Introduction and Background

Introduction and background

BP is one of the largest oil and gas companies in the world. The company's operations include exploration and production of gas and oil, trading of natural gas, power, and natural gas liquids. BP is headquartered in London, the UK and employs about 79,700 people (Datamonitor, 2011).

The company expands and develops partnerships around the world. It is present in Europe, the US, Canada, Russia, South America, Australasia, Asia, and some countries of Africa. BP operates in 29 countries.

BP has received economical benefits from expanding horizontally. Its alliance with Reliance Industries in India is a venture into growing markets that allows BP to gain wide market share and increase profit. BP acquired from Reliance a 30% interest in 21 oil and gas production-sharing agreements operated by Reliance in India for $7,026 million. It's especially important for BP's business because emerging markets have higher return of investment. Also, BP acquired Devon Energy's equity stake in 2011.

BP has wide variety of related products and activities that use oil and gas for the final products.

Efficiencies gained and economies of scope

BP has benefited from economies of scale and economies of scope expanding geographically. Expanding geographically allows the company to operate in new locations. Geographical diversification can give an opportunity to differentiate prices on the company's products and make a large margin in regions where demand for its product is high.

BP can get advantage from expanding horizontally by operation in regions with less concentration of competitors. Also, expanding allows the company to decrease fixed cost per unit (per barrel of oil) significantly reducing its cost. BP has well built research and development infrastructure. In 2010 BP's expenditure for research and development was $780 million (Datamonitor, 2011). All the administrative expenses, expenses for advertising can be split out for greater number of outputs and decrease its fixed costs per unit. The company has well established brand name, reputation that can be used in running business in new areas.

BP will benefit from economies of scope by sharing resources common to different products called "synergies". Partnership allows to consolidate resources of companies to achieve maximum result in their development and gaining greater financial results. "The partnership [with Reliance] combines BP's world-class deepwater exploration and development capabilities with Reliance's project management and operations expertise" (BP corporate website). The company has achieved success by merging with another company which positions strongly in related technology and intellectual property. Acquisition of the cellulosic biofuels business of Verenium demonstrates "BP's intent to be a leader in the cellulosic biofuels industry in the U.S. and positions [its] as one of the few global companies with an integrated end-to-end capability" (Seewald, 2010).

Working on new alternative resources of fuel let BP diversify its future business, expand cross-selling to already existing customers, increase demand for the company's products. "That [diversification and horizontal expansion] may help to offset the effect of rising oil prices, which have reached almost record highs" (Scott, 2012).

The company produces a large variety of different products. For instance, one of the major products that British Petroleum makes is a lubricant. It produces lubricants for the automobile, machinery, marine equipment, aviation etc. It doesn't specialize in one particular product but rather cover many sectors of industry and