particles through the use of its carbon capture and storage technology (BP PLC 2010).

BP has the core capability of designing thin film photovoltaic cells that are important in reducing manufacturing costs incurred by the company during oil extraction and refinery. The company has distribution capabilities which are in the form of in-field flow lines, oil pipelines, oil gathering centres and offshore oil platforms.

The company also owns a shipping company, BP Shipping, which is used in the shipment of oil and petrochemical products to various destinations around the world (BP PLC 2010). The company has the capability to provide a safe working environment for its employees.

The number of injuries and spills has reduced considerably over a ten year period in the company’s operations. 2009 noted two fatalities only in the various oil rigs and wells operated by the company which is an indication of the company’s ability to provide a healthy and safe environment for its workers (BP Personal Safety 2010).

BP Value Chain Analysis and Strategic Fit

The value chain of the company involves analysing the company’s activities that lead to the production and manufacture of oil and oil based products and what value has been added the chain. The activities are performed by BP based on the company’s value chain include the primary and the support activities.

The primary activities of the company include oil exploration and production which involves the extraction of natural gas and crude oil from the oil fields, inbound logistics which involves the shipment of the crude oil through pipelines, transit lines or by transportation (road, rail or ship).

Operation refining involves the refining of crude oil into refined oil which is then transported and distributed through the use of outbound logistical processes such as pipeline and transportation networks (Reuters 2010).

The support activities are the elements that are used to carryout the primary activities.

The support activities of the company include its experienced employees who work in the various divisions of the company, the infrastructure which involves the distribution and logistical networks that are used to transport crude or refined oil such as the oil pipelines and the shipping division of BP, technology that is mostly used in the research and development division of the company which includes purified terephthalic acid technology, BP Solar, carbon capture and storage technology (CSS) and BrightWater Technology.

The company’s financial resources have also been important in its value chain as they support the primary activities and supporting technology which is used in oil, natural gas production and exploration as well as the refining and marketing of the company’s products and related services (Reuters 2010).

The strategic fit of an organization deals with how the company’s resources and operations complement the goals, objectives and strategies of the company. An organization that has a good strategic fit will be successful in achieving its goals and objectives through the optimal use of its resources (Scott 2001). BP has achieved a strategic fit that has seen most of its strategies meeting the company’s goals and objectives.

The company has been able to achieve strategic fits that have seen it minimizing its production and manufacture costs through the use of thin film photovoltaic cells and better operational safety.

BP has also been able to achieve a strategic fit through the minimization of corporate overheads and investing in alternative energy research and development activities. These activities have seen the company gaining a competitive advantage over other oil companies within the industry.

Alignment of the Resources to Business Strategies

Once the resources and capabilities are identified, the key task is usually to formulate a strategy that will ensure the resources and capabilities are deployed for the greatest benefit. The value chain analysis of BP identifies the primary activities of BP to involve oil extraction, inbound logistics (crude oil shipment), oil refining, outbound logistics (distribution of refined oil) and marketing of oil, petroleum products.

The resources and capabilities of BP have been aligned to reflect the business strategies of the company which are to explore and produce oil to facilitate growth of the company, produce energy for consumption, marketing and refining products and providing alternative energy sources to oil (BP Strategy 2010).

Conclusion

BP has been viewed to be one of the major oil producers in the world. The company’s strong financial, physical and human resources enable it to earning high profits and revenues. The company’s revenues margins have continued to increase over the years as a result of industry analysis activities and environmental scanning activities.

The analysis of the industry has also enabled the company to develop business strategies that have enabled it to maintain its growth over the years. Though it is still the third largest producer of oil and natural gas, the company is gearing itself to be the dominant player as it continues to invest heavily in safer energy alternatives and renewable energy technology.

References

Baum, J. A. and McGahan, A. M., (2004) Business strategy over the industry lifecycle. New York: Elsevier

BP.Com (2010) BP Sustainability reporting 2009: our people. Web.

BP Personal Safety (2010) BP aims to create a safe working environment for its workforce. Web.

BP PLC (2010) Group results: fourth quarter and full year 2009. Web.

BP Financial (2010) Financial and operating information 2005-2009. Web.

BP Global (2010) Products and services. Web.

BP Strategy (2010) BP outlines plan to improve financial performance while growing production through 2010. Web.

BP Web (2010) Company assets and financial integrity. Web.

Company and Markets (2010) BP p.l.c.: financial and strategic analysis review (global data). Web.

Grant, R. M., (2005) Contemporary strategy analysis. 5th Edition. Oxford, UK: Blackwell Publishing.

Griffin, R. W., (2008) Fundamentals of management. Boston, US: Cengage Learning.

Grunig, R., and Kuhn, R., (2008) Process-based strategic planning. Berlin, Germany: Springer-Verlag Heidelberg.

Helfat, C. E., (2003) Organizational capabilities: emergence, development and change. Oxford, UK: Blackwell Publishing.

Hill, C. W., and Jones, G. R. (2008) Strategic Management Theory: An Integrated Approach. 8th Edition. Boston, US: College Permissions.

Johnson, G. & Scholes, K., (2002) Exploring Corporate Strategy. 6th Edition, New Jersey: Pearson Education Limited.

Porter, M. E., (2004) Competitive strategy. Oxford, UK: Free Press.

Research and Markets (2010) British Petroleum Company: company analysis. Web.

Reuters (2010) Profile: (BP.N). Web.

Scott, B., (2001) Partnering in Europe: incentive based alliancing for projects. London: Thomas Telford Publishing Limited.

World Energy Research (2009) Oil and natural gas. Web.

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