The possible impacts of a crisis on a company's risk management and performance

A case study of BP plc and its Deepwater Horizon disaster


Bachelor Thesis, 2016
58 Pages, Grade: 1,0

Excerpt

Table of Contents

Abstract

Table of Figures

I. Introduction
1.1. Background
1.2. Research Objective
1.3. Research Questions
1.4. Structure of the Paper

II. Literature Review
2.1. History of Risk and Crisis Management
2.2. Definitions
2.2.1. Definition of Risk, Crisis and Management
2.2.2. Definition of Risk and Crisis Management
2.2.3. Distinction between Risk and Crisis Management
2.2.4. The possible Impacts of Risk and Crisis Management
2.3. Literature about sensible Risk and Crisis Management
2.3.1. Risk Management
2.3.2. Crisis Management
2.4. BP and its Risk and Crisis Management Execution and Development
2.4.1. Short Introduction to BP plc (former name: British Petroleum)
2.4.2. BP´s official understanding of Risk and Crisis Management
2.4.3. The Development of BP´s Risk and Crisis Management (2005 - 2010)
2.5. The Deepwater Horizon Disaster
2.5.1. The Accident
2.5.2. BP´s Execution of Crisis Management
2.5.3. The Consequences

III. Methodology
3.1. Research Philosophy
3.2. Research Approach
3.3. Research Strategy
3.4. Research Choices/ Research Design
3.5. Time Horizons
3.6. Data Collection Techniques and Analysis Procedures

IV. Discussion
4.1. The Correlation between the Deepwater Horizon Disaster and BP´s Risk Management
4.2. The Impact of the Deepwater Horizon Catastrophe on BP´s Performance
4.2.1. The Development of BP´s Stock Quotation: A Comparison between BP and its Competitors
4.2.2. BP´s Triple Bottom Line (TBL) from 2005 to 2015

V. Conclusion

Bibliography

Table of Figures

Figure 1: The chosen methodology options

Figure 2: BP´s & its competitors´ safety violations (2007 - 2010)

Figure 3: BP workforce fatalities & injuries (2005 - 2015)

Figure 4: The development of BP´s stock quotation in comparison with BP´s main competitors (2005- 2015)

Figure 5: The first P, people: females in group leadership (%), people from racial minorities in group leadership (%), change in number of employees (%) (2005- 2015) .

Figure 6: The second P, planet: number of oil spills (number), environmental and safety fines ($ million), direct carbon dioxide emissions (CO²) (million tonnes (Mte)) (2005- 2015)

Figure 7: The third P, profits: dividends paid to shareholders ($ million), total hydrocarbons produced (thousand barrels of oil equivalent (mboe) per day), total petrochemicals production (thousand tonnes (kte)) (2005-2015)

Abstract

This dissertation investigates the possible impacts of a crisis on a company´s risk management and economic performance through a case study of the company BP and its Deepwater Horizon accident. The investigation is based on gathered data about risk and crisis management as well as about BP and the Deepwater Horizon case. The hence arisen findings can be divided into two categories. The first covers BP´s risk management and performance before the disaster and the second category deals with the development of these factors after the disaster. The observed period was from 2005 to 2015 in order to see BP´s developments five years before and five years after the crisis. The results were that beforehand BP was a company with huge gaps in its security and risk management and that its economic performance was flourishing. BP was realising the upside potentials of its attitude “profits before safety”. Eventually, this attitude led BP to the most expensive and biggest oil spill disaster in history. Through the catastrophe, BP reported huge losses and drops and was forced to implement and adapt changes. Through these changes in its general risk attitude and management, BP achieved new environmental and social all-time highs and experienced a slow but steady performance recovery although BP did not achieve to live up to earlier profit successes.

I. Introduction

1.1. Background

Albert Einstein once stated that “insanity is doing the same thing over and over again and expecting different results”. It is in the nature of sane, intelligent life forms to learn from former made mistakes. These mistakes can occur by attempting to achieve a specific goal. That specific goal can be nearly everything, from the avoidance of a specific event to the achievement of it. The consequences of every failed attempt are very different and have various extents. Some may be harmless whereas others may have dramatic scales. However, if a failed attempt occurs and leads to an unfortunate event it will, most likely, influence all the parties involved and indicate the necessity to change the process that led to the event. Nowadays, companies manage the chances and extents of specific events through their risk and crisis management. Yet, if this management of risks and crises is not sufficient and appropriate enough, companies also experience the necessity to change through the accumulation of unwanted events. Nevertheless, there are only two possible ramifications for an affected company: the achievement to implement change successfully and timely or the experience of serious consequences, as to file under chapter 11.

1.2. Research Objective

The objective of this dissertation is to investigate the possible impacts of a crisis on a company´s performance and risk management by using the example of the multinational company BP and its Deepwater Horizon disaster.

1.3. Research Questions

Did BP´s risk management fail and cause the Deepwater Horizon disaster?

What impact had the crisis on BP´s risk management as well as on BP´s performance?

1.4. Structure of the Paper

The following second chapter reviews relevant and appropriate information, data and literature about the topic of risk and crisis management as well as about the company BP. First, the terms risk, crisis and management and their compound meaning are defined and differentiated from each other. Thereafter, literature about the measurement and implementation of risk and crisis management is collected, the company BP is introduced, and information about its risk and crisis management is provided. Thereupon, the Deepwater Horizon accident is examined and its consequences are investigated. The succeeding third chapter is about the outline and justification of the research methods underlying this dissertation. More specific, the methodology is divided into philosophy, approach, strategy, choices and design, time horizons as well as the data collection techniques and analysis procedures. Ensuing, in chapter four the results and findings of the literature review are discussed and analysed. Furthermore, necessary information regarding the research questions are evaluated and discussed in order to meet the research objective. Lastly, to round out this dissertation, chapter five summarises and reflects the overall findings and ultimately provides specific answers to the research questions in order to achieve the research objective.

II. Literature Review

This chapter reviews appropriate literature about risk and crisis management as well as about the company BP and its Deepwater Horizon catastrophe. The review begins with the origins, meanings, relevancies and applications of the terms risk and crisis management. Then, the literature review examines how BP interprets both terms and how they were put into practice before, during and after the disaster. Furthermore, information and literature about the causalities and the consequences of the catastrophe will be inspected. However, primarily the disaster´s impact on BP´s performance will be examined and its correlation with the development of BP´s risk management.

2.1. History of Risk and Crisis Management

Risk Management

Hubbard (Hubbard, 2009) suggested that even the earliest civilisations managed risk: “Organizational risk management could be said to have existed at least as early as the first time a king or chieftain decided to fortify walls, make security alliances, or store extra provisions in case of famine.” (Hubbard, 2009, pp. 22). Furthermore, he emphasised that only since the 1940s, with the development of nuclear power, the oil exploration and the emergence of computers, it was possible to generate thousands of random risk scenarios. Therefore the scope and scale of risk management changed and grew tremendously to the extent as we know and use it today (Hubbard, 2009).

Crisis Management

The word crisis has its origins in the Greek language and was firstly used to describe the medical condition of a patient´s turning point for better or worse (Pfaltzgraff, 2008). Furthermore, Pfaltzgraff stated that “crises occur in all dimensions of human existence: between individuals, groups large and small, and, of course, nations. We also have crises between human beings and nature […].” (Pfaltzgraff, 2008, pp. 1). In combination with the term management, as Pfaltzgraff (2008) additionally explains, crisis management was first introduced during the Cold War. At that time, several defining Cold War crises were experienced and the term became both the means and the goal because all such crises had the potential to get out of control and destroy the modern civilisation (Pfaltzgraff, 2008). Consequently, the term crisis management is a relative modern one, which arose from modern circumstances.

2.2. Definitions

The categories of risk and crisis management are broad fields, but, according to Hubbard (2009), they are often used in a much too narrowly sense, either because the term risk, the term crisis or the term management are used too narrowly, or en masse (Hubbard, 2009). Therefore, it is necessary to specify these terms first before describing the compound meaning.

2.2.1. Definition of Risk, Crisis and Management

Risk

Hubbard (2009) described risk as “the probability and magnitude of a loss, disaster or other undesirable event” (Hubbard, 2009, pp. 8). He additionally added that his definition in simpler words mean that “something bad could happen” and that this shorter version is more to the point, but the longer version gives an indication of how to quantify a risk (Hubbard, 2009, pp. 8). Another definition by the International Organisation of Standardisation (ISO) defined risk as “the effect of uncertainty on organisation´s objectives” (ISO, 2009a; 2009b). This uncertainty is the result of internal and external factors and influences that are experienced by organisations of all types and sizes. Furthermore, ISO states that every activity of an organisation involves risk and that this risk needs to be managed (ISO, 2009a; 2009b).

Crisis

According to Pfaltzgraff (2008), the term crisis cuts across many fields, academic disciplines, and human activities. In this thesis, the term is used in the context of economics and business. Therefore, in economic sense, the term crisis can be defined as “a significant unexpected disruptive event that affects an organization´s Personnel, Facilities, Information Systems, or Critical Records, which in turn creates uncertainty and may dramatically impact profitability, reputation, or ability to operate normally if not handled in an appropriate manner” (Folk, 2013). Furthermore, Folk (2013) mentioned that a crisis is often accompanied by extensive news and media coverage, which may affect the organisation´s operations and could have a legal, financial, political or governmental impact on the company´s business (Folk, 2013).

Management

Subsequently after his definition of risk, Hubbard (2009) defined the term management as “the planning, organization, coordination, control, and direction of resources toward defined objective(s)” (Hubbard, 2009, pp. 9). His short and simpler version reads as follows: “Using what you have to get what you need” (Hubbard, 2009, pp. 9). It is already possible to see the correlation between risk and management through Hubbard´s simpler versions: Something bad could happen, so you use what you have to get what you need, which is an elimination or reduction of the probability that something bad happens.

ISO´s, Hubbard´s and other authors´ definitions and opinions of the compounded terms risk management and crisis management are shown and explained in the next sections.

2.2.2. Definition of Risk and Crisis Management

Risk Management

Connecting with the latter section, Hubbard (2009) defined risk management as “the identification, assessment and prioritisation of risks followed by coordinated and economical application of resources to minimize, monitor and control the probability and/ or impact of unfortunate events” (Hubbard, 2009, pp. 10). Hubbard´s short version of this definition was that it is crucial to be smart about taking chances (Hubbard, 2009).

Another interpretation by the International Organisation of Standardisation (ISO) described risk management as the identification, analysis and evaluation of risk and the “coordinated activities to direct and control an organisation with regard to risk” (ISO, 2009a; 2009b). Moreover, ISO stated that it is crucial for a successful risk management process that an organisation communicates and consults with its stakeholders and monitors and reviews the risk and, if required, modifies the risk in order to ensure that no further risk treatment is needed (ISO, 2009a; 2009b). ISO created an entire international standard family, which is ISO 31000, dedicated to risk management only.

Crisis Management

According to Pfaltzgraff (2008), it is vital to differentiate between crisis management and crisis leadership. The latter describes the setting of the course and goal of actions and operates at the strategic level, whereas the crisis manager tries to realise the set goals by implementing operational and tactical-level tasks (Pfaltzgraff, 2008).

Nayor (2016) described crisis management as “the nature of activities to respond to a major threat to a person, group or organization” (Nayor, 2016). Nayor described this nature of activities as proactive, such as forecasting potential crises and their preparation. Additionally, Nayor added that many people would refer to his description, as risk management and not crisis management (Nayor, 2016).

The specific distinction between those two terms will be thematised within the next section.

2.2.3. Distinction between Risk and Crisis Management

According to Flick (2015), crisis management can be described as a response whereas risk management can be labelled as a strategy. Concluding, risk management is a strategy that should prevent crises from taking place. Nevertheless, it will never be possible to eliminate every risk and therefore crisis management is required, as a fallback position for situations in which risk management was insufficient (Flick, 2015).

Duffy (1996) explained that even a solid risk management could not predict all crisis events and prevent them. “Good crisis management is essential, but never a substitute for daily risk management processes.” (Duffy, 1996). The essence of Duffy´s statement was that risk management is a continuing every day process that never stops whereas a crisis management process starts not until a crisis occurs.

2.2.4. The possible Impacts of Risk and Crisis Management

“Proper risk management will reduce not only the likelihood of an event occurring, but also the magnitude of its impact” (Stanleigh, 2016). Therefore, the impacts of managing risks and crises are either the absence of the risk happening or the preparedness when the risk is happening. In either case, it is important to remember that without the management of risks and crises, the impact would be an unknowingness of the types, possibilities and probabilities of risks. Furthermore, if a risk occures, there would be no preparation and no strategy or plan of how to handle the situation. Furthermore, the larger the enterprise the larger will be the impact, because the amount of risks, dangers, regulations, fines and cash is growing with the company. Consequentially, it is vital and crucial for the success of a venture to manage its risks and crises.

2.3. Literature about sensible Risk and Crisis Management

In order to assess BP´s risk and crisis management and its development, it is necessary to investigate relevant literature so that an expressive comparison is possible and deviations as well as similarities can be found.

2.3.1. Risk Management

Risk management is a process that involves identifications, analyses and responses of risk factors while always acting in the best interest of the company’s objectives (Stanleigh, 2016). Furthermore, “proper risk management implies control of possible future events and is proactive rather than reactive” (Stanleigh, 2016).

The conduct and measurement

According to Stanleigh (2016) and Mills (2001) risk management can be conducted through three stages of activities, which are risk identification, risk analysis and risk response (Mills, 2001). These activities are usually part of a risk management framework (RMF), which is designed to do more than just identifying the risk. This framework is applied through an implementation of a risk management system (RMS), which aims to coordinate all activities and processes and can, if required, repeat a specific activity or all as often as necessary (Stanleigh, 2016). The likelihood, or the probability, of an adverse event, is usually expressed in terms of the number of such events expected to occur in a year (Godfrey, 1996). Whereas the consequence of an adverse event, sometimes called damage, is often expressed in monetary terms (Mills, 2001). Risk can be calculated with the formula “RI = L x C”, in which RI stands for risk impact, L for likelihood, and C for consequence (Mills, 2001). Alternatively, systematic risk can be measured with the factor beta (β).

Risk identification

Williams (1995) found that the identification of each risk is possible the most difficult step in risk management but an essential one (Williams, 1995). According to Godfrey (1996) the key is to ask for the discrete features of the project (risk sources) which might cause a failure (Godfrey, 1996).

Risk analysis

Williams (1995) defined the quantification of risk as the frequency and magnitude or time frame of each event (Williams, 1995). Different methods and techniques can be used in order to evaluate risk, as code optimisation, sensitivity analysis, probabilistic analysis or kinetic tree analysis (Mills, 2001).

Risk response

Mills (2001) states that if the uncertainty associated with a project is increasing the more deliberate the response must be (Mills, 2001). Different ways to respond to risk, some of which can be used in combination, are to avoid it, reduce it, absorb it, or transfer it (Mills, 2001). “The most efficient response to risk is to allocate the risk to the party that is in the best position to accept it” (Mills, 2001).

2.3.2.Crisis Management

The perception that the incidence and impact of crises are increasing has heightened the importance of crisis research and management (Buchanan and Denyer, 2013). Several trends are influencing the consequences and causes of crises and accidents (Buchanan and Denyer, 2013). This includes technological changes such as the creations of new hazards and failure modes through digital systems or the increasing complexity of the relationship between humans and machines (Buchanan and Denyer, 2013). Other trends as the change in the regulatory views of safety, and the decreased public tolerance for accident losses are also influencing the causes and consequences of accidents and crises (Buchanan and Denyer, 2013).

The conduct and measurement

Buchanan and Denyer (2013) suggested that the event sequence of a crisis event can be divided into six phases:

1. pre-crisis or incubation,
2. event,
3. crisis response management,
4. investigation,
5. organisational learning,
6. implementation (Buchanan and Denyer, 2013).

Furthermore, Buchanan and Denyer (2013) emphasised that this sequence is for an ´ideal type´ event and that not every of the six phases is necessary or viable for every crisis event (Buchanan and Denyer, 2013).

Coombs (2007) suggested that the best preparation for a crisis consists of a crisis management plan (CMP) that is updated at least annually, a designated crisis management team that is properly trained, the conduct of crisis exercise at least annually to test the crisis management plan and team, and pre-drafted select crisis management massages and statements (Coombs, 2007).

The next section will identify BP plc, cover the implementation and the development of BP´s risk and crisis management and examine the relationship between these with the Deepwater Horizon catastrophe.

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Details

Title
The possible impacts of a crisis on a company's risk management and performance
Subtitle
A case study of BP plc and its Deepwater Horizon disaster
College
Anglia Ruskin University
Grade
1,0
Author
Year
2016
Pages
58
Catalog Number
V338578
ISBN (eBook)
9783668282841
ISBN (Book)
9783668282858
File size
630 KB
Language
English
Tags
British Petroleum, BP, Risk Management, Risiko Management, Crisis Management, Krisen Management, BWL, Performance Development, Entwicklung, Deepwater Horizon, Golf of Mexico
Quote paper
Peter Bernklau (Author), 2016, The possible impacts of a crisis on a company's risk management and performance, Munich, GRIN Verlag, https://www.grin.com/document/338578

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