Bp in Russia Case Solution

Topics: Petroleum, Strategic management, Russia Pages: 12 (2940 words) Published: July 6, 2013
Introduction:
BP has been operating in Russia since the early 1990s. In 1997, it purchased a 10 per cent stake in Sidanco, the Russia’s 4th largest oil company. The stake was subsequently increased to 25 per cent plus one share in 2002. In 2003, BP merged its interests in Russia with those of TNK to create TNK-BP, a hugely successful joint venture employing around 50,000 people and operating in nearly all of Russia’s major hydrocarbon regions. Since its formation, TNK-BP went on to become Russia’s third biggest vertically integrated oil and Gas Company. In 2005, TNK –BP became the second largest oil producer in the Russian market with an average of 1.58 million barrels of oil produced per day. TNK –BP maintained production growth above the industry average through the consistent application of world class technology, a continuing renewal and reserve replacement in excess of production. The company was moved into Russia’s gas sector by an agreement on major terms of cooperation with Gazprom in June 2005. Over the history of TNK-BP, the joint venture generated around $19 billion of net dividends for BP's shareholders, while paying more than $190 billion in taxes and duties to the Russian Federation.

TNK –BP at a Glance:
INDUSTRY| ENERGY |
PREDECESSOR | TNK- BP|
FOUNDED| In 2003|
KEY PERSON| ROBERT DUDLEY (CEO)|
EMPLOYEES | 50,000|
PRODUCTS| OIL AND GAS|
REVENUES| US$ 24.7 Billion (2006) |
NET INCOME| US$(6.6) Billion (2006) |

Problems:
1. The cultural differences between Western and Russian national cultures, TNK-BP founders appointed Westerners to top positions including CEO, COO and CFO; foreigners from heritage companies were in charge of finance, marketing, planning and environmental protection; and Russians managed extraction, legal support, security, and government relations. 2. The country’s oil export tax was unstable and rising continuously.

External Environmental Scanning:
One of the critical determinants of a firm’s strategy is the evaluation of the threats and opportunities in its competitive environment. If a firm understands these threats and opportunities, it is one step closer to being able to choose and implement a “good strategy”; that is a strategy that leads to competitive advantage.

PEST Analysis:
Pest analysis means monitoring trends in the societal and natural environment. The scanning of economic, technological, political-legal, socio-cultural is needed to get overall idea about the economy.

Political-legal:
1. The Russian government’s restriction on the flow of managers and executives from other countries would make it difficult for BP to introduce Western management standards and establish BP’s corporate culture in Russia. 2. The Russian government stated that they did not have the appropriate law to work with foreign companies, so they canceled some projects for developing strategic oil fields and denied the permissions for buying more than a 50 per cent share in local companies. 3. Unstable export tax, rising continuously.

Economic:
1. Strong Competitors existed in the market. (Shell, Chevron, Total, ConocoPhillips) 2. From 2003 – 2008 oil reserves and production both were increased and thus economy developed. 3. Impact of fluctuating Exchange Rates.

4. Russian Economy and oil price volatility.
Socio-cultural:
1. Russians attitude towards foreign employee was not good. 2. Cultural Differences were existed in TNK – BP.
3. Strong cultural elements changing the environment of Russian energy industry, which reflect the customer preference and of other companies.

Technological:
1. Energy availability was high and costs were comparatively low. 2. Local employee’s skill level was low.
3. No regulations on technology transfer.
4. Renewable energy technologies.

Industry Analysis:

Porter’s Five Forces (PFF):

Bargaining power of Suppliers:
* The industry is dominated by a...
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