EXXONMOBIL

ExxonMobil ( XOM) is one of the half- dozen major oil companies in the world. The firm has four primary operating divisions ( upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years. A recent major acquisition was XTO Energy, which was acquired in 2009 for $ 41 billion. The XTO acquisition gave ExxonMobil a significant presence in the development of domestic unconventional natural gas resources, including the development of shale gas formations, which was booming at the time. Assume that you have just been hired to be an analyst working for ExxonMobil’s chief financial officer. Your first assignment was to look into the proper cost of capital for use in making corporate investments across the company’s many business units.

a. Would you recommend that ExxonMobil use a single company- wide cost of capital for analyzing capital expenditures in all its business units? Why or why not?

b. If you were to evaluate divisional costs of capital, how would you go about estimating these costs of capital for ExxonMobil? Discuss how you would approach the problem in terms of how you would evaluate the weights to use for various sources of capital as well as how you would estimate the costs of individual sources of capital for each division.

 

Sample Solution

EXXONMOBIL

ExxonMobil is one of the largest publicly traded international oil and gas companies and holds an industry-leading inventory or resources. As an analyst working for ExxonMobil`s chief financial officer, I will not recommend that ExxonMobil to use a single company wide cost of capital to analyze different capital expenditures in different business units. This is because of the fact that different departments possess different risk levels and different cost structures. The company wide cost of capital has to be adjusted for each business unit with the view to make more accurate business decisions. If the company wide cost of capital is used to analyze the projects, the company can drop some potential acceptable projects or can accept the projects that are not financially viable to the company.

The co-owned / partnership is one of the prime element that gives John Lewis a competitive edge to build their HCA and JLP puts significant level of efforts in their rigorous recruitment and selection processes (Online tests, Application form, Video Interview, Assessment centre) to secure partnership behaviour from the beginning and hire candidates who are not only skilful and talented but also align overall with organizational cultural values. This approach is based on universalist / ‘best practices’ (Preffer, 1998), however, due to the rigorousness and length of the recruitment and selection process JLP incurs huge cost to hire people, hence, it is imperative for JLP to keep employee turnover low; one of the way they encounter this problem is to offer higher rate in comparison to industry’s pay rate.

It shouldn’t be a surprised that John Lewis also employs ‘best fit’ approach to generate human capital advantages (Pfeffer, 1998). JLP introduced an IT Apprenticeship with the Queen Mary University of London which will help apprentices to receive BSc (Hons) in IT while working in John Lewis’s IT department, which is aligned with business strategy to grow retail’s business through e-commerce in the digital world (JPL, 2016).

When it comes to partner’s development, it wouldn’t be an understatement that JLP is one of the best in retail’s industry, the partnership currently spends 56% more than similar organisations on partner development which is enshrined in Constitution (Rule No. 56) to encourage partners to fulfil their full potential and increase their career satisfaction.

The ‘Horizons’ training programme allows partners to choose their own development pathways and partners are allowed to work in any charity of their choice for six months fully paid (JLP, 2016). This example clearly shows JLP managed to blend beautifully both ‘best fit’ and ‘best practice’ approaches together for creating HCA (Pfeffer, 1998).

John Lewis has a very different approach when it comes to reward management system which is rare from the point of view that partners have involvement in formulating it. Partners (line managers and non-management staff) have the opportunity to come forward and put their ideas by engaging and looking at performance measures, pay-banding and appraisal system and have a real impact that how their performance should be appraised. This approach is very much in aligning with the organisational culture and partnership behaviour and unique way (‘best fit’) to motive partners and create HCA (Hutchinson and Purcell, 2007).

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