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Closing the Transformation Gap: Who’s doing it?

In part I of ‘Closing the Transformation Gap’, we outlined Strategy Tools’ Transformation Roadmap. For part II, we’re going to explore two organisations currently undergoing transformation that is fundamentally changing the way they operate.  


BP – A Company ”Performing While Transforming”

In the Summer of 2020, CEO Bernard Looney set the target of becoming a net-zero carbon company by 2050. This lofty ambition will require a transformational change that will fundamentally alter the company’s value creation logic. It’s also a process that will undoubtedly take considerable time and effort and as such BP has broken the target down into micro goals to hit sooner.  They include increasing renewable energy development from 2.5GW to 50 GW and doubling traded electricity from 250 TWh to 500 TWh by 2030. They also want to double the number of customer touchpoints, which they are closely tying to their goal of increasing the number of EV (Electric Vehicle) charge points ten-fold, from 7,000 to 70,000. Oil and gas production will drop by 40% over the next ten years in a bid to free up capital to spend on renewable projects.   

In essence, BP is hoping to make a step change from an International Oil Company (IOC) into an Integrated Energy Company (IEC) focused on renewable sources. This move symbolises the growing strategy divergence among European and US oil and gas majors. While Exxon Mobil and Chevron are taking a “pump it while we can” approach, Shell, BP, and other European majors are betting their futures on profitable clean energy.

Action has been swift, which is, in part, due to the fallout of the global pandemic and ailing crude oil prices. August 2020 saw BP cut its dividend (one of the largest payouts in the FTSE 100) for the first time in a decade. It slashed capital spending, issued billions of dollars worth of bonds, and announced 10,000 job cuts as part of significant restructuring. They also swallowed enormous write-downs on the value of oil and gas exploration assets. On the capital expenditure side, the company announced a $1.1 billion deal for a 50% stake in two offshore wind farm projects overseen by the Norwegian group Equinor.  

While these are all necessary steps for BP to transform successfully, many investors have had their confidence shaken. BP’s share price had lost over 60% of their stock market value by the third quarter of 2020 with their share price hitting its lowest value for over 25 years. They are skeptical of renewable energy’s ability to match the profit margins produced by oil and gas, mainly because no major provider has yet successfully made the switch from oil and gas to renewables. 

While it’s by no means indicative of the end result, investor unrest and poor market sentiment is usually a feature of successful transformations according to the framework laid out in the Building a Transformational Company report authored by Strategy Tools CEO Christian Rangen. This was seen by Adobe when they faced investor revolt through transitioning to cloud-based subscription products. However with a well-executed communications strategy and robust early financial performance, the confidence and subsequent market cap returned.  

Thus, to pull off a successful transformation, BP will have to convince investors that it can “perform while transforming.” Despite promising initial financial results, markets are still undecided. Looney faces an uphill struggle to convince shareholders of the new value creation logic, even though more than a year has passed since the initiative was announced. 

Only time will tell if BP’s bet on becoming a world leader in a clean, green energy future will come to fruition. However, they have certainly taken promising initial steps. The current leadership will have to remain committed despite the present challenges they face with global events and restless investors. 


VW – From Global Emissions Scandal to the World’s Biggest Electric Car Maker 

Not much more than five years ago, VW was in the midst of a storm. Tests carried out in the USA unearthed sophisticated software that helped diesel vehicles cheat emissions tests, often releasing as much as 40 times more pollution than allowed. On the morning the news broke, the company lost €15 billion of its market value in a mere matter of hours. Countries such as Switzerland even took action to ban the sales of VW diesel cars. In the UK, as many as 1.2 million VW vehicles were affected (one in every ten diesel vehicles on the road). The company had to reportedly take out a €20bn bridging loan to shore up its balance sheet against the prospect of multibillion-pound fines as police raided offices and arrested employees.   

VW knew that it had to act fast. Not only to temper the rampant reputational damage but also to take its responsibility to the environment seriously. The VW brand decided that it couldn’t merely shift its focus to greener vehicles. It would instead move to electric-only vehicle production, eschewing the traditional shift via hybrid technologies, before 2030. Known as the TRANSFORM 2025+ strategy, 2016 saw the company make a pact to become the world’s leading producer of electric vehicles (EVs) within 15 years.

With this bold strategy shift, VW hopes to transform themselves from disgraced manufacturers of polluting diesel cars to world leaders in e-mobility. The company made this pact irrespective of the fact that major BEV (Battery only EV) producers such as Tesla held huge head starts over them, particularly in the field of battery technology.   

Nonetheless, the company has already made impressive headway. Whole factories have already been converted to exclusively BEV production such as those at Zwickau, Emden, Hanover, and Dresden in Germany. With a €28.1 billion investment over the next few years, 70 new BEV models are in line for production. The process of phasing out combustion engine vehicles will be complete by 2026, a mere decade after signing the pact. 

According to analysis conducted by Wood Mackenzie, this extraordinary transformation will see VW achieve its target of becoming the world’s biggest electric car manufacturer by 2030. The energy consultancy firm expects Volkswagen to produce 14 million battery-powered BEVs cumulatively by 2028 and climb from its 2018 ranking as the 10th largest manufacturer to the very top of the global pile. To put that in perspective, estimates suggest that Tesla will have sold six million BEVs during the same period. If sale and production projections come to fruition, the company will snag a 53% market sense of electric-only vehicles before 2030.

But as mind-boggling as this decade-long transformation from relative electric obscurity to dominant market force is, it only forms part of the equation. Garnering much less attention is VW’s under-the-radar transformation from an automotive company to a technology company. VW’s vision of the future doesn’t involve drivers. They believe in smart cars that drive themselves. Much as the smartphone developed a considerable range of capabilities beyond the conventional mobile phone, vehicles will become a hub of activities that have very little to do with driving.

The company has launched a subsidiary named Car.Software to develop a whole new software operating system. Known as the “VW.OS,” this cutting-edge software will be made up of billions of lines of code, handling everything from infotainment and cockpit functions right through to assistance systems and chassis management. The work of the 10,000-strong unit will help VW to solidify modern software development as a core competency. Car.Software has been deliberately set up as a separate, agile software company wholly detached from their traditional world of mechanical engineering. They operate with the Silicon Valley ethos of “move fast and break things” in a bid to secure huge and long-lasting competitive advantages. With their enormous resources and agile setup, there’s a good chance of success.

VW hasn’t just transformed its whole ethos, brand identity, and output. It’s fundamentally transforming itself from a car manufacturer to a technology company that makes the smart vehicles of the future. In doing so, VW has managed to occupy the unique position of gaining a first-mover advantage over traditional car brands while boasting both the mass production infrastructure and manufacturing know-how that electric-only players such as Tesla are still trying to figure out. This remarkable feat is the reason that the company is almost certain to acquire the dominant market share that analysts have predicted. The rest will have to simply play catch up.