Shell Oil Company

Introduction

Background of shell

Shell, a global group of energy and petrochemical companies is a multinational company with worldwide recognition. Shell is best known for its service stations and for exploring and producing oil and gas on land and at sea. In truth Shell deliver a vast range of energy solutions and petrochemicals to customers, produce and sell petrochemical building blocks to industrial customers on a global scale, invest in making renewable and lower-carbon energy sources, competitive for large scale use.

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Corporate Strategy of shell

By being more upstream Shell aims to focus its investments on long term, high return projects to develop oil and gas resources, and grow the companies leading liquefied natural gas business. Downstream profits involves; generating more cash by reshaping integrated oil products and petrochemicals portfolio to enhance operations and focus on growth markets, particularly in Asia.

Shell believes that this strategy will improve their business performance and increase their contribution to sustainable development. “Stronger emphasis on our upstream activities and fast growing markets will help us deliver the energy the world needs for economic growth and poverty reduction”. Shell aims to increase focus on producing cleaner burning natural gas, in so doing reducing dependency on coal. Shell is aware that the growing demand for oil and gas presents sustainable development challenges. Producing and using this extra energy is only sustainable, and socially acceptable, if ways are found to combat the risks to the climate and avoid health, safety and environmental incidents. “We recognize that we will not achieve our strategy and improve business performance for our shareholders unless we respond effectively to these key environmental and social concerns”.

Deliberate or Emergent

“Deliberateness refers to the quality of acting intentionally. When people act deliberately they ‘think’ before they ‘do’. They make a plan and then implement the plan. A plan is an intended course of action, stipulating which measures an organization proposes to take”.

Shells’ planning does not take the form of complex and inflexible ten-year plans generated by a team of corporate strategists. Rather, the planning process generates a series of “what if” scenarios. “Scenario planning is the process in which managers invent and then consider, in depth, several varied scenarios of equally plausible futures with the objective to bring forward surprises and unexpected leaps of understanding”. The implementation of the planning process allows Shell to make strategic no matter what the future.

For a company like Shell it is necessary to have a deliberate strategy as well as emergent. Plans need to be outlined and addressed in order to set company objectives. Large oil spills or uncontrollable air emissions are never planned, for this reason it is important Shell pays attention to being emergent as then it can encounter any problems that may arise.

Below is a model showing the distinction between deliberate and emergent strategy.

Business Strategy

Business strategy is concerned with “how firms should go about creating a sustainable competitive advantage in each business in which they operate”

Critical analysis

Internal Analysis

Michael Porter identified the ‘value chain’ as a means of analyzing organizations strategically relevant activities in order to understand the behavior of costs. Competitive advantage results from carrying out those activities in a more cost-effective way than its competitors. The value chain tool is a great technique to employ in order to single out the firm’s specific competitive strengths and weaknesses.

As it can be seen above Porter has distinguished between the primary and support activities. For the purpose of this report focus will be given to the primary activities whose direct concern is with the creation and delivery of a product or service.

Inbound Logistics

“Activities associated with receiving, storing and disseminating inputs to the product, such as material handling, warehousing, and inventory”

Due to the size of Shell, and to ensure the smooth running of the many processes involved in a company of its size, there are strict rules to follow.

The 1st step of the inbound logistics is receiving. At Shell the initial step would be to find the oil. This is of huge importance and the company invests a lot of money to use statistical analysis to determine the location of oil. Once locating the oil it is essential for Shell to draw up exploration contracts with the countries within whose boundaries the oil was first established. Once the contracts have been approved and negotiations agreed the company can then start its drilling process. Shell’s subsidiary company “Shell Shipping” is used to ship oil to relevant locations. After the distribution of the oil to its desired location the next process is for it to be stored.

Outbound Logistics

“Activities associated with collecting, storing and physically distributing the product to buyers, such as finished goods warehousing, material handling and scheduling”

Having recognized how the company extracts and then stores the oil the next process is to successfully distribute that to customers. Having processed the oil in its refineries, the oil is driven out to relevant service stations throughout the country by freight management. Once it arrives at the service station the oil is distributed to different pumps and then is ready for use by its consumers.

Operations

During this stage of the value chain process, goods are manufactured or assembled. Due to the large number of processes involved in extracting and processing oil, we can establish how large the operation base is at Shell. Shell places a great emphasis on conducting operations in the right and accurate manner. It will be detailed in the operations as to how much fuel needs to be distributed to relevant service stations as well as stating what type of fuel is needed. This is sensitive data and incorrect judgments could result in huge revenue being lost.

Marketing and Sales

This area focuses strongly upon marketing communications and generating sales. Industry sectors like the oil industry have to try and differentiate their products from those of their competitors. Customers view their end product, petrol, just like that of any other commodity. Shell recognizes the need to build brand loyalty and to establish a returning customer base. The best way to do this is through advertisement. This report will move on to discuss how Shell has used advertising to its advantage.

Services

For Shell, after sale service is a difficult benefit to offer. However, as petrol is a consumable commodity it is not something that can be returned or exchanged. Once the petrol has been purchased by consumers it is not within the companies interests to accept an exchange. Shell believes it is necessary to maintain a good name and reputation. The customer satisfaction programme focuses on customer and consumer ratings at BP in comparison to relevant competition. Evaluations are based on actual experience with BP and its competitors. Measures attained in this way tend to be more operational in nature focusing on market execution.

External Analysis

A PEST (Political, Economical, Social and Technological) analysis is used to analyse the external environment. Below a Pest analysis has been conducted;

Political

Factors that need to concern shell are as follows:

• Government Taxation
• Shell having interest in Unsteady Countries

Government taxation is a concern for the oil industry because it is already heavily taxed and more taxes could start a process whereby people would start moving away from petrol to find cheaper more sustainable products.
Shell have interests in countries where there is no political stability or where there are chances of dangerous wars breaking out. Such as Iraq and Nigeria this is very damaging especially when a company like Shell has invested millions of Pounds on exploration and drilling.

Economical

The cost of petrol continues to increase causing consumers to wrongly blame the oil companies. The price of oil is managed by OPEC, an international price fixing body.

The OPEC MCs coordinate their oil production policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.

Social

Consumers are more ethically inclined and the ethical marketplace, in Britain alone, is currently worth 14 billion pounds. While petrol may not be seen as an ethical purchase, petrol companies can, as well as advertising their product, inform the consumer of the Company’s commitment to the environment. That is advertising the fact that they deal in sustainable energy products.

Technological

The oil industry is becoming aware of the need to produce efficient and environmentally conscious fuels. We can’t use fossil fuels forever as they are a non-renewable and finite resource. Research suggests that we should start using hydrogen. Hydrogen is a colourless, odourless gas that accounts for 75 percent of the entire universe’s mass.

Porters 5 forces

There are five stages to the Porters model. These are shown below.

Competitive Rivalry

One enduring characteristic of the oil industry has been change. Competitive rivalry in the oil industry is very high due to there being very little difference between the products of all the suppliers. BP has learned to be responsive to change and indeed to be at the forefront of the change process. It is not commonly known that oil is refined at shared premises, so in reality all petrol is the same, regardless of the company label given to it and as such competitive rivalry is high.

On 11 October 2007, BP announced their intention to simplify their organizational structure. From 1 January 2008, there are only two business segments exploration and production and refining and marketing.

Power of Suppliers

There are no direct suppliers of the oil industry, and in the case of Shell there are none whatsoever the company has subsidiary organisations to handle all aspects of what the company does. Countries could be defined as suppliers, since it is there that the oil comes from, but the effect over the oil companies is limited to the law.

Power of Buyers

Buyers have no power over the oil industry since oil is a commodity that is always in demand.

Threat of Substitutes

At present there are no substitutes for petrol. While hybrid vehicles are making their presence known, electric cars are not as powerful as fuel consuming cars and are not in demand by the consumer.

Threat of a New Entrant

It is difficult for a new company to break in to the oil industry as the cost of entry is pricey. Current competitors in the market are having a hard time finding new oil reserves.

Porters five forces model is essential in helping understand the industry in depth before any consideration is given to entering it.

Financial Reviews

Even though the accounts show profits and financial figures from the year 2001-2005, it can clearly be seen that BP has generated a greater amount of revenue. If the financial information is going to be compared to today’s age then BP still lie ahead.

Existing Strategy

An organization and its environment need to fit. This is expressed in terms of the classic SWOT analysis tool. The tool suggests that a sound strategy should match a firm’s strengths (S) and weaknesses (W) to the opportunities (O) and threats (T) encountered in the firms environment (De-Witt & Meyer, 2005)

SWOT Analysis

Strengths

The UK offshore oil and gas industry provides an important indigenous energy supply.
As well as being used for energy purposes, oil and gas have other uses, notably as a source of feed stocks for the petrochemicals industry.
Much of the UK industry boosts employment in areas where it would otherwise be very low as a result of the declines of shipbuilding, the UK steel industry and other large industrial sites.

Weaknesses

Large UK offshore oil and gas reserves are becoming more difficult to find and develop economically.
Some UK fields are depleted and companies active in the UK Continental Shelf (UKCS) are now faced with the burden of dismantling and disposing of offshore structures in an environmentally acceptable manner.
Variations in oil prices and the unpredictability of international politics mean that the UK offshore oil and gas industry fluctuates in response to these forces.

Opportunities

Many of the newer discoveries are smaller and more difficult to develop than most of the older fields, thereby presenting a commercial and technological challenge for the innovation of new, economically viable ways of extracting oil and gas.
Having now worked in the UKCS for several decades, UK companies, suppliers and consultants have built up extensive expertise that can be utilised overseas.

Threats

Large international oil and gas companies are placing a greater proportion of their resources in regions outside the UKCS, where development and operational costs are lower than they are in the UK.

Future speculation

Having critically evaluated the strategy of Shell I feel there is a need for them to improve in order to fulfill the desire to become market leader and overtake BP. The company emphasizes through its strategy that it is very environmentally and socially conscious yet its not doing a great deal different from other companies out in the market. I feel now is a good time for shell to invest in something new like hydrogen fuel cells or wind and solar energy. Hydrogen as a fuel is high in energy, yet a machine that burns pure hydrogen produces almost zero pollution

A new investment is expensive but the benefits are huge as it is a new innovation which has been on the cards for sometime. Investing in fuel cells will limit the damage caused to the environment as the technology is environmentally friendly. Millions of pounds, required to clean spillages/leaks, will be saved and a positive public image will be established if not further reinforced.

The company has done a lot of research into this technology so it is not something that they have not considered. In the future, hydrogen could also join electricity as an important energy carrier. An energy carrier stores, moves and delivers energy in a usable form to consumers. Shell realizes that hydrogen is a fuel for the future but it needs to be more pro active rather than re active. It should try and introduce this technology into the market.

References

1. Porter, M.E (1987), “From competitive advantage to corporate strategy“, Harvard Business Review, pp.43.
2. Hamel, G, Prahalad, C.K (1989), “Strategic intent“, Harvard Business Review, pp.63-76.
3. RAPHAEL, A. and ZOTT, C. 2001. Value Creation in e-Business. Strategic Management Journal, No 23, pp493-520.
4. Porter, M.E (Response to letters to the editor), Harvard Business Review, pp
5. COLTMAN, T. R., DEVINNEY T. M. and MIDGLEY, D.F. 2007. E-Business Strategy and Firm Performance: A Latent Class Assessment of the Drivers and Impediments to Success. Journal of Information Technology No 22 pp87-101.
6. MOLLER, K. and RAJALA, A. 2007. Rise of Strategic Nets – New Modes of Value Creation. Industrial Marketing Management No 36 pp895-908.
7. PORTER, M. E. 2001. Strategy and the Internet. Harvard Business Review, March, pp63-78.
8. SHAFER, S. M., SMITH, H. J. and LINDER, J. C. 2005. The Power of Business Models. Business Horizons No. 48, pp199-207.
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16. www.opec.org
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