Your SlideShare is downloading. ×
THE "GREEN" PATH TO COMPETITIVE ADVANTAGE
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

THE "GREEN" PATH TO COMPETITIVE ADVANTAGE

1,498
views

Published on


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,498
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
19
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. THE “GREEN” PATH TO COMPETITIVE ADVANTAGE A COMPARATIVE ANALYSIS OF BP AND EXXONMOBIL’S BUSINESS STRATEGIES Summary This paper will examine the sudden reversal of British Petroleum’s stance regarding the environment and climate change. Within several years, BP went from an opponent of environmental regulations to one of the leading oil companies promoting exactly such change in its own business lines. With the change came an aggressive marketing campaign using “green” strategies, and the company sought to move its image away from oil. The following will provide a background into the energy industry and the environmental debate, as well as the business strategies of BP and ExxonMobil, to argue that BP’s decision reflected an attempt to garner first- mover advantages through a new “clean” reputation. In short, the campaign was and is a public relations game to gain competitive advantage in the industry. The Puzzle The debate regarding climate change began in the late 1980’s as scientific evidence presented models relating manmade emissions to atmospheric change and global warming. The international polemic had begun and much of the world’s attention focused in the mid-1990’s on the proposed Kyoto Protocol, which would lower emissions of greenhouse gases (GHGs) below the 1990 levels. Governments and the business community alike formed institutions and lobbying organizations to study the effects of such emissions reductions. The energy industry has been greatly impacted by environmental regulations since the 1970’s and formed the Global
  • 2. 2 Climate Coalition (also known as the Climate Change Convention) to oppose any government action against global warming. The Global Climate Coalition represented oil and energy industry big wigs such as ExxonMobil, Shell, British Petroleum (BP), and Chevron. In 1996, however, the organization lost much of its legitimacy as BP left the coalition, followed by Shell. The industry’s once unified voice became fragmented as BP changed course and initiated a “green” business strategy. Since that time, BP has launched a rebranding campaign emphasizing support for emissions reductions and the Kyoto Protocol. Meanwhile, ExxonMobil has been vilified for its continued criticism of such regulations and apparent reluctance to invest in “clean” sources of energy. As with any sharp reversal of policy, the question arises as to why BP chose to pursue such a green strategy. I argue that BP employed an aggressive green marketing campaign to improve its image and gain market share in an increasingly competitive industry. Furthermore, I propose that the timing of the move may be explained by three things: 1) the long-term view embraced by BP’s corporate culture; 2) the heightened British and European emphasis on meeting the Kyoto GHG emissions reductions; and 3) the British and European public’s desire for environmentally-friendly products. The Context In the late 1990’s BP found itself struggling in a quickly consolidating industry. Ranked twelfth in oil production and fourth in both refining capacity and marketing, it had been unable to really distinguish itself as a leading oil company (Podolny and Roberts: 1998). Attempting to improve its competitive position, BP merged with Amoco Corp. in 1998 and acquired Atlantic Richfield (ARCO), another major American oil company, in 2000. BP’s operations are now in
  • 3. 3 all areas of the oil industry: exploration and production, gas and power, refining and marketing, and chemicals. The majority of its operations are located in the U.S. (42%), followed by the U.K. (23%), the rest of Europe (18%), and other countries (17%) (Standard and Poor’s: 2002). Meanwhile, Exxon, formerly Standard Oil, was in a better market position throughout the 90’s. Ranked eighth in production, fourth in natural gas, and second in both refining capacity and marketing, it found itself consistently behind Shell, then the industry’s largest private company (Podolny and Roberts). Exxon enhanced its industry position in 1999 through its acquisition of Mobil, another leading American oil company. Now known as ExxonMobil, the company’s principal business is energy, involving the exploration, production, transportation and sale of crude oil and natural gas, and the manufacture, transportation and sale of petroleum products. The company is heavily involved in the manufacture and marketing of petrochemicals including olefins, aromatics, polyethylene and polypropylene plastics and a variety of specialty products. Other business lines are in the exploration, mining and sale of minerals such as coal and copper, and the company also has interests in electric power generation facilities (Standard and Poor’s: 2002). This industry context, combined with the Kyoto debates, led to BP’s green strategy and a reorientation of the industry’s internal debate. As mentioned earlier, energy companies formed a united front in the 1980’s and early 1990’s against the sort of mandated emissions reductions contained in the 1997 Kyoto Protocol. Emphasizing the uncertainty of the science, lack of accurate measurement techniques and the high costs involved, businesses advocated a market- based, free-trade and voluntary approach to solving environmental problems (“Earth Summit: World Business …”: 2002). While not denying the existence and problem posed by climate change, companies urged the development of long-term solutions that would minimize the risk of
  • 4. 4 climate change from energy use without unacceptable social and economic consequences (www.exxon.mobil.com). Why Go Green? The BP Strategy The discussion regarding the destructive nature of GHG emissions continued to play a prominent role in the public debate and is cited by BP executives as the reason for their company’s change in tune. A policy adviser to BP CEO, John Browne, stated that, “We felt, and still feel, that the scientific evidence on global climate change is inconclusive. But we felt that the coalition’s public statements were inappropriately dismissive” that climate change due to human activity could be a serious social problem (Reinhardt: 2000). So why would BP choose to voluntarily impose upon itself the high costs involved in restructuring its business, especially given the fact that it too believed that scientific evidence of a causal link was lacking? As with other cases in which a company reversed course from an entrenched industry position – i.e. DuPont and its production of CFC’s or the Starkist switch to dolphin-safe tuna – BP presented its decision in terms of the public benefit. It reoriented its business because it wanted to “do the right thing,” not because it hoped to increase its profits or one-up its competitors. BP’s decision to go “green” however was a calculated public relations move designed to garner the company first-mover advantages. To a certain extent, it has succeeded. Not too long after refusing to renew its membership in the energy industry’s Global Climate Coalition, BP embarked on a marketing campaign to rebrand itself. The company wanted to “ditch its image as an old-fashioned oil group and rebrand itself as an environmentally-aware energy and general services company” (“BP” in Marketing: 2002). As part of a £100 million rebranding program, BP adopted the “Beyond
  • 5. 5 Petroleum” mantra and redesigned its logo from the former shield to the new “sunburst.” Both of these are meant to reflect an interest in cleaner, more environmentally-friendly fuels such as natural gas and solar power. The current ad campaign “BP on the Street” continues to promote the green-company image. Citizens in New York, Illinois, California and Washington, DC are featured discussing their views of oil companies, alternative fuels and other energy-related topics. Each ad concludes with BP commenting on actions it is taking to address these concerns (Darbonne: 2001). The campaign has grabbed the public’s attention and brought praise from environmental groups. BP’s stated goal is “to do no damage to the environment” (www.bp.com). Four years ago the company set a target to reduce GHG emissions from its operations by ten percent. It accomplished this goal last year at a cost of $150 million, which it has since regained through the $400 million in savings from new production efficiencies (Hanley: 2002). It accomplished this partly by initiating an internal market of emissions credits, allowing dirtier business lines to buy “credits” from cleaner ones (Skelton: 2002). Having cleaned up much of its production, the company is beginning to go beyond the goal of “no damage” to positively benefit the environment. This is being done through local plans to conserve and improve the quality of natural habitats and precious resources (www.bp.com). In addition, BP has diversified its investments to become a leader in solar power, and now accounts for almost a fifth of the world solar market. Continuing the improvement of its own energy efficiency, it has plans to build the “world’s most environmentally friendly service station.” BP will install solar panels and wind turbines to generate up to half of the station’s power (Darbonne). The company appears to be taking a proactive leadership position in anticipating the inevitable shift to cleaner, less carbon-intensive fuels. It plans to increase
  • 6. 6 investment in lower-carbon energy markets like solar and hydrogen to $300 million over the next three years, and is also shifting its focus from oil to natural gas (Thomas: 2001). Going Green: Contributing Factors ExxonMobil would argue that BP’s move to a green strategy to enhance its market position is riskier than it may appear. John Browne, BP’s CEO is likely to agree. It was his philosophy, however, along with the tide of opinion sweeping through Britain and Europe, that contributed to the social and economic environment BP concluded would support and reward its gamble. Three factors encouraged BP’s decision to gamble on a green strategy. First, BP’s corporate culture and executive leadership were more apt to accept risk and adopt a long-term perspective to enhance their market position than their competitors. Those familiar with BP’s history assert that the company has always been image-conscious. The concern with public perception began in its earliest days with its famous shield logo in 1924 and the enclosure of the letters ‘BP’ in the shield in 1931. The image evolved over the years with the adoption of the green and yellow colors in the 1940’s, an explosion of advertising in the 1950’s, the use of animation as well as macho imagery throughout the 60’s and 70’s, and taglines like “BP. Britain at its best” and “BP. On the move” (“BP”). Image has consistently been one of the company’s tools for expansion. The decision to adopt ambitious green strategies like the emissions reduction target also stemmed from previous management experiences. Executives were influenced by several positive experiences with “stretch” targets in the environmental arena as well as outside it. In the early 1990’s for example, the chemical company halved its emissions of air pollutants (Reinhardt). Such previous successes undoubtedly encouraged accepting the risks of a green strategy.
  • 7. 7 Second, the emphasis within the British government and those of other EU nations on reducing GHG emissions to meet Kyoto targets provided further incentives to adopt green strategies. As a British company and one whose European sales typically approach fifty percent of its total (42% in 2001), BP saw an opportunity to meet the rising demand for cleaner energy. Britain for instance faces a fall in supply from its traditional sources of energy and must also seek to reduce its GHG emissions. Oil and gas from the North Sea had been a secure supply of energy for the last quarter century, however, the reserve is now ageing and the UK must look elsewhere for secure supplies (Lloyd’s List: February 15, 2002). Furthermore, due to decommissioning, Britain will lose much of its nuclear supply of energy (currently 25% of the total) (Webb: 2001). Given the decline in energy from these sources, the British government has called for an expansion of renewable sources. The review by the Performance and Innovation Unit, Prime Minister Blair’s think-tank, called for a tenfold increase by 2020 of the use of renewables, which is equivalent to 20% of the country’s energy mix (Lloyd’s List). For the moment, gas is the dominant fuel, but the pendulum appears to be swinging towards greener energy sources. Third, British and European citizens are typically more attune and supportive of environmentally friendly companies than Americans – one may point to the European sensitivity, and American indifference, to hormone-injected beef or genetically modified foods. As a major European energy supplier, BP used the heightened interest surrounding the Kyoto debates, to capture the attention and business of the European public. As the ultimate consumer of BP products, favorable public opinion is extremely important. All Is Not As It Seems
  • 8. 8 While BP is the environmentalist’s friend, ExxonMobil has been a target of the environmental lobby’s wrath. It should be noted that BP’s green strategy has not gone uncriticised, and it is not drastically different from the rest of the industry. BP is still a company that produces mainly oil and gas, and contrary to its critics, ExxonMobil has taken steps to promote environmental protection. Many in the oil industry have questioned the merits of BP’s greenery. “People are rather cynical about it [BP’s environmental record]” and support the argument that the company’s efforts have more to do with public relations than welfare (Buchan and Buck: 2002). Others have accused BP of failing to honor its commitment to seek alternatives to fossil fuels (Mortishead: 2001). Even Greenpeace has accused the company of using its climate change policy as a “cover” to continue its traditional oil production activities. What is perhaps a better indicator is the distinction seldom noted when discussing BP’s reduction of its GHG emissions. Its aggressive target to reduce emissions by 10% from 1990 levels only affected the company’s own emissions and did not extend to reducing the emissions of the consumers of its products. While emissions from BP’s refineries were reduced, nothing was done to reduce the emissions released when a customer drove her car (Reinhardt). ExxonMobil on the other hand, has not been credited for its efforts to protect the environment and reduce GHG emissions. The company was one of several to begin reducing emissions from its refineries in the 1970’s. Since 1973, the company has improved its energy efficiency by more than 37% through the more efficient production of electricity. In 2001 it spent $1,782 million ($505 million of which was capital expenditure) on environmental projects; an amount representing 11.6% of its net income (SEC Report: 2001). In the same period, BP spent $850 million on environment-related projects, or 10.5% of its net income (SEC Report:
  • 9. 9 2001 and Darbonne: 2001). Lloyd’s Register of Quality Assurance has attested that ExxonMobil’s Operations Integrity Management System meets the intent and requirements of the ISO 14001 environmental standards, and has also found “ExxonMobil to be among the industry leaders in the extent to which environmental management considerations have been integrated into ongoing business practices.” Furthermore, the company has concentrated its research efforts in the development of new energy systems with lower carbon emissions and increased fuel efficiency, and has been collaborating with General Motors and Toyota on fuel cell technologies. Unlike BP, ExxonMobil has not only sought to improve environmental performance on the supply side, within its production lines, but also on the consumer end (www.exxon.mobil.com). ExxonMobil’s Approach to the Environment and its Business Rather than pursuing a riskier long term approach like BP, ExxonMobil has chosen to focus on protecting and improving its short and medium-term investments. The uncertainty regarding best technologies and regulatory regimes, as well as the high costs of renewable energy and the public’s unwillingness to pay higher energy prices, all contribute to support ExxonMobil’s stance. The company acknowledges the importance of renewables in the long run, but views hydrogen and fuel cell technologies as having the greatest potential to reduce emissions from transportation. Given that the industry will be dominated by oil and gas for the next thirty to fifty years, ExxonMobil views reducing the environmental impact of their use as the best means of protection (“Environment: BP Beats Emissions Target”: 2002). To further these more immediate improvements, the company is collaborating with Toyota and General Motors to
  • 10. 10 explore options such as hybrid vehicles that combine conventional battery-powered systems for greater fuel efficiency (www.exxon.mobil.com). This approach to environmental protection reflects the uncertainty of regulations. Companies such as ExxonMobil are reluctant to take drastic measures to reform and “clean” their operations because it is difficult to calculate the costs and benefits of such investments. For instance, if a company were to build a more efficient plant now, before regulations are in place, those actions may not count towards credits when regulations are written years later. In the prevailing market, firms are finding it difficult to calculate liability because it is contingent on future regulations. A report being drafted by the Rose Foundation for Communities, a shareholder advocacy group, predicted shareholder losses from “fines, penalties, and cleanup costs due to violation of environmental laws, increased costs due to changes in environmental regulation, and greater-than-expected costs due to understated or undisclosed liabilities” (Cortese: 2002). Another report by the World Resource Institute, an environmental research group, asserts that regulatory and other efforts to curb climate change may cause shareholders in leading oil and gas companies to lose six percent or more of the value of their investments. ExxonMobil’s focus on improving current energy uses also reflects the uncertain future of renewables due to their high cost and the public’s unwillingness to pay more for energy. According to a report by the Cato Institute in Power Economics, renewable sources of energy such as solar and wind power, face a trajectory of rising costs and cannot compete with conventional generating technologies. The production costs of renewables vary widely due to the dependence on their location. Therefore, ideal sites will produce lower-cost power but the number of such sites is limited. Therefore, ideal sites will be developed before higher-cost sites, causing the future price of renewable energy to rise. Furthermore, the dependence of production
  • 11. 11 costs and generating capacity of solar and wind power on weather conditions, makes them unsuitable sources for continuous power generation. Traverse City Light and Power for instance, installed one of the largest wind generators in the country in 1996. Wind speeds have been fifteen to twenty percent below projected averages, however, and the plant has produced only sixty-seven percent of the anticipated electricity (Taylor and Vandoren: 2002). If one were to take public opinion polls at their face value, investments in renewable energy might be more attractive. Over the last several years, the polls have continued to suggest that consumers are willing to pay higher energy costs if doing so will improve environmental quality. In reality, this is not the case. One may point to the US debate several years ago during the Clinton administration over a proposal to raise taxes on gasoline. The proposal met strong resistance from the American public. Examples of cases where Americans are offered a choice between energy sources also points to the public’s unwillingness to pay for renewable energy. Across twenty-eight states, eighty utilities offer special packages of renewable energy to ratepayers at a premium. The power costs between 0.4-20 cents per kWh more than the conventional power in these plans, with a median premium of 2.5 cents per kWh. Due to the higher costs, no more than one and a half percent of customers in any state have signed up for such programs (Taylor and Vandoren). Conclusion While the ultimate success of BP’s green marketing strategy and bid to gain competitive advantage will be revealed in the long term, it has been successful in improving its image and gaining brand recognition. In an increasingly competitive industry, the image and recognition gained from first-mover advantages will most likely prove fruitful. ExxonMobil on the other
  • 12. 12 hand, has not ignored the environment, but due to its sheer size on the global market, it does not feel the need BP does to use such strategies to gain competitive advantage. As one industry expert heard ExxonMobil executives say, they will continue to serve the interests of shareholders and will invest in the technologies they feel will best meet current energy needs. The company is prepared to “take the hits” as they come and believes it will withstand the criticism (Goldwyn, David: 2002). BP, however, does not have ExxonMobil’s luxury of size. The majority of its effort may be a public relations ploy, but as industry expert David Goldwyn states, in the current competitive climate, a company’s “reputation is as big as its market” and the PR game isn’t such a bad idea.
  • 13. 13 Bibliography “BP.” Marketing (London). August 1, 2002. “BP p.l.c.” Standard and Poor’s Corporate Descriptions plus News. September 14, 2002. Cortese, Amy. “As the Earth Warms, Will Companies Pay?” The New York Times. August 18, 2002. Darbonne, Nissa. “Painting the Elephant Green.” Oil and Gas Investor. December 2001. “Earth Summit: World Business Council Joins Greenpeace in Support of Kyoto.” AFX. August 29, 2002. “Environment: BP Beats Emissions Target.” Petroleum Economist. April 2002. “ExxonMobil Corp.” Standard and Poor’s Corporate Descriptions plus News. September 14, 2002. Goldwyn, David. Personal Interview. President of Goldwyn International Strategies, LLC. October 11, 2002. Hanley, Paul. “Oil Company Saves Millions Exceeding Kyoto Target.” The Star Phoenix. September 24, 2002. Lloyd’s List. Insight section, p. 7. February 15, 2002. Mortishead, Carl. “Oil Barons Find Price Pressures Supplanting Green Concerns.” The Times (London). April 19, 2001. Podolny, Joel and John Roberts. “The Global Oil Industry.” Graduate School of Business, Stanford University. November 18, 1998. Reinhardt, Forest. “Global Climate Change and BP Amoco.” Harvard Business School. February 28, 2001. Securities and Exchange Commission. 2001 reports for BP and ExxonMobil. Skelton, Chad. “Klein Pushes BP for Sure Word on Arctic Gas Pipeline.” Edmonton Journal. May 17, 2002. Taylor, Jerry and Peter Vandoren. “Renewable Energy; Evaluating the Case for Renewable Energy: Is Government Support Warranted?” Power Economics. March 31, 2002. Thomas, Victoria. “An Oil Major Redefines its Role.” Petroleum Economist. February 2001.
  • 14. 14 Webb, Tim. “Renewables Edge Further into Energy Policy Frame.” Sunday Business. November 11, 2001. www.bp.com www.exxon.mobil.com