A study to explore the international business strategy using tnk bp strategic alliance as a case study
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This study explores international business strategies using the TNK-BP strategic alliance as a case study, highlighting resource-based and institution-based views. It emphasizes the importance of understanding market dynamics and the significance of strategic alliances, particularly in the oil industry in Russia. The document discusses the challenges and considerations for foreign firms entering the Russian market, as well as the ethical implications and miscommunications that can arise in international partnerships.
A study to explore the international business strategy using tnk bp strategic alliance as a case study
- 1. A Study to Explore the International Business Strategy 1 A Study to Explore the International Business Strategy using TNK-BP Strategic Alliance as a Case Study Charm Rammandala California Intercontinental University
- 2. A Study to Explore the International Business Strategy 2 Abstract The purpose of this study is to explore international business strategies to enter new markets using TNK-BP strategic alliance an example. Study will discuss the resource based view as well as institution based view from the BP’s point of view. Further, study will explore how some countries such as Russia and China have different approach towards western countries in international trade and business ethics.
- 3. A Study to Explore the International Business Strategy 3 A Study to Explore the International Business Strategy using TNK-BP Strategic Alliance as a Case Study Firms been exploring markets beyond their home country for centuries. There are numerous literature written on this dating thousands of years back. With the globalization efforts and founding of GATT in 1948 & World Trade Organization in 1995, companies wanted to explore opportunities in other regions and countries increased. Governments helped these efforts by signing bilateral and multilateral agreements with strategically important countries (Norman 2012) Unlike in the distance past, firms need to understand the opportunities in the international market based on their product portfolio and resources. In the past as there were only few countries and companies engaged in the world trade, most often trade efforts were profitable. In today’s context this is hardly the case as competition in many industries are fierce. Evaluating the industry relevant to the company and understanding the company strengths, firms can take an informed decision as to how to move in to the international market (Peng 2013) International market entry methods It is vital for firms to strategically position themselves in the international market. First step is to understand the reasons for moving to international markets. Firms explore opportunities in international market for various reasons. Some of those reasons include, looking for new customers, raw materials, cheap labour, other monitory and fiscal benefits such as lower taxes, lower energy prices, host country subsidies (Peng 2013) Some of the international market entry strategies are, Exporting, Franchising, Licensing, Joint ventures, Strategic alliances & wholly owned. Out of the various entry methods, easiest,
- 4. A Study to Explore the International Business Strategy 4 cost effective and mostly used is method is to export goods. Franchising is another relatively easy method to have international presence for a company. In licensing and franchising, company gives the authority for a third party company to use company patented process, products or trademarks and logos for a royalty fee. Joint ventures and strategic alliances are an arrangement between two or more companies often based in different parts of the world, work as a team to achieve a common objective. This form of arrangements help companies to work together more closely and share the expertise and market intelligence. Wholly owned is the riskiest market entry strategy as firm has to set up the business from the scratch and need to allocate all the resources by themselves. However, this mode offers the most flexibility as there are no partners and company could operate the way they wish (Peng 2013) The importance of industry based view and resource based view in international trade The firms who are interested in international trade needs to have an in-depth understanding on two core aspects. First is the industry. This is called industry based view. It’s vital for a company to have a deep understanding about the industry dynamics, its competition and technological advances. The second aspect is to understand the firm strengths and weakness as well as opportunities. This is known as resource based view. The two viewpoints discussed above are known as international business strategies to assist firms to evaluate on market opportunities and firm readiness to move in to international markets. It is important for firms to understand the host country rules and regulations, market intelligence, strengths and weaknesses of competitors, technology in use and more importantly customer expectations. When the firm is aware of the market dynamics and opportunities, it can do an internal analysis using tools such as SWOT and VRIO analysis. This helps to determine the firm readiness for a such a move (Reed 2013)
- 5. A Study to Explore the International Business Strategy 5 From an industry based view, why strategic alliances are the frequent mode of entry for the oil industry in Russia According to the Russian law, foreign companies can establish their presence in the country through a license office, limited liability company, a branch of foreign supplier, joint venture or as a partnership. In essence this is same as many western countries and foreign companies are welcome to operate using any form of market entry modes in Russia (Norman 2012) When entering oil and gas industry in Russia, rules and regulations are somewhat stringent. The foreign firm interested in Russian oil and gas industry expected to establish and maintain the requisite technical, legal and business presence in Russia either directly or through an agency arrangement. There are many legal and government procedures to follow and typically this process takes over 6 months to complete. Government itself encourage companies who are interested in investing in the industry to work with a local partner. Each step government ministries get involved and this could be a daunting task for the foreign company if it decides to do it themselves (Reed 2013) From the industry based view, working with a Russian local partner is the most logical and the safe mode for a foreign entity. Strategic alliances offer the flexibility of not binded by any legal frameworks yet working with two or more firms complimenting and benefiting each companies’ expertise. When we analyze the political, economic and legal environment of Russia, it doesn’t make business sense to establish a wholly owned company as rules and regulations of the host government as well as the home government could change any given time. If such a situation occurs, impact to the firm’s assets and business operations could be significant.
- 6. A Study to Explore the International Business Strategy 6 One of the main reason western companies such as BP interested in doing business in Russia is due to large reserves they possess within their territories. Russian firms always in look out for attracting latest technology to the industry and strategic alliance is an excellent strategic framework for all parties to work together (Norman 2012) Complimentary resources and capabilities of TNK & BP from the stand point of resource- based view When discussing the TNK-BP joint venture in Russia, it is clear that each company was looking for the expertise of others firm for the growth of the company. As discussed in an earlier chapter, resourced base view helps each firm to determine its own capabilities and limitations. This knowledge helps to determine the best strategies to grow the business in terms of whether to expand to overseas markets and what type of entry strategy to pursue (Reed 2013) TNK is a combination of three different entities and all three are Russian firms. They have the necessary know how on how to navigate the local legal and regulatory frameworks. This is a very important aspect of the business when it comes to Russia. BP is one of the leading player in the oil market and their know how in the latest technologies to extract oil from the fields and distribute is an industry leading and well known. Both companies have their own strengths in and off the field hence coming together as a team using strategic alliance is mutually benefitting both companies. The formal and informal rules governing oil and gas industry in Russia Russia is a relatively new player to the open market concept after being a socialist country for over 70 years. They opened the markets in 1991 after falling of Soviet Union but rules and regulations governing foreign trade were tightened in 1998 after the financial crisis. To make
- 7. A Study to Explore the International Business Strategy 7 matters further worse, Russia and Western countries always on the edge over political, economic as well as ideological reasons. These attributes become very important factors to remember when discussing business dealing between western companies and Russian companies. From the institution based view, BP needed to be aware the political dynamics as well as the TNK expectation and ambitions when forming the strategic alliance. If BP did the relevent due diligence, they would have realized the extent of political influence in the Russian market. While it is a strategically significant move to tie up with Russia’s second and third largest oil producers, BP ignored the scenario what would happens if one firm object to the deal. This short coming brought the Russian government in to the picture and created a difficult situation for BP. In essence, politics is presence in all Russian business activities formally as well as informally (Norman 2012) How to advice BP as an ethics consultant on episode 1 & 2 It is important to be sensitive to geo political differences in different regions and countries in the world. It’s important to look in to business practices, ethics and norms when looking in to industry based view in the preliminary stage prior to move in to a country. While working on the business strategy, part of it should be planning and prevention of ethical issues and how to handle it if something goes wrong (Brett 2013) One of the first steps to take an BP ethics consultant is to outline a set of principles covering ethical conducts, employee behaviors and best practices to follow all parties involved. This will help to have a common understanding on how to operate, explain what is acceptable to everybody in the organization. It is also important to understand the terms and conditions of the
- 8. A Study to Explore the International Business Strategy 8 strategic alliance between BP and TNK and honor the partnership contract even if it is not the best strategic move for the company in terms of finance and revenue. Russia’s political motivations, allies and interests are significantly different from the West. Two companies from two different countries coming together bound to create some news and by taking a long term view on the new alliance, BP needed to communicate its position on expanding the business, management structure, employee benefits and perks to avoid unnecessary grievances and production holts Faelten 2016) If I were an arbitrator which side should I take in both episode 1 and 2 Looking at the details of the episode 1, it is evident that the reasons for disagreements between Russian forms and BP were due to lack of communication and not going in to details about the extent of the business practices and interests. BP as a company from the Western world has certain obligations to be bound by rules and regulations of world bodies as well as US government. Russia might be obliged by the world bodies but not necessarily follow the directions of US government on whom to do business with or not. Failure to discuss such a scenario at the inception left both parties involved to interpret the company business goals from two different points of view (Brett 2013). As a firm, TNK-BP’s primary motive is to increase the revenue and improve the shareholder value. If this means working with countries and governments which western world frown upon, that is a secondary issue for the company. Essentially when working with countries which has restrictions against them, profitability is high as competition is low. This was a motivation for TNK partners. As an arbitrator I would recommend BP to work with TNK to work out the differences and open up channels to have better communication. If this means in short term,
- 9. A Study to Explore the International Business Strategy 9 working with countries which have questionable reputation, then that would be part of the deal (Brett 2013) Episode 2 also a classic example of BP’s failure to adhere to the contract with TNK and looking for opportunities to maximize the market reach by joining Rosneft who is a competitor to the TNK-BP. It is an important aspect of the business negotiation to agree on the partners’ interests and business practices (Faelten 2016). In this episode it is very much clear that BP tried to take the advantage of the situation and put their initial partnership in a disadvantage position by coming to an understanding the Rosneft. Conclusion In 2003 BP and AAR entered in to a joint venture agreement to jointly explore oil reserves in Russia and Ukraine. This strategic alliance known as TNK-BP and became the 3rd largest oil company in the world. Due to the lack of communication and mistrust between the Russian partners and BP, there were grievances from the inception of the strategic alliance and this was escalated to the point where media as well as the governments had to intervene. Russian government was much more aggressive and eventually BP had to come to terms with the ground reality and compromise in several fronts to be able to continue to work with TNK and gain and retain the access to Russian oil reserves.
- 10. A Study to Explore the International Business Strategy 10 Reference Brett, J (2013) Negotiating Globally: How to Negotiate Deals, Resolve Disputes and make Decisions across Cultural Boarders. Journal of International Business Studies. Retrieved from gala virtual reference library: http:/galegroup.com (10/08/2016) Faelten, A (2016). Why Deals Fail: And how to rescue them. San Francisco, McMillan Norman, J (2012). The Oil Card: The Global Economic Warfare in the 21st Century. Irwin, McGraw-Hill Peng, M (2013). Global Strategy. New York, Pearson Reed, S (2013). In Too Deep: BP and the Drilling Race that Took it Down, New York, Person