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Understanding Externalized Costs Through Brightline: Analyzing Oil Industry Performance

This document introduces Brightline, a model that addresses the implications of externalizing costs in the oil industry. It proposes that the more aggressively a company externalizes costs, the poorer its long-term performance will be, particularly under government regulation and shareholder activism. By collecting performance data across various parameters, it reveals that aggressive externalizers face declining performance over time, with shareholder actions moderating this trend. This analysis provides essential insights for companies, customers, and shareholders regarding the financial impacts of externalization.

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Understanding Externalized Costs Through Brightline: Analyzing Oil Industry Performance

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  1. The Costs of Externalizing Robert A.G. Monks April 18, 2002

  2. Introducing Brightline What is Brightline? What are Externalized Costs? How Does Brightline Work? Robert A.G. Monks – April 18, 2002

  3. How Does Brightline Work?The Model’s Parameters General Context Companies Customers Shareholders Government Robert A.G. Monks – April 18, 2002

  4. The Brightline Interface:Following the Game Robert A.G. Monks – April 18, 2002

  5. The Brightline Interface:Keeping Score Robert A.G. Monks – April 18, 2002

  6. The Brightline Interface:Game Statistics Robert A.G. Monks – April 18, 2002

  7. The Brightline Interface:Setting the Parameters Robert A.G. Monks – April 18, 2002

  8. A Model of performance in the Oil Industry Robert A.G. Monks – April 18, 2002

  9. The Objective To show that, given a sufficient level of government regulation, and when competition in the oil industry is measured over a sufficient length of time 1. the most agressive externalizers lose to the less aggressive externalizers 2. shareholder action weakens this effect. Robert A.G. Monks – April 18, 2002

  10. The Hypothesis The more aggressively a company externalizes its costs, the poorer will be its performance over time. Robert A.G. Monks – April 18, 2002

  11. The Strategy Collect performance data for a large number of Brightline parameter setting combinations. Graph and statistically test the results. Robert A.G. Monks – April 18, 2002

  12. The Variables Dependent: Wins Earnings Share Independent: Time Aggressiveness Shareholder Action Covariant: Market Share Robert A.G. Monks – April 18, 2002

  13. The Parameter Settings Time: 3-11 years Aggressiveness: XOM=50; TOT=40; RD=20; CVX=10; BP=1 Shareholder Action: Focus Company=XOM Activation Time=12 Months Market Share: XOM=20; TOT=7; RD=8; CVX=7; BP=13 Robert A.G. Monks – April 18, 2002

  14. No Shareholder ActionPerformance x Time Robert A.G. Monks – April 18, 2002

  15. Shareholder ActionPerformance x Time Robert A.G. Monks – April 18, 2002

  16. The Observed Trends Given a sufficient level of government regulation, 1. the performance of the most aggressive externalizer deteriorates over time 2. the introduction of shareholder activism weakens this effect. Robert A.G. Monks – April 18, 2002

  17. Statistical Results Controlling for the influence of market share, 1. there is a significant interaction effect of aggressiveness and time limit on performance of companies 2. the performance of both XOM (highest externalizer) and BP (lowest externalizer) was significantly influenced by the introduction of shareholder action. Robert A.G. Monks – April 18, 2002

  18. Websites http://www.ragm.com (http://www.ragm.com/brightlineII/index.html) http://www.thecorporatelibrary.com (http://www.thecorporatelibrary.com/spotlight/activism/xom.html) Robert A.G. Monks – April 18, 2002

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