Doing Business Globally and Internationally: BP and ARR - Essay Example

? Group number number s submitted TABLE OF CONTENTS Part A Identification of ARR as “Partner”…………………………….. 3 2. National and Corporate Culture………….…….……………….. 5 3. Risk associated with Joint Venture….………………………...... 7 4. Foreign Exchange Rate Movements..…………………………… 9 Part B 5. Challenges in doing business internationally...….......................... 12 References …………………………………………………………..…... 14 Appendices …………………………………………………………..…... 16 Part A 1. With reference to the academic literature and using your analysis of relevant environmental factors, speculate how and why BP identified AAR as a potential ‘partner’. In which areas are the expected benefits and synergies for both companies involved? BP and ARR met in March 2003 to establish a joint venture having the equal proportion i.e. 50-50% in the oil and gas sector of Russia (Sylvia, 2011). TNK and Sidanco were the target companies of this joint venture. BP i.e. British Petroleum is one of the most renowned oil and gas exploration based companies which is running many sub divisions under various different forms across the globe. The other party to the joint venture is ARR which is a consortium developed by some richest investor groups of Russia namely as Alfa Group, Access Industries and Renova. This joint venture was quite important for both BP and AAR as both these firms had their own unique expertise due to which they could exploit the synergy effect if they could work together as a combined entity. There were numerous environmental factors associated with both the companies due to which both of these companies became indispensible for each other. Following are some of the factors due to which BP identified AAR as its partner under this joint venture: 1. Financial soundness of AAR AAR is comprised of three giant groups of Russia, which are individually strong in respect of their financial health. One of the reasons of BP picking AAR as its partners is the financial soundness of its partner (Yenikeyeff, 2011). Since Russia went default in the year 1997, due to which the government was practically not able to protect the investment capital of BP. In such case, BP preferred AAR, a private consortium but with billions of dollars in their pockets to safeguard the interest of TNK-BP. 2. Local knowledge and working relations with government Another important reason for the selection of ARR by BP is local knowledge, expertise, industry practices, and cultural awareness of ARR being a rich investor group of Russia, which could help TNK-BP easier than BP. In order to meet any confrontation with the Russian government, AAR can manage this situation in a better and efficient manner than that of BP because of maintaining appropriate level of working relations with their government, local community and other environmental stakeholders. Expected Benefits and Synergies TNK-BP is such a joint venture that could not only provide major benefits and synergies to both BP and AAR but also to Russian government. Being a multi-national company, BP has the ultimate expertise, knowledge and business skills in the massive field of oil and gas exploration, refining, marketing, and retail business. The exposure, that BP carries with itself is unmatchable and allow other participants to use such expertise for their benefits. With the entry of BP into Russian oil and gas sector, Russia itself got an enormous opportunity to upgrade and develop its energy sector (Yenikeyeff, 2011). However, due to mismanagement and lack of government’s interest, BP could not avail those facilities, which it was realizing at initial projections. The joint venture TNK-BP benefitted from the synergy effect of the combination of BP and ARR. BP is world market leader in the field of oil and gas whereas AAR is consortium of the richest investors of Russia. The combination of such technical and financial stability from the two partners strengthened their joint venture TNK-BP even though both these stakeholders experienced significant deadly times. Due to cultural clashes and deprival of some facilities to BP, many conflicts climbed up but the managements of both the partner firms resolved their issues in the best of their joint venture. Those areas in which further synergies can be expected is the increase in the foreign investment made by BP in collaboration with ARR. BP can also introduce more recent technologies, and development in Russian oil and gas sector, provided they are mainly facilitated by the Russian government. 2. By applying appropriate theory, compare and contrast the national and corporate cultures involved. Critically evaluate the actual and potential impact of both on this partnership. The decision of BP to enter into Russia for expanding its business and shake hand with AAR to establish TNK-BP was the deal full of cultural conflicts. BP is the oil industry giant based in UK whereas AAR was the consortium of Russian billionaires. Cultural differences between the two organizations were the core reasons due to which some disputes came into lime light and media gave them the special coverage, which led to the both companies to ponder about their decision to continue with their future journey. There are various differences in the national cultures of Britain and Russia but in today’s business environment, the importance of national culture can be undermined provided if there is a strong corporate culture prevailing in the organization. In case of TNK-BP, cultural differences were prevailing in terms of national culture but the corporate cultures of both the organizations were like two opposite poles (Wilson, 2008). Both BP and AAR were culturally different in terms of their nature of organization such that BP was publicly limited company, the stocks of which trade in the various international stock exchanges whereas AAR was the private company owned by the billionaires of Russia. The business environment and organizational maturity of BP and AAR were also quite different as BP had the loads of oil and gas exploration experience whereas AAR was the consortium established only for earning financial returns from this TNK-BP joint venture having very limited knowledge of oil and gas industry. Another important difference was the distinction in the corporate cultures of the acquiring and acquired companies i.e. BP, TNK, and Sidanco. One of the major conflicts that arose in enforcing the British or rather Western culture in TNK-BP was the act of Russian government, which did not allow foreign managers and executives to travel to Russia. BP wanted to reinforce Western culture in TNK-BP as it could harmonize and ease out its operations especially marketing, finance, environmental protection and planning. BP had intended to allow AAR and the management of TNK and Sidanco to take control extractions, local laws and regulations, security and working relations with government of Russia. The major aim of BP was to develop such corporate culture, which can bring the greatest of synergies with this joint venture, as BP was carrying expertise in carrying out oil, and gas business and AAR had the financial solutions and local knowledge of the oil and gas industry. Since BP executives were not permitted to stay in Russia and further visa related issues occurred which in fact sabotaged corporate objective of BP. Therefore, various issues kept arising such that in 2004 around 20% of the local staff refused to continue working with the existing management due to having cultural issues. Due to the cultural differences between BP and Russian organizations including AAR, TNK, and Sidanco, both these parties to the joint venture could not make the most of each other’s expertise and skills. BP had the best of business skills of conducting oil and gas business on global business but it had to confine its activities due to difference in national and corporate culture of Russia. BP also could not exploit the expertise of local oil and gas sector, as well as the consortium because of the distinct corporate cultures, as the local companies were not ready to accept the increasing role BP in the management of the business as they think that BP is considering TNK-BP as its subsidiary rather than a joint venture. On this note, this joint venture could have awarded better returns to both the parties but due to unnecessary influence and restrictions of Russian government, this romance between Britain and Russian entities experience more bitter encounters. 3. With reference to the academic literature, explain the risks associated with the choice of joint venture as an approach to this particular partnership. Was there a feasible alternative? Justify your view. In 2003 when the joint venture between BP and AAR came into being in order to expand the oil and gas business in Russia and Ukraine previously held by TNK and Sidanco, both BP and AAR had to face numerous risks and challenges. Russian government allowed foreign direct investment in 1997, which opened the door for many international business to invest in Russian geographical boundaries as this step would help both Russia and those foreign companies. However, this program to welcome the foreign entities into Russia lacked serious planning and legal issues, which came up as the unavoidable risks to the foreign companies (Macalister, 2008). Following are some of the risks, which had to be borne by the joint venture firm, i.e. TNK-BP: 1. No Legal Protection For those companies who wish to enter into Russia for conducting business, the biggest risk that they had to face is the absence of any specialized laws and regulations designed for the foreign companies doing business in Russia. In such circumstance, it became very difficult especially for BP to shake its hands with ARR to operate TNK-BP, as there were no laws safeguarding the rights of BP in Russia. 2. Work Permit Issues Even in the absence of specialized rules and regulations for the foreign companies operating in Russia, still the government uses its control orders to bring in those changes, which do not allow foreign companies to carry out their own strategies. The most ridiculous of those orders was the order of not allowing the work permits to the British employees, managers and executives to perform their tasks and duties in Russia. This risk and challenge did not allow BP to settle its business operations and strategies in TNK-BP, which caused serious corporate issues in the top management of the joint venture. 3. Capital sharing and holding requirements Another risk faced by the TNK-BP at the time of its establishment was the restriction imposed by the Russian government for the foreign companies that those foreign companies cannot increase their holding to more than 50% in any case. In other words, foreign companies working in Russia cannot carry out business in standalone capacity, nor can they take charge on any small business and act as parent company of that subsidiary. The only way out available to the foreign company, is to create joint venture based upon the partnership in which the share of partners should be either equal or the foreign company should have a lesser share. 4. Economic Situation of Russia After facing a default in 1997-98, the foreign companies had some serious risks pertaining to the economic and fiscal situation of Russia. They were highly exposed to the risk of their investments, which was on stake as the safest avenue to protect their capital experienced a recent default. In such circumstances, it was a kind of gamble played by BP to enter into Russia as the economic parameters of Russia have never been so much attractive especially for the foreign investors and especially after the default (Yenikeyeff, 2011). By considering the above risks associated especially with conducting a business in the form of joint venture, it can be stated that joint venture was the last resort, which was available for BP to penetrate in Russia. The absence of specialized laws for foreign companies, restrictions on work permits of foreign executives, restrictions in gaining substantial control over the local firms of Russia and other factors are core reasons due to which BP had to undergo as joint venture to ARR. This is done by BP in order to earn at least some chunks of profits, which Russian locals alone can never harvest because of unawareness and lack of access to current oil and gas based technologies and tactics. 4. Drawing upon academic literature and theory, critically discuss the long-term, strategic effects, both positive and negative, of exchange rate movements on the TNK-BP deal during the exploration/negotiation period and after the deal was agreed. Foreign exchange rates play a key role especially in case of foreign direct investments. The importance of foreign exchange rate becomes more vital because of the foreign entity remits the profits and cash flow in its home currency (Hi Trans, 2012). If local currency becomes stronger and foreign currency becomes weaker, the foreign entity welcomes such situations, as this position will earn more of a foreign currency i.e. home currency. Conversely, if the foreign exchange rate moves in an abrupt manner i.e. local currency get depreciated as opposed to a foreign currency, then this situation is quite unfavorable for the foreign company as it would have to remit lower foreign currency (home currency). When BP started making its negotiations with AAR to act as a joint venture to takeover TNK and Sidanco, the local currency of Russia i.e. Ruble (RUB) was weaker against foreign currency i.e. home currency of Britain, which is Pounds (GBP). As the terms of joint venture moved forward and the positive news started appearing from the camp of both the companies, RUB started to climb such that its value increased as the price of GPB 1reduced from RUB 52.5 to around RUB 49.5 in hardly 3 months time i.e. from January 2003 to March 2003. This foreign exchange movement was apparently in the favor BP as there was likelihood that Russian currency will become stronger and would lead BP to remit more GBP to United Kingdom. However, this fantasy of BP ended very quickly as in April 2003, GBP started growing stronger as compared to RUB due to which the foreign remittance of BP went down sharply. This whole era of depreciation of GBP against RUB ended in November 2004. In a way, the beginning of journey with AAR did not result in better prospects especially in respect of foreign exchange movements, which hurt BP badly along with other issues. Since then, the foreign currency movements have remained almost in favor of BP as RUB against GBP experienced significant losses until March 2006. In that time-period, BP negated off almost all of its foreign exchange movement losses, which it incurred prior to November 2004. From April 2006 to July 2007, BP again had to suffer unfavorable movements of foreign exchange rates, which hurt it severely. However, just after that GBP suffered deep losses as it decreased from RUB 51 to around RUB 41 until the end of 2008. This whole period has been the greatest period for BP as all of its cash flows experienced tremendous increase because more GBP currency was available for BP to remit it to UK. After that climax period, RUB started to depreciate steeply and touched its all time highest rate of RUB52.23 per GBP. After the recession of 2008, the foreign exchange rate movements between RUB and GBP have experiences normal ups and downs, but no significant fluctuations have been observed in this regard. In a nutshell, it can be analyzed from the history of almost 10 years of BP working ARR that the exchange rate fluctuation did have an impact especially upon BP, but those fluctuations were set off in the very next period. Over past 10 years, the range of foreign exchange rate remained in between RUB 41 to RUB 54 per GBP, which is not a very long range. This shows that, BP did not reap too much benefit from the favorable foreign exchange movements nor it lost too much money when its home currency strengthened against local currency of Russia. Following is the10 year chart of the exchange rate movement between GBP and RUB. The exchange rates in tabular format are provided in the attached appendices. 5. Identify three (3) specific aspects or challenges of doing business internationally that you personally have come to appreciate through studying this module. Discuss how these will influence you if you go on to an international business career. In order to carry out business on international basis, there can be various challenges that might have to be faced by the foreign company intending to make investment. Out of those challenges, three major challenges are discussed below: 1. Government Intervention Governments play a key role in facilitating the foreign companies to make foreign direct investment. However, the role of government becomes quite crucial because they not only have to facilitate the firm, which is bringing investment into the country but also have to protect the local manufacturers, institutions, and overall sovereignty of the country (Blum, 2012). Generally, the foreign companies have to confront with the governments because the foreign companies seek only profitable environment but on the other hand, governments have to limit the activities of foreign companies for which it makes stringent regulations in order to regularize them. This is done in order for intended purpose of foreign direct investment to be fulfilled as well the domestic market participants should also remain protected. In case if the foreign companies are allowed too much liberty and freedom, there is likelihood that they can start exploiting that foreign country and can sabotage the local industry. 2. Cultural Barriers Many top class companies failed to conduct overseas business mainly because of the cultural barriers, which they could not manage. Finance and monetary power is the only thing that can lead a company toward the way of success especially in a foreign country. Unless a foreign company studies, understands, and executes the cultural dynamics of that country, it would become extremely difficult for that foreign company to operate in that country. Detailed cultural studies should be carried out by the foreign company in order to align its business strategies with the local norms, behaviors, language, dispositions, taste, traditions, customs etc (Hi Trans, 2012). In such case where a company complies with all the cultural impacts, to be specific national and corporate culture, of that country, it would have an easy way out in managing and creating appropriate strategies along with their adequate implementation. Conversely, if a company fails to understand the cultural norms of that foreign country and does not adopt a relevant strategy, the company will have to face tough times even this could lead the company in wrapping up its business more quickly than expected. 3. Foreign Exchange Rate Movements The exchange rate movement stabs the companies badly especially in case of those companies, which belong to that currency which starts appreciating as opposed to foreign currency, which depreciates. This actually reduces the amount to be remitted in the local currency of foreign company. If the foreign currency starts appreciating, it means the local currency of foreign company starts depreciating. This situation causes a favorable impact upon the foreign company as the amount to be remitted to home country, increases due to lower value of home currency (Blum, 2012). In a summarized manner, foreign exchange rate movements play a very significant role especially for those companies who expand their business on global dimensions. The only way out to mitigate the abrupt foreign currency movements is to devise a proper hedging strategy that can minimize the risk exposure of unfavorable foreign currency fluctuations. References AFP. (2012, April 19). Russia blames TNK-BP for massive oil leaks. Moscow. Blum, J. (2012). Entrepreneur. Retrieved December 02, 2012, from Tech Tools That Make Doing Business Internationally Easy: http://www.entrepreneur.com/article/223575 Hi Trans. (2012). The Challenges of Doing Business Overseas. Retrieved December 02, 2012, from Hi Trans: http://www.hitrans.org/the-challenges-of-doing-business-overseas.html Macalister, T. (2008). Oligarchs to sue TNK-BP after failing to agree control of company. Retrieved December 02, 2012, from The Guardian: http://www.guardian.co.uk/business/2008/jun/12/bp.oil1 Papiryan, G. (2008). BP in Russia:  Settling the Joint Venture Dispute.  Richard Ivey School of Business. The University of Western Ontario. Ivey Publishing: London, Ontario, Canada. Shiryaevskaya, A. (2012). TNK-BP Says Oil Spills ‘Inherited’; Shares Fall on Putin Rebuke. Retrieved December 02, 2012, from Bloomberg Businessweek: http://www.businessweek.com/news/2012-04-20/tnk-bp-says-oil-spills-inherited-shares-fall-on-putin-rebuke Sylvia, P. (2011). BP struggling to tame the Russian bear. Retrieved December 02, 2012, from Financial Times: http://www.ft.com/intl/cms/s/0/2ebf7cb2-dada-11e0-a58b-00144feabdc0.html#axzz2DyNGIF9U Wilson, H. (2008). TNK-BP peace deal paves way for multi-billion dollar IPO. Retrieved December 02, 2012, from Financial News: http://www.efinancialnews.com/story/2008-09-04/tnk-bp-peace-deal-paves-way-for-multi-billion-dollar-ipo Yenikeyeff, S. (2011). BP, Russian Billionaires and the Kremlin: a Power triangle that never was. Oxforf Institute for Energy Studies , 1-18. Appendices Month Rate Month Rate Month Rate Jan-03 51.4463 Mar-06 48.6282 May-09 49.091 Feb-03 51.087 Apr-06 48.6621 Jun-09 50.6144 Mar-03 49.7282 May-06 50.497 Jul-09 51.4732 Apr-03 49.1095 Jun-06 49.8177 Aug-09 52.2362 May-03 50.1125 Jul-06 49.6352 Sep-09 50.2283 Jun-03 50.5599 Aug-06 50.5869 Oct-09 47.5464 Jul-03 49.3603 Sep-06 50.4786 Nov-09 47.9929 Aug-03 48.4001 Oct-06 50.3451 Dec-09 48.6553 Sep-03 49.3426 Nov-06 50.7943 Jan-10 48.253 Oct-03 50.5304 Dec-06 51.595 Feb-10 47.0316 Nov-03 50.4009 Jan-07 51.8613 Mar-10 44.4251 Dec-03 51.5249 Feb-07 51.5374 Apr-10 44.6382 Jan-04 52.4852 Mar-07 50.8241 May-10 44.5701 Feb-04 53.0968 Apr-07 51.2944 Jun-10 45.8744 Mar-04 52.1155 May-07 51.222 Jul-10 46.601 Apr-04 51.835 Jun-07 51.4267 Aug-10 47.4092 May-04 51.8201 Jul-07 51.8961 Sep-10 47.8265 Jun-04 53.1001 Aug-07 51.5396 Oct-10 48.0168 Jul-04 53.6195 Sep-07 51.131 Nov-10 49.4521 Aug-04 53.186 Oct-07 50.8416 Dec-10 48.1036 Sep-04 52.3562 Nov-07 50.7264 Jan-11 47.4709 Oct-04 52.5603 Dec-07 49.6213 Feb-11 47.1095 Nov-04 53.1406 Jan-08 48.1939 Mar-11 45.9254 Dec-04 53.8691 Feb-08 48.1431 Apr-11 45.9028 Jan-05 52.5531 Mar-08 47.5067 May-11 45.6186 Feb-05 52.7722 Apr-08 46.6151 Jun-11 45.3315 Mar-05 52.6307 May-08 46.6082 Jul-11 45.011 Apr-05 52.6993 Jun-08 46.49 Aug-11 46.9249 May-05 51.8467 Jul-08 46.4432 Sep-11 48.2328 Jun-05 51.8458 Aug-08 45.7902 Oct-11 49.1748 Jul-05 50.2791 Sep-08 45.5663 Nov-11 48.5312 Aug-05 51.0594 Oct-08 44.8382 Dec-11 48.8231 Sep-05 51.3782 Nov-08 41.9218 Jan-12 48.4532 Oct-05 50.381 Dec-08 41.7312 Feb-12 47.0312 Nov-05 49.896 Jan-09 45.3719 Mar-12 46.3001 Dec-05 50.2662 Feb-09 51.4073 Apr-12 47.0898 Jan-06 50.012 Mar-09 48.9762 May-12 48.8278 Feb-06 49.3181 Apr-09 49.0113 Jun-12 50.8894 Read More