Petrobras: The rise and fall of a business model

Humberto Elias Garcia Lopes – Professor of Strategy of the Graduate Program in Management of  University Pontifical Catholic of the Minas Gerais – Brazil.

Fabian Salum – Professor of Strategy and Innovation Management at FDC and Visiting Scholar at INSEAD.

“For what does it profit a man to gain the whole world and forfeit his soul?”

Mark 8:36

 

Storm clouds on the horizon

 

 

March, 17th, 2014. The day was sunny and hot as usual in the Brazilian Summer. The beaches of Rio de Janeiro embraced tourists from all the world. The contrast between the deep blue sea and a white sand remembered people why Brazil had some of the most beautiful beaches in the world. 

Apart from that paradisiac landscape, the life in Rio continued as usual: the chaotic traffic mixed with the crazy stream of people walking down the streets trying to go to work, to school, or to attend personal appointments. 

Meanwhile, in downtown, near the mythical Macarana stadium, the sun shined over the windows of the dubious architecture building of Petrobras headquarters. Despite the fantastic weather, a storm is coming. The Federal Police vehicles accomplish warrants of seeking and arresting in six states and the Federal District from Brazil. The so-called “Lava Jato Operation” had begun.

The ongoing investigations found out that Petrobras was in the center of a massive web of corruption. It used company’s revenues to finance shady actions that served both the liberal party of the President Dilma Rousseff and a plethora of politicians, businessmen, and some of the company's high management members. The Lava Jato Operation also revealed that the ones involved in corruption deviated nearly 29 billion of U.S. dollars from Petrobras revenues. 

Two years later, many of those people went to jail. Rousseff – the first woman to be elected President in Brazil’s history - lost her term after the Congress had considered her guilty of “responsibility crime” - a euphemism for systematically violating the National Constitution. 

Petrobras wasn’t the responsible for the corruption, though one of its most visible victims. In fact, it resembled a patient suffering from a severe illness for years, but whose doctors – some of the company’s top managers – insisted on hiding the symptoms because they were somehow benefiting from the situation. 

The consequences of those actions were harmful to Petrobras. The firm lost a significant part of its market value. Its image and reputation were severely damaged. Its business model almost collapsed. How could things be so wrong?

Petrobras’ business model: from monopoly to competition 

 

Petrobras was created by Brazilian President Getulio Vargas in 1953 as a state-owned and monopolist firm in the oil and gas industry. Because of that, for decades Petrobras controlled the exploration, production, refining, and transportation activities of the oil industry in the national territory. In 1997, during the social democratic government of President Fernando Henrique Cardoso, the Congress approved a new regulation that ended Petrobras’ monopoly. Despite that, the firm still has significant participation in the chain of the oil and gas industry.

Likewise its competitors, Petrobras behaves in the market following some patterns which the recent literature calls business models. In a broader sense, they are the choices a firm makes to operate (Demil & Lecocq, 2010). There is a vast list of definitions about business models (Wirtz, 2016; Wirtz, Pistoia, Ulrich, & Göttel, 2015; Wirtz, Schilke, & Ullrich, 2010; Zott & Amit, 2013; Zott, Amit, & Massa, 2010; Zott, Amit, & Massa, 2011), but they converge to the same point: choices.

Petrobras business model attended to a monopolist market. Without competitors on the horizon, the company chose not to focus on value creation and competitive advantage into the domestic market. That situation changed after the new regulation of 1997. Petrobras had to rethink its business model and to learn how to compete after controlling the Brazilian market for decades.

In fact, the logic of Petrobras’ new business model was to meet high standards of effectiveness on its activity system (Barbosa, 2013; Pactual, 2015). In a positioning view (Porter, 1979, 1996, 1998a, 1998b), that means to reconfigure the company's value chain. In doing so, the firm should choose between overcome competitors by distinctively executing the same activities or by having different activities in its value chain. That is how the traditional competitive strategy theory would understand cases like Petrobras. But business models offer a new way of looking at them.

  

Understanding Petrobras’ business model: the “choices-and-consequences” framework

  

Under a business model perspective, the case of Petrobras can be analyzed by the “choices-and-consequences” framework- CCF (Casadesus-Masanell & Ricart, 2010). The CCF proposed that a business model is a structure of choices and consequences about value creation and capture. Choices are the decisions made by management about how the firm should operate, and the consequences are the result of those choices.

Management can decide about three aspects of a business model. The first are the choices about policies, where a firm establishes the courses of actions for all aspects of its operation. The second are the choices about assets, which are the tangible resources needed by a firm. The third are the governance choices that refer to the structure of contractual arrangements that regulate the decision rights over policies or assets. Those governance choices are at the core of the framework since they mediate the decisions about assets and policies. In the choices and consequences framework, an effective business model must count on a rational and robust governance system. Figure 1 illustrates the CCF.

 
 
 
 
 
 
 
 
 
 
 
 
                                                                                Figure 01: the choices and consequences framework (CCF)
                                                                                            

Petrobras had to change its business model to confront competition in a market the company used to control. That implied to review its governance system and its related decisions over assets and policies. The goal of such change was to create a business model with virtuous cycles and reinforcing activities that allowed Petrobras to create and capture value, even though it was no longer a monopolist.

Petrobras and its new business model seemed to compete in the 21st century adequately. The company was still state-owned, but it persevered on its way to achieving higher levels of compliance and professionalism.

Unfortunately, Petrobras was highly profitable and because of that continued to attract a swarm of politicians interested in nominating their aides or even themselves for powerful positions in company's organizational chart. However, the political ambitions were not enough to significantly damage the company's goals and business model.

 

The beginning of the fall

 

The situation began to change in 2003. The liberal party "Partido dos Trabalhadores" (PT) succeed in the Presidential elections. Lula da Silva, a former white collar worker, became Brazil's 35th President.

As part of PT's agenda, Lula da Silva implemented a new policy for Petrobras based on three guidelines. Firstly, the government supporters must hold top management positions, no matter if they had a few – if any – understanding of the dynamics of the oil and gas industry. Secondly, Petrobras was part of government economic policy. Because of that, the government controlled the company's prices for consumers and distributors to keep the inflation low. Thirdly, the company should expand its scope. Consequently, Petrobras was compelled to enter into a series of bad businesses. In one of them, Petrobras paid the price above the market for an old refinery in Pasadena, USA.

In fact, Petrobras's business model was compromised by governmental interference. For years, its business model core was to develop its activity chain to create and capture value in a very powerful way. By its turn, that effectiveness depended on the governance choices that mediated company's decisions on assets and policies. However, the government submitted Petrobras governance system to political interests that didn't meet the company's goals for excellence.

The final shot occurred in 2014. The investigations held by the Federal Justice and the Federal Police unveiled a massive web of corruption in which politicians, businessmen, and some of Petrobras's top managers were using the firm's revenues to support their shady interests. The results were impressive, as shown in Table 1.

                                                                                        Figure 02: Source: Suisse (2016)

The case of Petrobras shows that the business model governance of a state-owned firm can be severely affected by political decisions. Especially if those decisions covered a vast web of corruption that drains company's revenues to finance shady interests. In that case, no business model can hold its integrity or maintain its capacity of creating value.

 

A remarkable future?

 

The solution to the crisis allegedly came up in 2016. The Congress impeached Dilma Rousseff. The vice president Michel Temer became Brazil's 37th President and nominated Pedro Parent as the new Petrobras' CEO. Parente is an electrical engineer who has a long and respectable career both in the public and private sector. He started actions to restore Petrobra’s governance and to move the company towards higher levels of compliance. Political interference is still on stage, but it is now expected to be limited to a degree in which Petrobras' business model can work properly.

Petrobras' business model fell because its governance system was overwhelmed by political interest, some of them illegal. In a situation like that managers rarely count on rational decisions about assets and politics that meet firm's goals. In other words, the case of Petrobras is useful to understand the limits and fragilities of a business model, especially in a state-owned company.

REFERENCES

 

Barbosa, P. (2013). O Endividamento da Petrobras com o BNDES. Rio de Janeiro. http://bibliotecadigital.fgv.br/dspace/bitstream/handle/10438/11659/O%20Endividamento%20da%20Petrobras%20com%20o%20BNDES.pdf?sequence=1

Casadesus-Masanell, R., & Ricart, J. E. (2010). From strategy to business models and onto tactics. Long Range Planning, 43, 1-21.

Demil, B., & Lecocq, X. (2010). Business model evolution: in search of dynamic consistency. Long Range Planning, 43, 227-246. doi:10.1016/j.lrp.2010.02.004

Pactual, B. (2015). Equity research Petrobras. Retrieved from https://www.btgpactual.com/Research/OpenPdf.aspx?file=31322.pdf

Porter, M. (1979). How competitive forces shape strategy. Harvard Business Review, Mar-Apr., 137-145.

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Porter, M. (1998a). Competitive advantage: creating and sustaining superior performance New York: Free Press.

Porter, M. (1998b). Competitive strategy: techniques for analyzing industries and competitors New York: Free Press.

Suisse, C. (2016). Petrobras (PBR). Retrieved from https://doc.research-and-analytics.csfb.com/docView?source_id=eqgl&document_id=1065067751&format=PDF&language=ENG&serialid=nfyyIzMnT9n7dwL8wOvSRAzroEjqI5ApLFNEvMpFcMU%3d&serialid=cdJt90eATl6%2bpRBZo7FusJOFTFlmb3M5JhORPsBKs%2fc%3d

Wirtz, B. W. (2016). Business model management: design process instruments (2 ed.). Wiesbaden: Speyer.

Wirtz, B. W., Pistoia, A., Ulrich, S., & Göttel, V. (2015). Business models: origin, development and future research perspectives. Long Range Planning. doi:10.1016/j.lrp.2015.04.001

Wirtz, B. W., Schilke, O., & Ullrich, S. (2010). Strategic development of business models implications of the web 2.0 for creating value on the internet. Long Range Planning, 43, 272-290.

Zott, C., & Amit, R. (2013). The business model: a theoretically anchored robust construct for strategic analysis. Strategic Organization, 11(4), 403-411.

Zott, C., Amit, R., & Massa, L. (2010). The business model: theoretical roots, recent developments, and future research. IESE. Barcelona.

Zott, C., Amit, R., & Massa, L. (2011). The Business Model: Recent Developments and Future Research. Journal of Management, 37(4), 1019-1042. doi:10.1177/0149206311406265

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