Describe BP's strategic objectives in terms of local responsiveness, global coordination, and organizational learning?

Organizing for Performance at BPX



In 1992-3, British Petroleum plc, Britain’s largest firm and the
fourth-largest of the great international integrated oil companies,
faced a major crisis. The company was experiencing its first losses in
its eighty-year history, while internal morale was battered further by
downsizing and organizational upheaval. The Board had asked for and
received the resignation of the Chairman and CEO, Robert Horton. His
replacement as CEO, David Simon, had announced ambitious “1-2-5”
targets to the market: BP would, he promised, achieve $1 billion-a-year
in debt repayments, $2 billion net profits and no more than $5 billion a
year capital expenditure by 1995.



For Jolm Browne, the chief executive of BP Exploration, BP’s upstream
operations that traditionally generated the largest share of the
company’s earnings, the implications of the crisis and of Simon’s
goals were obvious. Quite simply, the firm needed to generate much
better perfonnance from its assets. In his three years at the head of
BPX, Browne had already initiated a new strategy for exploration. This
strategy was paying off: BPX had increased its rate of discovery while
cutting the amounts it spent on finding oil. Getting more from the
existing assets would, however, be crucial. In BPX, this meant lowering
operating costs, getting more production out of its oil and gas fields
and controlling capital expenditures, while still finding and developing
new hydrocarbon deposits.



Brown wondered how to do it.





BRITISH PETROLEUM PLC



The first to develop the petroleum resources of the Middle East and the
leading oil and natural gas producer in the North Sea and Alaska, BP’s
petroleum business was organized into three “streams:” BP
Exploration (BPX), BP Oil and BP Chemicals. Together they were often
referred to as the EP Group. BPX was responsible for the “upstream”
activities of exploration and production (E&P) of oil and natural gas.
It had or was developing production in Alaska, the North Sea, the Gulf
of Mexico, the Atlantic west of the Shetland islands, Colombia,
Venezuela, the Middle East, Australia and Azerbaijan and was exploring
in other areas. BP Oil handled “midstream” transportation and
shipping of crude oil and “downstream’ refining and marketing (R&M)
of petroleum products. It owned refineries in Europe, the U.S., and
Australia and had interests in ones in Singapore, New Zealand and South
Africa. It also owned a fleet of ships to move crude to refineries and
tanker trucks to transport refined products, as well as a major crude
oil trading operation. Refined products were sold through over 15,000
service stations and to commercial and industrial users, as well as at
over 600 airports (through Air BP) and 800 ports (BP Marine). BP
Chemicals operated plants in the U.K., U.S., France and Germany and was
increasing its presence in East and Southeast Asia, with production
focused on three categories of petrochemicals. (See Exhibits 1, 2 and 3
for financial statements, Exhibit 4 for employment data and Exhibit 5
for the Supply/Demand Balance in the Group.)



Historical background



BP was founded in 1909 as the Anglo-Persian Oil Company to exploit the
first commercial oil discovery in the Middle East, which had been made
the previous year by William Knox D’Arcy. In 1914 the British
government, seeking a reliable source of fuel for the Royal Navy, became
a major customer and shareholder. The government’s ownership stake
later peaked at over two-thirds, but it never explicitly involved itself
in company management.



In the succeeding decades, Anglo-Persian expanded throughout the
vertical chain from its upstream base, establishing refining and
marketing operations in the United Kingdom, Europe, Africa and
Australasia. it also expanded E&P geographically, adding fields in Iraq,
Kuwait and Qatar as well as the British Isles, so that by the late l940s
it was the third-largest oil producer in the world. Production remained
focused on Iran, however, whose oil industry Anglo-Persian (by then
called Anglo-Iranian) owned completely. In 1951, the Iranians
nationalized Anglo-Iranian’s assets. A complete international embargo
of Iranian oil followed, ending only with the ousting of the Iranian
Prime Minister. Anglo-Iranian ended up with a 4000 stake in a consortium
that took over production of Iranian oil. The company’s changed
circumstances were recognized that year by the adoption of the new name:
The British Petroleum Company.2



Lacking a marketing presence in the United States and Japan, BP found
itself unable to sell its huge output through its own channels. It thus
relied increasingly on sales to other oil companies. It also developed
global businesses in supplying ships with fuel oil and airplanes with
aviation gasoline and jet fuel. As well, it entered the petrochemicals
business in the 1950s as a way to market its excess hydrocarbons. At the
same time, recognizing the risks of being dependent on only a few major
sources of crude oil located in politically unstable areas, BP
intensified its exploration activities. It had major successes in
Nigeria, Libya and the Persian Gulf, but the more important finds were
in the United Kingdom and the United States.



In the North Sea, BP brought in the West Sole gas field in 1965 and the
massive Forties oil field in 1970. Also in 1970, BP was rewarded for ten
years of exploration in Alaska when the gigantic Prudhoe Bay field was
discovered on the edge of the Arctic Ocean. BP’s experience with
similar geological structures in Iran led it to focus its bidding for
drilling rights towards the edges of the area that was up for lease
(where, additionally, the bidding competition was less intense). This
bet turned out well: the oil was concentrated around the edges of the
field. As a result, although Atlantic Richfield actually struck oil
first, BP owned the rights to 60% of the reserves.



Alaskan oil could not legally be exported from the U.S. Thus, to exploit
the Alaskan discoveries, BP struck an alliance with the Standard Oil
Company of Ohio. Sohio took title to the Alaskan field and 8,500 service
stations in the U.S. that BP had just acquired from Sinclair. In return,
BP acquired the right to receive a maximum of 54% of Standard Oil’s
equity.



The North Sea and Alaska came to provide most of BP’s crude oil
supplies through the 1980s, both because they were so productive and
because of the loss of its sources in the Middle East and Africa to
nationalization. (See Exhibit 6.) The company also became a leader in
the development and use of trading strategies in oil, utilizing the
increasingly effective world spot and futures markets to sell its crude
production and to supply its refineries. As well, it increasingly relied
on purchases from non-BP refineries to meet its retail needs, and on
sales to others’ service stations to absorb the output of its
refineries. The company was led in this “de-integration” by Peter
Walters, who had long advocated using markets rather than assuming that
BP crude should flow through to BP service station pumps. Walters became
Chairman of the company in 1981, at age 49.



The oil price explosions of the 1970s meant that the oil companies’
cash flow increased immensely. At the same time, future prospects for
the industry became very uncertain in the face of nationalizations and
conservation attempts. Most of the major oil companies, including BP,
responded by diversifying. By the end of the decade it had business
lines in nutrition, detergents, minerals, coal, chemicals, shipping and
information technology businesses, as well as oil and gas. To support
this conglomerate portfolio and global scope, Walters instituted a
matrix organization. It involved 11 international business streams and
70 national companies that ran the group’s businesses at the country
level. Each stream had its own CEO and Board and dealt with other
streams at arm’s length. At the top was a large corporate center that
filled a 32-story high-rise in the City of London. The center provided
corporate services, while both the business streams and headquarters had
large staffs involved in strategic planning, operational and financial
control and other management tasks.



When Walters took over, excess capacity downstream and in chemicals was
generating losses of 1.5 million pounds a day. Walters sold refineries
and led BP’s exit from all but a few chemicals businesses. He also
started to divest the non-related lines of business, sharpening the
company’s focus on the long term objective to he an integrated
hydrocarbons business, underpinned by technology. This process was
largely completed by the end of the 1980s. BP also increased its
exploration activities during the decade, searching for hydrocarbons
even in the Netherlands, the home base of Royal Dutch/Shell, the
industry’s largest firm.



Three major structural changes occurred in 1987. Sohio’s
diversification attempts had been particularly disastrous and its
spending on exploration lavish and unproductive. Despite an earlier
agreement that BP would not interfere in Sohio’s internal management,
Walters oversaw the resignation of Sohio’s top executives in 1986. in
their place was installed a BP team headed by Robert Horton, with John
Browne as EVP and CEO. The team quickly implemented a successful
turn-around that laid the basis for HP’s 1987 purchase of the
remaining 46% of Sohio for $7.6 billion. Sohio’s $23 billion in assets
and 43,000 employees were then brought into BP’s other American
interests. The combined operations became BP America.



In the same year, BP acquired Britoil, the former British National Oil
Company, which had, from the time of its founding in 1976, automatically
been awarded 50% interest in all petroleum finds in the British portion
of the North Sea. The two acquisitions together doubled HP’s size.



The company also completed shedding all but a nominal amount of its
government ownership in 1987. Unfortunately, the UK government’s sale
of its remaining 31.5% share coincided with the October global stock
market crash, The Kuwaiti government investment office quickly scooped
up what threatened to be a controlling interest in HP, but U.K.
competition authorities led it to drop its holdings back under 10%. HP
itself bought and retired the shares the Kuwaitis had been pressured to
sell. In the process the company’s debt rose significantly, which
affected HP’s fortunes into the 1990s.



Project 1990



Despite a severe economic downturn during the latter half of the
eighties, BP “had taken the line that it was right to spend through
the recession, ... to ride through business cycles.”3 Large negative
cash flows and high debt levels soon drove the stock markets valuation
of the company to little over asset value. In 1989 Sir Peter Walters
announced his plan to retire a year hence. Named to succeed him as
Chairman and Chief Executive was Robert Horton.



Described in a BP publication as “flamboyant,” “expansive,” and
“larger than life,” Horton had distinguished himself in BP’s
shipping and chemicals businesses before taking on the CEO job in the
U.S. At Sohio he had encouraged delegation of responsibility, supported
by IT, and implemented what he described as “leaner, looser styles of
management control.”4



Walter’s divestitures meant that by 1989 HP was down to just •four
business streams (Exploration, Oil, Chemicals and Nutrition) and had
adopted a regional (Europe, America, Ear East) approach in place of the
previous focus on national markets. The matrix structure that was
designed to control and coordinate 11 businesses and 70-+countries was,
however, still largely in place. Turf baffles, buck-passing and
bureaucracy were rampant, and decision making was slow and cumbersome.
Head office alone had 86 committees, senior executives were attending
hundreds of formal committee meetings a year, and financial proposals
required fifteen signatures before they could be accepted.



A July 1989 opinion survey revealed that BPs senior managers believed
that the company’s structure, committees and command-and-control focus
impeded flexibility and cooperation among units. It also made clear that
they were very uncertain about what the company’s strategy was.



Horton’s response was Project 1990. Developed by a team of young
middle managers, its aim was “to simplify the role of BPs corporate
center, devolve financial authority and responsibility down a flattened
hierarchy, and eliminate committees and layers of control and planning,
.. [forcing] individuals to take responsibility and initiative.”
Horton explained



Corporations which achieve the greatest success will be those which are
prepared and able to respond rapidly, flexibly and imaginatively... What
I’m trying to do is to simplify, refocus, make it clear that we
don’t need any longer to have hierarchies.... What I want to get away
from is a culture where the Chairman says “I really want to know why
the lavatories at the service station in Shiplake are not adequately
stocked with toilet paper.



Chief aims were to simplify and speed up decision-making while vesting
greater authority and responsibility in individual managers. The most
immediate changes were in London headquarters. Ninety percent of the
head office committees were eliminated (along with enough jobs
employment fell from over 2,000 to 350 — that the high-rise office
could be let go and the company retum to its original classic low-rise
office building). Corporate departments were replaced with small,
flexible teams. Investment authority was delegated to the four business
streams, and residual operational responsibility was taken away from the
regional “barons.” Henceforth, the regional headquarters in
Cleveland, Brussels and Singapore would focus on regional strategies,
integrate regional services and represent BP to the outside world.



Project 1990 also aimed to change behavior. Employees were encouraged to
take responsibility and exercise initiative and were given incentives,
including room for failure without penalty, to adopt the new desired
behaviors. They were also encouraged to build working relationships with
one another based on openness, trust and cooperation.



Along with Project 1990, Horton also set about downsizing, cutting 8,000
staff Capital budgets were also slashed. However, he steadfastly refused
to cut the dividend, even in the face of mounting debt, falling oil
prices, reduced margins in refining and marketing, difficulties in
chemicals, eroding Group profits and a deepening global recession. The
downsizing was accompanied by a “proclamation of values, such as
openness, care, teamwork, empowerment and trust,”6 that was
communicated through an extensive workshop and training program.



Employee resentment and bitterness mounted. One employee said: “Horton
treated everybody as though they were head gardener. People could not
bear to have any more sandpaper rubbed over them.” While many within
HP saw that the company needed real change, and some saw the necessity
of Horton’s tough actions, many felt that his talk of values did not
match his style.



On June 25, 1992, the Board asked for and received Horton’s
resignation. Lord Ashburton, a BP outside director, became part-time,
non-executive Chairman. COO David Simon became Chief Executive while
remaining Deputy Chairman. Simon had risen within the firm through a
career focused on downstream, particularly in Europe. The split of the
roles of Chairman and CEO -~ almost as unusual in the U.K. at that time
as the firing of a CEO — reflected emerging concerns within HP, and in
British industry more generally, that the dual role concentrated too
much power in the hands of one individual.



Simon, although popular within BP as calmer, more intuitive and
softer-spoken than Horton, continued the rationalization drive with the
full support of the Board. During 1992, 14,500 jobs were cut, with the
aim of eventually reducing worldwide payroll by 50,000, halving
employment at BP. That year BP lost $811 million on a historical cost
basis ($654 on a replacement cost basis) after write-offs and allowances
for closures and severance payments, compared with a replacement-cost
profit of$ 1.74 billion in 1991. In the face of the company’s first
losses in eighty years, the board concluded that the dividend would have
to be cut by half HP’s share price, already lagging, fell sharply.





BPX: THE HEART OF THE COMPANY



Exploration and production entailed four conceptually distinct phases
(see Exhibit 7). First was the process of pure exploration getting
drilling rights, finding hydrocarbon deposits and determining their
commercial viability. Next came the development stage, where the find
was brought into production. Third was the stage of steady, peak or
plateau production. The last stage was when the field was in decline. By
the 1990’s all of these were highly knowledge- and capital-intensive.



Exploration relied on highly educated, experienced professionals using
increasingly high technology to find hydrocarbons. Professionals also
were responsible for obtaining rights to explore and drill, both by
negotiating with governments and by bidding at auction. Increased
computing power had allowed effective three-dimensional seismographic
mapping of underground geological structures, which lowered the
likelihood of drilling a dry hole, and sophisticated drilling techniques
(including drilling horizontally) allowed reaching potential pools of
oil that otherwise might have been inaccessible or required construction
of additional platforms. Still, the expertise and initiative shown by
the professionals was crucial, and the risks substantial. Browne
described the nature of oil exploration:



When dealing with pure exploration, we’re exposed to huge risk. But on
the other hand, that is what the heart of the company is. So people
wouldn’t regard taking big risks as something very special; it’s
something that we just do. We spend $500 million a year with a potential
outcome of zero value. Equally, it might have the potential of massive
value.



Development and production were also knowledge-intensive activities.
Even after the challenges of getting wells drilled and oil flowing had
been overcome, numerous problems could arise, and good technical and
commercial management could increase yields and extend the life of
fields significantly.



Employees proudly saw BPX as more risk-taking and “out on the edge”
than the rest of the oil industry: “If you joined up with BP, you’d
expect to go to strange places.” Even the politically stable North Sea
and Alaska fields were not easy places to work, although much of the
business activity was in the cities of Aberdeen and Anchorage. With the
Prudhoe Bay and Forties fields steadily pumping out oil and with
opportunities in the Middle East curtailed by nationalization, however,
some of the adventurous element had gone out of exploration at BP in the
l980s.



John Browne



The son of a BP executive, E. John P. Browne had joined BP in 1966 as a
university apprentice. After receiving a first in physics from Cambridge
in 1969, he had worked in the U.S. and Canada in a variety of jobs and
in the U.K. as a petroleum engineer. In 1980 he had been one of the
first of a stream of promising HP managers sent to Stanford Business
School’s Sloan MSc Program. He then worked in BPX, running the Forties
field for a year, before becoming Treasurer of the HP Group and head of
HP’s international finance unit. Sent to Standard Oil with Horton as
EVP and CFO, he also ran Standard’s production company. In 1989, he
returned to London to lead BPX.



Ever immaculate and organized, the soft-spoken, articulate Browne was
known in BP for his keen intelligence, for driving himself to legendary
lengths and for his commanding presence. While holding high expectations
of those around him, he was never known to lose his temper.





Changing the Exploration Strategy

On taking over at BPX , Browne develop an integrated strategy designed
to build on the companies strengths, and confront obvious areas of
weakness. The new strategy covered exploration in terms of scale and
focus, technology, portfolio rationalization and the development of a
distinctive business in gas, as well as the pervasive challenge of
costs.



First, he moved the company to look in new, “frontier” places for
hydrocarbons that would eventually replace the Alaskan and North Sea
fields. This effort would take BP explorationists and production teams
to newly accessible areas with large hydrocarbon potential —
Azerhaijan, Colombia, Venezuela, Vietnam, and deepwater areas in the
Gulf of Mexico and the Atlantic, west of the Shetland Islands. These
were places where extraction was technically difficult or that had been
left unexplored because of Cold War polities or local government
restrictions on oil company operations.



He also led a reformulation of the fundamental process of exploration.
As Browne explained the way things had been done before:



We were [in a particular site], so we drilled. And then we didn’t find
enough, so we decided to spend some more money, and drilled even more.
What I concluded in 1989, when we redid the strategy, was that we needed
to spend less money to find more. Force the focus on areas most likely
to succeed.



This meant focusing on places that were likely to have
“distinctive,” really major hydrocarbon deposits like Alaska and the
North Sea had been, rather than smaller fields.



BPX in fact was able to find major new sources of oil using
significantly less capital expenditure, thereby reducing the costs per
barrel of oil discovery. Within Browne’s first two years, BPX also
sold $2 billion in assets and let go 1,900 employees, while lining up
new exploration deals in the newly targeted areas. “Taken together,
all the new fields will help to raise production by as much as 4- 5 %
per year, with enough opportunities to continue the growth well into the
next century,” claimed Browne. In 1991, Browne was named to the board
of the HP Group as a Managing Director.



The Organizational Challenge



Horton’s Project 1990 had begun “de-cluttering,” reducing the size
and role of corporate headquarters and devolving authority from
headquarters onto the business streams. Through the early 1990s, Browne
ran the E&P stream via a Regional Operating Companies (ROC) model, with
four regionally defined companies between the operating units and the
BPX Global Management Group. This body included Browne, the chief
executives of the ROCs and some senior functional managers. Decisions
were largely made at level of the Global Management Group, with
implementation overseen and managed through the ROCs. At the same time,
discussions in the quarterly performance review meetings (which Browne
very actively chaired) increasingly focused on what was going on in
individual “assets” — specific operating units, such as individual
oil or gas fields or co-located groups of fields.



While the new exploration strategy was paying dividends already, Browne
pondered what organizational changes would permit the major performance
improvements that he believed were possible and knew’ were needed if
the HP Group were to survive the crisis and ultimately meet Simon’s
1-2-5 goals. Browne knew that no simple architectural change would
suffice: It would not be enough to redraw the organization chart,
although that would likely be part of a solution. Getting significant
performance improvements would necessitate fundamental changes in
mindsets and behavior, and inducing these would require changes in both
the management processes and the culture of the BPX organization.



There were, in fact, many alternatives. For example, Exxon, which was
much larger than HP, had long been considered an industry leader in
getting top performance from existing assets. It was very centralized,
with highly regularized, standardized processes imposed throughout the
organization and strict, detailed control being exercised by
headquarters. Increasingly, however, the real performance challenge
seemed to be coming from the “petropreneurs.” These were small,
nimble, independent operators who focused on a limited number of
projects at one or another specific stage of exploration and production.
Despite their lack of scale, they frequently generated much better
returns on capital than any of the majors.



Browne wondered what to do, and where to begin.

























































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