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Read Case 6: BP: Organizational Structure and Management Systems (R.M. Grant, Contemporary Strategy Analysis, 11th ed. Wiley, 2022).
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Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case.
The disastrous explosions at BP’s Texas City refinery and its Macondo oil well in the Gulf of Mexico have drawn attention to the organizational structure and management system created at BP by former CEO John Browne.
Discuss the role that specialization with coordination and cooperation played in the BP disaster? Provide examples of organizational capabilities that could have facilitated this process.
What structure is used in your organization and is this model appropriate to the industry in which you work? Why or Why not?
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Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.
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Case6 BP: Organizational
Structure and
Management Systems
When John Browne stepped down as CEO at BP pie in January 2007, he was credited
with having transformed an inefficient, bureaucratic, state-owned oil company into
the world’s most dynamic, entrepreneurial, performance-focused, and environmentally
aware oil and gas major. Since taking up the job in 1995, BP’s market capitalization had
increased fivefold and its earnings per share by 600%.
Even before Browne’s departure, BP’s fall from grace had already commenced.
Concerns over BP’s HSE (health, safety, and environmental) management had been
circulating for years. However, in March 2005 disaster stmck: an explosion at BP’s Texas
City refinery killed 15 employees. This was the first of a series of catastrophes that
destroyed the company’s reputation and threatened its very survival.
In 2006, a corroded pipeline from BP’s huge Alaskan oilfield leaked 4800 barrels
of oil. Then in March 2009, BP was fined for safety violations at its Toledo refine1y.
The next month, an explosion on Transocean’s Deepwater Horizon oilrig drilling BP’s
Macondo oil well in the Gulf of Mexico killed 11 workers and caused one of the worst
environmental disasters in US history. The company took an accounting charge of
$37.2 billion to cover the likely costs of the cleanup, compensation, and legal penalties,
but by 2018 these costs had reached $65 billion.
BP’s troubles extended beyond its safety and environmental mishaps. Between 2003
and 2013, BP’s trading activities in the cmde oil, gasoline, propane, and natural gas
markets were investigated by US regulators, resulting in a series of fines. In Russia,
BP was hit, first, by a dispute w ith its joint venture partner, TNK, and then from the
declining value of its 20% stake in Rosneft following Western sanctions on Russia.
In the recriminations that followed the Texas City and Gulf of Mexico disasters,
attention increasingly focused upon the organizational structure, management systems,
and corporate culture that had developed at BP during John Browne’s tenure. The
management system developed by Browne had produced what the Financial Times
described as “the most swashbuckling, the most entrepreneurial, the most creative”
of the world’s biggest oil companies. 1 Was it also the most accident prone and, more
generally, was it suited to the circumstances and needs of the petroleum industry?
A Brief History of BP
BP began as the Anglo-Persian Oil Company, which had been founded in 1909 to
exploit a huge oilfield that had been discovered in Iran. At the outbreak of World War
I the British government acquired a controlling interest in the company, which it held
until the company (by then renamed British Petroleum) was privatized by Margaret
Thatcher’s government in 1979.
This case was prepared by Robert M. Grant. ©2021 Robert M. Grant.
CASE 6 BP: ORGANIZATIONAL STRUCTURE AND MANAGEMENT SYSTEMS
Under a series of chief executives-Peter Walters, Bob Horton, and David Simon-BP
went from being a highly centralized, bureaucratic organization to becoming less hierarchical and more financially oriented. However, it was under John Browne that BP’s
transformation gathered pace. Browne initiated the acquisitions of Amoco, Atlantic
Richfield, and Burmah Castro! which, not only made BP the world’s third biggest petroleum
major after Exxon and Shell, but also precipitated an industry-wide wave of consolidation. Browne refocused BP’s exploration efforts around frontier regions including deep
waters (the Gulf of Mexico in particular), Angola, Siberia, and the Arctic. Browne also
broke away from industry convention by acknowledging climate change, supporting
the Kyoto Protocol, and rebranding BP as “Beyond Petroleum.” This strategic transformation was accompanied by radical changes to BP’s structure, systems, and culture.
The Atomic Structure
In 1997, the Harvard Business Review commented upon the changes occurring at BP:
Orga nizatio nally, BP is much smalle r and simple r than it was a decad e ago . It n ow
has 53,000 e mployees-down from 129,000. Before , the company was mire d in procedures; no w it has processes that foste r learning and tie p eople’s jobs to creating value .
Before, it had a multitude of baronies; no w it h as an a bundance of teams and informal
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networks o r communities in which people eagerly share knowledge.
At the heart of Browne’s transformation of BP were high aspirations. According to
Nick Butler, former head of strategy at BP:
When Brow ne ste pped in as CEO in 1995, we knew we had to create some thing
diffe rent. We looked at the ROACE [return on average capital e mployed]: we were
all o p e rating w ithin a limite d sp ace. We realized that to break out we had to redefine o urself. It was no t a bo ut beating Exxon , it was a bo ut how to beat the ROACE
of Microsoft. We wanted to create [a] com pany w ith sufficie nt scale to take regio nal
knocks w ith en ou gh reach to survive in almost any circumsta nces.3
Through a series of mergers and acquisitions, Browne created a company with the
scale he believed was essential to become a leader in the petroleum industry. But it also
created the challenge of how to organize such a huge company- by 2000, BP was the
world’s seventh biggest company in terms of revenues. Browne’s approach was built
upon three principles:
• BP operates in a decentralized manner, w ith individual business unit leaders
(such as refinery plant managers) given broad latitude for running the business
and direct responsibility for delivering performance.
• The corporate organization provides support and assistance to the business
units (such as individual refineries) through a variety of functions, networks,
and peer groups.
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• BP relies upon individual performance contracts to motivate people.
At the time, most of the oil majors had a corporate head office that coordinated
and controlled a few major divisions. This divisional structure typically comprised:
upstream (exploration and production), downstream (refining and marketing), and
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CASES TO CONTEMPORARY STRATEGY ANALYSIS
petrochemicals. BP had been similar; its divisional structure had been described as a
“collection of fiefdoms.”
Browne was keen to break away from the management conventions of the oil
industry. His inspirations were the management styles of Silicon Valley and the corporate transformation that had been unleashed by Jack Welch at General Electric. The
structure created by Browne was radically different: the divisions were dismantled and
the company was organized around 150 business units each headed by a business unit
leader who reported directly to the corporate center. According to the deputy CEO, this
was “an extraordinarily flat, dispersed, decentralized process of delivery” that reflected
a division of responsibility between the business unit heads who were responsible
for operational performance and senior management who were responsible for strategic direction and managing external relations- especially with governments. The 150
business units were organized into 15 “peer groups”-networks of similar businesses
that could share knowledge, cooperate on matters of common interest, and challenge
one another.
The Performance Management System
A basic principle of BP’s management system was decentralized, personalized
responsibility:
Under the Management Framework, autho rity is delegated, but accountability is not.
Delegations of auth ority flow from the shareho lders to the Board of Directors to
the Group Chief Executive and dow n throughout BP. BP’s philosophy is to dele gate authority to the lowest appropriate point in the organization- a single point of
accountability. The single point of accountability is always a person, as opposed to
an organization, committee, or o the r group of people, w ho man ages performance
through monitoring and intervention. Those higher in the chain of delegation monitor this performance and report up the line of delegation to meet their accountabilities . This stru cture re flects BP’s philosophy that leadership monitors but does not
supervise the business; leadership only supe rvises the people who report directly to
the m. BP’s Management Framework is evident at every level of the organization . Its
concepts of delegation and accountability begin w ith the shareholders and extend
through each level of the organization. 5
The relationship between top management and the business units was governed
by a “performance contract”: an agreement between the head of the business unit
and the corporate center over the performance that the business would deliver in the
year ahead. While the performance targets included strategic and operational goalsincluding HSE objectives- the primary emphasis was on four financial targets: profit
before tax, cash flow, investment, and return on invested capital.
Performance goals for the year were proposed by the business unit head after discussions, first with his/her own management team and, second, with the other business
unit heads within the peer group. BP encouraged the business unit heads within each
peer group to support and encourage one another. There was a particular responsibility
for the top three units in each peer group to assist the performance of the bottom three.
Each business unit then discussed its performance targets with top management. The
outcome was a performance contract. Once a performance contract was agreed, the
business unit leader was free to pursue them in whatever way he or she found appropriate. The monitoring of performance targets involved a quarterly meeting between
CASE 6 BP: ORGANIZATIONAL STRUCTURE AND MANAGEMENT SYSTEMS
top management and the business unit leader. “There is an understanding here … that
this is a performance culture and either you deliver or you don’t,” explained one senior
executive. Failure to achieve performance targets often meant reassignment to another
job or termination.
Performance contracts were given to all managers within BP from the CEO down
and were a key determinant of a manager’s annual bonus.
BP as a Learning Organization
At the same time as driving financial and operational performance, Browne was determined to recreate BP as a “learning organization.” According to Browne:
In order to generate extraordinary value for shareholders, a company has to learn
better than its competitors and apply that knowledge throughout its business faster
and more widely than they do. Any organization that thinks it does everything the
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best and that it need not learn from others is incredibly arrogant and foolish.
Turning BP into a learning organization involved redefining the role of top
management. The primary role of top management was strategic thinking, which
involved a quest for knowledge and a commitment to analysis and sharing ideas.
Browne espoused an intellectualism that was foreign to the senior executives of most
oil companies:
This company is founded on a deep belief in intellectual rigor. In my experience,
unless you can lay out rational arguments as the foundation of what you do, nothing
happens. Rigor implies that you understand the assumptions you have made: assumptions about the state of the world, of what you can do, and how your competitors
will interact with it, and how the policy of the world will or will not allow you to do
something. 7
This openness involved BP’s executives fostering links outside their own company
and outside the petroleum business. Browne was a board member of both Intel and
Goldman Sachs.
The same cu lture of interaction and communication was encouraged among peer
groups and supported by a number of intranet-based knowledge management and
groupware tools. It also involved increased emphasis on career development w ithin BP
through training and mentoring.
Social and Environmental Responsiveness
Browne sought to distance BP from the common p erception of oil companies as being
powerful, secretive organizations complicit with the corrupt, autocratic practices of
many leaders of oil-producing countries. Browne envisaged the “new BP” as being
more open and responsive to the interests of its employees and the needs of society:
To build the reputation, we picked four areas. First, safety: when you invite someone
to come and work, you should send them home in the same shape as when they
arrived- that is a minimum requirement for respect of a person, and you have to take
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CASES TO CONTEMPORARY STRATEGY ANALYSIS
that terribly seriously. Second, you have to take care of the natural environment. It is
important because people do not want companies to make a mess and leave them
behind. Third, everyone wants a place in the ideal which is free of all discrimination;
it doesn’t matter w hat you stand for in terms of your race, gender, sexual orientation,
or religious be liefs. All that matters is merit. Fourth, the company has to invest in the
community from w hich the peo ple have come, so as to narrow the gap between life
w ithin the company and life outside the company.
The key initiative was Browne’s endorsing of the link between greenhouse gases
and climate change and his commitment to a path of environmental responsibility for
BP. The resulting effort to reposition BP in the minds of consumers, governments, and
NGOs involved a host of initiatives, including renaming British Petroleum as simply
“BP” and replacing its shield logo with a sunburst. The effectiveness of BP’s newfound
environmentalism was indicated by references to BP and Exxon as “beauty and the
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beast” and the Oil & Gas Journal’s lauding of the company:
Among the top 10 [o il and gas companies] there is one striking example of a company
driven by a different vision. BP has designated corporate citizenship and being
forward-thinking about the environment, human rights and dealing w ith people and
ethics as the new fulcrum of competitio n between the o il companies.9
Adapting the Management Model, 2001-2008
In 2001 and again in 2003, BP’s organizational structure underwent significant revisions designed to address excessive decentralization and to improve coordination
and control.
Instead of the individual business units reporting directly to top management, the
peer groups were replaced by “strategic performance units,” which were more formalized organizational units with their own budgets and with responsibility for the
business units beneath them.
The strategic performance units were organized within three business segments:
exploration and production; refining and marketing; and gas, power, and renewables. Thus, while BP’s individual refineries remained as separate business units, they
reported to refining, which itself was one of the three strategic performance units that
comprised the refining and marketing segment.
In addition to the business structure, there was a regional structure. BP had four
broad geographic areas: (1) Europe; (2) the Americas; (3) Africa, the Middle East,
Russia, and the Caspian; and (4) Asia, the Indian subcontinent, and Australasia. The
head of each region was responsible for ensuring regional consistency of the businesses within that region, managing BP’s relations with governments and other external
parties, and conducting certain administrative functions relating to tax and compliance
with local laws.
Further changes took place when Tony Hayward took over from John Browne in
2007. A consulting report from Bain and Co. declared that BP was the most complicated
organization that the consultants had ever encountered. Bain identified more than
10,000 organizational interfaces. Hayward’s “forwa rd agenda” emphasized cost cutting
and simplification . Regional structures were eliminated, functional structures streamlined, and the number of senior executives was reduced from 650 to 500.
CASE 6 BP: ORGANIZATIONAL STRUCTURE AND MANAGEMENT SYSTEMS
Findings of the Baker Panel
An independent investigation by a panel led by former Secreta1y of State James Baker
into the Texas City refinery explosion offered penetrating insights into the role that BP’s
culture and management system had played in the events leading up to the disaster.
Among the findings of the Panel were the following:
• From board level downwards, “BP has not provided effective process safety
leadership and has not adequately established process safety as a core value
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across all its five US refineries.”
• Inappropriate performance metrics. Establishing and monitoring performance
targets can reconcile individual decision-making with overall coordination-but
only if the targets encourage the right decisions. In safety, BP’s key performance
metric was the number of days lost through injury. While conducive to improvements in personal safety, this metric did not help BP in improving its process
safety. According to the Panel: “BP’s corporate process safety management
system does not effectively translate corporate expectations into measurable criteria for management of process risk or define the appropriate role of
qualitative and quantitative risk management criteria.’>1 1
• Inadequate resources. The Panel reached no conclusion as to whether BP’s
emphasis on cost reduction and profit performance had impeded safety. However, it did observe that: “the company did not always ensure that adequate
resources were effectively allocated to support or sustain a high level of process safety performance. In addition, BP’s corporate management mandated
numerous initiatives that applied to the US refineries and that, while wellintentioned, had overloaded personnel at BP’s US refineries. This “initiative over12
load” may have undermined process safety performance.”
• Failure of board oversight: “BP’s Board of Directors has been monitoring process safety performance of BP’s operations based on information that BP’s corporate management presented to it. A substantial gulf appears to have existed,
however, between the actual performance of BP’s process safety management
systems and the company’s perception of that performance … [T)he Panel
believes that BP’s Board can and should do more to improve its oversight of
process safety at BP’s five US refineries.” 13
Similar allegations surfaced following the Deepwater Horizon tragedy. A study by
the Center for Catastrophic Risk Management observed that BP lacked a “functional
safety culture”; there were “gross imbalances between the system’s provisions for production and those for protection”; a potent driving force was “BP management’s desire
to “close the competitive gap” and “improve bottom-line performance.” In addition to
“incentives that provided increases in productivity without commensurate increases
in protection” and “inappropriate cost and corner cutting,” the study pointed to BP’s
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emphasis on “worker safety” and its failure to address “system safety.”
However, these inquiries into the Texas City and Deepwater Horizon disasters
focused entirely on BP’s performance in relation to safety. A broader issue concerned
the appropriateness of BP’s organization structure and management systems to overall
corporate performance. It was notable that BP’s organizational delayering and system
of performance management had not been imitated by other oil and gas majors. ExxonMobil, for example, remained organized around 10 global businesses, and maintained
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CASES TO CONTEMP ORARY STRATEGY ANALYSIS
a management system that was dominated by its emphasis on disciplined processes.
Its management style had been described as “no-nonsense,” “conservative,” “detailoriented,” “engineering-based,” and “military.” Yet, ExxonMobil had maintained the
best financial performance in the industry and was widely admired for its operational
excellence-including its safety record: it had not suffered any major incident since the
Exxon Valdez oil spill in 1989.
Notes
l. “BP: The Inside Story,” Financial Times (July 3, 2010).
2. “Unleashing the Power of Learning : An Interview w ith
British Petroleum’s John Browne ,” Harvard Business
Review (September-October 1997).
3. Tbe Transformation of BP, Lo ndon Business School (March
2002): 2-3 .
4. See Tbe Report of the BP US. Refineries Indep endent Safety
Review Panel (January 2007) .
5. Ib id.: 27. Note that the “Management Framework” refers to
the company’s d escriptio n of its manage me nt system, produced in 2003.
6. Tbe Transformation of BP, London Business School
(March 2002): 5.
7. Ib id .: 7.
8. I. H. Rowlands, “Beauty and the Beast> BP’s and Exxo n ‘s
Positions on Global Climate Change” Environmen t and
Planning: Government and Policy 18 (2000): 339- 54 .
9. “Common Financial Strategies Found among Top-10 Oil
and Gas Firms,” Oil & Gas j ournal (April 20, 1998).
10. Tbe Rep ort of the BP US. Refineries Independent Safety
Review Panel (January 2007) : xii.
11. Ib id .: xv.
12. Ib id.: iii.
13. Ib id.: xv.
14 . Deepwater Ho rizon Sn 1dy Gro up , Final Report on the
Investigation of the Macondo Well Blowout (Center for
Catastrophic Risk Management, March 1, 2011) .
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