– Exxon Co. A Case Study Essay, Research Paper
I. EXXON CORPORATE HISTORY
+ 1870 – Standard Oil Company formed
John D. Rockefeller first entered the oil business in 1863. Seven years later, he and others formed the first Standard Oil Company in Ohio. The “Standard” name was chosen to indicate high, uniform quality. The company was the largest refiner and marketer of kerosene in Cleveland.
+ 1882 – Standard Oil Trust formed
Early in 1882, the Standard Oil Trust was formed under the leadership of John D. Rockefeller. The Trust organized the interests of 40 separate petroleum companies into one orderly system.
+ August 5, 1882 – Standard Oil Company of New Jersey incorporated
The company’s principal facility was the Bayonne refinery, which could process 2,000 barrels of oil per day. Initial capitalization was $3 million.
+ 1888 – Anglo-American Oil Company organized
1890 – Interest acquired in Deutsch-Amerikanische Petroleum – Gesellschaft, Germany
Anglo-American was Standard’s first international venture, formed to market products, principally kerosene, in England. Two years later a 40 percent interest was acquired in DAPG, a new German company. Marketing expansion proceeded rapidly to many other countries around the world.
+ 1892 – Standard Oil Trust dissolved
Standard Oil Interests formed
The new group consisted of twenty holding/operating companies, including Jersey Standard. In 1899, Jersey became the holding company for all, with Rockefeller as President. The organization had by then expanded into an industrial consortium of more than 70 companies.
+ 1898 – Imperial interest acquired
1904 – First foreign oil production
When Imperial needed financing to expand in Canada, Anglo-American purchased a majority interest. Six years later Jersey organized its first affiliate for foreign oil production, in Rumania.
+ 1906 – U.S. Government files anti-trust suit 1911 – U.S. Court orders break-up
The court divided Jersey standard into 34 unrelated companies, seven of which kept “Standard Oil” in their name. Jersey was left with 43% of its original assets, mostly refining and marketing operations, but little production or access to former research and technical activities.
+ 1914 – Peru operations begin
1919 – 50% of Humble Oil & Refining Company purchased
After the dissolution, Jersey needed production, which led to expansion into new countries and areas. Humble in 1919 established the first broadly-based research and development department in the oil industry.
+ 1921 – Venezuela operations begin
1928 – Purchase of Creole Petroleum
Initial operations in Venezuela were greatly expanded with the purchase of Creole Petroleum’s holdings in that country.
+ 1934 – Standard-Vacuum Oil Co. formed
The new company was formed by merging the Far Eastern affiliates of Jersey and Socony-Vacuum.
+ 1959 – Domestic decentralization
1966 – Foreign decentralization
Rapid growth for many years resulted in an organization too large and complex for central
management. Beginning in 1959, Jersey’s major U.S. affiliates were consolidated into wholly-owned Humble Oil & Refining Company. Efficiency was greatly increased, and Humble became the largest U.S. producer, transported, and marketer. Foreign decentralization began in 1966, by establishing four regional organizations to coordinate the work of affiliate companies in each area. Creole, Imperial, and Humble were left as separate regions.
+ 1972 – Exxon Corporation name adopted
1975 – Venezuelan assets nationalized
The name change was needed so that the company could operate in the U.S. under a single nationwide trademark, instead of regional brands.
When Venezuela nationalized the assets of Creole Petroleum and other affiliates in 1975, the action duplicated the seizures by Bolivia in 1937, Mexico in 1938, Iran in 1951, Peru in 1968, and Iraq in two stages, 1972 and 1976.
+ 1986 – Corporation-wide reorganization
Restructuring actually began in some areas of the company in the early 1980s, but the major changes began in 1986. The objectives included: 1) re-focusing on the primary petroleum business, and closely related activities; 2) creating a streamlined, more flexible organization, better aligned with changing energy markets. The changes have resulted in improved financial returns and the ability to quickly respond to opportunities as they emerge.
+ 1989 – Imperial purchases Texaco Canada
The purchase, at a cost of $4.1 billion, was made primarily to implement Imperial’s downstream strategy of greater emphasis on transportation fuels, especially gasoline. Texaco Canada Inc. was renamed McCoU-Frontenac Inc.
II. EXXON TODAY
+ Business Objective
Exxon’s overall objective is “to remain the world’s most profitable oil company.” This objective includes excellence in the oil and gas business, and in chemicals, coal and minerals. The objective involves achieving sound financial results (profitability and enhancement of shareholder value) while providing customers with a consistently reliable supply of energy and products at competitive prices. Each key business segment is expected to be a top competitor and make an important contribution to corporate profitability.
+ Present Environment
Competitive
Unstable
Exxon’s competition comes from other private companies and from various government-owned organizations. Oil and gas supply surpluses, plus excess capacity in refining and marketing, intensify the competition. Exxon employs all methods of competition which are legal and appropriate; nevertheless the company emphasizes the highest standards of ethical behavior and quality in all its activities.
Unstable conditions are largely created by cyclic variations in supply and demand. In 1994 an upturn related to increased economic activity in most major markets stimulated growing demand for crude oil and petroleum products worldwide. Many factors may contribute to the variations, including exploration success, technology developments, general economic conditions, laws and regulations, and political situations. The political variations are perhaps most severe, such as the rise in prices after the oil embargo of 1973, the price collapse of 1986, and 1991 oil price swings related to the conflict in the Middle East
+ Future Environment
Slow Demand Growth
Shrinking Reserves
Continued Competition and Instability
Overall growth in demand is expected to be slow, although some regions such as Asia-Pacific will continue to be more rapid. If present trends are indicative of the future, crude oil reserves will probably decrease in many countries as production continues and finding new reserves becomes more difficult. Unless major discoveries are made elsewhere, control of crude production will increasingly belong to oil exporting nations where large reserves have already been found. The probability is that current competitive and unstable conditions will continue into the future. Overall, the only future certainty is change.
+ Exxon Strengths
Resource Base Functional Diversity Geographic Diversity
Technology Leadership
To prosper in a difficult present and future business environment, Exxon has some significant assets. One is a very large and growing natural resource base distributed around the world. The company’s operations are diverse, including all major functions of the petroleum business plus chemicals, coal and minerals, and other activities. Geographic diversity sustains overall profitability even though regional economies change. Numerous operations have profited from a wide range of technologies developed by Exxon research programs. Other company research has significantly lowered costs.
+ Exxon Strengths
Employees
Financial Resources
Quoting Mr. L. G. Rawl, former Chairman, Exxon Corporation,” . . . for the continued success of our worldwide operations, our most valued resource – as always – is the quality and character of the people we employ.” This quote appears on the cover of the 1989 Annual Report. In subsequent Annual Reports, and in many other statements, the high quality of its people is given as one of Exxon’s primary strengths.
The present corporate structure has enabled Exxon to maintain its position among the oil industry’s most cost-effective operations in finding, developing, and marketing petroleum. The result is very healthy financial resources, combined with the flexibility to respond advantageously to rapidly changing conditions and opportunities. Over the past ten years, internal cash generated from operations provided more than $ 1 00 billion; the amount in 1994 was $9.9 billion.
+ Business Strategies
As you may recall from the overview course, the operations of the oil business are divided into “upstream” and “downstream” sectors. Upstream includes Exploration, Land, Drilling, and Production. Transportation occurs as part of upstream operations and also in connection with Refining and Marketing in the downstream group. Some types of Land work are required downstream as well.
The business strategies used to achieve the corporation’s objective vary geographically according to market conditions and business environments. Selectivity and flexibility are two key elements incorpo-rated into the business plans. After decisions are made and plans implemented, the results air, carefully compared with expectations.
Another key element is continuous improvement of Exxon products, operations and service to customers, using advanced technology. Exxon maintains an ongoing focus on upgrading the overall assets of the corporation. In the decade of the 1980s more than $90 billion was invested in projects which met the criteria of quality, attractive returns, compatibility with overall goals, and improvement in competitive position. Other assets, which no longer satisfy those criteria, have been sold. Asset sales over the past five years average more than $1 billion per year, with $1.4 billion in 1994. Most sales have come from mature North American operations.
Overall, the best opportunities are sought to employ Exxon’s capital for maximum profitability.
+ Upstream Strategies
Exploration Opportunities
Superior Returns
New Gas Markets
Maximize Profitability of Existing Production
Upstream strategies include reserves replacement through pursuit of all attractive exploration opportunities worldwide, and development of new discoveries and other projects that will deliver superior returns even at relatively low energy prices. These strategies emphasize development and application of superior technology for exploration and production. The asset mix will be continuously upgraded. Natural gas is the fastest growing energy source, and new markets are being sought for Exxon’s large undeveloped gas reserves worldwide. Another strategy centers on maximizing the profitability of existing oil and gas production through cost reductions, increased volumes, and other improvements. Innovative approaches are sought to ensure that all operating systems are reliable, cost effective, and meet the highest environmental and safety standards.
+ Downstream Strategies
Focus on Best Markets
Emphasize Profitable Products
Optimize Raw Materials
Upgrade Refineries and Service Stations
Lower Costs
Maintain Competitive Advantage
Downstream strategies include emphasis on expanding high-potential markets where Exxon can operate competitively and profitably, such as the Asia-Pacific region, Latin America and Eastern Europe. Exxon also focuses on the more profitable transportation fuels, lubricants, and specialty products for which demand is growing. Raw materials will continue to be optimized by careful sales, purchases and trades, and the effective use of refinery upgrading process units . Both refineries and marketing facilities will continue to be upgraded to meet consumer and environmental requirements. Efforts to reduce unit operating costs and improve efficiency are on going, as is the emphasis on safe, reliable operations. Large investments in research will be made to achieve or maintain product differentiation and competitive advantage.
Exxon has several areas of competitive advantage in downstream operations. There are efficient, integrated refining facilities worldwide. The company is one of the largest manufacturers of lubricants in the world, which are some of the highest value products made from petroleum. Exxon has been a leader in converting to unleaded and reformulated gasoline s and the introduction of new retail technology such as the automated Express Pay system. Strong recognition of the Esso brand in many countries is another advantage.
+Chemicals Strategies
Strengthen and Commercialize Proprietary Technology
Expand Profitable Businesses
Lower Costs
Improve Synergy s
Upgrade Business Portfolio
Exxon is prominent in a wide range of petrochemicals. These include aromatics, ethylene and polyethylene (some of the basic building blocks of petrochemicals); a dynamic range of plastics, composites and other polymers; and specialty products such as fuel and lubricant additives, fine solvents, vinyl and oil field chemicals. Strengthening and commercializing proprietary technology enables the company to maintain or improve its competitive position. The focus is on higher value-added products combined with support services tailored to customer needs. Where there is a good match with Exxon’s strengths and skills, the company will expand profitable businesses into growing markets such as the Asia-Pacific region. When additional plant capacity is needed, low cost techniques such as “debottlenecking” will be used, whenever possible, rather than new construction. Several chemicals operations have achieved substantial savings and increased production by converting surplus refinery process units to chemicals manufacture. Lower ma unit production costs are continuously sought, while enhancing safety and reliability. Other significant benefits can be achieved by continuing to improve synergies with Exxon refining and producing operations. The company maintains an ongoing effort to upgrade its business portfolio by divesting non-strategic assets, and by selective investments, acquisitions and joint ventures.
+ Corporate Activities
Oil and Gas
Chemicals
Coal and Minerals
Public Service
Exxon Corporation concentrates on its basic businesses and is dedicated to being a leader in those businesses. Most of Exxon’s operations are related to oil and natural gas in one way or another. The company’s other basic business involves coal, copper and other minerals. Extensive research is conducted in support of principal businesses to maintain or increase competitive advantage. There are also operations in electric power generation and real estate. Additionally, Exxon sponsors a variety of programs for the benefit of communities and countries in which the company operates.
+ Exxon Worldwide
Exxon currently operates or markets products in more than 100 countries, and employs approximately 86,000 people, less than half the peak level in 198 1. About 36% are employed in the United States. Oil and gas operations account for well over one-half. The company’s operations are roughly two-thirds international and one-third in the United States with the trend toward increasing the international focus. Over 98% of the employees are citizens of the countries where they work.
+ Corporate Elements
Board of Directors
Management Committee
Compensation and Executive Development Committee
Operating Divisions and Affiliates
These corporate elements give the corporation general direction, establish policies, monitor performance, and carry out the strategies selected to meet Exxon’s objective. We’ll look at each of these elements.
+ Board of Directors
3 Inside Directors
9 Outside Directors
General Direction
Exxon currently has twelve positions on the board of directors. Three are also officers of Exxon Corporation. The first two outside directors were elected to the board in 1966. The outside directors today represent a variety of other businesses (seven), education (one), and research (one). The employee directors are Exxon’s Chairman and Chief Executive Officer, L. R. Raymond; President, C. R. Sitter, and R. E. Wilhelm, Senior Vice President.
The board of directors is responsible for giving general direction to the entire corporation.
+ Management Committee
Broad Policy Guidance
Long-Range Strategies
Operating Results
The members of the management committee are the chief executive officer, president, and the senior vice presidents. The present members are also identified in your packets.
Under the direction of the board of directors, the management committee establishes policies which give broad guidance to the entire corporation. The committee decides on long-range business strategies and develops related financial plans and budgets for capital spending. The activities of all elements of the corporation are reviewed with respect to operating results. Each member of the committee serves as a contact executive for a major corporate division or affiliate.
+ Compensation and Executive Development Committee