We are well into the latest wave-trough of low oil prices, and talks around board rooms invariably centers on what’s being done to survive the situation. Studies such as one presented in a 2010 Harvard Business Review article1 which looked at periods of economic slump (like the current slump in the industry due to dropped oil prices) have identified three typical strategic responses taken by enterprises attempting to survive. And putting these responses into an oil and gas industry context, these three strategies are:
- Offensive: Companies perceive compelling opportunities in the dip in oil prices and aggressively invest in new capabilities to grow the business.
- Defensive: Companies elect to “pull back” and ride out the low oil prices by cutting costs, downsizing, and putting a stop to any new investments.
- One-Two Punch: Companies balance the first two strategies, taking the offense in the form of strategic investments for future business advantage and taking the defense by reexamining operations and processes to improve efficiencies (thereby cutting costs and increasing productivity).
Upstream companies have historically followed defensive strategies in response to dropping oil prices. A number of enterprises have found disadvantages to this approach because they understand that the organization would lose their strategic position eventually when the market turns favorable, primarily due to the lack of investments in technologies that enable new levels of efficiencies and profits.
I expect to see something different this time. Companies that took a defensive stance in the past may learn from their errors and not entirely close the door to investments in new technologies and capabilities. They are more likely, I believe, to follow the combination strategy - the one-two punch approach. If they can balance the offense and defense, they will be able to remain solvent by streamlining and implementing new efficiencies, and at the same time invest enough to be positioned for new success when oil prices become more favorable.
A key to one-two-punch success is the IT function. Savvy CIOs can have a positive influence on both “punches.” Working with the business units, IT can make substantial inroads in streamlining and bringing in new efficiencies in the field through implementation of analytics and other strategic technologies. At the same time, CIOs with insights into the business and who have good integration with operational organizations can oversee capital projects around leading edge areas like big data to make sure the company is not behind the technological times, when the economic environment turns favorable again.