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Image: Dr Tony HaywardBP, which celebrated its 100th birthday in April 2009, is a vertically integrated private sector oil exploration, natural gas and petroleum product marketing company. It is the world's third largest global energy company and one of the six “oil super majors”. The health of the energy sector is extremely important to the UK's economy. The energy sector pays a quarter of all UK corporate taxes, about the same as its banks. In 2008 BP and Shell also accounted for a quarter of the dividend paid by FTSE All Share companies.

In 1978 BP acquired a controlling interest in Standard Oil of Ohio entering the US market in earnest. The British government sold its entire holding in BP in several tranches between 1979 and 1987. The sale process was marred by timing (it occurred on “Black Monday” when stock markets around the world crashed) and because the Kuwait Investment Office, the investment arm of the Kuwait government, took a significant stake (21.7 per cent) in BP. This was strongly opposed by the British government and BP had to repurchase half of this stake from the KIO. In 1987, BP negotiated the acquisition of Britoil and the remaining publicly traded shares of Standard Oil of Ohio.

In 1989 Robert Horton was appointed Chairman and Chief Executive of BP. Horton took the company through a period of restructuring and was accused of a number of poor decisions including inconsistent planning, diversification and subsequent divestments, shift away from its US operations, emphasizing high risk exploration in the North Sea, and continuous down sizing. The result was a demoralized workforce, the company's first ever reported quarterly loss during 1991 and out of control debt. Horton was forced out in a boardroom coup in 1992. His job was split in two and David Simon was appointed the Chief Executive. He immediately cut the dividend in two, and the share price plummeted but Simon stabilized the situation by changing management style and culture.

In 1995 John Browne was appointed the Chief Executive of BP and he transformed BP from a “two pipeline company” in the North Sea and Alaska, to a global business through a series of ambitious acquisitions. However, despite the initial success Browne's tenure was marred by a number of high profile setbacks. These included spills in its Alaskan oil fields in 2006, a trading lawsuit in the USA, and a fatal explosion in its Texas refinery in 2005. These, and personal revelations, forced Lord Browne out in May 2007.

Tony Hayward took over as the Chief Executive of a badly bruised BP from Browne in May 2007. He introduced his “Forward Agenda” with the aim of turning BP into a more efficient and simpler organization. His formula is simple and unlike the Browne era it is not wrapped in fancy language, it is simply about operational efficiency. His mantra “less is more” is liked and understood by his employees. Hayward believes operational excellence, matched with the proven ability to source new oil reserves, will lead to profit growth.

BP reported its third quarter results in October 2009. The results were substantially ahead of analysts' expectations. Underlying profit, excluding non-operating items and swings in the valuation of derivatives instruments, was $4.67 billion, beating consensus forecast of $3.16 billion from a Reuters poll of 11 analysts. BP's replacement cost profit – a measure that strips out the effect of changes in the value inventory – was $4.98 billion.

Increased oil and gas production was also important part of BP's positive results. Output grew by 7 per cent from the third quarter of 2008. Costs were cut by $3 billion and another $1 billion will be eliminated by the year end. Recently BP overtook Royal Dutch Shell in market capitalization for the first time in more than three years. BP's out-performance of its closest rival for the title of Europe's biggest oil company is a reflection of the success of changes introduced by Tony Hayward.

Journal of Strategy and Management: How do you define strategy?

Tony Hayward:

Strategy is multi-dimensional – at one level it is an articulation of the culture of the company, and at another level it is an articulation of where the company is going and its role in the world.

JSM: What is the process for establishing strategy at BP? What are the key elements of the process? Who drives the process and who are the key stakeholders?

Tony Hayward:

BP has a small corporate strategy team. The executive team creates BP's strategy through debate, dialogue and discourse. Inputs that inform and shape our strategy-making process include: general market data for the markets that are of interest to BP, the nature of supply and demand and the competitive context in these markets, our projections of the future of the energy market, our predictions of future regulatory changes including climate regulation, CO2 emissions. We then consider what we are going to do in a given situation. The strategy created by the executive team is presented to the board. It is considered, discussed and debated by the board and following detailed consideration agreed.

JSM: What is your strategic timescale?

Tony Hayward:

We tend to focus on a period of 20 years as the nature of the business is long-term. Decisions that we make today will have real consequences in terms of corporate performance in 10-15 years time. This is why we project and consider how the energy market might evolve and its potential shape in 20 years. This sets the broad direction and we then focus on a three to five year time span and create a detailed strategy and action plan covering this period. It is quite difficult to do anything in the energy industry in less than three years most strategic initiatives take 10-15 years to come to fruition.

You will have noted that we recently completed a big deal in Iraq – that will start making a difference in five plus years’ time. In 2009, we made a giant oil discovery in the Gulf of Mexico – that will not start making a difference until beyond 2020. To illustrate the length of timescale, exploratory licences for the Gulf of Mexico finds were obtained over five years ago!

Although the time scale is long, it is vital to ensure that what we do day-to-day is operationally consistent with our long-term direction.

JSM: Do corporate social responsibility issues play a role in determining strategy? Is it possible to have some examples?

Tony Hayward:

Corporate social responsibility is not something separate – it is absolutely integral to everything we do. Wherever we go in the world, we try to create the idea of a local energy company by becoming part and parcel of the society and communities in which we operate. That includes everything from building capability that is specific to BP – for example in Trinidad we have built a Trinidadian company, led and staffed by Trinidadians. We have also built a local supply chain. Until BP invested in Trinidad all equipment and infrastructure for the industry were imported. All platforms etc. are now fabricated on the island by Trinidadian contractors using a local supply chain. We also work with the community more broadly to build capability.

“At the end of the day the only thing that is sustainable is an educated population.”

Most of the countries in which we operate have major challenges to build institutional capability. We work with the countries and their governments to build capability so that they can benefit in the best possible way from the wealth that is created by oil and gas development. At the local level we work with local communities – in Trinidad we have a micro finance scheme which has worked well and is very successful. We set it up about five years ago with $1.5m – it is now self funding. It has a default ratio of only 5 per cent and there are now about 10,000 small businesses that have been financed by the micro finance scheme. So as I mentioned earlier, corporate social responsibility is not a standalone activity but an integral part of everything that we do. At the end of the day the only thing that is sustainable is an educated population.

JSM: To what extent do your policies impact on the countries that you operate in?

Tony Hayward:

To varying degrees. For example we have had a massive impact in places like Colombia, Azerbaijan and Trinidad because of the size of our operations in those countries. For example, in Trinidad, BP is responsible for 25 per cent of GDP – we, therefore, have the wherewithal to make a big difference and impact.

JSM: You took over three years ago a badly bruised BP. Did you know the magnitude of the challenge or were you surprised by what you found and was there anything in particular that influenced your subsequent decisions?

Tony Hayward:

BP had clearly been through a rough period and had some major issues. It was clear to anyone looking from inside or outside the company that a number of problems had to be sorted out. Yes, I was a bit surprised that some areas had gone so far off track. It was in many way likes peeling an onion as one discovered more and more opportunities to improve.

JSM: One of your first acts on taking over as Chief Executive was to engage Bain & Co. – to what extent did Bain & Co. “holding a mirror up” to BP influence your decisions?

Tony Hayward:

This is probably something that every Chief Executive coming into the role does, which is establish a baseline. We asked Bain & Co. to hold a mirror up to the company and tell us what they saw. We did not want any solutions or any answers – we just wanted a very clear diagnosis of the state of the company. I recall the first meeting in April 2007 before I officially took over and was surprised to hear the degree of complexity that had developed in BP in the previous six or even years – of course much of this complexity arose from the mergers in 1999 and 2000, responses to Sarbanes Oxley, and a changing regulatory framework requiring a lot of additional assurance and verifications.

Another surprise was the identification of 10,000 organizational interfaces in a company employing 100,000 people and that we had allowed lots of organizational layers to creep in – in some areas there were 12 layers between the Chief Executive and the front line/operational level.

JSM: What did you do as the result of the Bain & Co. report?

Tony Hayward:

We eliminated much of the regional structures, greatly simplified the functional structures, and developed a number of organizational guidelines such as the span of control has to be at least seven people and ideally more than that and no more than seven layers between myself and the front line operations.

JSM: BP's third quarter 2009 results were far better than analyst's expectations (November 2009). The profit of $4.7bn was nearly 50 per cent better than expected and projected cost savings of $4bn were $1bn better than expected. Analysts attribute, correctly, BP's better than expected results to your “Forward Agenda” launched towards the end of 2007. Can you please tell us elements of “Forward Agenda”? The difficult part of any substantial turnaround plan is the implementation. What were the key facets of your implementation plan?

Tony Hayward:

Forward Agenda contains three themes; safety, people and performance. The first element is a focus on safe reliable and efficient operations. We are in the process of putting in place a common operating management system across all BP's assets and that is a task that is more than 50 per cent complete – it will be four to five years before we get the full benefit of it.

The second element of the agenda is people and a very simple notion permeates this – having the right people in the right place with the right skills. We have made great strides in this regard particularly at the top of the company – we have reduced the number of senior executives from 650 to 500. While the number was reduced by 150, more importantly 50 per cent of the remainder are new in role and 30 per cent of them are from outside the company.

"...when you are producing 4 million barrels of oil and gas a day growing anything more than a couple of percentage points is not credible on a sustainable basis as the demand is not there. At BP we are confident that we can grow at 1-2 per cent on a sustainable basis over 10-20 years."

We have had an enormous assessment of high grades – to ensure that we had the right people with the right skills. This in turn has made an enormous difference to the quality of leadership in BP. We established a common leadership framework across the company. It talks about valuing expertise, energizing people, taking decisions and delivering results. This changes the skills sets, offers a common way of leading in the company and focusing on the things that we felt were important.

The third dimension relates to performance – the first elements related to the reduction of the complexity of BP and, therefore, the costs and the second related to restoring the revenues.

JSM: How easy was it to align?

Tony Hayward:

It took some time to get going – we had a very important leadership meeting in spring 2008 in Phoenix, Arizona where we made it clear that we were “standing on a burning platform” so to speak. At that stage people understood that unless we changed the performance, we could not expect BP to be around in its current form in a couple of years’ time.

I invited a well respected oil and gas analyst to attend the meeting to give his perspective – he reiterated the same points. It certainly helped people accept the need for change.

JSM: Did you retrain your staff?

Tony Hayward:

As part of the change process we established an operations academy at MIT designed to provide operational skills from the executives down. For example it includes how you lead as an executive in an operational dimension, and at middle level how you manage operationally, and then to operational technicians. We had a big investment in skills and capabilities in line with the ethos of moving operations to the heart of the company. That aspect had got lost from the culture of the company as the latest “great idea” took over from a focus on operations.

JSM: Do you benchmark BP with others in the industry?

Tony Hayward:

Certainly Exxon is seen as the benchmark in the industry today. I don't think that the energy industry is particularly efficient as an industry – and there are other industries that are far more efficient than the oil and gas industry in terms of basic operations such as procurement and costs of operations. We don't need to do a lot of benchmarking – you can start by looking at BP's returns compared with some of our competitors'! There is a gap and now we are focusing on closing that gap.

JSM: Analysts are still concerned with BP's ability to deliver long-term growth. Mark Bloomfield of Citigroup stated that “the operational turnaround has been largely delivered”. As momentum slows, the relative case [for BP] may become more challenging. FT also quoted an investor saying “cutting is one thing, growth another”. Has “Forward Agenda” reached its conclusion? What is your strategy for future growth?

Tony Hayward:

There is a bigger concern about the super majors generally as a group. None of us have been able to grow sustainably. At BP, we are beginning to address this – this year has been good in this regards – for example, the Iraq access and our discovery in the Gulf of Mexico – but there is more to do. It is also clear that when you are producing 4 million barrels of oil and gas a day growing anything more than a couple of percentage points is not credible on a sustainable basis as the demand is not there. At BP we are confident that we can grow at 1-2 per cent on a sustainable basis over 10-20 years.

JSM: You are quoted as saying that you want to put to bed BP's chequered past, lurching from one disaster to the next. How do you create a BP that ten years from now does not end up in a ditch?

Tony Hayward:

It is about something that I call organizational quality: defined by the leadership and culture of the organization, the skills and capabilities, and systems and processes that the organization uses. Ensuring that all three are improved on a continuous basis is key to the creation of a sustainable organization. This forms the basis of our focus in the next phase and is designed to ensure that we avoid any future slip ups.

JSM: Where do you see BP in the next 20 years?

Tony Hayward:

If you look at the forecasts for the future – the world will need 35-45 per cent more energy in 2030 of which up to 80 per cent are likely to come from hydrocarbons. So the oil and gas industry is a massive growth industry if we are to satisfy the world's demands that are driven by population growth from 7bn to 9bn people and increased industrialization in China and India. If you look at the most conservative demand projections for the oil sector, taking into account regulatory issues, efficiency aspects of the combustion engines and electric vehicles, oil demand will grow from 85 million barrels a day to 95-100 million barrels a day in 2030. This may not sound like much but because of the underlying decline in mature fields, the gap is in effect more like 50 million barrels. So the industry has got to add 50 million barrels of new production capacity by 2030. This is equivalent to four times the current output of Saudi Arabia. In my view we will be doing much the same as we do today with probably increased demand for gas. We will also have the beginning of an alternative energy business – BP is very active is biofuels and has an aggressive programme in that area. Biofuels will comprise over 10 per cent of the global fuel mix by 2030 and in some markets could be as high as 25 per cent.

We are also currently developing a big wind power portfolio in the US – there are lots of synergies between gas and wind – one complements the other. Other activities include solar energy and carbon capture and storage.

If you look at the energy industry the nature of change is one of evolution and not revolution. The transition from wood to coal and from coal to oil took place over many decades. I expect that over the time period to 2030 we will see a gradual evolution from a world dominated by hydrocarbons to one that is much more diversified. Hydrocarbons are still going to be a big part of it – personally I think it will not be until the second half of this century that these new energy resources will really take centre-stage.

JSM: You have a new Chairman Carl-Henric Svanberg. How important is the relationship between Chairman and Chief Executive to the success of the organization? What are the key characteristics of a good relationship?

Tony Hayward:

It is obviously a very important relationship. Peter Sutherland has been an outstanding chairman, guiding the company through one of the most successful periods in its history. He will be a hard act to follow. But I am convinced Carl-Henric will be a worthy successor. He is a businessman of international stature who is recognized for his transformation of Ericsson. Our shared views on many aspects of global business give me great confidence that we will work very effectively together on the next phase of BP's progress.

June 2010.

This is a shortened version of “Revitalising an oil giant: An interview with Dr Tony Hayward, Chief Executive of BP”, which originally appeared in Journal of Strategy and Management, Volume 3 Number 2, 2010.

The authors are Nicholas O'Regan and Abby Ghobadian.