BP Deepwater Horizon: Strategic Framework & Crisis Management

Introduction to BP and the Deepwater Horizon Accident

One of the most prominent names in the oil and gas industry is British Petroleum (BP), widely regarded as one of the largest providers of oil and gas for transportation, heating, lighting, and petrochemical retail services globally. The company's financial and operational performance for 2010 is summarized below:

(BP's Corporate website, 2010)

On 20 April 2010, the company faced a severe challenge when one of its oil rigs began leaking and could not be stopped. The Deepwater Horizon accident severely damaged BP's public image, and many observers urged management to overhaul its crisis management and public relations strategy. The accident resulted from a gas release that caused an explosion on the Macondo exploration well in the Gulf of Mexico. The intensity of the explosion was such that flames burned for 36 hours before the rig sank. The environmental consequences were primarily caused by the leakage of hydrocarbons into the Gulf of Mexico over 87 days before the well was finally sealed.

BP's management committee reported that the accident occurred due to a loss of pressure control in the well, which caused a blowout triggered by the failure of a blowout preventer — a device specifically designed to maintain consistent well pressure. Compounding the disaster, the blowout preventer's emergency function also failed to seal the well, allowing the leak to continue unchecked. Eleven people died in the accident and many others were injured. Severe damage was inflicted on the environment and surrounding communities. BP accepted responsibility for the clean-up and committed to compensating affected individuals, spending $17.7 billion on restoration measures. The company also pledged to work closely with government, local residents, shareholders, stakeholders, the industry, and the media in fulfilling its social responsibility obligations.

Beyond the direct lessons learned from the Deepwater Horizon accident, the incident had serious implications for BP's pre-accident strategic outlook, its crisis management response, its post-accident strategic framework, and the company's long-term future. These issues generated concern from media, investors, stakeholders, and social and environmental activists. The company therefore needed to develop a strategy that addressed the concerns of all parties and restored its image as a socially responsible organization committed to maintaining a healthy and cleaner environment.

BP's Strategic Framework Before the Accident

BP's journey began in 1909 when William D'Arcy and his team successfully extracted oil from Persia, laying the company's foundation. The BP brand logo was first designed by A.R. Saunders from the company's purchasing department in 1920, after winning an internal competition. With minor variations, that logo represented the BP brand for the following 80 years. BP celebrated its centenary in 2009 with events and publications marking a hundred years of exploration, achievement, and discovery. Starting as an oil company in 1909, it had grown into a global energy group by 2010. BP's strong historical background and organizational heritage allowed it to reach the pinnacle of success through firm adherence to its corporate goals and mission.

Business ethics is defined in terms of the principles of conduct within an organization that guide decision-making behavior. Strategists recognize that maintaining high ethical standards is essential, and that all decisions relating to strategy formulation, implementation, and evaluation carry ethical implications. The natural environmental perspective holds that organizations are increasingly concerned with protecting and maintaining the natural environment, and many are aligning themselves with environmental groups for this reason. Harming the natural environment is unethical, illegal, and costly — a fact recognized by BP, which had established environmental, safety, and public relations strategies in response.

BP committed itself to eco-friendly business operations and adopted a range of measures in association with agencies working to protect the environment. The company applied a product life cycle approach to maintain environmental responsibility across all business operations. In practice, this meant understanding and managing the sensitivity of the environments in which it operated — taking responsibility from the start of a project to its conclusion. Operational teams worked within structured guidelines designed to minimize adverse impacts on marine, terrestrial, aerial, and wildlife environments. These guidelines focused on identifying and assessing potential environmental impacts during the strategic planning and project implementation phases, formulating appropriate mitigation measures during project operations, and closely monitoring the environment even after project completion. All of BP's monitoring sites were certified under the international environmental management system standard ISO 14001.

BP also worked to protect flora, fauna, and local species. Biodiversity protection was built into the pre-access stage of the project life cycle and made an integral part of the project screening process. Impact assessment findings were supplemented by information from stakeholders and shareholders, which was used to identify opportunities and mitigate risks to biodiversity and ensure secure project functioning.

BP established strategic alliances with international agencies to protect biodiversity, including its support for the World Conservation Monitoring Centre (WCMC), a specialized body for biodiversity information and assessment operating under the United Nations Environment Programme (UNEP). BP also worked with the Garadagh Cement Plant (GCP) in Azerbaijan to protect native species, and collaborated with ConocoPhillips and ExxonMobil to reduce interactions between bears and people.

BP's safety management record had frequently come under scrutiny, and the company was continually working to strengthen safety measures across all business operations. Various incidents demonstrated that safety measures and policies were still in developmental stages, with poor outcomes whenever accidents occurred. Strategically, the company applied a group-based operating management system designed to rigorously address safety, risk management, and operational integrity. The Operational Management System (OMS) covered health, safety, security, environmental responsibility, operational reliability, regulatory compliance, maintenance, contractor relations, and organizational learning — all integrated across countries of operation.

Safety performance was assessed through audits conducted by an independent audit team. The team prepared quarterly reports highlighting any risk elements or issues for management. BP also developed a performance management system built on rewarding safe operations, supporting an organizational culture centered on safety, responsibility, sustainability, and a better future. Within this system, employees were evaluated on personal attributes including safety, compliance, and risk management; effective teamwork; skills development; adherence to standards and operating procedures; and contribution toward annual goals and BP's long-term strategic framework.

With operations in nearly eighty countries worldwide, BP recognized its impact on local communities and economies. The company pursued a socio-economic approach by adopting investment strategies that benefited both local communities and BP itself. Business operations contributed to local economies through job creation, tax revenue generation, and expanding opportunities for local suppliers.

When an oil and gas company partners with local authorities in supply chain management, it can reduce costs, increase local and national commitment to projects, and build stronger relationships with businesses and government bodies — ultimately benefiting local investors and other stakeholders. Through localization strategies and close cooperation with government, BP could better serve its stakeholders and investors at scale. Programs such as business skills development, contributions to educational development, sharing of technical expertise with national and local governments, and community investment initiatives formed a core part of BP's social development program.

However, having a code of ethics, documented operating procedures, and social development plans is insufficient on its own, as these do not ensure ethical behavior in practice. They primarily signal the company's awareness of such issues and help generate positive media attention. To ensure that a code of ethics is read, understood, believed, and remembered, organizations must conduct periodic ethics workshops to sensitize employees to workplace circumstances in which these issues arise (Gellerman, 1989).

Maintaining business operations that are ethically sound, socially responsible, and environmentally friendly requires management support from the top to the bottom of the organization, and it must be embedded as an important component of the strategic framework to be applied at all levels with strong leadership and management control. Organizations therefore need to develop proactive strategies rather than reactive ones. Proactive strategies mean operating with full awareness of risk and being prepared to mitigate it before it materializes, rather than simply learning from mistakes after they occur — which is the domain of reactive strategies.

Strategic decision-making in an organization occurs at two parallel levels: the individual level and the aggregate level. These processes are mutually associated in terms of obtaining information, encoding, storing and retrieving data, making strategic choices, obtaining outcomes, and providing feedback. Both processes interact at every level, and the failure of one can have a disastrous effect on the other (Corner, Kinicki, and Keats, 1994).

From a theoretical perspective on strategic management failure, several prominent reasons can be identified in the case of BP:

Strategic Management, Risk Scenarios, and Corporate Responsibility

Strategic management is the ability of a firm to formulate, implement, and evaluate cross-functional decisions that enable an organization to achieve its objectives. The theoretical development of strategic management begins with the importance of organizational objectives, as articulated by Peter Drucker (1954), who stressed the importance of objectives through the development of Management by Objectives (MBO). The process of setting objectives and establishing monitoring procedures was to be adopted throughout the entire organization, from top to bottom. The concept of knowledge workers was introduced in the early 1950s, and organizations were made responsible for developing their intellectual capital (Drucker, 1954). Strategic management theory was further developed through the inclusion of competitive strategy, with concepts such as five forces analysis, generic strategies, the value chain model, strategic groups, and clusters entering the literature. Generic strategies laid out the detailed interaction between cost minimization strategies, product differentiation strategies, and market focus strategies (Porter, 1987).

The MIT Industrial Performance Center identified seven best practices considered benchmarks for industry (Lester, 1989):

The changing global environment required organizations to be dynamic in their business operations and strategic management frameworks. Accordingly, strategic planning was viewed through five different lenses (Henry, 1988):

The dynamic industry structure has transformed business strategy into a more competitive framework focused on cost advantage, competitive edge, and differentiation. Alongside these competitive strategies, companies must also manage the range of risks inherent in their industry. These risks can take the form of technological breakdown, operational risk, financial risk, market risk, investment risk, infrastructure risk, social risk, environmental health and safety risk, and liquidity risk. Such risks not only hinder organizational performance internally but also weaken a company's position against competitors, stakeholders, and investors. They can destroy a company's market image and generate negative publicity in the media and press. Management must then decide which strategy to employ in responding to media-raised issues — whether to act defensively, offensively, confront the issues directly, or avoid them. Any strategy adopted consumes company resources in terms of time, effort, and money. It is therefore critical that organizations — particularly those operating in the sensitive oil and gas sector — develop a robust risk management strategic framework.

Risk management is the process of understanding and managing the risks an organization undertakes in pursuit of its corporate objectives. Market research is an important method of assessing and reducing uncertainty, and risk strategy can be formulated using a variety of analytical tools.

In the case of BP, the strategic risk management model most applicable is scenario planning combined with simulation. Scenario planning involves the following steps:

The simulation technique applied is Monte Carlo simulation, which uses statistical simulation methods capable of addressing the most complex applications. It involves the constant random generation of values for uncertain variables to simulate a model, considering all possible combinations of variables. Monte Carlo simulation can incorporate all random events that might affect the success or failure of a proposed project within a scenario planning context.

A corporate social responsibility (CSR) strategic framework outlines an organization's responsibilities to its stakeholders in ways that go beyond the legal minimum required by market forces. Companies must commit to doing more than what is legally required — for example, cleaning up and landscaping an old industrial site, donating funds to international charities, pledging to become carbon neutral, and paying above-market wages in developing economies. While many strategists consider corporate social responsibility a morally sound course of action, there are also strong arguments on both sides of the debate.

Arguments frequently raised in discussions of corporate social responsibility include the following:

On this basis, CSR can be justified to shareholders as a strategic decision that, while requiring an upfront allocation of funds, will benefit the firm in the long run. Ethical conduct by businesses increases the likelihood of avoiding legal issues, financial losses, and reputational damage.

Conclusion

Successful strategy formulation does not guarantee successful strategy implementation. Companies like BP, known for a strong organizational culture committed to quality and community service, can still fail to address the issues raised in a crisis situation and be wholly unprepared for crisis management. The lesson from the BP oil spill is that an organization's strategic framework must be creative, innovative, and technically advanced. Tools such as creative problem solving, innovation, and alternative strategy implementation cannot be improvised at the last minute. They require full commitment from top management — articulated through a clear vision and mission communicated down through every level of the organization — and the standardization of performance benchmarks for global operations.

When a company operates internationally, it must understand the magnitude of impact its business can have on local communities and prepare itself for any consequential effects. In preparing, companies must be proactive rather than reactive, so they can contain risks and prevent harm before they materialize. This approach can save companies significant time, effort, and money, freeing resources for more productive and sustainable ventures.

BP's Corporate website, 2010. Annual Report 2010.

Corner, P., Kinicki, A., and Keats, B. (1994). Integrating organizational and individual information processing perspectives on choice. Organizational Science, vol. 3.

Drucker, P. (1954). The Practice of Management. Harper and Row, New York.

Gellerman, S. (1989). Managing ethics from the top down. Sloan Management Review, Winter 1989.

Lester, R. (1989). Made in America. MIT Commission on Industrial Productivity, Boston.

Mintzberg, Henry and Quinn, J.B. (1988). The Strategy Process. Prentice-Hall, Harlow.

Performance Management, the Association of Chartered Certified Accountants, Kaplan Publishing Foulks Lynch.

Porter, M.E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, May/June 1987, pp. 43–59.