Stan Aldrich, Michael Tey
Gemini Consulting
Morristown, N.J.
The future of the oil and gas industry is perpetually clouded, and we believe its chief executive officers (CEOs) have a special need to take the time to understand where they are going to be able to meet the business transformation needs of their customers in the years ahead.
A LONG PARTY
For a quarter-century, the oil and gas industry has cycled through boom and bust, diversified into related and unrelated businesses, downsized to become lean and mean once more, and reengineered itself to improve operations throughout its three primary value chains-upstream, downstream, and midstream.
But now that long, inward-looking management party is over, and industry leaders are awake to some hard morning-after truths. Reengineering is no longer enough. The challenges facing the oil and gas business today are largely external, and even magnificently run companies that are inwardly focused will fail in a business climate that is dominated by environmental and political concerns on the one hand, and supply and demand pressures on the other.
These transformation forces mean that oil and gas industry leaders must question a number of issues. For example:
- How will Russian and Chinese oil reserves affect the international markets?
- What new environmental regulations will change the rules of the game?
- What political upheavals will change the game itself?
- How can the industry take full advantage of tax incentives that may develop, disappear, or evolve?
- What about conservation incentives?
- What impact will the developing countries' increasing appetite for energy have on the industry, and what kinds of organization will meet those new demands?
- How fast and how complete will the shift from oil to gas be?
The oil and gas industry will metamorphose into something new: the energy business. And metamorphoses are rarely placid.
A BLUEPRINT
The industry today is highly volatile and charged throughout with uncertainty. How can the leaders of the industry respond to these uncertainties in ways that are better than simply gambling on one possible scenario or another?
The answer is that those oil and gas companies' leaders that transform their companies will be able to anticipate profitably whatever twists and turns the path to the future takes.
What does transformation mean? First, companies need to establish clearly how to reframe their corporate responses to the issues they face. Where are we competitive? Will we focus on upstream, midstream, or downstream activities for new alliances, new products, new businesses?
Second, corporations must establish how to restructure their efforts in terms of their future customers and markets, not in terms of their current products. Third, companies must develop strategies to revitalize their business through leveraging their core competencies to create new products, markets, and industries. And finally, corporations need to prepare their employees constantly to renew themselves in an industry that will be redefined at an ever-increasing rate in the future.
These "Four Rs" are what we call Business Transformation. They are the essential tools that enable companies to balance short-term and long-term strategic needs. Transformation in this sense is a method for assessing the total impact of all the programs of guided change that a corporation has under way.
Mapping a company's course of direction in this fashion yields a blueprint that focuses the entire organization and Galvanizes it. Thus the whole corporation can organize around the CEO's objectives and participate in the process of realizing them.
How does an organization get started?
Industry leaders and CEOs must begin by asking themselves a series of difficult questions: What is the purpose of all our reengineering programs? How do we choose among worthy alternatives? What are the real benefits going to be? Are they measurable? How many resources do they consume? Who sponsors them? When will they be completed? What will be the effect on shareholder return? Finally, with so many efforts under way, is there a clear path forward?
Understanding these transformational issues is critical to establishing a clear vision for your business. Continuous progress must be made along all four indices-reframing, restructuring, revitalizing, and renewing-but not necessarily all at the same speed or time.
It's worth looking at each of these activities in more detail.
REFRAMING
In the oil and gas industry, companies can work in all three value chains available to them-upstream, midstream, and downstream-but most firms' limited resources mean that they must pick one where they can establish a true competitive advantage.
In so doing, they need to look at refraining from both the strategic and operational perspectives. Thus, the CEO of each firm must articulate a vision of where the company should seek to leverage its competitive strengths and ask itself a series of questions to help reframe--or view in a different way--its strategic goals.
For example, a CEO may decide that environmental arrogance will simply not be tolerated in the future. What will the costs of environmental compliance be for the firm? Can it increase the output of lighter, cleaner fuels, or should it get out of the refinery business and focus on downstream marketing instead?
Reframing the content of a company's strategy by deciding to manage for total business excellence and customer focus instead of the traditional focus on asset optimization is a necessity. This external service-oriented posture, rather than an internal one, is crucial for meeting the markets of the future. Oil and gas firms must "decommoditize" their strategies and cultures-an essential step in an industry long used to thinking of its business as a commodity.
Partnering between management and employees is critical to successful refraining. A major European oil and gas firm was able to break a longstanding organizational and cultural paradigm by establishing working partnerships with a strong union, not only in planning for major change, but also in the implementation. Without this kind of innovative thinking, refraining efforts will fall victim to traditional bureaucratic obstacles.
RESTRUCTURING
In the last half of fiscal 1993, the oil and gas business as a whole shed some 20,000 jobs in exploration and production. This kind of massive retrenchment affects entire organizations across the industry and brings no guarantee that the job skills represented by these numbers can be maintained or reestablished. In the long run, only our customers and markets decide what your structure needs to be.
Maximizing a business portfolio is the responsibility of the CEO. It's perhaps the most difficult job the CEO faces and a crucial part of the restructuring work. But unless that portfolio maximization is integral to a process that begins with a vision of the future for the industry and the corporation, it will ultimately miss the markets it aims to reach. Incremental change just isn't enough.
For example, CEOs must ask themselves and their companies, if new markets are growing in developing countries, are we taking the steps now to be able to compete in those markets 1 year, 5 years, 10 years out? Or again, do we have the alliances and processes growing now to be ready for Russian and Chinese markets and whatever effect they have on worldwide supply and demand?
Restructuring your organizational "muscles" is a process that requires constant exercise; for global concerns, "lean and mean" may be the wrong image. "Big but agile" may be a better analogy.
Oil and gas firms must have the ability to realign their organizations faster than their competitors. Moreover, they must have the ability quickly to establish alliances and partnerships when the cost of asset realignment to capture market opportunities is too high for a single player. Finding partners who not only possess unique assets or techniques, but also common goals and objectives, is critical. The growth of gas as a key fuel and the creation of new businesses to exploit it is an example of an opportunity for customer-oriented restructuring of this kind.
REVITALIZING
Companies must look for ways to revitalize themselves in order not to miss the marketing opportunities of the future. Revitalizing involves two key steps.
First, companies need to determine what their core business is and establish the necessary means to grow that successfully. Key to success is remaining alert to the needs of customers. What are the new products you need to keep customers satisfied? How can you understand them better? How can you leverage your processes-pricing, production, marketing, and sales-to keep ahead of the competition?
Expanding geographically is not new to the oil and gas industry. Over the next decade, however, revitalization of asset portfolios must be accomplished in a more focused way. Companies will simply not be able to optimize everywhere in emerging global markets. For example, one of the top five major oil companies played in 125 geographic regions as little as 5 years ago. Today, it is in less than 30.
Second, imaginative companies will focus their efforts not only on dominating and growing existing businesses, but on creating new ones. These are the wildcatters of the future. Where will the new product technology for lighter, cleaner fuels come from? What alliances will companies form to, develop those new technologies?
Growth will come from the development of new industries in the convergence between existing ones like the chemical industry and oil and gas. Oil and gas companies will have to build new downstream competencies to complement their traditional ones in upstream alliance formation. Cooperative alliances will replace risk-preventative joint ventures.
In these new businesses, having a clear vision and being able to articulate it through alliances or organic growth will be critical to an industry that is historically highly sensitive to the uncertainty of global prices and trends. For example, a medium-sized German oil firm has created a business alliance with a major Russian gas conglomerate to attack the market share leader in the Western European gas industry. In this case, because of its imagination and foresight, the "mouse" is successfully challenging the "lion."
Another example is creating specialty fuels to meet environmental regulations that will similarly require not just the traditional alliances within the industry, but also bringing together cross-industry skills and technologies. Companies that lack the vision and flexibility to adapt to these new methods will miss not just market share, but whole markets.
RENEWING
Perhaps the most difficult aspect of continuous transformation is renewing. As change in the industry continues to accelerate, the question of preparing employees to cope with rapid change becomes increasingly important.
How can companies "grow" their people, develop their skills, and redeploy them to staff the new processes and markets of the future? How can corporations make use of the extraordinary pool of talent that has been "downsized" from the industry over the last 5 years? It is in the joint ventures, networks of firms, new businesses, and alliances that some of these skilled workers will find employment. Which companies will be quickest to see that labor pool as an opportunity?
The issue of renewal addresses a company's role in society, its function as a creator of productive jobs. And it also addresses a company's survival. Companies that are unable or that lack the vision to use the existing labor pool to begin new businesses risk being left behind. Companies that fail to devote serious efforts to renewing themselves and redeploying their employees' skills in new products and market areas will similarly be unable to cope with the pace of short-term change.
But, at the same time, the industry must look to its long-term creativity and innovative strength. Historically, oil and gas people resources and skills have been grown from within. The industry must seek additionally to capture new insight and skills by seeding itself with diverse thinking and know-how from other industries as well as from its own.
AN INDUSTRY TRANSFORMED
The oil and gas industry is "transforming." The energy business is emerging from that transformation.
The next few years present extraordinary opportunities for those companies that can think holistically about their own continuous transformation into corporations with a future focus and mission. Those companies that leverage their strengths and core competencies in alliance with others to create new markets and new industries will grow, not die.
Meta-industry alliances take vision, clarity, and patience sometimes for many years. Those companies that transform themselves successfully will have the suppleness and strength to respond to the issues of supply and demand, of environmental concern, and of political change, as they become critical.
Transformation is a journey, not an event. A firm's ability to manage long-term, large-scale change will be critical in sustaining competitiveness and responding to rapid shifts in the marketplace. The transformational path is long, but it is the only sure way into the future of the energy business.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
Issue date: 11/07/94
