BP Organizational Behavior Evaluation Final

Running head: WHAT HAPPENED AT BP 1

Organizational Behavior Evaluation – What Happened at BP

Richard W. Stumbo, Jr.

University of Phoenix

Doctoral Learner

ORG 711

Igal Hebron, Ph.D.

May 2, 2011

WHAT HAPPENED AT BP 2

Abstract

BP, a century-old global oil and gas company has suffered a number of major disasters in recent

years. Evaluation of the organizational structure and corporate culture at BP clearly establishes

its significant responsibility as a contributor to these disasters. Currently BP is at the point of no

return. Aggressive action by the board of BP in structure and culture may salvage this proud old

company. This evaluation identifies the weaknesses of the status quo and offers possible a

possible solution.

Keywords: BP oil spill, corporate culture, organizational behavior, multidivisional matrix


Organizational Behavior Evaluation – What Happened at BP

The Gulf of Mexico oil spill, also called as the “Deepwater Horizon oil spill” and the “BP

oil disaster” (Cleveland, 2011, p. 1), (hereinafter the “BP oil spill”) has brought unwanted

attention to BP and its organization. This was the latest in a string of BP disasters that have

brought undesired media, investor, and governmental focus on the practices of that company. Of

particular interest in this evaluation will be an organizational behavior evaluation of BP on how

it has handled these huge environmental disasters, how it could have averted or at least

minimized them, what changes they have been made, and what recommendations could be made

for the future. Understanding of BP at the time of these disasters requires a brief history of the

firm with particular attention to their corporate culture and their organization design.

A corporate culture is not developed overnight. According to Entrepreneur Media,

Inc. (2011), it is a complex “blend of the values, beliefs, taboos, symbols, rituals, and myths that

all companies develop overtime” (Corporate Culture, para. 1). A 100-year-old company like BP

has developed its culture from its leaders, its successes and failures, and the road it has traveled.

BP has compounded that by bringing together through acquisition and varied global areas of

operation the cultures of other companies and many countries. BP must change its culture if it is

to survive (Shefrin, 2010). Cultural change will be researched from both a theoretical and a

pragmatic approach. The organization design of a company can be changed to achieve a set of

goals, but the change will only be successful if the culture is appropriately changed as well.

A Brief History of BP

In 1901 Australian-British mining entrepreneur William Knox D’Arcy won an oil

exploration franchise from Persia (now Iran). Seven years later the greatest oil discovery of its

time was made in southwest Persia. Within another year, the Anglo-Persian Oil Company (AP)


(later to become BP), was in business. In the early years AP had plenty of oil but could not sell

all of it. In 1914, the United Kingdom (UK) government became the major shareholder in AP

and a cash crisis was averted. Shortly after the Great War (World War I) began and by its end,

war without oil would be unimaginable. The British Petroleum brand, created by a German

owned firm to distribute oil in the UK, was taken over by the British government and in 1917;

the Public Trustee sold it to AP creating an instant distribution network in the UK. In the decade

of the 1920’s the use of oil in the UK, in mainland Europe, and in the United States of America

(US) greatly expanded and BP expanded with it (BP plc. 2011; Tharoor, 2010).

Persia changed its name to Iran in 1935 and AP became Anglo-Iranian (AI). World War

II brought on gasoline rationing on the home front and significant uses of oil and gasoline in the

war effort. In 1951, after the war, the oil industry in Iran was nationalized. After nearly two

years of nationalization and a global embargo, the Iranian economy was in a shambles. The

Iranian government allowed a new consortium to run their oil industry. AI’s stake was 40% and

the consortium included AI, Standard Oil of Indiana (Amoco) and others. In 1954 the company

once again changed its name, this time to The British Petroleum Company. After years of

generally unsuccessful exploration in other parts of the world, the company was allowed to

explore in international waters off the UK and found a major deposit of natural gas. This was

followed in 1969 in Prudhoe Bay, Alaska, with BP and partners finding the largest oil reservoirs

ever found on the North American continent. This was followed in 1970 by the finding of the

large oil reserves in the North Sea. The 1970’s saw huge turmoil in the Middle East,

Nationalization of the oil industries in Iran, Iraq, Saudi Arabia, Abu Dhabi, and Qatar followed

and BP shipments in the Middle East dropped radically. Middle Eastern oil went from 80% to


10% of BP’s supply. BP went from an entire strategy based on Middle Eastern oil to a strategy

with virtually no Middle Eastern Oil (BP plc. 2011).

In many ways BP, nearly a century-old, had to start over. They embarked on large-scale

projects in the Gulf of Mexico in North America, Russia, Indonesia, Azerbaijan, and elsewhere.

They also embarked on a series of major acquisitions including Amoco, ARCO, Castrol, and

Aral. They operate across six continents, and their products and services are available in more

than 100 countries (BP plc. 2011). BP is trying to repot itself while carrying the baggage of a

100-year-old “Success Formula” that is no longer appropriate (Hartung, 2010, para. 5).

Development of Organizational Design

In the latter part of the 1980’s BP “was a politicized, top-heavy bureaucracy managed

through a cumbersome matrix structure” (Roberts, 2005, p. 1). BP was spread across many

separate lines of business that had resulted from not completing the undoing of a conglomerate

diversification it had attempted in the 1970’s. In the 1990’s and early 2000’s BP was

reorganized once again will the goal of returning to exceptional performance. Unrelated

businesses were divested and the company fixed on three principal business areas: “upstream”

gas and oil exploration and production, “downstream” petroleum refining and marketing, and

petrochemicals. Although obviously related, these three businesses were run quite

independently. Decision-making was transferred from the corporate center to the three

businesses. Layers of management were trimmed and headquarters employment decreased by

80% and apparently not just added back at the three business units. Employees were empowered

to take responsibility and to exercise initiative. A culture with values of caring, trust, openness,

teamwork, and cooperation was promoted. An upstream strategy focusing on finding “elephant”

(very large) hydrocarbon deposits was promoted even though it ran contrary to the conventional


wisdom that there were no more “elephants.” Outsourcing was increased as an efficient method

of fast response and cost efficiency. This structure increased the near-term profit performance of

the company (Roberts, 2005). Such a structural design can be highly efficient if all parties have

the same goals and can maintain the standards of performance.

Problems can arise as corporate goals are perceived differently between different

business units and between the business units and corporate. At BP it appears that the profit goal

fostered a shaving of safety and environmental goals. Their overall organizational design created

the wrong business emphasis. In his 2008 book, Ending the Management Illusion, Hersh Shefrin

described BP as a company possessing nearly all of the psychological failings of companies

headed for trouble: unwarranted optimism, overconfidence, selecting high risk alternatives to

avoid accepting a negative outcome, and not seeing the warning signals (Shefrin, 2008). Shefrin

contends that,

BP's weaknesses led it to engage in excessive cost-cutting and to take disproportionate

risks with respect to the environment, worker safety, national security and its own

profitability. I wrote about BP's problematic ethics - that despite being hailed by the

financial media for its corporate citizenship, its rhetoric and deeds about social and

environmental responsibility were diametrically opposed. And I pointed out that these

negative inclinations were all baked into its corporate culture (Shefrin, 2010, para. 3).

Organizationally the company appeared to have followed a very bureaucratic structure,

“A formal set of rules was bound into the hierarchy structure to insure stability and uniformity”

(Walonick, 1993, para. 5). This strategy, while lauded by Roberts (2005) may have created higher

profits in the short-term, but the long-term financial cost of the recent disasters will exceed those

profits. The long-term public relations cost is incalculable. They clearly did not understand or


did not care about the potential safety and environmental impact of their strategy. Application

of “Simon’s Theory of Administrative Behavior” (Scott, p. 50) that supports a strategy of

satisficing the highest level of profitability for safety and environmental goals might have prevented

the current situation (Jones, p. 336). Because some sacrifices were not made, BP will be known as

high-risk, accident-prone, profit-hungry environmentally unfriendly business for years to come.

They may even be excluded from exploration efforts in the US (Radke et al, 2010).

In 2005 the BP refinery in Texas City, Texas, exploded during an especially dangerous

procedure of restarting a unit that had been down for repairs. According to the U.S. Chemical

Safety and Hazard Investigation Board (2007), “15 workers were killed, 180 were injured and

financial losses exceeded $1.5 billion” (Refinery Explosion and Fire, p. 17). Additionally BP

suffered permanent reputational harm and intense government scrutiny (Schorn, 2006). Parker

Waichman Alonso LLP also reported that the Investigation Board found BP senior management

knew of “significant safety problems” at the Texas City plant and 34 other BP facilities many

months or years before the explosion but that “unsafe and antiquated equipment designs were in

place, and unacceptable deficiencies were tolerated” (Parker Waichman Alonso LLP, 2011, p. 1).

In October 2009, the Occupational Safety and Health Administration (OSHA) fined BP $87

million for failing to fix problems identified after the Texas City explosion (Parker, et al, 2011).

New Corporate Strategy and Corporate Culture

The success formula that BP lived by for the last 100 years must be changed. Their

identity, strategy, and tactics were geared to execute that formula. BP single-mindedly pursued a

strategy to do more of what had created the profitable growth of the past. Their strategy and

culture was predisposed to look only at things the company understood; exploration, production,

and distribution of oil (Hartung, 2010).


BP has given lip service to its new and improved focus on safety and environment issues.

BP has launched a “sustainability” effort and has communicated it on their website as follows

(2011):

At BP, we are working hard to restore trust in our ability to operate safely and

responsibly wherever we do business. Our approach to sustainability covers issues

relating to governance and risk management, safety, the environment, the energy future

and our local and global socio-economic impact. We aim to report on these issues in a

way that answers key questions raised by our stakeholders (BP and Sustainability, para.

1).

The new corporate structure at BP must give safety and environmental concerns true top

to bottom priority. The newly named CEO Bob Dudley “must identify and successfully address

the major psychological weaknesses in BP’s corporate culture” (Shefrin, para. 1). The outdated

success formula must be discarded and replaced by a structure that accurately supports an

organization dedicated and committed to sustainability. Even though the company tried a matrix

organization previously and rejected it, they need a multidivisional matrix structure with a

stronger corporate direction (Jones, 2010. pp. 170-171). The table Multidivisional Matrix

Structure for BP illustrates the type of structure needed

Executive vice presidential responsibility and authority is given to sustainability and vice

presidential authority to public and investor relations. The board of directors must add a

sustainability committee with dotted line authority to the Executive VP Sustainability. Only the

CEO has “more” weight than the sustainability department. All employees must realize that

sustainability issues such as safety and environmental effect are the most important goal of the

company. This means that operational profitability will be reduced.


The corporate culture must change to a “culture of safety” from the current “culture of

growth with cost-cutting” (Margolis, 2011, p. 1). The new chief executive of BP, Bob Dudley,

announced in a press release dated September 29, 2010 that BP will “create a new safety division

with sweeping powers to oversee and audit the company’s operations around the world. The

Safety & Operational Risk function will have authority to intervene in all aspects of BP’s

technical activities” (Dudley Sets Up New Safety and Risk Unit and Signals Sweeping Changes

at BP, para. 1). This would appear to follow the organizational changes suggested above.

However, the press release continues with the statement, “These announcements do not mean

that everything in BP is going to change” (Dudley, para. 19). This seems to hedge the

commitment made in the earlier paragraph. In a February 1, 2011 press release BP stated, “In an

update to investors later today, BP will confirm that its immediate priority is to complete the

process of embedding world-class safety and operational risk management at the heart of the

group’s approach to all of its activities and throughout all its operations” (BP Resumes Dividend

Payments, Targets Investment on Delivering Value Through Long Term Growth, Will Reduce

North American Refining Footprint, para. 2).

Corporate Actions

The culture and structural change does not appear to receive the highest priority it needs.

Announcements are buried in releases touting resumption of dividend payments, significant

increases in exploration budgets, and other financial items (Dudley, 2011). The release of the BP

annual report for 2011 triggered an assessment of that report by various investor groups. The

Christian Brothers Investment Services reported on their assessment in part as follows:

Investors had a fair expectation of robust and substantive disclosure on the way in which

risks are and will be managed. Investors also expected more detailed disclosure about the


company’s strategy, including short- and long-term goals and objectives, relating to BP’s

role in averting catastrophic climate change. BP’s 2010 Annual Report must be viewed as

incomplete in these respects (as cited in Kropp, 2011, para. 3).

BP’s annual meeting of drew a storm of protesters with 25% of the voting against the re-

election of BP's safety committee, a damning indictment of the recent record of accidents

(Webb, 2011).

Summary and Conclusions

BP’s culture and strategy of profitability culminated in a series of disasters in the period

2005 to 2010, most recently the 2010 BP oil spill. BP’s disasters have triggered huge financial

losses for the corporation including a total pre-tax charge of $40.9 billion in 2010 in relation to

the accident and spill (Svanberg, 2011, para. 10). Stakeholder outrage at the BP management

has attempted to resolve the situation by promoting greater safety awareness. However, a radical

corporate cultural change is deemed necessary and the corporation’s actions to date do not seem

to have embraced that need. Unless the culture is changed the future outlook for BP is dismal.

.


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storms-of-protest-at-annual-meeting


Table

Multidivisional Matrix Structure for BP

Other Stakeholders

Stockholders

VP Finance

Marketing

“downstream” petroleum

refining

“upstream” oil and gas

exploration

VP XXX VP Sustain.VP Law VP Public Relations

Board of Directors

CEO

BP Organizational Behavior Evaluation Final

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