British Petroleum Company was ranked fourth in the FTSE 100 all-share index ranking as at close on Friday, 10 August 2012 (Stockchallenge.co.uk. 2012). The company’s shares were selling at a price of $ 448.60 with a market capitalization of 85,334.4 million (Stockchallenge.co.uk. 2012).
The company is one of the biggest vertically integrated oil and gas companies in the world. The chief operations of the company include exploration and production of crude oil and gas (Bp.com. 2012). The London based firm is also involved in marketing and trading of natural gas, liquids, and power. British Petroleum Company has a work force of more than 90,000 people (Bp.com. 2012). BP is actually ranked at the world’s 3rd largest energy company and is positioned as a multinational oil company (Bp.com. 2012).
SWOT analysis of BP
SWOT analysis is a widely accepted technique through which managers quickly assess their company’s strategic environment (Managementstudyguide.com, 2012). This technique assumes that an effective strategy of any company is dependent upon a balance between the company’s internal resources (strengths and weaknesses) and its external environment (opportunities and threats) (Managementstudyguide.com, 2012). A good balance between the two increases the firm’s strengths and opportunities while reducing its weaknesses and threats. Though simple, when accurately applied, the technique has powerful implications for the design of an efficient strategy (Managementstudyguide.com, 2012).
Table illustrating the SWOT analysis of British Petroleum Company
· Dominant market position
· Vertically integrated operations (Participates in London Stock Exchange, IPO in New York Stock Exchange. and is listed in the FTSE 100 Index) (IEA, 2012)
· Wide geographic presence (Operates petrochemical businesses worldwide through the network of its subsidiaries and retail brands(Amoco; ARCO; BP Express, BP Connect; BP Travel Centre; ampm; Burmah Castrol etc) (IEA, 2012)
· Strong brand management driven by the ‘Beyond Petroleum’ slogan (BP Amoco strong brand loyalty for oil) (IEA, 2012)
· Decline in crude oil and natural gas production
· Controversies and criticisms (Launch of controversial business with the Baku-Tbilisi-Ceyhan pipeline) (IEA, 2012)
· Increase in petrol prices in the UK
· Accidents and incidents such as explosion of BP refinery in Texas that in 2005 and criminal charges due to the oil spills (IEA, 2012)
· Closing of Alaskan oil wells in the united states
· Increased demand for natural gas in north America
· Rising demand for petrochemicals and refined products in china (IEA, 2012)
· Oil and gas exploration projects such as expansion of frontier areas suitable for BP’s future reserves (post-Soviet Union territories) and extension of strategic oil and gas acquisitions in North Sea area (IEA, 2012)
· Investment in the research of alternative fuel methods, including hydrogen, natural gas, wind and solar
· Launch of more elastic price strategy to compete major rivals (IEA, 2012)
· Infiltration of resources in the north sea (IEA, 2012)
· Instability in some oil producing regions such as the middle east
· Environmentally unsound policies resulting to environmental regulations due to frequent oil spills (IEA, 2012)
· Occasional refinery explosions
· Lawsuits considering the company’s ecological activities
· Sale of corporate-owned stations
· Competition from Shell and Chevron
· Corrosion in pipelines (IEA, 2012)
Porter’s five forces affecting BP
This framework assists clients to analyze the competition between incumbents, risk of new entrants and replacements, and the bargaining power of buyers and suppliers in an industry (Porter, 1980). The bargaining power of BP’s suppliers is relatively high, motivated by the small number of alternative energy suppliers and relative lack of information and product choice for buyers (IEA, 2012). Barriers to entry are high due to the large fixed costs and economies of scale required to operate within the industry (IEA, 2012). However, the alternative energy industry experiences a high threat of substitution for lower cost provision within the wider energy industry (IEA, 2012). Competitive rivalry is also very high
Includes factors such as high exit barriers, low industry concentration, high fixed costs, slow industry growth nevertheless alternative energy is imperative for the long term future of the industry, very diverse rivals in validation for strategies to invest among others (IEA, 2012).
Barriers to entry
These include among others large economies of scale required to achieve cost leadership, which is central in energy provision, large capital requirements to set-up operations, hence large number of acquisitions and joint ventures (IEA, 2012).
Threat of Substitutes
Include lower, but growing inclination for buyers to substitute to alternative energy because of higher cost, hence, high price-performance trade-off between substitutes (IEA, 2012).
Bargaining Power of buyers
Comprise low bargaining leverage of buyers, low buyer volume, low buyer information, high importance of brand identity, high availability of substitutes and relatively high buyer incentives, in terms of tax breaks and energy provider buy-backs (IEA, 2012).
Bargaining Power of Suppliers
Consist of low concentration of alternative energy suppliers and high importance of volume to industry development and survival (IEA, 2012).
Conclusions and recommendations
BPs strategic plan entails having relentless focus on safety and the firm’s strengths which above those mentioned in the table include: “exploration, giant fields, deepwater, gas value chains, a world-class downstream, technology and relationships” (Bp.com. 2012). In summary, the company should aim to have a sharp focus on safety and risk management, capitalize on their strengths, become stronger and more focused yet simple and more standardized and finally create more visibility and precision to value (Bp.com. 2012). As a result of these measures, the company aims to achieve a vigorous portfolio management, set up new upstream projects with unit working cash margins twice the 2011 average, make around 50% more annually in working cash flow by 2014 against 2011, use half of incremental operating cash for re-investment, and the other half for other purposes including distribution, and finally have a strong balance sheet, with gearing in the lesser half of the 10-20% range over time. Gearing in this case refers to the ratio of the group’s net debt to net debt plus equity and is a non-GAAP measure (Bp.com. 2012).
Bp.com. (2012). Our business strategy. Retrieved 14 August, 2012 from http://www.bp.com/sectiongenericarticle800.do?categoryId=9021974&contentId=7072362
IEA. (2012). World energy outlook 2012: International Energy Agency. Retrieved 14 August, 2012 from www.iea.org
Managementstudyguide.com. (2012). SWOT analysis. Retrieved 14 August, 2012 from http://managementstudyguide.com/swot-analysis.htm
Porter, M.E. (1980). Competitive strategy: techniques for analyzing industries and competitors. New York: Free Press.
Stockchallenge.co.uk. (2012). FTSE All-Share Index Ranking (unofficial guide)
as at close on Fri, 10 August 2012. Retrieved 14 August, 2012 from http://www.stockchallenge.co.uk/ftse.php