SWOT and Porter Five Forces Analysis of Royal Dutch Shell
Royal Dutch Shell Plc is the second largest oil company with global operations in more than 80 countries and more than 30 refinery plants. The company has a registered office in London, United Kingdom and headquarters in The Hague, Netherlands and was ranked number one with a market capitalization of 135,511.7million US Dollars as at the close of 11th Tuesday, 2012.
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The company’s major strength includes a global presence with globally recognized brands, growing financial strength, significant manufacturing and technological capabilities and diversified portfolio of products. The global operations of the company are associated with difficulties of standardising quality due to varied operational conditions. Furthermore, the company is faced with stiff competition from the leading suppliers in the industry including Exxon Mobil Corporation, Total S.A. and BP Plc. However, the company can use differentiation strategy capitalizing on its globally recognized brands to establish a competitive edge over the competitors. In addition, the company can expand its global presence through striking strategic partnerships with local small companies in foreign markets to enhance penetration in the markets.
Royal Dutch Shell plc commonly known as Shell is an independent company with its registered office located in LondonUK and headquartered in The Hague, Netherlands operating in the oil and gas industry globally (Reuters, 2012). The operations of the company are divided into three main segments including; Downstream, Upstream and Projects and Technology. The Upstream segment combines activities involved in the search for and recovery, liquefaction and transportation of oils and natural gas and wind energy. The Downstream segment is engaged in the activities of manufacturing, distributing and marketing of chemicals and oil products. Finally, the Projects and Technology segment includes all the critical support functions of the company’s core business in the Upstream and Downstream segments (Shell Plc, 2012). In 2011, the company had revenues of 470,171million US Dollars and based on these revenues, the company is ranked as the second largest company worldwide (Bloomberg, 2012). As at the close of business on Tuesday 11th December 2012, the company was ranked as number one on the FTSE100 Index with a market capitalization of 135,511.7million US Dollars (Stock Challenge, 2012).
Shell SWOT Analysis
The company has a number of strengths. Firstly, Royal Dutch Shell Plc is a leading company globally in the Oil and Gas industry with global presence in many countries. Consequently, the company derives its strength in this global image in the industry. Secondly, the company has recorded growing financial performance since the 2008/2009 economic downturn. It therefore has a strong capital base for competing in the competitive industry. Thirdly, the company has established strong brands recognized globally like Shell V-Power and the Shell FuelSave. Finally, the company has strong exploration and technological capability as an internal strength coupled with a diversified portfolio of products in the upstream and downstream segments of the company (Shell Plc, 2012).
The size and scale of the global operations of company may be a weakness due to the difficulties of the company to control quality and standards of its products since the operational conditions of different refinery sites differ. This also impacts negatively on the administrative efficiency and effectiveness of the company’s management. Exposure to different regulatory regimes through the global presence of the company presents difficulties in formulating uniform policies applicable to the global operations of the company (Shell Plc, 2012).
There is increasing awareness and concern for environmental sanity where reduced carbon emission is a necessary consideration for most oil-related products. Consequently, there is increasing demand for liquefied natural gas as a source of clean energy. This is likely to increase the company’s revenues from liquefied natural gas. There are also opportunities for the company to expand to the emerging economies like China through joint ventures, mergers and acquisitions like acquisition of Neste Oil Oyj in Poland (Reuters, 2012b).
The economic slowdown in the US and European Union due to the debt crises involving member countries presents a threat to the company’s profitability. Terrorism activities threaten the company’s global functions by increasing related business operational expenses. Increasing strict environmental regulations is also a threat to the current and future operations of the company which will require more efficient and environment friendly exploration and manufacturing technologies. Fluctuating interest rates and the war in the Middle East countries is also a threat to the company due to its global operations.
Porter’s Five Forces Analysis of Shell
Porter (2008, p.80) identifies five forces that can be used to analyse the competitiveness of a company’s industry of operation. The forces include the threat of new entrants, threat of substitutes, bargaining power of suppliers and buyers and rivalry among existing competitors. Royal Dutch Shell Plc has established large scale operations in more than 80countries enjoying economies of scale, global image with established strong brands which makes it hard for new entrants. Therefore the threat of new entrants is low due to the high capital requirements to set up operations.
Threats of substitutes are high for the company. This is because oil-related products, chemicals and natural gas produced by different companies are highly substitutable. Major competitor products can be used as substitutes for the company’s products. Therefore, the threat of substitutes for the company is high.
Royal Dutch Shell Plc has embraced a vertical integration growth strategy which involves acquiring and merging with companies at different levels of operation and therefore it has significant influence on its supply chain. Furthermore, the company has enhanced its technological capacity through the projects and technology segment of its business (Reuters, 2012). Therefore, the bargaining power of suppliers is low.
Oil and gas are essential products in any economy. Economic production processes in an economy make use of oil. This explains why in some developing countries oil supply is under state agencies. Furthermore, the oil industry is characterized by companies coming together to form cartels that would enable them control the market (Bloomberg, 2012). Furthermore, most of the buyers of oil products buy in bulk and therefore loss of one buyer would significantly affect the company’s revenue. Consequently, the bargaining power of buyers is medium.
The major competitors of the company include Exxon Mobil Corporation, Total S.A. and BP Plc which have also established global presence in the oil and gas industry (Hoovers, 2012). Rivalry with these companies is high due to branding and differentiation strategies applied by the companies in their operations globally. The companies have established brands recognized globally and major clientele which makes rivalry in the industry high.
Royal Dutch Shell Plc has established strong brands recognized globally enhancing its image in the global market. Despite the complexities and risks that are associated with the global operations of the company, there are opportunities for the company to expand and grow its operations in the emerging markets. The company can use a differentiation strategy to position its products globally as superior using its brand names. To deal with the risks of globalized operations, it is advisable that the company use strategic partnerships with the local operators in the new markets to enhance its penetration in the markets. Furthermore, the company can establish its competitive advantage increasing its control over the supply chain through more vertical integration mergers and acquisitions. Lastly, to increase efficiency of the company’s operations, there is need for re-engineering of the production process and adoption of new efficiency technologies.
Bloomberg, (2012) Royal Dutch Shell Plc Financial Statements, available at http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=RDSA:LN accessed on 14th December, 2012.
Hoovers, (2012) Top Competitors for Royal Dutch Shell Plc, available at http://www.hoovers.com/company-information/cs/competition.Royal_Dutch_Shell_plc.01e84f5552dabef3.html accessed on 14th December, 2012.
Porter M. E. (2008) The Five Forces that Shape Strategy, Harvard Business Review, pp.79-94.
Reuters, (2012) Royal Dutch Shell PLC: Company Overview, available at http://www.reuters.com/finance/stocks/overview?symbol=RDSa.L accessed on 14th December, 2012.
Reuters, (2012b) Royal Dutch Shell PLC: Latest Key Developments, available at http://www.reuters.com/finance/stocks/RDSa.L/key-developments accessed on 14th December, 2012.
Shell Plc, (2012) Our Business: Shell is Organised into: Upstream, Downstream and Projects and Technology, available at http://www.shell.com/home/content/aboutshell/our_business/ accessed on 14th December, 2012.
Stock Challenge, (2012) FTSE All-Share Index Ranking as at Close on Tuesday, 11th December 2012, available at http://www.stockchallenge.co.uk/ftse.php accessed on 12th December, 2012.