For over twenty years, Fulcrium has worked with many Fortune company board executives. In that time, the business environment has become more volatile and the primary need now is for sustainable initiatives to help create a balanced portfolio and drive corporate, business unit and functional performance. They also need to be flexible and able to realign as conditions change – which means constant evaluation of markets, and repeated benchmarking against best-in-class operators inside and outside their sector(s).
Probably the most infamous example is General Electric. Over-confidence in its ability to extend the brand into more and more diverse sectors led to near-disaster before, in August 2017, CEO Jeff Immelt handed over to John Flannery. In October 2017, Mr Flannery explained to investors how completely GE needed to decide what kind of business it wanted to be and how it could create sustainable value excellence:
“The benchmarking review of the company has been, and continues to be, exhaustive… We are evaluating our businesses, processes, [the] corporate [function], our culture, how decisions are made, how we think about goals and accountability, how we incentivize people, how we prioritize investments in the segments … global research, digital, and additive [manufacturing]. We have also reviewed our operating processes, our team, capital allocation, and how we communicate to investors. Everything is on the table … Things will not stay the same at GE.” https://fortune.com/longform/ge-decline-what-the-hell-happened/
The five largest, non state-owned energy companies worldwide (ExxonMobil, BP, Royal Dutch Shell, Chevron and Total) are termed supermajors and hold about 3 per cent of global hydrocarbon reserves. They were created from the late 1990s to hedge against oil price volatility, achieve economies of scale and reinvest cash reserves. While the supermajors got bigger, so did the challenges they face, with implications for their survival.
The good news is that scale is an advantage when exploring for hydrocarbon resources in the most inhospitable and inaccessible parts of the world, in developing technology, in undertaking mega-projects.
The bad news is that “diseconomies” were inherited with consolidation. These include issues of corporate governance, and trying to manage merged behemoths; the reduced accuracy of information flow; slower decision-making; greater responsibility for the safety of staff, contractors and for the environment; and increased emphasis on performance management.
The supermajors are now going to have to up their game to avoid being relegated to lower-value service providers – or eventually face extinction.
“Winning” is often defined as gaining access to and exploring the largest hydrocarbon basins, replacing the produced reserves, successfully developing mega-projects, optimising production, and managing reservoir decline. In addition, decommissioning mature fields, health, safety and the environment have become more important. “Winning” is also defined as being able to strike partnerships with host governments, national oil companies (NOCs), other international oil companies (IOCs), and contractors.
The supermajors are positioning themselves to win by renewing their strategies for corporate governance, organisation, technology, projects, engineering and contracting.
ExxonMobil, for example, is known for its centralised management, while some supermajors give greater autonomy to business units. Both models can work, but the decentralised approach will need robust delegation and accountabilities, otherwise there is a risk the corporate centre, business units and the functions will end up tripping over each other.
BP has embarked upon an aggressive simplification programme. Shell’s corporate mantra over the last few years has been ESSA – eliminate, simplify, standardise, automate.
As part of the simplification drive, every division, function and business unit will need to become a focused contributor to the business. Functions in particular, such as technology, procurement/supply chain, finance, human resources and legal must be organised and managed to world-class standards.
Technology is critically important, but the supermajors do not have exclusive influence over it. The value they add is in screening it in the marketplace, R&D and testing.
Having outsourced some core skills and competencies, the supermajors have become “super contractors” and “super project managers”, bringing together partners, managing and integrating huge programmes and disciplines. In effect, they are managing budgets, risk, delivery, health and safety, quality, timescales and pushing technical limits.
Whether or not they are relegated to becoming low-margin service contractors, they will still need to foster a service mindset. This means becoming agile, responsive and competitive in order to be selected as partners of choice by NOCs and host governments.
The oil-producer cartel Opec and the NOCs are growing sophisticated. They, too, are hiring the best technology and brains in the industry. The supermajors will be obliged to offer propositions that are a lot more compelling when compared to near competitors – pure service companies such as Schlumberger or Halliburton.
When all is said and done, one question remains: are the supermajors just too sluggish to leverage their scale profitably?
Raju Patel is chief executive of Fulcrium (a London-based global benchmarking specialist).
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