shell business management case analysis

8/15/2019 Shell Business Management Case Analysis

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Royal DutchShell

Case Analysis


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Introduction

Royal Dutch Shell Group was created in 1907 through the full merger of“Royal Dutch” petroleum company and “Shell Transport and Trading”. Since its

establishment, Shell has experienced a fast expansion all over the world, includingEuropean, North American and Asian areas. Oil exploration and production weredeveloped in Romania (1906), Russia (1910), United States (1912) and many other

parts. By 1938, its crude oil production per day accounted for more than 10 percent ofthe world total production. In the 1980s it expanded overseas business through acquisition. The acquisition of30% shares of Shell Oil in 1985 consolidated Shell‟s operations and business in the

U.S. market. With the collapse of Communist regimes in Eastern Europe in 1989,Shell gained access to markets in these regions. The first operation was started in

Hungary though the joint venture structure. Soon the business expanded at a quickspeed to many other Eastern European countries, including Russia. In this time, the“gas to liquids” technology was widely applied, which played a significant role in itslater development in the following decades.

In the new century, Shell began to expand business into China and Russia. InChina, to meet the increasing consumption demands for oil and gas, Shell has built amassive joint venture company with China National Petroleum Corp. (CNPA)-CNOOC and Shell Petrochemicals Company Limited.Until the first quarter in 2010, its business across the world continues to grow in asteady and favorable tempo. In Australia, Shell Energy Holdings Australia Ltd. andhis partner Petro China International Investment Company Ltd have reached anagreement with Australia-based Arrow Energy Limited, in which Arrow decides tosell out his 100% shares to Shell and PetroChina at a total price of 3.5 billion.

Now, Shell is operating in more than 70 countries around the world and hasabout 87,000 employees. It is the main natural gas producer in the world with 20.2million tons sold per year and 3.3 million barrels of oil produced every day. Shellowns more than 30 refineries and chemical plants and 44,000 Shell service stationsworldwide.

Vision

Since its establishment in 1907, Shell has a clear vision of being the leader in

oil industry and this is clear from its vision statement.

"Reinforce our position as a leader in the oil and gas industry in order to

provide a competitive shareholder return while helping to meet global energy demand

in a responsible way".


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Objectives

As one of the largest companies over the world, Shell has very clear objectives

which satisfy its vision and allowed it to perform successfully during the past decades.

Thes objectives are:

• Focusing on exploration for new oil and gas reserves in its „Upstream‟

businesses

• Sustaining cash generation in „Downstream‟ businesses.

• Continuous improvement of technology and innovation as the core of its

strategy

• Commitment to minimize the environmental and social impacts of the growing

worldwide demand for energy

Strategy

Shell current strategy has been developed in 2004 after the oil reserves crisis.

In 2004, Shell overstated its oil reserves worldwide by about 20%, resulting in loss of

confidence after the announcement of this news. Consequently, Shell paid a

£17 million fine to the Financial Services Authority and a lawsuit resulted in the

payment of $450 million to non-American shareholders. This scandal led to the

departure of chair executive officer Phillip Watts.

The new CEO Peter Voser had a big responsibility in revealing the reasons behind this crisis. The main problem found is the miscommunication between thecompany's branches in United Kingdom and Netherland. As a result, Shell hasdivided its headquarters operations to be totally independent and sustain regularmeetings during the year to discuss the progress and new updates. Also the new board

tried to overcome the great decrease in its oil resources by investing more money inexploration and production activities. Shell intended to strengthen its portfolio anactive program of divestments and selective focused acquisitions. It increased itscapital expenditure to about $15 billion per year for the medium term, and in the

period from 2004 to 2006 sold non-strategic or under-performing assets with revenuesabout $12 to $15 billion. The new strategy was so simple to craft the next era, it was"More Upstream, Profitable Downstream'.


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1.3. Licensing

To help other refiners to develop business applications of cutting-edgetechnologies, Shell also expands its business in the form of licensing. Shell GlobalSolutions is such a company that provides support for its customers through licensing

advanced technologies. With a license issued by Shell Global Solutions, the clientcould get a particular technical assistance or operational consultancy to upgrade itsown business performance. There services range from initial and basic consultancy tofull guide through all phases in a project. As a leading company in the petroleumrefining industry, Shell Global Solutions provides a wide range of lead-edgetechnologies for other refineries.

Unique organizational structure is the key factor that affects Shell‟s

internationalization path. Shell Group is classified into four types of companies:

1- The parent companies including UK-based (Shell Transport and TradingCompany) and Netherlands-based (Royal Dutch Petroleum Company)

2- The group holding companies3- The service companies with a total number of 9, which are meant to

provide advice to the operating companies, such as Shell InternationalPetroleum Company Limited

4- The operating companies which are made up of more than 200 companiesacross the world

The different types of companies employ different modes in their internationalexpansion. For example, when entering into a new foreign market for the first time,the operating companies tend to take the joint-venture. In this way, Shell could benefitfrom partners' detailed knowledge about the local market; in addition, risks and costscould be shared by both foreign investor and local partner. While for the servicecompanies, the licensing is most likely to be employed during expansion process. Forthis entry mode could help develop business applications of intangible property, likethe practice of Shell Global Solutions. In addition, licensing also has some other

benefits such as reduction is costs and risks of building foreign companies andimmunity against restrictive investment barriers.

Another factor influencing Shell‟s entry mode choices is the target country

environmental factors. Take the market in China for example, in earlier stage, Shellexpanded business into this market using direct or indirect exports, while since theimplementation of China‟s opening up policy which encourages foreign investment in

the mainland mark et, Shell‟s entry model changes from simple exporting intocombination of exporting and joint venture.


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2. SWOT Analysis

WeaknessesStrengths

• The whole corporation is focused

only on oil

• Majority of its oil from the

Middle East

• 2n largest company

• Operations in +70 countries

• Wide range of products

• Large network of supply base

industries (transportation and

manufacturing)

• Strong Technology & Research

• Strong brands recognized

globally: Shell V-Power and theShell FuelSave

ThreatsOpportunities

• Government Strict Laws

• Instability in the Middle East

• Difficulties of quality control

and standards

• Potential Oil Reserves: the

Siberian region ,Nigeria • Tar sands reserves in North

America

• Renewable sources of energy

• Increasing demand forliquefied natural gas

2.1. Strengths

Royal Dutch Shell Company is the second largest company in the whole worldwith operations in more than 70 countries. The company markets a whole range of

products that ranges from growing the proportion of Exploration and Production and

Gas & Power assets in the Group's portfolio. This would include a gradual shifttowards gas as the fuel of choice, profitable growth and cash generation in OilProducts and Chemicals. The company has a large network of organized andmethodological supply base making the transportation and moving of its productsfrom oil producing countries to the market faster and efficient.

2.2. Weaknesses

In looking at the company, the whole corporation is still particularly gearedtowards making and manufacturing products that are based on oil. This step is notonly inefficient from an ecological point of view but is also ineffective since the

world is not shifting to renewable sources of energy. The company gets the majority


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of its oil from the Middle East and international disputes, difficulties and negativesactivities in that region would tend to increase the prices of oil.

2.3. Opportunities

The company can commence or lead other oil companies in exploring other potential oil fields to ease its dependence on Middle East oil. Potential explorationareas are the Siberian region in Northern Russia and the Russian island of Sakhalin inthe Pacific. Another potential oil field that must be fully developed is in Nigeria. Thecompany must also venture on developing, researching and promoting renewablesources of energy. It must conduct studies and research with regards to techniques,materials and policies that would decrease the company's reliance on oil whileincreasing its need on nuclear, solar and hydroelectric sources of power.

2.4. Threats

The primary threat against Shell Company is fluctuating interest rates and the warin the Middle East countries is also a threat to the company due to its globaloperations. Another threat are lobby groups that try to influence governmentlegislations with regards to strict implementation of laws and statures that would

protect the ecology and the environment from carbon emissions.

3. BCG Matrix

3.1. The Stars

The exploration and production business and the oil refining and chemical

industry business are regarded as the Stars in Shell activities. On the basis of the rapiddevelopment of technology, the consumers‟ demands for the quality of the chemical

products are increasingly high. As a result, in order to win the competitive advantage

in the competitive market, Royal Dutch Shell should attach great importance on

improving the oil exploration and production business and the oil refining and

chemical industry business. Royal Dutch Shell is always paying attention to the

investment of the exploration and production business and the oil refining and

chemical industry business. At present, the Shell's exploration and production

companies have exploration and production activities in more than 45 countries

around the world.


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3.2. The Cash Cow

Products' sales have the low market growth rate and the relative high market

share. The business can provide Royal Dutch Shell with the more cash, so as to

support the survival and the development of other businesses. Such business should

put the maintaining strategy into effect in order to maintain its strong position as far

as possible. Royal Dutch Shell should according to the accurate brand positioning,

through preserving the excellent reputation, keep brand preference degree of the first

position in the market. Then in the market share, Royal Dutch Shell should strive to

maintain its market share and make every effort to develop the potential market. In

other words, focusing on the products sales will make for the development of Royal

Dutch Shell.


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3.3. The dogs

The dog activities have low market growth rates and low relative market share. It

cannot produce large amounts of cash and need to spend a lot of cash, so these

products cannot improve its performance. In general, the business of in Royal Shell is

the research and projects activities as it serves the other activities with technology

without creating much cash flow.

3.4. The Questions

Natural gas and pipeline can be considered to the questions methods. The relative

market share of the natural gas and pipeline business is relatively low in the market,

which can adopt the development strategy to realize the change for the Stars. TheShell's goal is to develop its chemical status in Asia, with Shell's status in the United

States and Europe. Royal Dutch Shell is the major natural gas producer as it has the

rights and interests with the three major world of liquefied natural gas plants (Brunei,

Malaysia and Australia) and those under construction in the liquefied natural gas

plants (Nigeria and Oman), and in Europe, America and other parts of the main

natural gas pipeline company. Along with the development of Royal Dutch Shell,

Shell group is the world's main natural gas production and dealers, whose sales of

natural gas exceed 65 billion cubic meters, just behind the world's largest producer

and exporter of natural gas, Russia. It is obvious that developing the natural gas and

pipeline business has the positive aspect on the development of Royal Dutch Shell.

Hence, Royal Dutch Shell should pay more attention on the natural gas and pipeline

business.


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Exxon Mobil

BP

TOTAL

Substitute Products

Renewable Energies

Buyer

Weak

New Entrants

National

Clusters

Supplier

Doesn’t

Exist

4. Porter's Five Forces

4.1. Suppliers bargaining power

Obviously, the oil and gas industry is mainly controlled by the state and the main

competitors within the industry are the country companies with a large group. From

oil exploration to product sales or oil trade, the whole is the integration of homework

and one package service. For Royal Dutch Shell, there is no independent supply

business enterprise. The raw materials are supplied by itself or the mutual supply

between oil and gas companies. Therefore, supplier bargaining power can be seen asthe inexistence.

4.2. Buyer bargaining power

In the current economic situation, oil and gas, as important strategic resources,

occupy an important position in the development of all countries and even relates to

the national survival. And oil and gas are the renewable resources, whose storage

capacity is fixed and limited. Along with more use of exploitation, oil and gas

resources in the world will gradually decrease, which will inevitably affect the supply


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Financial Analysis

1. Selected Income Date

Money (Billion $) / Year 2012 20112010

Total Revenue 481.7 484.5378.2

Purchases 369.7 370.1283.2

Production &

manufacturing26.28 26.5 24.5

Exploration 3.104 2.32.1

Research and Projects 1.314 1.1251.019

It is clear from the selected data that most Shell revenues are from Purchases in

addition to production and exploration activities. As mentioned before, research and

projects operations create the least revenues compared to the other activities. It is

noticed that total revenues decreased in 2012 due to the large investments on R&Pline which on the opposite returned lower cash than in 2011.

2. Market Rivals

2012 ShellExxonMobil

BP

Total Revenue481.700 482.295 388.258

Purchases 369.725 265.149 293.242

Production and manufacturing 26.280 38.521 33.911

Exploration 3.104 1.840 1.475

Research and Projects 1.314 N/A N/A


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0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

123

482,295486,429

383,221 375,580375,517

297,107

R e v e n u e s ( B i l l i o n $

)

Rivals Revenues (2010-2012)

Exxon Mobil

Shell

BP

From the previous data and graphs, it is clear that Shell holds the second

position in oil market after Exxon Mobil and British Petroleum comes after them. The

competition between these three giants is high especially between Shell and Exxon on

the first ranking. Similarly to Shell, the other rivals main revenue channels are from

Purchases and exploration and production activities. However, Exxon Mobil and BP

do not have strong research and projects operations such as Shell.


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Recommended Strategies

It is clear that all Shell operations depend mainly on oil. Considering that oil is a

non-renewable resource, Shell should explore other products and strategies. These are

some recommended strategies for shell in order to sustain as leader in energy industry.

1. New Resources of Energy

1.1. Tar Sands

Tar sands are types of heavy petroleum deposits.

Advantages Challenges

Large Reserves (Double oil

Reserves)

More products range

Biggest reserves in Canada andRussia where Shell already has

high market share

Hard to produce from

ground

Require advanced

technologies

1.2. Fuel Cells

Fuel cells are devices which convert Hydrogen gas into electricity.

Advantages Challenges

Renewable source

No CO2 emissions

Broad market products

Hydrogen economic

production is still a challenge

Design of fuel cell to suit

various applications


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2. New Related Industries

Shell can enter new related industries such as fuel-efficient vehicles orFuel cells vehicles. This market will be a blue ocean for Shell where it will be

the leader company as it used. The big challenge for shell in this new market is

to utilize its research and projects department in developing new advanced

technologies in designing and producing these vehicles. Also it can form a

joint venture with one of the leading cars companies in which it will provide

the energy operations and benefit from the professional design experience of

the partner.

Recommended Objectives

Make tar sand the second contributor to Shell‟s energy resources byincrease 2% every year.

Improve liquefied natural gas energy quality and production.

Increase investment on Research and Projects department by 4% annually.

Develop prototypes of economic fuel cell vehicles by 2016.

Conclusion

Shell‟s existing strategy is to invest in the development of major growth

projects, primarily in the upstream businesses of Exploration & Production and Gas &

Power. In order to sustain its leading position in energy industry, shell should invest

more on researches and other types of energy rather than oil which can be used to

enter new related industries. In other words, Shell's strategy can be "More Upstream,

Profitable Downstream & Pioneer Research & Projects".


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Resources

Royal Dutch Shell Plc Annual Review and Summary Financial Statements2012

Royal Dutch Shell Plc Sustainability Report 2012

Exxon Mobil Annual Review and Summary Financial Statements 2012

BP Annual Review and Summary Financial Statements 2012

Alternative Energy - Innovation. 2010. The Shell Global Homepage - Global .Retrieved from:http://www.shell.com/home/content/innovation/alternative_energy.

Thompson, A., Strickland, A.J., & Gamble, J.E. (2014). Crafting and Executing Strategy 19th edition. McGraw-Hill

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