Wednesday, September 19, 2012

Global Leadership-Growth and Strategic Choices

Today I want to touch on the growth imperative and strategic choices a leader has to take.  I think the most important of those choices is what is in the portfolio of products and services?  A large integrated oil and gas company like Exxon, Shell, BP, Chevron or Total has choices to make on what kind of portfolio mix they want among liquids(oil), gas, unconventionals like oil sands, and renewables(wind, solar,hydrogen, biofuels).  The term integrated refers to control of the entire value chain from finding oil and getting it out of the ground,, transporting it(pipelines, shipping), refining it, and marketing/selling it at retail outlets.  Transportation fuel is the second largest segment of the worldwide energy market(power generation is #1) and it is the fastest growing.  Since it is almost exclusively an oil product this drives the big oil companies to those places where oil is found....deepwater Gulf of Mexico, the Arctic, and to countries like Nigeria, Equatorial Guinea, Chad, Indonesia, Venezuela, Iraq and others.   As I mentioned yesterday, the portfolio you choose is a more important driver in the oil and gas business than in other business.  Other businesses like a Wal-Mart or Coca Cola would likely be more driven by expanding markets for existing products and services or developing new products and services.  The point is a leader must understand what the growth driver is for their business and what choices those drivers may dictate.

Another strategic choice that is driven by growth is the make/buy decision.  In Coll's Exxon book he outlines two different choices Exxon made in different circumstances.  Although there were clearly efficiencies to be gained in common functions and economies of scale, the driver of the merger with Mobil was access to Mobil's reserve bookings.   When it came to the XTO acquisition, they were buying two things really.  One was access to gas leases.  Referring back to portfolio choices ExxonMobil  chose to shift to a more gas heavy portfolio. Why did Exxon make this portfolio shift? Because power generation is the largest part of the world energy market and environmental concerns are driving increasing preference for the cleaner burning gas than coal.  There was also an issue of expertise.  Fracking shale to get 'tight gas" involves different skill sets and approach to drilling.  ExxonMobil decided it was faster and better to acquire a company with the expertise than to try to develop that expertise organically in-house.  A note of caution.  The buying of expertise can be tricky.  Small companies and start-ups often operate on a low salary, high equity compensation scheme.  It's sometimes hard to retain staff who you've just made rich by buying their company.  Coll explains exactly how Rex Tillerson insured retaining expertise in the XTO acquisition.

My last point on growth and strategic choices has to do with when to say no.  ExxonMobil ultimately landed on using the Voluntary principles on security and Human Rights regime, compliance with the US Foreign corrupt practices act and technology transfer prohibitions.  They also categorized different countries as democracies, autocracies or "transitional" governments as a way of guiding choices.  The fact that most growth opportunities in oil lie in "transitional" countries makes those choices more difficult.  Nevertheless, leaders have to sometime say "no" to business opportunities on the basis or more than pure commercial interests. 

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