Strategic Framework in BP-Deepwater Horizon Accident One

Strategic Framework in BP-Deepwater horizon accident

One of the most eminent names in the oil and gas industry is British Petroleum, considered as the largest provider of oil and gas to its customers for transportation, energy for heating and light and retail services for petrochemical products globally. The financial and operational picture of the company's performance is illustrated in table1 below.

Performance at a glance for 2010

Facts and figures

Sales and other operating revenues

Replacement cost profit

Number of employees

Proved reserves

Retail sites

Upstream

Refineries (wholly or partly owned)

Refining throughput

$297,107 million (year 2010)

($4,519) million (year 2010)

79,700 (at 31 Dec 2010)

18,071 million barrels of oil equivalent

22,100

Active in 29 countries

16

2,426 thousand barrels per day (year 2010)

(BP's Corporate website, 2010)

On 20th April 2010 the company faced a serious challenge when one of its oil rigs started leaking and simply couldn't be stopped. With Deepwater Horizon accident, BP's image suffered a lot and many urged the management to change its future strategy for tackling crisis and managing public relations. The accident was result of gas release resulting in the explosion of an oil rig on the Macondo exploration well in the Gulf of Mexico. The intensity of the accident was such that flames continued for 36 hours before the rig sank. The environmental hazards that resulted from this were primarily due to the leakage of hydrocarbons into the Gulf of Mexico for 87 days before the well was practically closed and sealed. The management committee reported that the accident had occurred due to the loss of control on the pressure in the well. This had resulted in the well bursting caused by failure of the preventer which was especially designed to maintain a consistent condition. The misery didn't end there, the blown-out preventer's emergency function also failed to seal the well that caused the leakage to occur. In this accident eleven people died and many others were injured. Great loss was suffered by the environment and the surrounding communities. The company took the responsibility to clean-up and compensate people those who had been affected by the accident and assured to look after their health, safety and welfare by spending $17.7 billion in restoring measurement action plan. The company had devoted to sincerely work with government, local residents, shareholders, stakeholders, industry and media in their act of social responsibility.

Beside the lesson the company learned from the Deepwater Horizon accident, it has had laid serious implication on the strategic outlook of the company before the incident, BP's response to the oil spill crisis management, strategic framework after the accident and the future of the company. All these issues have raised concerns from media, investors, stakeholders and social and environmental activist. In this case company needs to develop a strategy that addresses the issues of all and restores the company's image as a socially responsible one that seeks to maintain healthy and cleaner environment.

BP's Strategic framework before accident

BP's journey began in 1909 when William D'Arcy and his team were successful in exploring oil from Persia and laid the foundation of BP. The BP brand logo was first designed by A.R Saunders from company's purchasing department in 1920 by winning an employee competition. With few variations in its contour, the logo represented BP brand for the next 80 years. BP celebrates its centenary in 2009 with events and publications marking hundred years of adventure, achievement and discovery. It started off as an oil company in 1909 and became a global energy group by 2010. BP's strong historical background and organizational cultural heritage had allowed it to achieve the pinnacle of success with firm adherence to the corporate goals and mission. Business ethics is defined in terms of the principles of conduct within organization that guides decision making behavior. Strategists are now more concerned that high ethical principles in the organization are maintained and practiced. All strategy formulation, implementation and evaluation decision have ethical implications. The Natural Environmental Perspective has shown that organizations are increasingly more concerned about the protection and maintenance of the natural environment for this reason they are joining environmental groups. Harming the natural environment is unethical, illegal and costly, this fact is also realized by BP and in response to this, the company has well established environmental, safety and public relations strategies.

Environmental Friendly Operation Strategic Framework

BP has committed itself to the eco-friendly business operations and in doing so it has adopted number of measures and has been associated with number of agencies working for the protection of environment. The product life cycle approach is on the way through which it maintains environmental friendly approach in the entire business operation. In their approach to remain environment-friendly throughout project life cycle, the company works to understand and manage the sensitivity of the environment in which it operates and holds itself responsible to it from the beginning to the end. The operation team has structured operating guidelines which are necessary in minimizing the adverse impact on the environment whether in marine, territory, aerial or wildlife form. These guidelines are focused on identifying and assessing potential environmental impacts in the strategic planning and project implementation phase, formulate appropriate measures to mitigate adverse impacts in the project operation and close monitoring and controlling of the environment even after the project has finished. BP's all monitoring sites have been certified by international environment management system standard ISO 14001.

BP is also working for the protection of flora, fauna and local species. In their approach to protect biodiversity, it has been inbuilt in the pre-access stage of the project life cycle and is an integral part of the project screening process. The impact assessment information is then further supported by the stakeholders' and shareholders' information which is then utilized in identifying opportunities and mitigate the risk factors on the biodiversity to have secure project functioning.

BP has established strategic alliance with international agencies in their effort to protect biodiversity and example of this is their support to the World Conservation Monitoring Centre (WCMC) which is a specialized body in biodiversity information and assessment center of the United Nations Environment Programme (UNEP). BP is also working with the Garadagh Cement Plant (GCP) in Azerbaijan to protect native species and BP is also working with Conoco Phillips and ExxonMobil to diminish interaction between bears and people.

Safety Measures Strategic Framework

BP's safety management has always been under attack and the company is trying to strengthen its safety measures in all the business operations. Various cases have shown that company safety measures and policies are in experimental stages and they have had bad effects whenever an accident occurred. Strategically company applies group-based operating management system that works rigorously for the safety, risk management and operational integrity of the company. The operational management system (OMS) works for the health, safety, security, environmental and operational reliability and compliance also for the maintenance, contractor relations and organizational learning integrated in the system across country.

To have safety measures assessment, the whole process is audited by the audit team working independently and assessing the operation site. The audit team prepares reports on quarterly basis and highlights any risk element or issues to the management in their quarterly report. BP has developed a performance management system that is based on rewarding the safe operations. Performance management system thus supports creation of an organization culture that is built on the objectives of safety, responsibility, sustainability and better future. In this system employees are evaluated on personal attributes of safety, compliance and risk management; effective teamwork, skills development, following the standards and operating procedures and lastly contribution towards the annual goals and BP's long-term strategic framework.

Social Responsibility Strategic Framework

BP has an international presence with its operations spread in almost eighty countries worldwide. In this global operation environment BP understands its impact on local communities and economies. BP is trying to maintain a socio-economic outlook by adopting investment strategies that benefit the local communities and BP. The business operations have benefit the local communities through creating more jobs in the economy, generating tax revenues and widening the business horizon of the local suppliers.

When the oil and gas company partners with the local authorities in the supply chain management it reduces cost, increased local and national commitment to the project and builds stronger relation with other businesses and government bodies that benefit the local investors as well as other stakeholders in the local community. With the strategy of localization and close cooperation with the government, the company can take care of its stakeholders and investors on a large scale. Establishing programs like business building skills, contributing toward the educational development and other community needs, sharing technical expertise with national and local government and making investment in the community programs have been part of BP's social development program targeted at the local and national authorities.

However it is not enough to have a code of ethics, documents for operating procedures and social development plans as these do not ensure ethical behavior. They merely show company's awareness of these issues and basically help in getting media attention. To make sure that code is read, understood, believed and remembered, organizations need to conduct periodic ethics workshop to sensitize people to workplace circumstances' in which these issues are addressed (Gellerman, 1989).

Maintaining business operation which is ethically proven, socially responsible and environmentally friendly requires management support from the top to the bottom and making it an important part of the strategic framework of the organization ensuring that it is applied at all levels with profound leadership and management control. In this regard organizations need to develop proactive strategies rather than reactive strategies. Having proactive strategies means running business operations conscious of risk elements and being prepared for mitigating the risk when it occurs and not learning from the mistakes and experiences which is the domain of reactive strategies.

Reasons for the failure of strategic plans

The process of strategic decision- making in an organization occurs at two parallel levels namely at the individual level and at the aggregate level. These processes are mutually associated with each other in getting attention, encoding information, storage and retrieval of information, making strategic choice, getting outcomes and providing feedback. Both these processes interact with each other at all levels and failure of one can lead to the disastrous effect of another (Corner, P. Kinicki, A. And Keats, B. 1994).

According to a theoretical perspective of strategic management failure identified by strategists many reasons can be seen as the failure of strategy out of which some of the prominent ones identified in the case of BP are listed as:

a) Company's inability to predict environmental reactions.

b) It's overestimation of resource competence like staff, equipment and processes.

c) Weak coordination, reporting and control relationships among the team members and work groups.

d) Underestimation of time requirement. Critical path analysis not being conducted properly.

e) Straying from initial plans, not tracking progress and its consequential effects.

f) Inability to manage change in the situation due to inadequate understanding of the risks, lack of vision and relationship between processes, poor integration of technological resources.

g) Poor communication system on the operating unit which is an essential component in maintaining sound and safe operations.

Strategic management, risk scenarios and corporate responsibility

Strategic management is seen as the ability of the firm to formulate, implement and evaluate cross-functional decisions that enable an organization to achieve its objectives. The theoretical development of strategic management starts with the importance of objectives for organization as defined by Peter Drucker (1954) stressing on the importance of objectives for organizations through the development of theory named management by objectives (MBO). The process of developing objectives and setting up the monitoring procedures should be adopted in the entire organization from top to bottom. The concept of knowledge workers was introduced in early 1950s and organizations were made responsible for the development of their intellectual capital (Drucker, 1954). The strategic management process was further developed by the inclusion of competitive strategy in the organization. Concepts like five forces analysis, generic strategies, the value chain model, strategic groups and clusters were introduced in the literature of strategic management. Generic strategies have laid down detailed interaction between cost minimization strategies, product differentiation strategies and market focus strategies (Porter, 1987).

The MIT Industrial Performance Center had identified seven best practices which were considered as benchmarks for the industry. These were (Lester, 1989):

1. Continuous improvement in cost, quality, service and product or service innovation.

2. Organizational barriers abolished between departments.

3. Eliminating layers of management thus making organizational hierarchy flatter.

4. Building closer relationship with customers and suppliers.

5. Use of technology intelligently.

6. Have global focus

7. Human resource skills development.

The changing global environment had required organizations to be dynamic in their business operations and specifically in their strategic management framework. Thus the process of strategic planning was viewed from five different types (Henry, 1988):

1. Strategy as a Plan- acting to direct, guide, action plan and intention.

2. Strategy as a Ploy- a course of action to beat competition.

3. Strategy as a Pattern- consistent with past behavior.

4. Strategy as a position- branding, segmentation, targeting, products and services, creating awareness and conceptual framework within and outside the company.

5. Strategy as a Perspective- idea of the broad strategists.

The brief progressive structure of strategy and its evolution in different phases can be summarized with the following chart.

Chart 1: Strategy Progression Review

The dynamic industry structure has transformed the business strategy to more competitive framework working for the cost advantage, competition edge and differentiation. Beside these competitive strategies companies also need to manage the element of risk prevailing in the industry. These risks can take form of technological breakdown, operational risk, financial risk, market risk, investment risk, infrastructure risk, social risk, environmental health and safety risk and liquidity risk. All these risks not only hinder the organization's performance internally but also weaken its position against competition, stakeholders and investors. It can destroy company's image in the market and gets bad publicity in media and press. Management then has to decide which strategy they would be using in addressing the issues raised by media whether they would play defensively, offensively, confront it or avoid it. Any strategy adopted can take company resources in terms of time, effort and money. Therefore it is important that organization especially the one operating in the sensitive sector of oil and gas should formulate risk management strategic framework.

Risk Management Strategic Framework

Risk management is the process of understanding and managing risks that organization undertake to achieve its corporate objectives. The risk management model can be shown in the diagrammatic way as below.

Model 1: Risk Management Framework

Market research is an important way of assessing and reducing uncertainty in the company and in the industry. Research can be done in number of ways and risk strategy can be formulated by applying various tools summarized in the chart below.

Chat 2: Risk Strategy Formulation Model

Source: Performance Management, the Association of Chartered Certified Accountants by Kaplan Publishing Foulks Lynch

In the case of BP the strategic risk management model applied would be Scenario Planning and simulation. Scenario planning involves the following steps:

1. Identify high-impact, high-uncertainty factors in the environment.

2. For each factor identify different possible alternatives.

3. Cluster together different factors to identify future consistent scenarios.

4. Writing the scenarios, building a detailed analysis and assessing future considerations. The detailed scenario will construct financial implications, strategic implications, assigning possibilities to key variables and financial analysis.

5. Assess possible causes of action for the firm.

6. Monitor reality to see which scenario is effective.

7. Revise scenarios and strategic options as appropriate.

The simulation technique used will be of Monte Carlo simulation which uses statistical simulation methods that is capable of addressing the most complex applications. It involves the constant random generation of values for uncertain variables to simulate a model and the consideration of all possible combinations of variables. Monte Carlo simulation has the capacity to include all random events that might affect the success or failure of a proposed project in scenario planning.

Corporate Responsibility Strategic Framework

Corporate social responsibility strategic framework outlines organization's responsibility towards its stakeholders so that it gives more than the legal minimum required by the market forces. Company must dedicate itself to do more than legally required to clean up and landscape an old industrial site, donate funds to an international charity, announce that it intends to become carbon neutral and pay more than market wage rates in a developing economy. Many strategists believe that corporate social responsibility is morally accurate to pursue yet there are intense arguments against the subject matter.

The arguments which are built on the corporate social responsibility of the organization include the following:

1. Organizations exist for the purpose of making profits. Profit itself is healthy as it supports stable employment, innovation, allows higher taxes to be paid and makes economies wealthier. Companies don't have to feel guilty about generating profits and not investing too much on social ventures.

2. It is argued by various commentators that prime stakeholders are shareholders and directors must strive to maximize the wealth of shareholders. If the company pursues any corporate social responsibility project, does it ask the shareholders? After all company is using their money.

3. Directors are making donations and taking up projects in the name of social responsibility, strategists argue over the reasons for these projects as viable. Is it merely based on the chief executives' choice or management likings or disliking certain projects?

4. The last argument for CSR is that it is good publicity for the company and this might increase customer goodwill, increase the number of people who would be happy being employed by the company, increase the reputation of the company with potential collaborators and reduce the chance of legislation being passed which forces payments.

Thus CSR can be justified to shareholders that it is a strategic decision taken by the company which might use funds but will benefit the firm in the long-run. Ethical behavior conducted by businesses increases its probability of avoiding situation of legal issues, financial loss and risks to reputation.

BP's response to oil spill crisis management and THE way forward

The oil spill disaster was considered as the second largest oil spill in the history after the Lakeview Gusher that had occurred between 1910 and 1911 in California. This leakage and the company's effort to address the issue were considered as a project. The steps taken by BP in their effort to recover from the situation were widely criticized in media as poor crisis management. The weaknesses and strengths which were identified in addressing the crisis situation were:

Weaknesses

1. BP initially was not capable of estimating the scale of the disaster and overestimated its ability to address it. In the initial stage it sent only 32 boats whereas in reality it needed 10 times more than this estimate.

2. BP lacked innovative idea and creative problem solving pattern. It had tried to repair the damaged blown-out preventer wasting 10 days in its repair mechanism. This shows that company also didn't have adequate resources available for crisis situation.

3. BP also lacked an alternative solution to the problem. The alternative solution was also sequential rather than as a parallel measure which could save time in recovery mechanism.