Cross-Border Trade and Profitability

Introduction

In the present global scenario, the cross-border trade has increased significantly. In this context, cross border trade has contributed to profitability, which, in turn, results in the growth of the company. In other words, cross-business enables economic growth, development of a country, along with it also helps in the social welfare of the people. There are some negative consequences of cross border trade, which include some environmental factors like pollution degradation of the natural resource on a large scale that hurts trade and investment of the company globally (Organization for Economic Co-operation and Development, n.d.). In this study, the prime focus is on analyzing the case study of a leading UK petroleum company of the world that is British Petroleum (BP Plc).

BP Plc is one of the leading players in the oil sector globally. It operates in 79 countries around the world. Also, this company focuses on various segments of businesses like biofuels, wind, solar energy, and the most critical part that is oil and natural gas. On the other hand, due to diversified business, it provides a massive opportunity for the company to explore the untapped reserves around the world. The company also offers innovative technology with the help of advanced research and development (bp p.l.c., 2020). In this case study, different management tools like PESTLE, Porter's five forces model, and SWOT analysis will be used in brief to understand the various issues related to BP Plc. In this context, they are Currency Risk, Political Risk, and others.

This case study aims to critically analyze the corporate and strategic actions along with identifying the currency risks, political risks faced by BP Plc. On the other hand, this study provides a glimpse of various corporate strategies use by BP Plc for the overall growth. Also, this study will provide a valuable recommendation to resolve the multiple risks faced by the company.

Corporate and Strategic Actions

In the era of competition, there is a need for a perfect corporate and strategic plan, which significantly impact the growth of the company. The company focuses on safety operation, which includes systematic processing during oil exploration. In this context, it helps to reduce the oil spill disaster and pipeline erosion, which is one of the weaknesses based on the SWOT analysis in the past. In this regard, BP Plc has formulated different strategies for safety, which in turn has proved to be good for the business and overall impact on the financial result of the market. On the other hand, the company is trying to increase the barrels per day that are around 900,000 barrels by 2021. The company is recently working on 20 projects to increasing its productivity. Besides, BP Plc is now focusing more on manufacturing due to competitive rivalry among various companies like Royal Dutch Shell and others based on Porter's five forces model. In this context, the company has extended its business in petrochemical, fuel marketing, which has significant impact the earning of the company that is $3billion from 2016 to 2021 (bp p.l.c., 2020). The biggest challenge the company is facing in its business is how to reduce the carbon emission in its operation and worldwide, which has influenced their business. It is the major weakness of the Oil Company. In the present scenario, the company has planned to spend around $500 million on various new technology and renewable sources. Also, BP Plc focuses on its cost and spending in business. This helps the company to grow in the long term, which has a positive impact on the returns of its shareholders. In other words, it enables to mitigate the currency risk among the shareholders, which improves the excellent image of the company (bp p.l.c., 2020).

The company has formulated different corporate actions to take a competitive advantage over its competitors, like product development, price differentiation, and diversification. BP Plc spends a significant amount on research and development for product development. On the other hand, the company offers quality products to its customers through price differentiation, which mitigates the risk of new entrants in this business and provide an edge before its competitors like Shell. This, in turn, increases brand loyalty among users. In this regard, BP Plc generates approximately 20% of the total oil production in the world (bp p.l.c., 2020). The company also focus on diversification of its business in the world, for instance, it has acquired Reliance industries in sharing contract (India) and diversified its business in other geographic location (BP Annual Report, 2019).

Identification and analysis of currency risk

Foreign Exchange Risk, also known as currency risk, refers to the losses and uncertainties that are faced by the fluctuation in currency. This change in the relative value of currency results decreases in the overall investment value. This type of risk is met by a company in case it is operating in international trade where the financial transaction is based on other currency than the currency wherein the company is based. Currency risk not only impacts cash flow but also investors engaged in international market trade along with import/export business. The types of currency risks can be categorized into three types that is transaction risk, translation risk, and economic risk, among others (IPAA, 2017). A company faces transaction risk when it is operating in a country and purchasing products/services from a different country. Thus, in such a case, the payables and receivables are in a different currency and, therefore, subject to change due to foreign exchange rate and its volatile nature. Thus, it poses a financial risk as the exchange rate can decrease or increase and causing gain or loss to the company.

On the other hand, translation risk refers to the loss that the parent company has to face when translating the financial statement of subsidiaries into the currency of the parent company. This type of risk is also due to the volatile nature of the forex market. Also, translation risk affects not only the stock price of the parent company but also impacts the income statement and the balance sheet as well (BP, 2009). The third type of risk, also known as forecast risk, is due to currency fluctuation that impacts demand for the product of the company and, in turn, revenue decreases along with the present value of the company.

The above discussion can be linked with the theory of PESTEL Analysis. Under this theory, it can be mentioned that the economic factor is one of the vital environmental factors that impact the decision making of a company in financial terms. The company operating in a country affects economic growth. In this context, the exchange rate is an economic factor that influences the business of a company and results in profit or loss (IPAA, 2017).

According to the report of Arnold (2014), BP Plc had faced currency risk wherein the in-house members of the company were held responsible for Forex scandal in which the company had to pay an exceptional amount of $4.3bn to six banks. Besides, the trading operations of the company and forex activities of the bank were also reviewed in this regard. The management of currency fluctuation and financial risk faced by BP Plc is managed by its treasury trading department. This department is responsible for the cash requirements of the entire BP Plc group, along with its subsidiaries operating in 100 countries globally (Global Custodian, 2005). In this context, the company follows the hedging strategy to manage the risk faced due to fluctuation in currency. Under this strategy, the exchange rate is fixed for the future on which the transaction will be done. This optimizes the impact of volatile exchange rates on the buy/sell of products. This prevents any loss for the company but also cut down the revenue in case of a favorable exchange rate (Papaioannou, 2006). Besides, a centralized treasury under the hedging strategy uses derivatives for the management of capital expenditure and revenue (Global Custodian, 2005).

The chart below shows the comparison between the exchange rates in $, €, and £.

From the above chart, it can be understood that the average exchange rate of $/€ in the first quarter of 2019 was 1.30, which declined to 1.28 in the first quarter of 2020. Similarly, the average exchange rate of $/ £ has also declined from 1.14 to 1.10. Thus, it can be highlighted that BP Plc in this period has also faced financial risk, which had required the company to implement the hedging strategy for managing risk efficiently.

Identification and Analysis of Political Risk

Political risk gives a significant focus on real investment and is not available readily. The difficulties in providing values to the investments hinder the research study and also impact the political risks. The oil spill is one of the most significant problems faced by the oil company. The oil spill in the Gulf of Mexico by British Petroleum became a political issue for the company (Faucon, 2011). In that situation, BP Plc was in massive pressure from all the companies around the world. In this regard, all other companies knew the importance of the gulf region, which is one of the profitable areas for them. Thus, the execution of an alternative business plan was under check. Taking a lesson from this disaster, the company had made different changes in their projects in due course (British Petroleum, 2017).

Political instability also affects the growth of the company as well as the geographical surroundings. For instance, Iran is dominated by the US for its political instability and rise in demand from India, and China also increases in oil price. In this similar context, BP Plc invests more in oil and gas reserves (Harrell, 2016). Moreover, BP had also faced significant political risks when it sold its 50% interest in TNK-BP joint venture during 2013. This joint venture had attained various issues, which include impairment of assets, insecure rights of property, political violence, and also a restriction in capital flow and inconvertibility currency. Apart from that, the company has too faced issues such as domestic political issues, internal business practices, corporate responsibility, and strategies for risk mitigation (Mucci, 2015). However, BP has its policy to tackle the political risks wherein HIS energy Group models were also chosen to resolve the political risks. British petroleum has applied two primary strategies to deal with the political risk wherein assets homogeneity is the initial approach. The company has used assets homogeneity wherein values cannot be compared in the plants, and petroleum assets also generate similar kinds of products. These heterogeneities are mainly controlled, utilizing the usage of proxies for the costs of production. Moreover, a liquid market for business in assets and data on the store were also permitted the stakeholders to attain the values directly. Lastly, to control the political issues, the company has also controlled its price, whereby it has fixed the price internationally and also attain subsidies from the government to compensate the loss bear due to political risks.

Conclusion and Recommendation

British petroleum is one of the biggest companies globally, which benefits the common public with its new products. BP is highly creative with its technology and has invested more in the installation of solar plants. The company has concentrated on the urban and rural areas as It is stated that due to glocalization, emerging markets have attained more dominance and are influenced because of the dynamism and size. This has become attractive to foreign investors. However, the political environment is changing continuously, and as the demand for energy sources is continuing the enhance, governmental reforms and political instability have evolved, which have led to the business outlook for the foreign investors. The company has made its greater emphasis on product development, quality of products, and price differentiation. However, the carbon emission, political, and currency risk are a significant risk that leads to a decline in the performance and profitability of the company. However, despite threats and issues, the company has kept on dealing with the problems and has given the focus on the company’s reputation and quality of the products. This has led the company to attain success and deal with political and foreign exchange risks.

It is seen that British petroleum has faced the issues of political and currency risk, so it is recommended that the company should safeguard against the political risk of creeping nationalizations whereby it should negotiate stabilization in its agreement. These clauses state that if fiscal benefits of the agreement are affected adversely by the unilateral regulation of government, then parties should adjust the budgetary benefits of agreement that gets affected by unilateral legislation. It is further recommended that parties should change the financial and contractual interests of the contract to provide the company with similar agreements in the absence of the unilateral action performed by the government. To safeguard the company against the one-sided change risks, the company should agree with the government and needs to be broadcasted with the assistance of effective legislation. It is also recommended that reviewing the political situation, diversification in commercial operation, and activities in the unstable regions, the company should usage the projects in the partner country and also sign long term agreement as it safeguards the company against the political risks.

In addition to that, it is stated that to deal with currency risks, the company needs to minimize the currency risks by operations performed with derivatives financial tools that are carried out in the corporate dealing framework to resolve the issues of currency risks. The company should also issue loans to the subsidiaries using local currencies using intra-group financing. Since instability in government leads to financial obligations, British petroleum should assess potential credit risks in the countries where the business is performed by suppliers and view the credit control process. In addition to that, It is also recommended that the company should appoint risk advisors to develop response plans which consider the requirement of alternative suppliers. It is even suggested that organizations should do the planning and also test the means of communication and also critically evaluate the crisis plan. It is further recommended that the company should also make credit and political risk insurance policy, which leads to political violence, currency inconvertibility, non-payment, and even frustration of contract. It is also stated that BP should regularly make political risk analysis as it assists the investors to enter the oil and gas industry.

Reference

Harrell, L. 2016.British Petroleum (Bp): A Critical Analysis Of Its Corporate And

International Strategies. Otago Polytechnic Auckland International Campus, 6(3), pp.143-156.