The organization is thriving to be the market leader and its main aim is to meet the energy needs of society, in ways that are economically, socially and environmentally viable, now and in the future.
Corporate Strategy
“Our strategy is: regaining upstream strength and delivering downstream profits; improving performance across all our activities; and creating what we call an ‘Enterprise First’ culture. It is reflected in our capital investment programme, which will increase to $19 billion in 2006 and will be targeted at the upstream. It aims to reinforce our position as an industry leader providing investors with a competitive and sustained shareholder return”.
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”.
Shell wants to measure its success by competitive returns, cash generation and total shareholder return underpinned by top quartile operational performance and project management.
For Shell it is important to give concrete examples of their strategy in progress around the globe, to keep shareholders happy and to quell the fears of any government watchdogs and NGO’s.
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”. (De-Witt & Meyer, 2004)
Shell has a huge emphasis on its long term planning. The company believes long-term strategic planning has served the company well in the past and will do so in the future. The planning process starts with the setting of objectives, followed by a systematic analysis of the internal and external environment of the organization. Based on this analysis, a long-term plan is then developed to enable the achievement of the company’s objectives.
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. The function is to try and get general managers at all levels of the corporation to think strategically about the environment in which they do business. “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.
The strength of this planning process was most evident during the early 1980’s. At this time the price of barrel of oil were around $30 and development costs were $11 per barrel, allowing most oil companies to reap record profits. Shell were conscious to the fact that oil gluts and drop in oil prices could prevent record profits from being made. Shell instructed the managers of its operating companies to indicate how they would respond to drop in oil prices and to be conscious of how this would be dealt with were it to become a reality. When oil prices dropped Shell was in better shape than its rivals as it had gained a head start in cost cutting efforts.
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. Being able to combat and rectify problems as they occur will benefit the company hugely as damage will be limited resulting in less costs and a greater public image.
Below is a model showing the distinction between deliberate and emergent strategy.
Purpose
“The purpose of the shell group is to engage efficiently, responsibly and profitably in oil, gas, chemicals and other selected businesses and to participate in the search for and development of other sources of energy to meet evolving customer needs and the world’s growing demand for energy”
Shell believes that oil and gas will be integral to the global energy needs for economic development, for many decades to come. Having established the importance of gas and oil, Shell’s role is to ensure that they extract and deliver them profitably and in environmentally and socially responsible ways. The organization puts a lot of emphasis on being environmentally conscious whilst trying, at the same time, to maximize shareholder wealth. This purpose fits in well with the strategy of the company; whilst engaging profitably in oil and gas it will be meeting the sustainability standards set by international regulators. BP has a similar purpose to provide products that satisfy human needs, fuel progress and economic growth and to maintain and invest in a sustainable environment.
Mission Statement
“To safely market and distribute energy and petrochemical products while offering innovative value added services”.
Every organization has a mission, a purpose, and a reason for being. Shell’s mission statement accurately explains why the organization exists and what it hopes to achieve in the future. It articulates the company’s essential nature, (energy and petrochemical products), its values (safety and value for money), and its work (the distribution of energy). The mission statement expresses the organizations purpose in a way that inspires commitment, innovation and courage.
The mission statement helps to provide Shell with direction to pursue strategic goals. It also helps to motivate staff and inspire employees to work together in order to achieve the desired mission. A mission statement forces you to clarify and express succinctly your deepest values and aspirations. A mission statement imprints your values and purposes firmly in your mind so it becomes a part of you instead of something you might have thought about just casually in passing.
Business Strategy
Business strategy is concerned with “how firms should go about creating a sustainable competitive advantage in each business in which they operate” (De-Witt & Meyer, 2004)
Internal Analysis
Michael Porter identified the ‘value chain’ as a means of analyzing organizations strategically relevant activities in order to understand the behaviour 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. Porter identified primary and support activities as shown in the following diagram:
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. This is done so on a temporary basis, either in refineries or reserves.
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. It is likely that a filling station will operate long hours if it has a record of accumulating large revenue through the sale of oil.
Below is an example of the steps undertaken in the operations process of exploration and production.
Drilling Field development planning “Drilling the Limit”
Production of oil and gas Logging
Shell realizes that as part of its operations it needs to research into whether a well would produce oil, gas or both. The Company recognizes that drilling is vital however the issue of planning and operating of wells is of greater importance. During the late 90’s shell introduced “Drilling the Limit” which allowed the company to focus attention on how efficiently wells are planned, drilled and managed as a process.
"Drilling the Limit” is a team focused process, and involves the managers, supervisors and employees of Shell, contractors, suppliers and other partners.
The main reason for introducing such a scheme was to limit costs. The company seems to have fulfilled its objectives in this matter as according to the company’s website their has been significant in reducing costs.
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 recognises 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.
Shell successfully changed its advertising technique from something that was narrow and specialized to something more global that actually helped the organisation save money and increase its profits through advertising.
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. Regardless of this reason the company still aims to offer efficient quality service and has personnel in place to help maximise the service offered to customers via private audits and inspections. 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. The study is based on feedback from around 65,000 consumers/customers in 30 of the businesses and spans 46 countries. The brand health programme covers issues related to brand awareness and imagery as well as usage and loyalty. Evaluations are based primarily on perceptions of BP and its competitors. In 2006, around 50,000 consumer interviews were conducted for this programme in 18 countries.
Outsourcing
There are certain activities that are outsourced for example the allocation of activities within different departments of the organisation. One way in which Shell uses outsourcing to help maximise its position both financially and socially is through the use of franchise. Service stations throughout the country are run independently but have an agreement with Shell to operate under Shell policies and to purchase fuel from Shell. The company emphasises the importance of adhering to its strict policy in regards to quality control. These decisions to outsource seem to be very popular and have generated a huge amount of revenue. There are certain areas where it would seem to be inappropriate to outsource. The inbound and outbound areas require a lot of research and investment to attain desired results. By outsourcing such activities the company will come under fire should anything go wrong leaving a negative affect on the company image. Since these activities require a lot of technical expertise it is for the best interests of the company to pursue them.
7S Framework
This model was developed as a model of organisational change. The framework can also be used as an organisational analysis tool. The model was developed By Waterman, Peters and Philips who argue that organisational effectiveness stems from the interaction of several factors. These are outlined below
The shape of the above diagram is fairly significant it has no starting point or implied hierarchy. It is not obvious of the factors to which is the driving force behind the direction in which the organization moves. By considering the organization from these 7 viewpoints it is possible to establish the major strengths and weaknesses.
Structure
At Shell the hierarchy of the organization starts with the chairman at the top. Different levels of the hierarchy are taken up by board of directors, executive committee and senior managers. The responsibility of running the company efficiently is given to the chairman and CEO. Whereas BPs management framework sets out clear principles to management on how authority and accountability are delegated to individuals in BP. This includes clear expectations on assessing risks, taking action to mitigate these risks and monitoring performance. The framework also includes the group values, which inform the employees on the manner in which BP will carry out its business.
Systems
At Shell due to the complex nature of the operations there is a range of different decision making systems. These are Drilling the limit Shell’s method of drilling
Shared Knowledge employees have access to databases with frequently asked questions outlining the problems that may occur on site Caratech Technology for flexible foam production
Style
The Company aims to please employee’s needs and wants. Shell tries to create a good-natured and comfortable atmosphere through their style of working. The company has established a reputation of being very forward thinking. The style of leadership is very participative as Shell wants its members in all parts of the organization to put forward their view in the decision making process. Shells rivals BPs human capability and technology is to nurture human capability and invest to ensure that the right technology, skills, behaviours and intellectual property are available for the pursuit of the board goals. Employee treatment: to treat employees fairly and with respect and dignity. Employee expectations: to make clear the expectations the group has of each employee in line with the group’s general principles of delegation. Each employee will be given open and constructive feedback to aid his or her continuing development and performance.
Inclusion: to enable employees to feel included as part of a democratic organization of people from diverse backgrounds.
Merit and diversity: to recruit, select, develop and advance its employees on merit, irrespective of age, gender, nationality, physical challenge, race, religious belief, sexual orientation or identity.
Remuneration: to reward employees in a manner that reflects their role in the group and their contribution to the achievement of targets.
Staff
Shell puts a huge importance on employing reliable staff that can help enhance their public image. A structure is in place which aids management teams to help select personnel with the right qualities. In order to move forward it is necessary that the right minds are selected. The company offers employees excellent working conditions as well as competitive monetary rewards. Shell operates in over 140 countries and employs something like 109,000 people. On the other hand BP Shells main rival employs 97000 employees which are active in over 100 countries around the world.
Skills
It is important the Company ensures all staff members are equipped with the skills required to fulfill a given role. It is clear that different skills are needed for different positions within the organization. The skills required for a senior managers position will obviously differ from those required by a sales assistant working in a service station. Shell ensure employees are given extensive training in any given work type.
BP uses a variety of methods to help their people develop their capabilities throughout their careers from e-learning coursework through to international assignments. Specific training and development activities are mandatory for some groups and BP encourage every employee to complete at least five training days a year.
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. The new social performance requirements at BP will help to promote better management of the impacts on communities around the world. By assessing the socio-economic impacts of the projects, including human rights and conflict issues, at an earlier stage in the project lifecycle BP hope to offer greater direct benefit to local communities affected by their operations. The requirements also aim to help BP build local relationships based on mutual advantage and enhance the reputation as a responsible operator. Unlike BP, Shell has failed to convince the consumer of its responsibility to the environment.
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. Hydrogen is found on Earth only in combination with other elements such as oxygen, carbon and nitrogen. To use hydrogen, it must be separated from these other elements
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. A separate business, alternative energy, will handle BP’s low-carbon businesses and future growth options outside oil and gas. This includes solar, wind, gas-fired power, hydrogen, bio fuels and coal conversion.
Shell says it is investing $1 billion in renewables over the next 5 years, representing an average of $200m p.a. It is unclear from information available whether this is purely in non-carbon energy (such as solar and wind) or whether it also includes some gas-fired power.
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.
Shell has reportedly cleared £12.72 billion for the year 2007. BP however have exceeded that by having its revenue rise by 23% from $54.7 billion to $67.1 billion. It clearly shows Shell is lacking behind BP.
(See Appendix)
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.
- The industry is a source of revenue from taxation.
- 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.
- The UK's carbon emissions in the electricity generation sector have been reduced as a result of gas increasingly being used as a replacement for coal. This is an important part of the UK's contribution to reducing climate change and is providing a buoyant market for gas.
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.
- Construction expertise developed in the UKCS oil and gas industry could be applied to the emerging market for offshore wind farms, which form part of the UK's renewable energy strategy.
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.
- Increasing terrorist activities on an international scale raise the likelihood of the UK oil and gas industry being the target of such an attack.
Conclusion
This report has constructed a strategic analysis of the multinational company Shell. The uses of proven strategic tools such as SWOT, PEST, Porters value chain and five forces have contributed in critically evaluating the current strategy and helping to make any recommendations.
Evaluations of the report show that Shell is behind its main rival BP and has to improve in order to fulfill the desire to be market leader. BP was the first company to take the solar technology used in space and develop it for everyday use. Today it is one of the top solar manufacturers in the world. Looking forward, BP believe technology can help make alternative energy sources like solar economically viable and the ‘carbon-free economy’ a reality. Along the way, a new generation of ‘low carbon’ and ‘de-carbonised’ fuels made possible thanks to technology that removes CO2 from fossil fuels could also help BP bridge the gap to a carbon-free future.
Shell is clearly way behind in technology and profit share to its major rival. The oil industry has a lot of threats that it needs to address coming from external sources such as terrorism. The opportunities to generate high revenue are huge in the industry as in the short term huge profits can be made resulting from increase in oil prices and wars in the Middle East.
Consumers are using up the fuels formed more than 65 million years ago. They can't be renewed; they can't be made again. Companies such as Shell can save fossil fuels by conserving and finding ways to harness energy from seemingly "endless sources," like the sun and the wind. Recommendations have been made for shell to invest in hydrogen fuel cell technology which would enhance its chances of being the market leader due to gaining a more positive public image.
There is no doubt that in an industry where change is the norm, setting objectives to meet all these criteria is not easy. BP and Shell constantly review their objectives against these criteria and against the feedback they get from investors and other stakeholder groups. In this way they endeavour to ensure that they continue to meet the expectations of the stakeholders, in a way which is responsible and mindful of the social and environmental requirements which both face as global corporations.
Recommendations
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. NASA has used liquid hydrogen since the 1970s to propel rockets and now the space shuttle into orbit. As the worlds stock of fossil fuels grows smaller, demand for it is increasing. Research shows oil will run out so now could be the right time to invest in something new.
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 and lead the way for others to follow.
Bibliography
Books
Journals
Websites
Appendix
Financial Ratios yrs 2001- 2005
