Managing large companies has never been easy. But, managing is particularly tough given our fast changing, global, intensely competitive market environment. With increasing frequency, senior executives have to make major strategic decisions which could have a huge impact on the future of the company, - perhaps even its very survival.
Among the toughest decisions facing the senior management of a company is finding the proper balance between investments in their current operations, and investments made in new, promising areas for the future. It is indeed a very delicate balance, even more so given an unpredictable future where major changes are likely to take place in technologies, markets and global economic conditions. Often, the consequences of these strategic decisions may not be apparent for years.
What is the right balance between carefully managing existing operations, and investing in potentially disruptive innovations for the future? There is clearly no set answer, as every industry has its own dynamics, and every company has a different mix of circumstances driving its decisions. A recent article reminded me of the challenges involved in making such strategic decisions, especially in the energy industries, which are particularly tough because of the multiplicity of choices now available, the long term implications of the decisions, and the highly uncertain market and political environment in which this industry operates.
For most of the 20th century, the energy industries were relatively predictable and slow moving, whether it was finding, extracting and refining oil, or generating and distributing electricity. But, in the past couple of decades, the search for clean, plentiful energy has become one of the grandest challenges in the world, as well as one of the most exciting areas of investigation.
About a decade ago, BP, one of the world’s largest energy companies, embraced a new strategy it called Beyond Petroleum. BP, under the leadership of its then CEO John Browne, was the first major energy company to openly acknowledge the seriousness of environmental and climate change concerns, as well as to then organize major initiatives aimed at reducing carbon emissions and searching for cleaner, renewable forms of energy.
On July 8, the Financial Times published an article which questioned whether BP is retreating from its position as a pioneer in the revolution expected to change the energy business. It writes that under its new CEO, Tony Hayward, the company has been re-focusing its efforts on its core oil and gas business, following a series of operational mishaps in the US, including a deadly refinery explosion, as well as lagging financial results compared to its key competitors.
For the last six years I have been a member of BP’s Technical Advisory Council (TAC), and have had an opportunity to review BP’s major investments in alternative energies. These include its ten year, $500M investment to establish the Energy Biosciences Institute, a joint venture between BP, UC Berkeley, the University of Illinois and the Lawrence Berkeley National Lab. Last October the TAC visited the BioSciences Institute in Berkeley and had the opportunity to learn first hand about some of the incredible innovations being unleashed by applying modern biological knowledge to the energy sector. We were also impressed by the growing number of young people now being trained to conduct research in the field.
Biofuels is one of the alternative energies being pursued by BP. Others include carbon capture and storage and wind. But, as it should, BP is also pursuing major innovations in its core oil and gas business. One of the most interesting for me is the Field of the Future project, which involves turning oil fields into Smart oil fields through the use of digital technologies an information analysis to significantly improve the performance and optimize the production of the fields.
Part of what makes these strategic decisions so tough, is that despite the many choices now available, the sources of energy are likely to change slowly over time. Over 85% of the energy consumed in the US now comes from fossil fuels - oil, natural gas and coal. The use of renewable energy sources, like biofuels, wind and solar is growing significantly faster than fossil fuels, albeit from a much smaller base, - in the single digits today. Twenty years from now, the percentage of energy coming from renewable sources will be significantly larger, but the majority of the energy consumed in 2030 will still be based on fossil fuels. Barring unforeseen technologies or global events, even by 2050 fossil fuels will likely account for about 50% of the energy we use.
In the end, nobody really knows what the world will be like in twenty years, let alone in forty. BP, like the other major oil and gas companies, have to make wise strategic decisions to be well positioned for such an unpredictable future. They need to continue to innovate in their current oil and gas businesses, developing advanced new technologies like those involved in Field of the Future. They need to master ways of de-carbonizing fossil fuels with sophisticated capabilities like carbon sequestration. But they also need to make serious bets in some of the most promising renewable technologies in the horizon, especially those new technologies that best fit within each company’s existing skills and culture.
How then do you best manage a large company given such tough decisions and such an unpredictable future ? The best advice I can give BP and any other company so they can be as well positioned as possible for an unpredictable future is to hire and retain the best possible talent. This includes top technologists and scientists, top managers and strategist, and especially, people with a broad base of knowledge who can not only understand the emerging technologies and science, but also have an appreciation for their business implications. In the end, it is the presence of such talented people that will best help a companies be ready for an uncertain future, regardless of what that future brings.
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