Printer Friendly

Atlantic Richfield Company.

*Anthony Finizza is Chief Economist, Atlantic Richfield Company, Los Angeles, CA.

See references at end of text.

At Arco, the focus of the Economics Department is on the business aspects of the economic environment. Three levels of emphasis are bringing new views to executive management, strategic planning and support.

JUST WHEN the world thought oil markets had calmed, Saddam Hussein threw the macroeconomy and the oil market into a cocked hat. Oil prices jumped out of the relatively narrow range that had characterized the market since the price crash of 1986. Senior management became increasingly uneasy, asking: Under what conditions will oil prices seek a new plateau? Will prices become more cyclical or will they settle down and return to another plateau below the range that we had envisioned? Does this event alter our long-term vision of oil markets? These questions are the types asked of the Economics group at Atlantic Richfield (Arco).

The Economics Department at Arco, formally called Economic and Environmental Analysis (EEA), is one of four segments of the Corporate Planning Division. Created in 1972, EEA was originally two departments, Environmental Analysis and Political Economics, which later were combined in 1982.

The EEA charter, largely unchanged in scope but honed over the past twenty years, has three levels of involvement in descending order of importance and difficulty;

1. Visioning

Help Executive Management to learn things they don't know by:

a. Challenging the firm's fundamental beliefs.

b. Heightening management's awareness and understanding of leveraging, emerging issues that may affect the corporate portfolio.

c. Testing and developing perceptions from outside sources to avoid inbred thinking.

2. Strategic Planning

Manage the Environmental Analysis role in the Long Range Plan (LRP) process by:

a. Suggesting new approaches and providing alternative views through scenario development.

b. Testing and probing leveraging planning assumptions.

3. Support

a. Provide economic support for Operating Companies and Corporate Staffs.

Note that the word "economics" does not appear in the charter. What the Economics Group brings to bear is an "economic way of thinking," along with other relevant disciplines (political science, etc.).

ROLE IN THE VISION FUNCTION

The first function is by far the most difficult to perform well and the most difficult to measure performance. Yet, there are a number of success stories.

The first example is of a mega-success. Analysis done in late 1984 for the 1985 long-range plan (LRP), suggested that oil prices would probably drop rapidly, a view developed more than one year in advance of the actual price drop. This competitive advantage allowed the company to undertake massive restructuring in advance of other companies. Although the energy scenarios had been suggesting a real price decline as early as the 1982 LRP (created in 1981), the new insight challenged basic company beliefs by calling for a price crash.

Second, the department's 1981 view of no increasing product prices, while inaccurate in detail, was directionally correct. It allowed the planning department to recommend sale of the Company's shale projects, which were predicated on rising real oil prices. This example points out the obvious fact that sometimes you only have to be somewhat differential from the competition to gain market advantage.

Third, insights from studies that the Economics Group undertook led to a restructuring of the firm's natural gas function.

Finally, the group developed insights about the Soviet Union, Eastern Europe, and the strength of the current environmental movement in advance of these becoming issues.

One forum for bringing in new views is the Business Environment Trends Team (BETT), chaired by the Chief Economist. The twelve-person team (three of whom are economists) has members from ten different corporate groups and an outside consulting service. The team's charter is to develop special insights that test management beliefs.

Another forum for identifying "surprises" is through a Rip Van Winkle process, an ad hoc method often used by the Economics Group. With this technique, one identifies a major assumption on which "one is betting the company." An example might be that of a real oil price rise by the year 2000. Because this major assumption may have gained status as a "sacred cow," planning can undertake little orthodox analysis. One has to step back, close one's eyes for twenty years (as Rip did) and wake up with prices, say, considerably lower than the reigning view. The point of the exercise is to identify the ways that this "discontinuity" could occur. The ways identified can help gauge the degree of certainty with which the Company should hold a price view as well as create an early warning system of variables for the group to monitor.

ROLE IN THE STRATEGIC PLANNING FUNCTION

Management of the environmental analysis role in the LRP process is part inspiration, but largely perspiration. The basic element of the Economic Group's contribution to the LRP process is providing international and domestic economic scenarios, energy supply and demand scenarios, and other elements of the future environment as planning cases for the LRP. The group develops, as appropriate, downside test cases to challenge project robustness.

The department's role is as provocateur: to identify and study critical issues, to make sure all aspects of the economic environment are considered, and to support the operating companies' economic group in division-specific studies.

The main guidance body for this role is the Strategic Planning Council, a committee chaired by the Vice President of Corporate Planning, with members including the eight divisional planning managers and the four corporate planning managers, one of whom is the Chief Economist.

Planning studies are identified and commissioned in the early stages of the annual LRP process at a company-wide meeting, the Environmental Analysis Forum, organized and chaired by the Chief Economist.

THE SUPPORT FUNCTION

The Economics Group provides economic support to various staffs. Interest-rate and exchange-rate forecasts are provided to the Treasury Department. The group provides support of litigation, economic advice for public advocacies, economic analysis of legislation for the Public Issues group, and input to Environmental Protection on economic aspects of pollution, global climate change, and various other topics.

Economists in the group sit on an interdivisional Tax Policy Council, making recommendation on the impact of alternative tax proposals on the Company. The group also provides monthly oil market perspectives to the Oil Pricing Committee. Most of these requests are routine, but the group does get frequent one-time only requests for economic analysis.

An important support area is political risk analysis. Before a Division can undertake a project in a foreign country, EEA has to pass on the political and business climate of that country.

The Economics Group developed and maintains a number of oil market models, one of which uses pathbreaking ideas from Artificial Intelligence.

The Chief Economist participates in a middle-management seminar six times a year where he presents the latest environmental outlook. The Economics Group also represents the Company on a number of industry committees (for example, the National Petroleum Council), trade associations (American Petroleum Institute), and professional organizations (for example, The International Association for Energy Economics).

HOW IS THE JOB DONE?

We provide information in oral or written form. Arco has a strong oral tradition, preferring presentations to long-winded memos. The economic staff uses a number of outside consultants, recognizing the need to provide nonparochial ideas. The large consulting budget, about 20-25 percent of the department's overall budget, includes outside economic and energy-modeling services, outside expert opinion, and special studies.

REPORTING RESPONSIBILITY

The Chief Economist supervises the economics function at Arco. He also serves as Manager, Economic and Environmental Analysis and reports to the Vice President of Corporate Planning, who in turn reports to the Chief Financial Officer. The Vice President of Corporate Planning is the agenda setter of the internal Management Group. This close tie insures that the Economics Group gets a hearing whenever it has a message to deliver.

There is another aspect of the reporting relationship that bears mentioning. At Arco, the Corporate Planning V.P. is the training ground for future leaders of the Corporation. Since it's inception, there have been ten Corporate Planning V.P.'s. In addition to the current V.P., the other nine include the current and past CEO, the current President, both Executive Vice-Presidents of Operating Company Groups, and three of the eight Operating Company Presidents. The tenth Executive Vice-president left the company but is now President of a set of assets that the company divested. This "success" story also explains the "preselling" of the importance and usefulness of the economics function.

STAFF

Including the Chief Economist, the Economics Group has five professional personnel: four economists and a political scientist. Two have the Ph. D. and three have training beyond the Master's degree. One person does international and domestic economic analysis, one performs country risk and political assessments, one addresses international energy issues, and one focuses on the domestic energy scene. The Chief Economist plays an oversight role as well as performs several of the support functions. While some economic departments at other companies have a number of junior analysts supporting the main staff, our principle is to have all members proficient in analytical techniques, all doing their own work. The time-honored premise is that we prefer to have people who are experts in their own right.

Prior to a significant downsizing of the corporation in 1985, the two departments from which the Economics Group was formed had ten professionals, while the political risk function had four people. The resultant combination was six. The widespread use of computers, a refocus on critical issues, and the deemphasis of monthly newsletters that were not perceived to have a strategic value helped in making the downsizing work.

The staff is encouraged to engage in outside professional activities. A number speak regularly in economic and energy issues to outside organizations. We must maintain a cachet both inside and outside the corporation.

The Corporate Planning philosophy is to have rapid turnover in its liaison groups, but less frequent movement in the specialized staffs. Members of the Economics Group have moved to other functions in the Company, but in general the positions do not lead to managerial positions.

SUMMARY

The Economics Group has changed emphasis over the past eight years, focusing on business aspects of the economic environment. The business economist at Arco is first and foremost an economist, but also a strategic planner, an idea generator, and hopefully, a sought-after resource.

REFERENCES

Finizza, A.J. "How the Rip Van Winkle Approach Helps Oil Executives Plan," Long Range Planning, Vol. 18, No. 1, pp. 59-63, 1985.

Levinson, M. "The Big Switch to Hands-On Economics," Dun's Business Month, August 1986, pp. 26-9.

Linden, D.W. "Dreary days in the dismal science," Forbes, January 21, 1991.

Wing, K.T. "What's An Economist To Do?," Business Economics, July 1987, pp. 34-7.
COPYRIGHT 1991 The National Association for Business Economists
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:petroleum industry and trade; economics department at Arco
Author:Finizza, Anthony
Publication:Business Economics
Date:Apr 1, 1991
Words:1788
Previous Article:Canada: recession and recovery.
Next Article:The statistics corner: new products from the Census Bureau.
Topics:

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters