Shell’s strategic position in the light of its external and internal environment

Shell – Strategic Analysis

The paper analyses Shell’s strategic position in the light of its external and internal environment and the key forces and pressures acting on it. The paper takes an overview and then uses PESTLE, SWOT and Value chain analysis to provide a strategic insight of the firm.

PESTLE; SWOT; Value Chain Analysis

Shell – Strategic Analysis

Introduction and Company Overview

Shell Group provides energy and petrochemical services across the world. With its headquarters in Hague, the Netherlands, and largest subsidiary in the United States, its mission is to position its self as a global leader in the oil and gas sector with a superior competitive advantage in terms of meeting energy demand responsibly. Shell Group belongs to Royal Dutch Shell Plc, based in Wales and England (Shell, 2010 [online]). Its upstream strategy focuses on the exploration of new natural reserves of oil and gas and investing in projects to gauge technological and know-how value-added advantages. As for the downstream strategy, the company selects growth markets to invest in and uses existing assets to acquire consistently high cash returns (Shell, 2010 [online]). Performance focus, growth delivery and new project plans form its strategic framework with strong priority given to competitive performance, profitable growth and sharper delivery. The group operates in more than 90 countries with over 100,000 employees and 44,000 service stations. Shell has the share of 2% in the global oil market and 3% in the gas sector. In 2009, its earnings were $12.7 billion which fell sharply from 2008’s $27 billion figure (Shell, 2010 [online]). The paper will explore how the external and internal environments of the company are affecting its strategy and operations and overall success.

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Comprehensive PESTEL Analysis

Political Forces

As declared by EU and UN, carbon emissions are to be charged with penalties and taxes, oil and gas companies have been forced to settle government pressures through partnership agreements and alliances to support their operations by offering an incentive to the government in the form of the betterment of the economy. Oil has been found to gauge economic development of a country (BBC, 2010 [online]). Due to its intense demand, especially in the U.S, government tends to come under the pressure of the leading giants and ease strictness on them, though; they still raise questions regarding the environmental impacts but with the demand pressures from the customers, governments allow Shell and companies alike to find new reserves to meet the demands (The Guardian, 2010 [online]). However, these new means include bio-fuels which do not harm the environment. But Shell has strong reliance on oil and gas reserves and has no intention to venture into bio-fuels in future despite of all social and political pressures.

Shell has been engaged with the Climate Action Partnership with the US, as an attempt to gauge a positive image of the company in terms of a socially responsible business, while it actually uses highly carbon intensive production methods (Foe Europe, 2010 [online]).The partnership is focused towards reducing the amount of greenhouse gas emissions in the atmosphere, but while the government is going in that direction, Shell, using its strategic alliances with the government has lessened the regulatory control over its high carbon emitting fuel products. Shell has been forced to take on such diplomatic measures to ease political and regulatory pressures onto the company, when it faces a decline in the conventional natural oil reserves and has to find new alternative forms of oil reserves to meet the demand, which are more carbon intensive but allow it to stay profitable (Foe Europe, 2010 [online]).

In underdeveloped nations such as Nigeria, which craving for basic necessities, welcomes companies like Shell to bring in foreign direct investment and more job opportunities. Thus, despite of social pressures to reduce exploitation of workforce and gas flares that is destroying lives, the government gives ease to the multinationals in order to support the growth of the economy (Foe Europe, 2010 [online]).

Free trade agreements among the European and Americas allow Shell to more profitability engage in exports of oil. Russia is a hub of oil reserves and Shell took on the opportunity to exploit the reserves in Russia to meet the challenge of its growing demand, and its increasing lack of conventional oil reserves around the world. Russian government, previously had a high export duty on oil imports, has recently reduced it by 2.6%, which is benefiting Shell and other oil companies with their plants in Russia to export the oil products to their home countries and respective countries where they sell the fuels (Shell, 2010 [online]).

Environmental Forces

Conventional oil reserves are fast declining but Shell since 1995 has been engaged in finding new forms of oil reserves as oil sands in Canada to oil shale, but with the expense of environmental degradation (The Guardian, 2010 [online]).

Research has shown that carbon emissions are much higher from the unconventional oil reserves being used in the manufacturing of fuel, and Shell having invested a large amount of capital in projects to extract oil from unconventional reserves has become the world’s most carbon intensive company (Foe Europe, 2010 [online]).

Social Forces

Oil and gas companies harm not only the environment but to the workforces as well as there are various security and health issues to consider. 20 people were reported to have died due to severe working conditions in 2009 (Shell, 2010 [online]).

In Nigeria, Shell’s operations have been causing gas flares consistently which has caught social attention but the company is reluctant to take action due to its cost reduction strategy (Foe Europe, 2010 [online]).

Globally, consumers are engaged in responsible consumption and the companies have been obliged to encourage responsible consumption (Dess, 2009). Shell took on the initiative in 2007 to advertise itself as a manufacturing facility that does not harm the environment but uses its waste (carbon dioxide) to cultivate flower growth (Foe Europe, 2010 [online]). This encouraged consumers to develop a positive image of Shell but later on, news reports on the matter suggested a different story. Only one of the plants in Netherlands was engaged in the flower growth while the rest were heavily involved in carbon emissions (The Guardian, 2010 [online]). This hampered Shell’s image further as not only was its accused of destroying the environment but also of misleading the consumers.

Technological Forces

The oil and gas industry has been benefited greatly owing to technological advancements in drilling and extraction of oil and gas. Heavy capital investments are required to acquire the advance technological equipment to extract oil and gas from unconventional reserves. Shell’s biggest strength is its investment in smart technologies that allow it to make the most out of the oil and gas reserves (Shell, 2010 [online]).

Economic Forces

Oil prices have increased the world over, which has resulted from heavy taxations from the government due to which costs of production have risen (Shell, 2010 [online]).

Using extensive, costly technology which requires heavy investments, further forces the companies to charge high prices for fuels (The Guardian, 2010 [online]).

There is a growing demand for energy, which is expected to rise up by 57% in the next 20 years (Shell, 2010 [online]). This becomes a challenge when there are fewer natural reserves of oil and gas left to meet this demand. Shell has used its scenario planning efforts to invest in new projects to extract oil and gas from unconventional reserves to be able to meet the growing demand in future, but this also translates to higher prices for customers (Shell, 2010 [online]).

Legal Forces

Environmental safety and carbon emission regulations have increased for all oil and gas companies, including Shell (BBC, 2010 [online]). With the growing concerns all over the world over the drastic changes occurring in the environment due to global warming, the government raises strong questions against major companies responsible for global warming, the oil and gas companies. Shell and BP are quite on the main screen when such allegations are put forward.

Oil and gas companies are enforced with strict employment safety and health regulations as the manufacturing plants are dangerous for human health. This has a heavy cost potential for companies (Hill, 2009).

Comprehensive Porter’s 5 Forces Analysis

Level of Competition

There is a high level of competition in the industry but among few players. Shell’s major competitor is British Petroleum. British Petroleum’s strategy has also been focused on acquisitions, partnerships and alliances to build up a larger framework to meet growing demand. Currently BP has acquired contractual agreement with the government of Azerbaijan and Gulf of Mexico, while Shell gauged its success in 2009 in Iraq, Canada, and Australia and also in the Gulf of Mexico (BP, 2010 [online]).

The competition among these two companies is intense due to their similar strategy to obtain cost reduction, performance focus and growth. While, BP has invested in solar energy, giving in to the political, social and environmental pressures, Shell is still glued to the oil and gas reserves to stay ahead in the game (Oil and Gas, 2010 [online]).

While BP has lowered its stakes by investing in solar energy, Shell is playing a much risky game by perusing new oil reserves through heavy capital investments (BP, 2010 [online]).

Threat of Substitutes

With the advent of alternative energy sources, the threat of substitute products has risen, such as from bio fuels. Many companies are now investing in bio fuel technologies to respond to social, environmental and political pressures (The Guardian, 2010 [online]).

Threat of New Entrants

Threat of new entrants is low, as it requires a heavy capital investment to set up plants and use advance technology for extraction domestically and internationally to meet the demands.

There are heavy fixed costs involved in the industry which can only be curbed once economies of scale are received (Oil and Gas, 2010 [online]).

Bargaining Power of Suppliers

Bargaining power of suppliers is low. There are few suppliers in the industry.

The industry is focused on low cost production and, thus, alternative energy sources are searched and invested in heavily, the suppliers of which are low, but under the influence of the manufacturers (Oil and Gas, 2010 [online]).

Bargaining Power of Customers

Bargaining power of customers is low as there are not many fuel companies available in the industry which offers conventional, alternative and bio mass fuels.

Detailed SWOT Analysis

Strengths

Shell has obtained competitive edge in terms of technology. In 2009, it spent over $1.2 billion in research and development activities (Shell, 2010 [online]).

Shell has obtained ‘first mover advantages’ by using unconventional oil reserves which has given its cost benefits (Shell, 2010 [online]).

The company has taken a much focused strategy for performance, which has allowed it to reduce costs by $1 billion by 2010 (Shell, 2010 [online]).

Shell signed a joint venture with Cosan (S.A) Company to produce and sell ethanol and extract power from sugar cane in Brazil. The company sensed its cost benefits and its prospect to enhance its presence in the ethanol market (Shell, 2010 [online]).

Shell has invested $ 1 billion in solar and wind energy which is part of Shell Renewables SBU (Shell, 2010 [online]).

Shell has 20% brand preference which is the highest among its competitors (Shell, 2010 [online]).

Weaknesses

Shell currently has a severe lack of association with bio fuels, which are growing in demand

There is also lack of substantial countering of the social pressures and the media exposures on part of Shell (Foe Europe, 2010 [online]).

Opportunities

Bio-fuel and low-carbon emission fuels sector is growing and is highly encouraged by the government, society and is healthy for the environment (The Guardian, 2010 [online]).

Promoting a better health and safe environment in the plants is a good opportunity for Shell using commercials or public relations campaign.

Threats

Government and interest groups are taken strong actions against heavy carbon emitting fuel companies, like BP and Shell

Heavy investments in unconventional gas reserves are full of stakes as these reserves allow for a large amount of carbon emission. This is potentially dangerous for the company’s image and acceptance (Oil and Gas, 2010 [online]).

Value Chain Analysis

Primary Value Chain Activities

Inbound Logistics

Shell is currently in contract with Cosan, a Brazilian company to supply ethanol. Azherbaijan and Russian suppliers are also used to supply oil and gas reserves (Shell, 2010 [online]).

Operations

The performance strategy involved restructuring and reorganizing the operations of the company to upstream and downstream where priorities were towards performance focus, competitive growth and new project investments. The overall operational performance has also met with improvement as efficiency rates have rose. The reorganization will allow faster implementation of future growth strategies as well (Shell, 2010 [online]).

Outbound Logistics

Shell has an extensive global outbound logistics network which allows it to distribute the refined oil in the most cost efficient manner. It uses light transportation (Shell, 2010 [online]).

Marketing and Sales

Shell markets itself as the largest fuel provider, where its service centers are located in 90 countries worldwide. It adds the image of an innovation and quality-focused company which does not compromise on performance. Although, Shell has previously received an excellent amount of sales revenue, recently, there has been a decline, due to rise in oil prices, rising social exposure of the workforce exploitation and environmental degradation by the company (Shell, 2010 [online]).

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Service

Shell uses its helpline service to address customer complaints and queries. Other than that, there is no extensive or special form of service that Shell offers to customers with regard to complaints and queries. Shell service stations have the direct interaction with the customers and the company makes sure that the employees address to customers appropriately and offer services in the standard way (Shell, 2010 [online]).

Support Value Chain Activities

Procurements

Shell is now engaged in e-procurement, using the help of SAP’s support systems to enhance its supply chain activities. SAP’s support offers an ERP system that allows procurement to be done online (SAP, 2010 [online]).

Technology Development

Over $1.2 billion have recently been spent by Shell in research and development of new technologies to gauge the most benefit out of the reserves of oil and gas and find new opportunities for investments (Shell, 2010 [online]). Technological innovation development in extracting energy is a key strength of the company and it is continually engaged in investing in new technologies that would give it an edge over its competitors.

Human Resource Management

Human resource activities are the most challenging for Shell as it has to face several employment issues starting from health, and work environment to safety issues. These are true for factory workers who work in high danger zones (Shell, 2010 [online]). In Nigeria, a high rate of people dying in the factory has become common.

As shell is a global competitive company, it seeks highly talented and experienced people who seek innovation and growth for the company for its management. Shell offers learning and development opportunities for its diverse workforce. It offers monetary and non-monetary forms of incentives to employees (Shell, 2010 [online]). The human resource management uses online application system for interested candidates and uses simulation based testing tools for hiring appropriate employees for middle management and senior management posts.

Firm Infrastructure

Shell’s infrastructure is heavily reliant on technological support, by means of ERP, data management, research and development, marketing, procurement, human resource management, extraction and production operations (SAP, 2010 [online]). This allows a strong network of coordination and communication to be maintained globally.

Conclusion

Shell Group with industry leadership in terms of cost, quality and technology, is faced with immense social, political, economic and legal challenges. Its strategy to focus on performance, new ventures to exploit unconventional oil and gas reserves and achieve profitable growth in return has met success, but the pace has slowed due to economic influences. for big oil giant like Shell, keeping diplomatic alliance with the governments of many countries has become common but this not something to rely on and to put heavy capital investments at stake like Shell is doing right now, by continuously investing in new plants for oil and gas extraction from unconventional reserves such oil sands and oil shale. Such attempts are increasingly causing environmental degradation and the government may go strictly against them in future once more drastic environmental changes become dominant. Clever strategy is to continue ethanol and solar and wind energy production and invest in more bio fuel energies to tap new opportunities.