The Oil and Gas Company Shell: Strategic Analysis

Change is required in the world energy policies to contain the huge demand for energy products

Definition of the structure of the oil and gas industry (energy) in which Shell operates and analysis of the competitive challenges Shell faces within the oil and gas (energy) industry

The structure within the oil and gas industry is a little bit complex since it involves a chain of participants. The chain comprises of those owning the energy resource, those financing the production processes, the engineering sector comprising of drillers and operators, equipment manufacturers, and those involved in service. All these processes and participants require a huge financial base for the successful delivery of energy products to the consumers (The Times 100, 2010).

In the past, the industry sold its products to large transportation pipelines at wellhead after which it was distributed to local channels making it available to consumers. However, the prices were regulated by the states making it affordable for domestic consumption. The prices are now determined by the forces of demand and supply. Within the current structure, there is the presence of marketers who facilitates the coordination between the producers and the consumers. The nature of regulation by governments has some effects on the shape of the industry (Chemical Market Reporter, 2001).

There are several producers and processors of energy from oil and natural gas all over the world. The United States alone has over 160 pipeline companies and over 100 storage facilities. The nature of the market within the energy sector depends on the demand, supply, and price of the products. The rise in demand leads to a rise in prices which ultimately makes the producers increase their rate of exploration and production to meet the rising demand (Barker, 2004; European Power News, 1998).

Challenges Shell faces within the oil and gas (energy) industry includes

Shell faces several challenges within the industry some of which are; safety and the environment technology, exploration programs, greenhouse gas emissions, energy prices within the market, rate of production, and the nature of the demand for energy products. The company also faces stiff competition from other related industries like BP. Most of the world nations demand that the nature of exploration applied by Shell should be environmentally friendly and not interfere with human settlements. Priority should be given to the ecosystem and the general environment (Macleod Institute, 2003).

There is also the challenge of losing a considerable amount of oil and gas through system leakages; this poses some threat to the surrounding environments. The annual fluctuation in energy prices forms one of the major setbacks to the Shell group. This leads to some level of uncertainty to the prospects of the company more so if the raw material for oil and gas gets exhausted (Shell Renewable, 2004a).

Shell group of Companies has formed a simple management structure that enables efficient running of their businesses

Analysis of the economic, political, social, technological, legal and environmental factors that affect Shell

Environmental factors

The effective analysis of environmental factors aims at distinguishing the most important from the less important issues. For a big profit margin to be realized in the Shell group, they must attach high values to their customers which is mainly based on an understanding of consumers’ needs. Their relation with suppliers is an important aspect that must be considered (UNFCCC, 2004). One of Shell’s business objectives is to develop means through which they offer valuable and affordable products and services to maintain and attract more customers.

The Shell group has to provide consumers with products that assure them of safety based on strong technological, environmental, and commercial terms and conditions. This is a very big challenge to the company since it requires the company to provide quality fuels at affordable prices (Mirvis, 2000; Barney, 1991; Modern Power Systems, 1997).

Social factors

The focus of the company is on the impacts of their products on the environment. Consumers are very sensitive to pollution and all the damages that fuel can cause to their surroundings. This calls for the provision of cleaner, efficient, and cost effective fuels like bio-fuels. This provides a challenge to the Shell group since the interest of the majority is now inclined towards liquid bio-fuel which are environmentally friendly. This makes shell focus on how to produce consumer-friendly fuels that use less energy as well as emitting fewer greenhouse gases (Frynas, 2003).

Shell Group focuses on developing products that have lasting benefits for communities. Concerning the social environment, the communities residing close to Shell oil refineries are concerned about their health and environmental safety. The company should try to win the trust of the affected people by providing education on safety measures and procedures. This has been enhanced through the creation of local partnerships which has seen the development of health centers and learning institutions (Broadhurst, 2000).

Economic factors

Shell Group recorded a slightly average return on capital employed over the last few years, this shows the companies efficiency in the way it utilizes its capital employed towards the generation of high revenues (McMenamin, 1999). It recorded a higher profit margin within the last previous years indicating that it is one of the most profitable companies in the industry, the value stands at 14%. This is an indicator of the appropriate use of shareholder’s contributions to the company (Brealey & Myers, 2000).

Technological factors

Most of the equipment used in the industry is over ten years old, sometimes the evaluation process is conducted manually which proves to slow process and sometimes not accurate according to industry standards. Technological progress has enabled control in the cost of production and exploration. However, the company cannot manage its costs effectively through the implementation of new technologies alone but needs to focus on other small areas like the use of low-cost wells and computerized fields (The Times 100, 2010).

In May 2009, Shell launched several Projects and new Technologies that match with the current market demand (Macleod Institute, 2003). Shell has invested in technologies that utilize hydrogen as a source of power. The technology is consumer-oriented and focuses on how to utilize the process performances to produce high-quality products with minimal environmental effects (Chemical Market Reporter, 2001).

Shell group is utilizing its acquisition strategy to invade the market and also indulge in partnerships, this aims at improving technological capability to enable mass production of oil products. Also on the technological aspect, the company has invested in appropriate designs consisting of good infrastructure with the ability to accommodate high capacity factors. There is a threat emerging from the alternative energy sectors, this can only be counteracted by appropriate technological breakthrough. Technology has been proved to be one of the key strengths of the Shell group which enables it to compete favorably with other alternative energy markets (Chemical Market Reporter, 2001).

Political factors

Politically, Shell group operations within the market have been affected by the threat of geographical instability. This is driven by climate destabilizations from greenhouse gas emissions which have prompted governments to impose some fees on companies depending on the percentage of their greenhouse gas emissions (EU, 2004). World energy markets have been affected by the increasing fuel demand from the emerging economies which has led to some tension between governments (Wright, 2004; Hoffman, 2004).

Shell Company started trading independently for the first time in 98 years of history and currently deals with the production, processing, and delivery of energy globally

Explain the strengths and weaknesses of the shell’s overall strategy

Shell Company has several strategies some of which include offering differentiated efficient fuels, the strategy of focusing on investment, and generating more revenue from differentiated products (McGee, Thomas, & Wilson, 2005). Several challenges are facing the strategies that applied in the day- to- day running of Shell Company. The development of new supplies and the expansion taking place within the market environment presents various challenges. The overall strategy of increasing Shell’s energy supplies is faced by tight competition leading to high energy prices. This constraint emanates from the unpredicted demand within the market (Lynch, 2006).

Strengths of the shell’s overall strategy (Johnson & Scholes, 2007)

  1. Job tenures; by ensuring job tenures for the workers, they are sure of securing employee security and so maintaining the experienced workforce. It also enables the employees to master their job and take responsibilities efficiently thus producing the expected results.
  2. Commercial and Project academies; these help them in assessing their strength and weaknesses and forge plans to meet the challenges. They also get new ideas from other areas or competitors.
  3. Emphasis on discipline and teamwork; these lead to individual efforts to meet the companies target, close supervision, and monitoring and thus achieving professionalism for all workers.
  4. Globalization; through these, the shell has been able to take their services and business beyond borders to meet the desired market. This contributes highly to their gross input as a whole.
  5. Common infrastructure; by doing these, they can save on costs and create a fair trading atmosphere for all their consumers (Johnson & Scholes, 2007).

Explanation on Strengths of an overall strategy

The strategy of increasing supplies and expanding the market is supported by the ability of the company to apply new technology and undertake more complex projects. The country-based organization has made the company close to consumers and the various governments; this makes it easier for the company to exploit the resources available within the specific regions. The strategy utilized is well connected to the rising new technologies within the markets and instant communication channels. This is reinforced by the unifying of parent companies under one name, Royal Dutch Shell plc, this means that the company currently operates under one board and chief executive officer operating from one headquarter (Johnson & Scholes, 2007).

This makes it easy for the company to gain from clear and accountable governance. The chief executive officer delivers the strategy to a single board elected by a single shareholder body. This gives the company the strength to be flexible on the use of their finances. The globalization of the business organization has ensured that the principles of operations are direct, integrated, and appropriate for the realization of faster growth.

Re-organizing the complexity within organizational leadership ensured that the company became closer to their customers and stakeholders through better services. The establishment of Commercial and Project academies ensures that successful strategies are applied systematically inappropriate way. (Johnson & Scholes, 2007).

Weaknesses of the shell’s overall strategy

  1. Rationalizing of the IT systems- the world is going IT. As such, they have to embrace fully the use of it to be efficient and effective in service delivery.
  2. Shared services in low-cost areas- these can be tricky since some countries are very poor. To strike a balance may mean one country is disadvantaged.
  3. Recruitment of more talents; since shell plans to recruit new technical professionals, the problem is that there are few science graduates in Europe and the US. Thus they have to think of better ways of doing the same (Modern Power Systems, 2002).

Explanation of Weaknesses for the overall strategy

The strategy is faced with constraints in energy supply which affects the demand through an increase in prices. There is a lack of resources that slacken the rate of supplies due to difficulty in the production processes. The strategy lacks enough support from the commercial conditions which justifies large and long-term investments. The strategy is faced with a decline in the number of science specialists within Europe and the United Kingdom. The consumer’s demand for efficient and clean energy in form of gas poses a big challenge to the company since it requires putting together complex chains that are costly. This should be done to ensure that customers in competitive markets are supplied adequately from the reservoirs (Modern Power Systems, 2002).

How the strategies meet the needs of Shell’s customers and other key stakeholders

The overall global energy demands are growing rapidly especially in the world’s emerging economies. Statistics predict that the growth in demand for world energy consumption could increase by a greater percentage within the earlier part of the next century. The consumers and stakeholders benefit from the Company’s ability to sustain high investment inputs. The company protects the shareholders’ contributions through the efficient utilization of resources and making high profits from its sales. The Company’s commitment to corporate values and clear communication on strategies have ensured fair dealing with every group hence reduced grumbles amongst the stakeholders (The Times 100, 2010).

Shell group have set their operations only in countries that have achievable business principles; this helps the company in protecting consumers’ rights by adhering to safety standards that aim at protecting the environment and regulation of greenhouse gas emissions. This has contributed to the reduction in health hazards within the regions of operation (The Times 100, 2010).

Reference list

Barker, R., 2004. An oil giant for players with patience. Business Week, 39(4), p. 148.

Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1), pp. 99-121.

Brealey, R., & Myers, S., 2000. Principals of Corporate Finance .6th Edition. Irwin McGeaw-Hill, London

Broadhurst, A., 2000. Corporations and the ethics of social responsibility: an Emerging Regime of expansion and compliance, Business Ethics: A European Review, 9(2), pp. 86-98.

Chemical Market Reporter, 2001. Energy markets poised for dramatic change. Chemical Market Reporter, 260(17), p. 8.

EU. 2004. The European Union Greenhouse Gas Emission Trading Scheme, EUROPA. Web.

European Power News. 1998. Oil giants. European Power News, 23(5), p. 18.

Frynas, J.G., 2003. Royal Dutch/Shell. New Political Economy, 8(2), pp. 275-286.

Hoffman, A., 2004. Winning the greenhouse gas game. Harvard Business Review, 82(4), pp. 20-21.

Johnson G. & Scholes K., 2007. Exploring Corporate Strategy, Financial Times and Prentice Hall, UK.

Lynch, R., 2006. Exploring Corporate Strategy. FT/Prentice Hall, UK.

Macleod Institute, 2003. The critical success factors for the commercial application of emerging alternative energy technologies, Innovation in Alternative Energy Workshop. Web.

McMenamin, J., 1999. Financial Management: An Introduction. Routlege, London.

McGee J., Thomas, H. & Wilson, D., 2005. Strategy: Analysis and Practice. McGrawHill.

Mirvis, P.H., 2000. Transformation at Shell: commerce and citizenship, Business and Society Review, 105(1), pp. 63-84.

Modern Power Systems, 1997. Shell invests in renewable, Modern Power Systems, 17(11), p. 12.

Modern Power Systems. 2002. First pollution trading. Modern Power Systems, 22(5), p. 3.

Shell Renewable, 2004a. About Shell Renewable. Web.

The Times 100. 2010. Business case studies; balancing stakeholder needs. Web.

UNFCCC, 2004. The convention and Kyoto Protocol, The United Nations Framework Convention on Climate Change. Web. November 2010].

Wright, W., 2004. Anxiety grows over rising prices. Global Finance, 18(6), p. 9.