Innovations and External Growth Strategy: the Case of Oil and Gas Supply and Service Companies

Abstract

The upstream oil and gas service sector has been going through a wave of consolidations since 1990. Indeed, many firms in this sector have adopted an external growth strategy in order to strengthen their core business, broaden their range of provided products or reorganize their activities. Nowadays, the upstream oil and gas service sector is characterized by the presence of an oligopoly which is composed of three Major service and supply firms (Baker Hughes, Halliburton and Schlumberger) and numerous smaller oil and gas service businesses. In this article, based on the research work of the economist J. A. Schumpeter, we first provide an original explanation for the strategic development of the three leading oil and gas service and supply firms. J. A. Schumpeter has in fact analyzed the process of disseminating innovation within an industrial sector that applies in the case of the three leading oil and gas service firms. Whereas the term innovation generally means the result of technical progress, we use it in this article in the context of Schumpeter for whom an innovation can be the manufacture of a new product as a result of a new demand, the launching of a new method of production or marketing, the opening of a new market, the use of a new raw or intermediate material, or the establishment of a new organization. Secondly, we justify the reorganization of the overall upstream service and supply sector by the fact that the process of disseminating innovation, to which we gave prominence within the oligopoly, remains relevant to justify the same reorganization of the many smaller oil and gas service firms. This process leads us to consider the form of consolidation that the sector will experience over the next few years.