Grand Strategy in Business

From the Strategist at BP

Grand Strategy and Business Strategy

Nick Butler Speech on 06 February 2006 at the Institute of Strategic Studies, Yale UniversityNick is Group Vice President for Strategy and Policy development at BP.

BP grand strategy

Ladies and Gentlemen, it is a great privilege to be here, but somewhat daunting to be speaking immediately after you have been through a class given by Paul Kennedy and Charlie Hill on the Grand Strategy of Philip II and Elizabeth I.

There would be a grave danger of sinking into bathos if I were to try to pretend that companies are in any way comparable to great nations. They aren't, and that's why companies don't talk in the language of grand strategy.

Most business decisions are focused on actions on a very limited practical scale.

Many decisions and choices which are labelled as "strategic" are, in the terms used in this course, simply tactical and operational.

The launch of a new product, the entry into a new market, a shift in organisational reporting lines could not possibly qualify for analysis as "grand strategy" however important they are to those directly involved.

Even really big, global businesses have nothing comparable to a national strategy.

Businesses have no armed forces; no binding faith; no patriotism - no flag to which people pledge allegiance.

Businesses after all are not permanent institutions but merely artificial temporary creations established to serve particular purposes.

Some, BP included, have existed for many decades but it is always worth remembering that 40 per cent of the companies which comprised the Fortune 500 in 1985 no longer exist today. Great names such as Pam Am and TWA have gone.

Even in the companies which have survived the mix of assets and people changes all the time.

Businesses have no fixed territory and no fixed population. In some cases they do not even have a fixed set of activities.

A company can shift what it does and, apart from the name, some of the largest companies in the world do things now which are quite different from the things their predecessors did 20 or 30 years ago.

People join companies on the basis of rewards and the expectations of rewards.

Many people are very loyal, often in the face of adversity, but the relationship is always transactional. People move around, often several times in a working lifetime.

They are no doubt loyal to the company they work for at each particular moment in their careers but they could be just as loyal to someone else tomorrow.

Equally, of course, the relationships between investors and companies are transactional.

Investors, almost by definition, also move around in search of the best returns.

In essence the life of a company is contingent on performance. Companies are driven and survive or fail on the basis of results.

Equally the process of competition which is at heart of thinking on business strategy is different from the competition between nation states which is the focus of your coursework.

For business there are no such things as peace and war. But there is intensive competition - a battle fought every day but a conflict in which no one dies, and in which the outcome is severely constrained by regulation.

Companies compete but within strict legal limits on the market share they can win.

Typically even the strongest and most successful business is constrained from taking a share in any particular market of more than 25 per cent. In many markets the limit is lower.

So life is very different for the Chief Executive of a major company from the life of Philip II or Elizabeth I.

There are, however, some similarities and some ways in which the language and thought process of "grand strategy" does apply to business.

There are ways in which the actions and thinking of some international companies are recognisable as strategic in the full sense.

To get a definition of "grand strategy" I went back to Paul Kennedy's book "Grand Strategies in War and Peace" and found there a series of points each of which translates without too much difficulty into the language of business.

Business does have "interests" and does seek "to control and utilise all its resources to promote those interests".

For businesses the resources to be utilised include people, assets, market positions, brands, and technology.

Strategy for a major business as for a nation is about "vision - and about a view of how the world is and could be changing";

about the detailed management and "development of resources and skills"; about "diplomacy and relationships with others" and about the "morale" and motivation of a workforce - individually and collectively.

As for nations strategy is "never exact or preordained".

Strategy is therefore an art not a mathematical science.

Strategic choices are matters of "judgment and leadership", requiring a "constant and intelligent reassessment of ends and means" and of the competitive response to any particular action or decision.

Most of those things are true for most large businesses.

The oil industry has in addition some unique features which shape our strategic thinking.

First, the commodity we produce is of vital importance to both producing and consuming Governments and that alone ensures that the business is inextricably linked to politics.

On the producers side the revenues from oil and gas development provide the principal source of total income - not just in countries such as Saudi Arabia, Venezuela and Nigeria but also in areas such as Russia, which has a substantial non oil economy and in individual states such as Texas and Alaska.

The volatility of that income can pose a challenge to Government.

The high revenues of the last three years have helped to sustain the popularity of a number of Governments around the world.

A fall in revenues, even if caused by factors well beyond their control, could similarly put some of the same Governments in jeopardy.

The dependence on oil and gas revenue, and the importance of the sector as a source of employment help to ensure that there is a profound reluctance on the part of almost all producing governments to transfer real decision making power in respect of natural resources to companies which are private or foreign.

The nature of the dependence on the other side of the supply demand equation is different but equally powerful.

The supply of energy and particularly of oil and gas is crucial for all modern economies.

The economies of the US, the UK and now of Eastern China rely on commercial energy supplies, and the risk of disruption to those supplies as we saw during the petrol supply dispute of 2000 in the United Kingdom is intolerable for the Governments concerned. Tony Blair has described that dispute as the worst moment of his premiership.

Energy supply, particularly in times when supplies are tight, or when there is tension between producing and consuming nations, rapidly becomes a matter of national security.

The involvement takes different forms.

In China energy is still primarily a state owned and controlled activity, although some of the state companies now have individual and even external minority shareholders. In Europe, key elements in the energy supply process - such as the companies transmitting and marketing electricity and gas - are seen as requiring "national" ownership - usually through the private sector.

All this means that Government in one form or another is never far away from the oil and gas business.

The second unique element which impinges on strategy is the global nature of the business.

For the oil industry this is nothing new. BP, Shell and the other companies created almost a century ago built their businesses through trading.

The spread of economic activity and the search for new resources has taken the companies into an ever wider range of places and technology has created completely integrated global markets which set prices and influence the movement of supplies.

The skills at the heart of the companies involved, however, remain unchanged - exploration, development, trading and marketing.

The market for oil has long been integrated.

The market for natural gas, traditionally limited to the local and regional level is becoming more integrated as the trade in liquefied gas grows and begins to set marginal prices on an international scale.

The third distinctive strategic element is the timescale for investment.

Our investments in the North Sea and in Alaska were made more than 40 years ago and continue to generate revenue. Our investment in Azerbaijan began almost fifteen years ago.

After a long process of development and pipeline construction the first oil from the Caspian fields will reach the world market later this year, with the prospect that the project will run for decades.

These realities mean that at any one time oil companies have to be thinking simultaneously about performance today - from investments made many years ago; about activities and developments for tomorrow - the projects currently under construction; and about the ideas for the day after tomorrow - the activities currently in embryo or even simply at the concept stage which will need to be selected and developed for the long term future.

The industry is also distinctive in the scale and complexity of its operations. That is true in geographic terms. Over 40 per cent of BP's business is in the US; another 12 to 13 per cent in the UK. Beyond that we spread across over 100 countries in at least 25 of which including Russia, Egypt, Trinidad and Azerbaijan we are the largest single international investor. Scale and complexity also characterise the things we do.

We explore for, develop, produce, transport, refine, process and market oil and gas. Our customers are not just individuals on the forecourt but also the world's shipping fleets and its aircraft, civilian and military alike.

The industry is also probably unique in its visibility - in the scale and the nature of informed and uninformed scrutiny it receives from the media and every form of campaigning group. For the constructive it is a potential ally and agent of change and progress; for the hostile its activities provide a platform on which to pursue their own particular agendas.

For the media the industry is a daily source of news.

Last but not least in terms of the strategic agenda the industry is fiercely competitive.

Within the private sector competition focuses on access to resources and markets and on the quality of performance and returns delivered to shareholders.

But competition is not limited to the private sector.

Eight of the ten largest oil and gas companies in the world - measured by reserves and resources held - are state owned companies. As production in areas such as the United States and the North Sea declines their role is likely to grow. 90 per cent of the world's remaining reserves are held by state controlled enterprises.

Uniquely, this is a sector in which the role of the public sector is growing year by year.

How do companies develop strategy in the face of all those factors ?

The response of each individual company to that question will be different because each company has its own history - its own accumulated experience, assets and market positions, its own relationships many of which will have been built over many years and its own distinctive reputation.

But for every company there are four crucial elements which taken together provide the starting point for strategy - history and the legacy of past experience; context - the trading and competitive environment in which one finds oneself; aspiration - the goal and ambitions of those leading the company; and finally the practical judgment of what is possible at any one moment in pursuit of those goals.

I'll talk about BP to illustrate what that means in practice.

First, the history.

BP was created almost a hundred years as a tiny exploration venture, one among thousands of similar enterprises built on little more than an individual's dream of riches and a few thousand pounds of borrowed capital.

In May 2008 oil was struck for the first time in Persia and the Anglo-Persian Oil Company was brought into being. In 1915 the company acquired its first ship - the Ferrara which took crude oil from Persia to England. In the same year Winston Churchill, as a member of the wartime Government in London, took a controlling interest in the company in the name of national security and the need to supply the British Navy's growing demand for oil.

Over the years Anglo Persian widened its resource base, and expanded its trading horizons. New oil was found in, among many others places, Kuwait, Iraq and Nigeria.

Its shipping fleet and downstream refining and marketing business grew as the world gradually shifted its energy needs from coal to oil, and as the spread of mass consumption and prosperity gave more and more people access for the first time to the concept of mobility.

Anglo Persian became Anglo Iranian and then British Petroleum.

The rise of OPEC and the subsequent expropriation of oil assets by the producing states forced the company to look elsewhere for its resources and by the 1970s activity was centred on the North Sea and Alaska.

Such a rapid summary is not intended to do justice to a complex history but rather to indicate the way in which a company's strategy is in part at least shaped by its past, and by the base of experience and skills which that past has created.

When I joined the company in 1977 BP was 68 per cent government owned - an institution close to the British government even though run in all but moments of great crisis on a completely independent basis. Only in 1987 did the company become in the modern sense a private enterprise as the Government shareholding was sold by Mrs Thatcher's government.

But despite the Government shareholding and despite the expropriation and retreat from many of its original frontiers, the company still thought on a global scale and because of its history considered itself the equal of any other business in the oil sector.

History is one input to strategy.

The second is the context in which a company is operating.

As we pick up the story in the early to mid 1990s a number of developments in the world beyond the company helped to shape our strategic thinking.

First, one could see the initial signs of a shift in the market in favour of Asia, following the changes in the leadership and the economic policy of China after 1978.

From the mid 80s onwards a disproportionate amount of incremental energy and oil demand came for the first time from the Eastern Hemisphere.

The second factor was the political changes which had occurred within the other parts of the communist world at the end of the 1980s.

The Soviet Union was breaking up and for the first time countries such as Azerbaijan and Vietnam which had previously been entirely closed to international investment were opening up. So too, prospectively at least, was Russia, known from a distance to be the holder of very substantive volumes of oil and gas.

The changes which were occurring were not limited to politics. Technology was enabling the industry to work in deeper and deeper water.

And advances in engineering were creating new opportunities for the use and transportation of natural gas.

And then there was the cloud on the horizon. The emerging evidence, at first dismissed as the work of eccentrics, but then gradually and painfully accepted by all but the most stubborn, that human activity and in particular the burning of fossil fuels was producing growing volumes of carbon emissions which as they accumulated over time in the earth's atmosphere could alter the world's climate.

The turning point for many came with the publication of the first reports of the highly distinguished International Panel on Climate Change during the early 1990s.

Where was BP in this period of dramatic change ?

The two areas which since the 1970s had provided our traditional resource base - the North Sea and Alaska - had both reached plateau production before entering a gradual long term decline. Through the 1970s and 80s the competitive order of the industry had been redrawn.

By the early to mid 1990s there were two serious major players - Shell and Exxon, half a dozen medium sized companies including BP and a host of small niche specialists focused on specific areas of geography or technology. On most competitive measures BP was 4th or 5th in the industry.

Culturally too the company was trapped in the past. Few women were employed and even fewer were promoted. Anglo Saxon males continued to dominate as did an attitude of wary hostility to NGOs, environmentalists and other external observers and critics.

To the history and context we have to add the aspiration. What did we want to do, and what did we see our purpose as being. ?

At one level, as for any company, the strategic purpose was survival - the ability simply to keep going, and to avoid predators. But for a major company with some history survival is never sufficient as a definition of purpose.

The objective was (and remains) to be the leading player in supplying energy - the most competitively successful as seen by both consumers and investors.

Good strategy, anywhere, starts with an acceptance of reality - and it was certainly clear by the early to mid 90s that radical change was necessary.

The actions taken I believe match Paul Kennedy's definition of strategy as a combination of steps taken on many different fronts in pursuit of a single objective and purpose.

Strategy for BP in the 1990s began with a focus on performance - a drive to reduce costs and to focus investment on a high graded portfolio of the assets with the highest potential.

Bureaucracies had to be removed and underperforming assets sold. Through the early 1990s the company went through a painful process of downsizing.

At the same time performance required the completion of the evolution from being an institution – the commercial wing of the British foreign office in one half joking description - to being a fully competitive private company.

To be competitive it was clear that we needed to match the scale and reach of those leading the industry and to be global in a business which through economic change was moving beyond the transatlantic marketplace which had developed over the previous half century.

It was equally clear that the necessary scale and reach could not be attained through investment in the existing asset base alone. The opportunities available were too limited and the need for change too urgent for organic growth to be a viable option.

The necessity therefore was to break the tradition of an industry which had seen no significant mergers or acquisitions for the previous 90 years.

With very few exceptions the landscape of the oil and gas business in 1995 was the same landscape which existed after the break-up of Standard Oil.

Forcing change was not easy but after one initial false start we moved rapidly to consolidate alliances with the American companies Amoco and Arco and the UK based lubricants business Castrol.

These steps set in train a series of mergers and combinations across the industry including the combination of Mobil with Exxon and the merger of Total, Fina and Elf in Europe.

It also became clear in the mid 1990s that opportunities were opening up in Russia, and that access represented a great prize for companies seeking natural resources.

Our experience there, which has been well documented, is a vivid illustration of the way in which different elements of an overall strategy can reinforce one another through time.

Our initial investment – taking a stake in a Russian venture called Sidanco – proved unsuccessful. We had chosen the wrong partners and more important had not developed a sufficient presence in Russia to be taken as seriously as was necessary in a country moving through a complex period of transition.

Having rescued some of the value which could have been lost through Sidanco we were helped in making our second step by the increase in scale which had come with the mergers. By 2003 BP was more than six times the size of the BP of the mid 1990s. We could afford to make a material investment - in the end amounting to $ 8bn in a combination with Russian investors.

TNK BP - the company created out of that combination was at the time the third largest oil producer in Russia and on its own the tenth largest private company in the industry worldwide. But because of the increase in scale which had occurred the investment represented just 10 per cent of BP's capital.

This meant that we could afford to take the risk and in doing so could operate in Russia at a scale and in a manner which made us a serious player in the Russian energy scene.

Mergers and acquisitions helped to provide scope and reach. The combination with Arco for instance brought access to a huge new gas field - Tannguh in Indonesia and in turn access to the rapidly growing market for natural gas in Asia.

Technology - in particular advances into the deep water in the Gulf of Mexico and offshore West Africa - gave us access to another new base of resources, while skills in engineering and drilling reduced costs in the already producing established areas of the North Sea and Alaska, improved recovery rates and extending the life of both provinces well beyond the initial expectations.

Also important was the development of a new alignment with the changing world beyond the company's doors.

In 1997 in a landmark speech at Stanford, John Browne as Chief Executive accepted that the evidence of climate change was sufficient to justify precautionary action. From the perspective of 2006 that sounds unexceptional and barely worthy of note.

But in 1997 the step was regarded as revolutionary by many in the industry and even by a few within the company. We established our own targets to reduce emissions from our own operations and developed our own internal trading system to ensure that the reductions could be achieved at the lowest practical cost.

For the first time, and ahead of all our major competitors, we had embraced a challenge and begun to demonstrate that the industry could be part of the solution and not just a partial cause of the problem.

A change of view on the environment was not the only strategic move. The culture of the old BP - white, male and Anglo Saxon - also started to shift.

To be a global company required a global staff and a global leadership. Colonialism had had its day.

So too had the culture of secrecy which had created the impression so beloved of conspiracy theorists that the oil industry exercised undue and unaccountable political power.

Through the late 1990s numerous steps were taken to embrace transparency and a firm declaration made that BP would make no political or partisan contributions anywhere in the world.

The result of all that can be measured in a number of ways.

In terms of size the market capitalisation of BP increased from $ 39 bn $ in 1995 to $ 250 bn by the end of 2005. After a wave of mergers following BP's initial engagement with Amoco, the industry's competitive map had been withdrawn. By 2005 BP was the second largest private company in the industry behind Exxon Mobil.

The ratio of oil to gas in the portfolio shifted from 85:15 to 60: 40 over the same period, while in geographic terms the company moved from being overwhelming concentrated in Europe and North America to an even balance between the OECD world and the non OECD areas with a further significant shift in prospect as investments in Russia, China, the Caspian, Africa, and Asia all grow in line with plans over the next ten years.

The company's culture has also changed in accordance with the realities of the new geography. There is significantly more diversity in the pattern of employment and a continued engagement with the outside world, including critics, on all the major issues where the company's activities impinge on public policy - including the environment, health and safety, transparency and the management of the revenues generated by resource development.

That, in very rapid summary, is the story so far. Some but not all of the strategic objectives developed in the mid 1990s have been delivered and the company is significant stronger as a result. Others remain as unfinished business.

In strategic terms what can we learn from the experience of the last decade. ?

The first lesson which perhaps Elizabeth and Philip II would recognise is that a cool appraisal of the context is essential if strategy is to be realistic and attainable.

The world is rarely as one would wish it to be, or even more rarely as it was 5, 10 or 20 years ago. To develop a strong and enduring strategy an unbiased understanding of what has happened and is happening is imperative.

Past success provides no guarantee of present or future triumph and strategic approaches which have worked before are in no way guaranteed to work again. Effective strategy, like good bread, must be made afresh for the needs of each new day.

The second and related point is that business is a function of society. Business exists to provide the goods and services which people want to buy and we work at the pleasure of those we serve and the governments they elect. As a part of society investing funds we depend on the social mechanisms of trust and the rule of law.

Business and anarchy do not work well together. To thrive business needs there to be legitimate governments in place and multinational businesses increasingly require the process of government to operate effectively at the international as well as the national level.

However big a company may become it is still smaller than the society of which it is part.

This is true in general and in each particular working environment. Enduring, sustainable success is only attainable if the relationship on which it is founded is one of mutual advantage.

Thirdly, we have learnt that we cannot predict the future. Markets may work over the very long term to produce rational outcomes but business lives in the short term where events and developments are driven by actions and behaviours which are often irrational.

Risk management therefore is about flexibility and the quality of the response to the unpredictable, ever changing pattern of events.

Risk management therefore requires a focus on the quality of people employed, and the strength of the standards and values to which they are required to perform.

The fourth point is the need to understand and respond to the management of scale. Business has not yet found the natural limit of its activities in terms of the size of individual enterprises. In many cases, BP included, companies are several times bigger than they were a decade ago.

The span of attention for senior management is much broader and, in our case at least, more complex. Size is necessary in order to extract the benefits of shared knowledge and economies of scale.

Size is also necessary as we have seen in Russia to ensure that managed risks do not overwhelm the entire enterprise. Size brings access and opportunity. But size also creates a management challenge, requiring an explicit management framework.

Even if the empire is strictly commercial the edge can seem a long way away. Good communications systems and management and control processes help but the question of whether there is a practical limit to size remains open. The Rise and Fall of the Great Powers remains a valid text for business strategists.

Finally, as Philip II and Elizabeth would surely have agreed, leadership in crucial - in understanding the history and the context, in setting the aspiration and in judging the limits of the possible from day to day.

Individual leadership is important in business and companies are made and broken by the leaders they choose. Individual leadership, however, is never enough. For global companies with operations across more than 100 countries a leadership model in which decisions all flowed to the centre would be unworkable.

The central leadership must set strategy and standards.

The implementation of strategy is a matter to be devolved requiring the qualities of leadership to be developed across a wide team.

The other area in which the quality of leadership matters is the ability to weave a whole cloth from a hundred threads. True strategy is holistic.

Technology, reputation, operational performance, relationships, culture, finance, and the development of human talent all matter and their unified direction is a fundamental strategy challenge for the leaders of any enterprise.

Such lessons are important for business not as a matter of history but because the making and implementation of strategy is something which is never complete.

For us the world in 2006 is very different from that of the mid 1990s. BP itself has changed and has added another decade to its history. Energy is more expensive and its supply is regarded by many as insecure. Nevertheless the demand for energy and for oil continues to grow.

The environment is more of an issue than ever and now a matter of popular political concern. The Middle East, the heart of the global oil business, is more unstable than it was a decade ago. Globalisation has changed the shape of the world economy but has yet to displace national identity and interests.

The role of multinationals has grown with the growth of trade and investment across the world economy, but the questions over their identity and loyalties continue to be tested by a political process which is still firmly grounded in the nation state.

Even the largest companies may eschew the rhetoric of "grand strategy" but the challenges and complexities we face do suggest that we have much to learn from those who analyse the relationships between nations, the history of conflict and the rise and fall of great powers.

Thank you very much.

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