Beating Competition in the Oil Industry
My analyses is based on British Petroleum (BP). To date, oil is the main source of energy. The company was one of the world’s largest petroleum and petrochemical companies in the world and had operations in more than 70 countries and had revenues of about US $79 billion. Around 1992- 1995 the company was faced by a myriad of challenges. According to the company’s financial reports of the financial year of 1992 the company made a quarterly loss. This forced the management to rethink their market approach strategies. At the time BP was known for successfully cutting costs in oil production but in the long run had not resulted in any meaningful market gains. The company was faced by a dilemma of whether to pursue a process that would lead to it increasing its market share or get into a partnership. In this strategy, the management proposed a strategy to upgrade its facilities at prime retail sites to improve petrol output, increase non-fuel revenue and also pursue expansion in Eastern Europe. The company was also toying with the idea of forming a partnership with Mobil. Mobil is the world’s third largest oil company which operated in more than 100 countries and had an annual turnover of US$ 73 billion on top of this the company owned 21 refineries and 28 tankers. Like the former, the company had suffered from the Gulf War.
On 29th February 1996, after a talks between BP and Mobil, the company decided to form a partnership. Through this the two companies believed that they would be able to tackle the financial problems that companies in the European Market were facing which were low returns, excess capacity and high exit costs Karel cool et.al. This decision was reached by the company after consultations with its financial analysts who clearly analysed the existing market and made a decision based on what was available in market and also on the best interests of both market players. They argued out that a joint venture was the only viable way of navigating their way into business success and control of the European oil market. The decision making process also involved other players such as lawyers. This was geared at streamlining operations since the companies were keen to retain their assets and equity.3.4 In each country that the companies operated, the two companies would combine their fuel and lubricant businesses through two partnerships one for fuels and the other for lubricants. BP would operate the fuel business and Mobil would operate the lubricants business.
I believe this was the best decision the two companies made. This is because this increased their assets base which increased to US $5 billion, 3.4 billion from BP and 1.6 billion from Mobil. Sales were scaled up to US$20 billion with an estimated 12 percent market share. The companies would also enjoy savings of about US$ 400 million which would come from, synergies that would arise from the complementary role played by the two companies this is because the two company would share stations all over Europe for example in the United Kingdom Mobil’s strong presence in south England complemented BP’s strong presence in Scotland. Also BP’s strength in fuel complemented Mobil’s talent in lubricant distribution. The partnership would also eliminate duplications this is because from that day onwards the company would operate as a single entity and not as two different business entities. This would lead to the company consolidating its portfolio. Selling out assets that were overlapping and this was geared at maximising capacity utilisation. The partnership meant that refineries would be spread across major markets and would thus reduce high transport costs to the retail site a good example is that in many cases, BP had been forced to buy from its competitors in refinery in the UK this is because its refinery at Grangemouth Scotland was too far from its supply network in south of England.
I believe BP would not achieved the above milestones had it decided to go the alternative route of building its own portfolio by increasing its market share by playing solo in the market. The process would have been overwhelming and the company would have had to invest a lot of capital into the process but with the partnership with Mobil the company was able to go back into its profitable ways without using a lot of effort,
REFERENCES
– BP-Mobil and the restructuring of the oil refining industry- Karel Cool, Jeffrey Reuer, Ian Montgomery, Francesca Gee.
– BP audited financial reports of 1987-1996.
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Study Notes:
Beating Competition in the Oil Industry
To beat competition in the oil industry, companies can implement the following strategies:
Invest in technology: Companies can invest in technology to reduce costs, increase efficiency and improve their products.
Diversify product portfolio: Companies can diversify their product portfolio to reduce the impact of fluctuations in oil prices on their revenue.
Increase exploration and production: Companies can increase exploration and production to boost their reserves and secure long-term growth.
Expand into new markets: Companies can expand into new markets to increase their customer base and reduce their dependence on existing markets.
Foster strong relationships with customers: Companies can foster strong relationships with their customers by providing high-quality products and excellent customer service.
Focus on sustainability: Companies can focus on sustainability by reducing their environmental impact and investing in renewable energy.
Collaborate with other companies: Companies can collaborate with other companies to share knowledge, resources and reduce costs.
