British Petroleum’s Changing Business Environment

This Report will assess the altering business background of a one of the largest perpendicularly incorporated oil and gas companies – British Petroleum, over the last five years.

The Micro and Macro business environment of the company have influenced by some main factors and the motive of this report is to focus on them to recognize, analyze and understand. In order to do this, some important tools need to be considered. PESTEL analysis is one of the tools can support the organisations to estimate macro-environmental factors which can have an impact on them. SWOT analysis is another important tool, which assists organisations in additional developing their self consciousness.

Introduction

Business environment can be defined as a complex of policy, legal, institutional, and regulatory circumstances that administrate industry activities. It is a sub-set of the investment policy and includes the administration and enforcement mechanisms that implement government policy, as well as the institutional activities influence the way key factors operate (e.g., government agencies, regulatory authorities, and business membership organisations including businesswomen associations, civil society organisations, trade unions, etc.). Figure 1.

Figure 1: Definition of the business environment.

Macro-environment

Macro-environment is the uppermost level of the environment, which consists of broad external factors that can influence the business. In this case, PESTEL analysis is a useful tool to identify these factors and this can be based on the analyses of future trends such as political, economic, social, environment and legal etc. Using this tool, managers can categorize the key drivers of modifications and this can be used to build the potential trend to future scenario (Johnson et al, 2009).

According to Worthington and Britton (2003), some manners may influence the business; renovate the inputs (resources such as labour force, technology, finance and materials) in outputs such as goods (products that can be touched such as foods, cars, and so on) or services (products that cannot be touched such as insure services). These performances can be used and prejudiced by companies in order to create their policy.

Considering that this macro environment is very complex and companies cannot control it, its analysis is very important. Companies need to identify them and understand the negative impacts they can produce, therefore they can be prepared to reduce them (Palmer and Hartley 2009).

Political Factors

According to Palmer and Hartley (2009), politicians are usually responsible to create and exceed legislation to companies and occasionally they may create direct influence some types of businesses, such as: client defence law, workers protection laws, regulates of effluence and so on. In addition, according to Lancaster (2008) others political decisions as the workforce education, health and environment, and even the economy infrastructure can also influence businesses operations.

Economic Factors

Economic factors are very significant for an organization because it is directly associated to GDP (gross domestic product), economic development, redundancy rate, inflation rate and so on. Any modification in the economy can influence businesses. One good example is the oil spill at Gulf of Mexico has made BP a huge quantity of financial loss. The increase in the crude oil price affected all the chain such as power charge, oil-based raw material, plastic, synthetic fibres and so on (Lancaster 2008). This example indicates the significance of monitoring the economy, either nationally or internationally, in order to recognize possible opportunities and threats.

Social and Cultural factors

The socio-cultural environment is possibly one of the most difficult factors to evaluate, considering that is based on people manners changes, such as religion, ethics, priorities, attitudes, philosophy and social changes (Lancaster, 2008). On the other hand, Palmer and Hartley (2009) state that a crucial part for businesses is to understand the cultural value of a society; companies should be monitoring this frequently to better match to customers desires and requirements.

Technological Factors

According to Lancaster (2008), technology is an important macro-environmental feature which is presented in many products that we use on our daily breathes, as television, calculators, video records, computers and so on. Companies play an important responsibility on generating more technologies due to this some of them has their own research and development department or work in partnership with universities or research institutes, seeking to provide new products or with better excellence to clients.

Environmental Factors

This factor has been constantly increasing, especially for multinationals, due to the challenging of social responsibility activities and projects with focus on the centre of population and the environment. These corporations have an important function on contributing to the social development (Worthington and Britton 2009).

BP, in the last five years, has worked proactively to reduce environmental risks and, as a result, it has improved its indices across the years. In its eco efficiency activities, they have focused on: reducing water consumption, energy, generation of effluents, production of residues solids and pastes. Moreover, it is also preoccupied with the society and develops projects in partnerships with the communities to improve factors such as people education, quality of life, social projects and so on (BP plc, 2010).

Legal Factors

Companies should work according to the law otherwise they can have important collision on their businesses. Some laws are changing to defend clients (municipal licences, anti-monopoly laws); workers (minimum wage, workers safety) and suppliers (copyright and patent laws which favour business investments). Some of them can manipulate market constitution and performance (Worthington and Britton 2009).

Microenvironment

Microenvironment, on the other hand, is the internal factors which generally business decisions are made. The internal environment is composed of various components such as employees, suppliers, customers and so on. Therefore, microenvironment can be divided in various small parts inside a company and each part is extremely important for the business.

Lancaster (2008) argues that one of the main objectives of marketing is to concentrate the requirements of consumers. In order to achieve this, companies can make use of their internal property and capabilities, their microenvironment, over which they have control, and use this as a foundation of information to create the better policy to please costumer’s requirements.

In addition, the microenvironment is easier to realize than the macro environment because it refers to everything that is part of a company such as suppliers, employee and so on. Everything that is direct or indirect interrelated to the company (Palmer and Hartley, 2009).

Customers

They are one of the most important parts of the microenvironment. Companies need to focus on monitoring possible changes on consumers trends and on creating an efficient relationship with them. In other words, companies need to be one step ahead, trying to calculate consumers requirements and needs and developing products to concentrate these demands. Moreover, companies must not focus just on this simple replica (creating a good products to customers), but think away from it (Palmer and Hartley, 2009).

Intermediaries

They correspond to associations between companies and customers. Some companies, mainly large ones, have some complications to attend all final costumers therefore they choose to sell their products through mediators to be present even in small supermarkets. Some companies can fail because they do not recognize this as an important policy (Palmer and Hartley, 2009).

Shareholders

At the end of 2010, there were 345,581 holders of BP ordinary shares and a further 163,397 holders of American depository shares. One American depository share (ADS) represents six ordinary shares. One of the holders of ADSs represents some 824,700 underlying holders. ADSs can be bought and sold on North American stock markets. The total number of actual shareholders in the US and UK is in excess of 1 million. About 80% of the ordinary shares and American depository shares are held by institutions such as pension funds and insurance companies. For more than 20 years, BP has encouraged its employees to purchase shares in the company on favourable terms, giving them an extra stake in the company’s success.

Competitors

Companies need to keep their eyes on their competitors, monitoring them and trying to expect their next steps. Furthermore, there are two different types of competitors: direct competitor, which sells comparable products; and indirect competitor, which is more difficult to identify, because sometimes competitors can appear in different forms. For example, who is the indirect competitor for a cinema? Is it another cinema? A home rent movie? (Palmer and Hartley 2009)

The following companies are some competitors of BP Plc:

Chevron Corporation

Exxon Mobil Corporation

TOTAL S.A.

Petrobras (Petroleo Brasileiro S.A.)

(Datamonitor, 2010)

SWOT

SWOT is a tactical development tool, used in management and strategy formulation in order to identify strength, weakness, opportunities and threats of a particular company. It mainly focuses on analysis and understanding the organisation’s internal and external environment.

Strengths are considered internal positive factors within an organization which can add value; Weaknesses, on the other hand, are negative aspects, which can disrupt the business from achieving its goals. Opportunities are external factors which help business and can represent one possibility of acquiring competitive advantage if the company has the ability of identifying them quicker than its competitors. Threats are also external factors but which can affect businesses operations negatively (Campbell and Craig, 2005).

SWOT analysis is used as an analytical tool to achieve significant information about the company in order to take suitable actions. A company can do better decision makings when it understands the quarter points of a SWOT analysis. Strength factors can be used as a foundation for constructing advantages, enchanting the opportunities; weakness can be seen as a challenge and used to correct errors (NetMBA, 2010).

Applying SWOT analysis on BP, we can see their strengths, weakness, threats and opportunities:

Strengths

Weaknesses

Dominant market position

Vertically integrated operations

Wide geographical presence

Oil spill in the Gulf of Mexico

Explosion in the Texas refinery

Violation of tax laws in Turkey

Opportunities

Threats

Acquisition of Devon Energy’s assets in Brazil, Azerbaijan, and the US deepwater

Gulf of Mexico

Oil and gas exploration projects

Saturation of resources in the North Sea

Instability in some oil-producing regions

Environmental regulations

(Datamonitor, 2010)

Company Overview

BP is one of the biggest perpendicularly incorporated oil and gas companies in the world. The company’s operations principally include the searching and production of gas and crude oil, as well as the marketing and trading of natural gas, power, and natural gas liquids. BP is headquartered in London, the UK and employs about 80,300 people.

7 Case Study

The Deepwater Horizon oil spill out (also referred as the BP oil spill, the Gulf of Mexico oil spill, the BP oil disaster or the Macon do blowout) is an oil spill in the Gulf of Mexico which flowed for three months in 2010. The impact of the spill continues since the well was capped. It is the largest accidental marine oil spill in the history of the petroleum industry. The spill stemmed from a sea-floor oil gusher that resulted from the April 20, 2010 Deepwater Horizon drilling rig explosion. The explosion killed 11 platform workers and injured 17 others.

On July 15, the leak was stopped by capping the gushing wellhead, after it had released about 4.9 million barrels (780Ã-103 m3), or 185 million gallons of crude oil. It was predictable that 53,000 barrels per day (8,400 m3/d) were evading from the well just before it was capped. It is supposed that the daily flow rate diminished over time, starting at about 62,000 barrels per day (9,900 m3/d) and decreasing as the reservoir of hydrocarbons feeding the gusher was gradually exhausted. On September 19, the relief well process was successfully finished and the federal government acknowledged the well “successfully departed”.

7.1.1 Impact on BP and the UK economy

BP – at the time the United Kingdom’s largest corporation and a major business in the UK investment world – came under powerful popular, media, and political pressure to terminate its 2010 dividends in their entirety. Media reports state that BP is of such a size and significance in that country, that “one pound in every seven” of investment and pension fund income in the UK is derived from BP. Local media offered views on what this might mean for citizens. As BP was reported to be “offloading billions of dollars in assets” in preparation, some estimates suggested the total legal responsibility could amount to as much as US $100 billion (UK £67.5 bn) by the conclusion of the tragedy. Financial analysts commented that BP was able of addressing the probable liabilities that might effect, and BP stock rose to some extent on the news that the preliminary US $20 billion compensation fund had been arranged.

7.1.2 Political and foreign relations impact

The disaster was seen by some as placing stress on US-UK relationships, insofar as BP is a British company. Both US President Barack Obama and UK Prime Minister David Cameron were under considerable pressure to comment politically on the matter. Insurance Times reported an open letter from the Chairman of RSA Insurance Group, “the head of one of the country’s leading companies”, to President Obama (text of letter) that expressed a concern over “double standards” compared to the sub-prime based banking crisis of 2007-2010 and over “prejudicial and personal” comments in the media.

Boris Johnson, the mayor of London, was also reported to have made a similar comment, and similar concerns related to the tenor of media releases were also expressed by Labour MP and ex-Parliamentary Secretary Tom Watson, Vince Cable the Business Secretary, and the UK Foreign Office. The Department of State stated that the issue will not affect US-UK relationships, calling the UK its “closest ally”. Cameron stated that “sensible dialog” was needed and BP would require certainty over its liability for compensation. Obama was later reported to have said that “his frustration over the mammoth oil spill in the Gulf of Mexico is not an attack on Britain” and that he had “no interest in undermining BP’s value”, as the two leaders tried to soothe trans-Atlantic tensions over the disaster.

7.1.3 Impact on BP due to US tourism

On May 25 BP gave Florida $25 million to promote the beaches where the oil had not reached, and the company planned $15 million each for Alabama, Louisiana and Mississippi. The Bay Area Tourist Development Council bought digital billboards showing recent photos from the gulf coast beaches as far north as Nashville, Tennessee and Atlanta. The U.S. Travel Association estimated that the economic impact of the oil spill on tourism across the Gulf Coast over a three-year period could exceed approximately $23 billion, in a region that supports over 400,000 travel industry jobs generating $34 billion in revenue annually.

On November 1 BP announced plans to spend $78 million to help Louisiana tourism and test and advertise seafood.

7.1.4 Other economic consequences

On July 5 BP reported that its own expenditures on the oil spill had reached $3.12 billion, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs. The United States Oil Pollution Act of 1990 limits BP’s liability for non-cleanup costs to $75 million unless gross negligence is proven. BP has said it would pay for all cleanup and remediation regardless of the statutory liability cap. Nevertheless, some Democratic lawmakers are seeking to pass legislation that would increase the liability limit to $10 billion. Analysts for Swiss Re have estimated that the total insured losses from the accident could reach $3.5 billion. According to UBS, final losses could be $12 billion. According to Willis Group Holdings, total losses could amount to $30 billion, of which estimated total claims to the market from the disaster, including control of well, re-drilling, third-party liability and seepage and pollution costs, could exceed $1.2 billion.

On June 25 BP’s market value reached a 1 year low. The company’s total value lost since April 20 was $105 billion. Investors saw their holdings in BP shrink to $27.02, a nearly 54% loss of value in 2010. A month later, the company’s loss in market value totaled $60 billion, a 35% decline since the explosion. At that time, BP reported a second-quarter loss of $17 billion, its first loss in 18 years. This includes a one-time $32.2 billion charge, including $20 billion for the fund created for reparations and $2.9 billion in actual costs.

On October 1, BP pledged as collateral all royalties from the Thunder Horse, Atlantis, Mad Dog, Great White, Mars, Ursa and Na Kika fields in the Gulf of Mexico. At that time, BP also said it had spent $11.2 billion, while the company’s London Stock Exchange price reached 439.75 pence, the highest point since May 28.

By the end of September, BP reported that it had spent $11.2 billion. Third-quarter profit of $1.79 billion (compared to $5.3 billion in 2009) showed, however, that BP continues to do well and should be able to pay total costs estimated at $40 billion.

Recommendations

Companies should observe regularly for new challenges, by focusing on developing strategies which can allow them to develop them better than their competitors. On this case, BP should do the same and seek for a strategy to become the first company in the world of petroleum industries, selling products with quality and diversity, achieving customers’ first choice.

If the company wants to be competitive, companies should evaluate its products with the ones from foremost competitors. They can also achieve competitive benefit by investing on its employees; looking for joint ventures with other companies in different countries so that they can achieve information from different markets; in search of operational efficiency and cost regulation; seeking for new partnerships, assessing where there are greater opportunities for export.

Conclusion

The micro and macro business environment of companies are influenced by various factors. They can change them when necessary (such as production, marketing strategy, etc) by taking immediate actions with respect to internal factors. Conversely, companies cannot take action directly on external factors. But in order to minimize their impact they can identify them with appropriate time.

Managers decision making capability can be based on the use of these tools and analysis the company can obtain a general overview about the company and aspects what kinds of impacts can happen such as politics, laws and regulations, economy, environment, technology and so on.

Due to high competition, with demanding requirement companies should use these tools such as PESTEL or SWOT to build up a successful policy and competitive with the market. BP has developed a variety of strategies by focus on customers, by producing quality products for domestic and international market and it is always doing a great job for the benefit of the society, employees, and environment.