|Publisher||Society of Petroleum Engineers||Language||English|
|Content Type||Conference Paper|
|Title||Using Portfolio Analysis to Develop Corporate Strategy|
|Authors||John I. Howell III, Portfolio Decisions, Inc.; Peter A. Tyler, Merak Projects|
SPE Hydrocarbon Economics and Evaluation Symposium, 2-3 April 2001, Dallas, Texas
|Copyright||Copyright 2001, Society of Petroleum Engineers Inc.|
Every exploration and production company has the difficult task of deciding between a large number of competing oil and gas projects for future investments. Many companies are developing corporate strategies and making investment decisions without considering the relationship between the two. The result is a less than optimal financial performance and failure to meet corporate goals. The application of portfolio analysis within the strategy and investment stages provides a disciplined and systematic method of analyzing these relationships. Portfolio analysis can be used to develop and compare strategies given a “pool” of investments. Conversely, portfolio analysis can also be used to evaluate individual investments with respect to how they impact the company's ability to meet its strategy. Effective portfolio analysis requires high-quality data addressing such questions as: what assets are currently owned, which ones might be purchased, what stakes might be acquired, or what stakes might be developed in the near future? By taking on a particular economic project, is another opportunity missed that has a better net return? This presentation will illustrate the use of portfolio analysis to develop and compare alternate strategies that a company might pursue. The examples illustrate how projects and corporate performance measures interact and how the interactions create new opportunities for the corporation. The interactions can be quantified in terms of simple graphical summaries that allow decision-makers to compare alternate strategies and quickly assess the business performance trade-offs they will likely face when they select one strategy over another.
All oil and gas companies use a corporate strategy to guide their business and investment decisions. Michael Porter3 characterized these strategies as being “explicit" or “implicit.” Explicit strategies are usually developed using a systematic process, and ensure that all business segments are being directed by common goals. Explicit strategies can easily be shared with others and discussed from a common understanding. Implicit strategies usually evolve from historical business practices. Implicit strategies are guided by the “professional orientation” of the business segment and the “incentives of those in charge”. Individuals who know the business segments specific area of expertise best understand implicit strategies. Unfortunately, implicit strategies are often difficult to explain to people outside of the business segment. Furthermore, implicit strategies are extremely difficult to change.
Porter's implicit and explicit approaches are easily identified in the petroleum industry today. Most corporations (though not all) have some type of explicit process for setting or updating the corporate strategy on an annual basis. The explicit approach uses input from business segments in a “roll-up” model to describe the initial picture of the corporation. However, the input to the corporate process, provided by the business segments, is often generated using an implicit approach. The “roll-up” is used because it fits the culture and business styles of the business units and the corporate center alike. Unfortunately, this approach frequently fails to generate a robust strategy.
One has to wonder whether a better process for developing a corporate strategy exists, and why companies have stayed with the “roll-up” approach for so long. In this paper we will explore an explicit process that relies on Portfolio Analysis for creating a business strategy. We will describe how this process can be adapted to conform to most companies' cultures. We will use several examples to illustrate this approach and finally we will discuss how the portfolio approach prepares a company to compete in the global economy.
|File Size||1,439 KB||8|