Financial decision making concern with the company’s financial position. Financial decision based on projected revenue and projected operating expenditures over the period of time being considered. Cost/benefit analysis is essential for performing financial decision making.
The aim of this report is to focus on the organizational activities of Royal Dutch Shell PLC which includes the comprehensive research on international activities and strategies, history of organization, its products offered. The report based on five sections, theory, result, analysis/discussion, conclusions and recommendations. Result and conclusion are in the light of financial reports. And in this report we indicate financial performance of two companies named Royal Dutch Shell PLC and BP PLC. We compare the financial ratios of both companies which help us to know the current position of both companies.
PREFACE:The main object of writing this report is to find out the financial position and marketing strategies of Royal Dutch Shell PLC. By comparing British Petroleum’s financial reports with the Shell we came to know the current position of the companies. In order to determine the depth of various sources like internet books and lectures have been considered. Result shows that both companies are well established and have achieved their customer trust and confidence. ACKNOWLEDGEMENT:
I acknowledge that I am very thankful to almighty GOD who gave me strength of writing this report. And I would like to thank to my lecturer of this project, Sir Zeeshan for the valuable guidance and advice. Beside I would like to take this opportunity to thank my centre ICM for offering this case study. It gave me an opportunity to learn about the different organization and apply all those theories which we have studies before. Finally, an honourable mention goes to my husband for his support and understanding for completing this report.
ROYAL DUTCH SHELL GROUP (SHELL PETROLEUM):The Royal Dutch Shell Group was created in 1907 when the Royal Dutch Petroleum Company (1890) and the Shell Transport and Trading Ltd (1833) of the United Kingdom merged their operations, it gave 60% ownership to the group and 40% to the British. Since Shell’s core business is to provide petroleum, this assignment will refer to Shell as the product itself. According to the fortune Magazine world’s top largest companies are: REFERENCE 1
1. Royal Dutch Shell2. ExxonMobil3. Wal-Mart Stores4. BP5. Chevron6. Total7. ConocoPhillips8. ING Group9. Sinopec10. Toyota MotorsOil and gas are essential for empowering the world’s needs and their continuously increasing demands. Shell provides 2.5% of the world’s oil and 3% of its natural gas. Shell sells enough petrol and diesel a day to fuel 16 million cars and enough liquefied natural gas to provide electricity for 34 million homes across the world. Shell intends to serve all its stakeholders, customers and investors effectively. Following data, tables and graphs illustrates the past performance of Shell.
Figure 1: Performance 2006-2010
Figure 2: Profit 2006-2010
All the parts of these figures are inter-related, internal and external. Through these diagrams we could identify the short-term goals in success, growth, profit, innovation, competitive advantages and decide if it is meeting the organization’s goal. Finally Royal Dutch Shell PLC will be compared and contrasted with the BP (British Petroleum) so that recommendations can be made. LITRATURE RIVIEW/ THEORY:
This section includes different models and theories which will apply to understand Shell’s international decisions and strategies and later on these theories will be use to determine the strategic recommendations. It will cover micro and macro environment issues, company issues and marketing mix strategies. MACRO ENVIRONMENT:
Macro environment can be explained through PESTEL, EFE etc. In order to make decision and to plan future goals, organization needs to focus on macro-economics in which they operate. PESTLE: PESTEL analysis is important in order to get the big picture of the external environment in which the organization is operating. Basically it is an ‘orientation’ tool. Political and legal environment include embargoes, export & import controls, trade endorse, regulations and different political actions. Political risks could be the form of expropriation, elimination and domestication. It has got some disadvantages as well such as social equality negligence, payments of fines considered as admission as guilt and flawed organization’s image.
Economic factor offers opportunities and possible problems in order to generate reasonable conditions for local production but it might manipulate the entry mode by doing direct investment. In this regard strategies should be made, developing options and processes to deal with such variations creating regional and global companies which may result in loss business or facing problems in reaching the organizational change. That can reduce the speed of decision making and increase centralization.
Emerging and developing markets indicates to those countries, which are looking for change and want to improve their economy through their developed nation and developed aims. For these kinds of strategies, company needs to focus on affordability management, investigation in placement and creating strong global brand. International buyer needs to research, develop buying power and use recent technologies.
Technological environment refers to inventions, modernization, and hi-tech change, innovations and diffusion. Social and cultural environment includes social satisfaction, cultural training and assimilator. Environmental and legal factor includes lots of natural factors such as high energy cost, pollution, government regulation of ecology, political risk and actions. EXTERNAL FACTOR EVALUATION (EFE): is a strategic management tool that is used to evaluate business circumstances, it includes opportunities and threat. MICRO ENVIRONMENT:
It include SWOT analysis, BCG model, 5 forces analysis, product life cycle, Ansoff growth matrix, quantitative strategic planning matrix, IEF etc. SWOT analysis involves examining the organization’s internal and external environment using its strengths (S), weaknesses (W), opportunities (O) and threats (T). S and W are found internally and they are refers as current while O and T are related to external environment and refers to future. It is use to determine the current position of the organization.
SWOT analysis is a strategic tool that helps in the process of formulating business strategy, plan for the future goals, and knowledge about the competitors. While doing SWOT analysis, company needs to talk about the important issues, like its weaknesses (gaps in capabilities, lack of competitive strength), threats (technological development, government policies), strength (resource, experience, financial reserves) and opportunities (alliances, new market and service, cross-selling).
INTERNAL FACTOR EVALUATION (IFE): It is a strategic management tool that is use to utilizes for assessment of major strength and weaknesses in functional areas of business. It includes internal strength (loyal employees, strong management team, increasing cash flow, good reputation and image, largest manufacturer in the market) and internal weaknesses (limited access to international market, little diversification, bigger long term debts). BCG MODLE (by Bruce Henderson in 1968) it was developed for the Boston Consulting Group.
It is an analytical tool in brand marketing, product management and strategic management. This matrix often utilized to prioritize which products within company get more funding and attention. Placing products in BCG matrix results in four categories, BCG Stars defined as having high market share in high growing market, if market share is kept, stars would become cash cow.
BCG Question marks have high growth but low market share, this is essentially for new product and marketing strategy is to get market to adopt these products. If the market share would not increase quickly they become dogs. BCG Cash cows have high market share but growth is low, they can generate a lot of cash flow, because of its low growth promotions and placement investments are low. BCG Dogs are in low growth and in low market share. 5 FORCES MODEL of Michael porter is widely use in strategic planning and to evaluate company’s competitive position. Porter’s 5 fundamental competitive are:
Barriers to entry| Government policies & taxation, capital requirement, cost advantage.| Threat of substitute| Buyer willingness, substitute performance.| Bargaining power of buyer | Price elasticity, incentives, brand identity.| Bargaining power of supplier| Ability to substitute, size of suppliers, unique service & product.| Rivalry among the existing players| Diversity of competitors, no. of competitors, differentiation, switching cost.| PRODUCT LIFE CYCLE (PLC) is use to define individual stages of a life of product. It can be divided into several stages demonstrated by the revenue and generated by the product. It can be define through the graph:
Basically product life cycle has four stages from product launch to its retirement. At the stage of introduction product or service introduce to the market. It involves is to promote maximum awareness about the product and service. Consumers are getting informed about the products quality, advantages, price etc at this stage. After the product being introduced to the market, customers become more interested in it. At this stage marketing cost become high and market share tends to be steady. Now market has reached to diffuse, brands, trademarks and image are key aspects in this life cycle. Prices are different and competition is for the common product.
Continuous decline in sales refers to enter into the Decline mode. The reasons for decline could be unfavorable economic condition, innovation products and change in consumer tastes. ANSOFF PRODUCT MARKET GROWTH MATRIX is a marketing strategic tool created by Ansoff (1957) which allows marketers to think in that way to expend their business. The matrix allows us to focus on the firm’s potential and present market. It is a series of the strategies which leads to the growth of the business. It implies four possible market/product combinations.
Market Penetration: in market penetration business sells its existing products in their existing market in order to get high market growth. It tries to increase usage by existing customer. Increase in market share through selling their current product and reorganize the market by driving out rivals.
Market Development: firms target is to achieve market growth with their existing product in new market. Possible ways of approaching this strategy could be new geographical market, new product channel and dimension. Product Development: firm launch their new product in their existing market in order to achieve high market share. It is a broad field of effort dealing with a lot of things like, creation, ideas, thinking, for marketing a new product. For example, Boots frequently market its new products (boots brand), while remaining within the relative industry.
Diversification: this is a point where firm is new into the market. They launch their new product and the market is new for them. It could be in a way that existing company launch their new product into different region/country. There is a lot of risk in this kind of strategy because company has no or little experience.
For the business when entering into the new market they must get clear idea that what they are expecting to gain. For example the core business of Reliance industries limited is petrochemicals, oil, gas and refining other segments of the company includes retail business, textile, telecommunication, special economic zone development and reliance retail has enter into the fresh food market called Reliance fresh, in this way Reliance entered markets where it previously had no experience.
This shows that risk increases as strategy go away from the existing productand the existing market. According to the Ansoff diversification was not among the other three which show the way to the idea that diversification have need of new expertise, practices and facilities. While rest of the three is normally go along with the same technological and financial resources which are used for the original product line. So the conclusion of this approach appears in the form of several organizational variations in the structure of the business which shows a individual gap with past business practices.
Thus, Ansoff matrix is usually of limited value with the strategic options available. Quantitative Strategic Planning Matrix (QSPM): it is a high level of strategic management approach for estimating possible strategies. It includes different strategies that describe into three stages. Stage 1 is the Input stage that extract information for the 2 stage that is Matching stage.
Stage 1 gathers all the information relating to the company weather its internal or external, the input stage is based on IFE Matrix, EFE Matrix and CPM while the 2 Stage includes TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix and Grand Strategy Matrix. The stage 3 is to compare alternative strategies and decide which one is the most suitable for the future goal and aim of the business. Managers need to decide while plotting up the matrix that which is the best strategy for the organization’s success. Market Entry Mode: A firm seeking to enter into the foreign market must make an important strategic decision that through which mode they can enter. The four basic modes to enter into a foreign market are: 1. Exporting
2. Licensing3. Joint venture4. Direct investmentExporting: is the sale of the locally produced product into the international market. This is one of the most developing and traditional method, lots of companies are still adopting it. Advantages:
* Gain global market share* Enhance domestic competitiveness* Can exploit economics of sales and economics of scopeDisadvantages:* Incur added administrative cost for the company* Reduce opportunities to gain knowledge of the host market and its competitors * May create dependence on export intermediariesLicensing: A contractual arrangement in which the legal owner gives permission to use intellectual property such as a brand, trademarks, production techniques, patents. For example, a well-known regional firm may reach a licensing agreement for another company to use the firm’s brand name in a different region of the country. Because small investment on the part of the licensor is required, licensing has the potential to offer a very huge return on investment (ROI). Advantages:
* It limits financial and economic exposure* Contractually agreed earnings through sale of production and marketing rights Disadvantages:* Transactions costs* Limits benefits from advantages of location of host nation * Loss of competitive advantage due to duplication
Joint Venture: have five common goals market entry, risk/reward sharing, technology sharing and joint product development and conforming to political policies. A joint venture is a long term participation of two or more companies. The key issues to consider in a joint venture are ownership, control, length of agreement, local firm capabilities, pricing, technology transfer, and government intentions. Advantages:
* Sharing risk with the venture partner* Combine complimentary capabilities and expertiseDisadvantages:* The objectives of the venture are not 100 per cent clear and communicated to everyone involved. * Relationship management with foreign partner* Loss of competitive advantage through imitationForeign Direct Investment (FDI): it plays a growing role in global business. It involves the transfer of ownerships including capital, technology, and personnel. It is actually a physical investment in other country. Directforeign investment may be made through the acquisition of a current entity or the establishment of a new enterprise. Advantages:
* Full control of resources and capabilities* Technology advancement* Integration into global economyDisadvantages:* domestic firms may suffer if they are relatively uncompetitive * Acquisition may lead to problems of integration and coordination Marketing Mix Strategy deals with the way in which a business uses price, product, distribution and promotion to market and sell its product. An Effective marketing mix strategy in which firm’s meets customer needs, it should be balanced and consistence, achieving marketing objectives and create a competitive advantage for the business. It is known as a “mix” because each component affects the other and the mix must overall be suitable to the target consumer. It is known as 4P : * Product – the product (or service) that the customer obtains * Price – how much the customer pays for the product
* Place – how the product is distributed to the customer* Promotion – how the customer is found and influenced to buy the product
RESULTS:This section provides initial findings by applying theories and models outlined earlier. QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM)INVEST IN RESEARCH & DEVELOPMENT INVEST IN BIO-FUEL
KEY FACTORS WEIGHTASTASASTASOpportunities1. Increase use of energy0.1220.2440.482. Increase price of energy0.1320.2640.523. Increasing tendency of people to spend 0.0620.1230.18 4. Increasing mobility of labor, capital & technology0.0820.1630.24 5. Demand shifts for renewable energy0.0540.2030.15
Threats1. Regulations restricted emission of CO2 0.0830.2410.08 2. Depletion of natural energy resources 0.1220.2430.36 3. The credit crisis and volatile commodity pricesthat emerged in the second half of 2008 affectedmany aspects of the business environment 0.0720.1410.07
1.00Strength1. Worldwide customer base 0.0720.1430.212. Strong financial position with income of$26.5 Billion and capital investment $38.4 Billion0.1130.3340.44 3. Investment in R&D more than $1.2 Billion 0.0820.1630.24 4. Spending on alternative energy and CSS$1.7 Billion in the last 5 years 0.06—-5. Generating wind power for nearly 250,000 homes 0.0540.2010.05 6. Operating in more than 100 countries and witharound 45,000 service stations worldwide 0.0910.0940.36 7. Running more than 25 refineries and chemicalplants 0.0910.0930.27
Weakness1. Chemicals – significantly lower margins, lowerincome from equity-accounted investments andhigher operating expenses 0.15—-2. Loss of $474 millions in chemical and corporateportfolios 0.17—-3. LNG sales of 13.05 million tonnes, down 1% 0.0420.0810.04
EXTERNAL FACTOR EVALUATION MATRIX
OPPORTUNITIES | Weight| Rating| Weighted score|1. Searching for other potential oil fields| 15%| 4| 0.60| 2. Focus onalternative energy and its research| 12%| 3| 0.36| 3. Development linking with government departments| 8%| 4| 0.32| 4. Acquisitions and Mergers| 5%| 3| 0.15|
5.Partnerships with manufacturers ofcomplimentary products| 8%| 3| 0.24|6. Focus on conversion of gas into liquid products| 7%| 4| 0.28| 7. Generating wind energy| 12%| 2| 0.24|THREATS | | | |1. New oil players| 10%| 2| 0.20|2. Stakeholders pressure regarding environmental issues| 6%| 1| 0.06| 3. Government blockages| 5%| 3| 0.15|4. Existing competitors moving into new market| 5%| 2| 0.10| 5. Economic downturn| 12%| 1| 0.12|TOTAL WEIGHTED SCORE| 100%| | 3.51|
INTERNAL FACTOR EVALUATION MATRIXSTRENGTH | Weight| Rating| Weighted score|1. Largest oil Producer in the market| 10%| 4| 0.40|2. Good reputation| 12%| | 0.48|3. Strong management team| 4%| 3| 0.12|4. Financial ratios| 6%| 4| 0.24|5. Globally recognised brand and trademark| 4%| 3| 0.12| 6. Products that ranges from oils, lubricants, diesel fuel, jet fuel, & petroleum | 5%| 3| 0.15| 7. Oil refinery plants in over 45 countries | 6%| 3| 0.12| 8. Large distribution & logistic network| 3%| 4| 0.12| 9. Owns & manufactures its supplies| 4%| 3| 0.12|
10. Up-to-date latest technology & I.T networks | 4%| 4| 0.16| 11. Loyal employees| 3%| 4| 0.12|WEAKNESS | | | |1. Oil spillages| 9%| 1| 0.09|2. Core business activities relies on oil products | 10%| 2| 0.20| 3. Scarce natural resources| 5%| 2| 0.10|4. Increasing demand for cleaner environment| 6%| 3| 0.18| 5. Unstablepolitical environment| 4%| 1| 0.04|6. Competitors reducing prices| 3%| 1| 0.03|7. 2009 Niger Delta Oil spillage| 3%| 2| 0.60|TOTAL WEIGHTED SCORE| 100%| | 3.39|LOWHIGHThe Product Portfolio Boston Matrix of Royal Dutch Shell plc
QUESTION MARKSSTARSMARKET GROWTHHIGH
Alternative energy productsBio-fuel CoalGas-to- liquid fuel
PlasticsCoatingsDetergentsNuclear metalsElectricity generationDOGSCASH COWSLOW
Stars: Gas-to-liquid fuel is the star for Shell plc as it is a main product. And this product is meeting the demand of fast growing countries like China and India. QUESTION MARKS: Shell is researching on alternative energy products because natural resources are diminishing. Bio-fuel and coal gasification are those products which will meet future demands. CASH COWS:Petroleum products used to be star for the Shell, but because of the high capital expenditure they become cash cow. These products has high share in high population and high economic growth country like China. DOGS: Nuclear, detergents, coatings and plastic are not the main business of Shell it is just to expend the organization into different areas that’s why they are in dogs gradient with the little or no return investment.
ANANLYSIS/DISCUSSION:In this section we discuss and examine the international decisions and strategies of the organization in a light of theories and results discussed earlier in this report. In order to make an improvement in Asian market this section gives conceptual arguments and evidences which Shell plc taken into account. Political and Legal:
Government, European Union, International laws, trade legislation all affects the conduct of the company’s business. For example the US, UK and Europe placed restriction on trade with certain countries such as Iraq, which is rich in oil supplies, therefore Shell is unable to extract, operate and supply any kind of business operations in Iraq. Social and Cultural:
Social and cultural factor refers to population, education, lifestyle, social trends etc. factors that are affecting Shell are as follows: * Population is increasing rapidly, this means demand for petrol consumption will also increase. * Luxurious lifestyle; people who possess luxury life style will have larger engine size and therefore consume more petrol. Technological:
For the growth of the business technological advancement is essential. Computer and IT network helps with the improvement towards logistics, machinery, stock-ordering, supplies, communication etc. It also helps with the administrative work and can conduct virtual meetings from long distance, for example one office in UK can have virtual meeting with another office in China. Sales and stock are easily monitored, recorded and reported effectively. Economics:
In third world countries where income level is low and private vehicles are not used that much that will affect the demand for fuel. In developing countries demand should be monitored closely as it is likely to increase high consumption. Physical Environment:
For Shell it is a major concern for corporation, natural disasters such as floods, earth quakes etc.
Porter’s 5 Forces Model of Royal Dutch PLC:Potential Entrants
Threats to new entrants Bargaining power Industry competitors, Rivalry among existing firms E.g., Shell, BP
of supplier Bargaining power of customer CustomersSuppliers
SubstitutesThreats of substitute products and services
Firms overall strength and weaknesses depends on the above mentioned factors. Intensity of rivalry among existing firms for example KFC and McDonalds sells same products and roughly their prices are almost same. To know what makes a company better than other and makes it different through this analysis. Shall has got research and development division which is consist of large no. of specialized employees.
They have invented a program called ‘Enhanced Experimentation’ (EE) which increase the efficiency of research and development projects by providing them higher performance testing efficiency for new products. It is eventually a quicker route to market. As compared to BP rivalry firm which operates 22,400 service stations, Shell currently has 44,000 service stations worldwide. Thus Shell is more reachable to customers and keeping up its brand image as well. Shell produces 3.1 million barrels of gas and oil every day as compared to BP which produces 2.3 million barrels per day. This is an advantage for Shell as they can add to its reserve and reduce its prices when supplying more markets.
Shell’s special ordering techniques and its adaptation to new technology has made it possible for them ‘to meet its customer’s requirements for speed, responsiveness and quality assurance in an increasingly competitive market.’ Speed of delivery is vital in a consumable market because if the petrol pumps run dry, customers will drive to other available petrol stations.
Marketing Mix StrategyProduct and Services:Shell has two product lines namely, fuel and lubricants which is available in Asian market. Fuel: Shell offers a wide range of fuel. These are:* Hi-Octane* Super Unleaded* Super* Hi-speed Diesel* CNG
Lubricants: The various lubricants offered by Shell are:* Rimula C* Rimula D* Rimula X* Helix Plus* Helix Super* Helix Standard* Shell Helix (CNG)
Price: In order to capture the Asian markets Shell plc adopt Market Penetration price usually this strategy used when new company is entered into the market. Due to its low price it attracts number of customers and high market share. Strategies adopted by Shell plc in Asian market are: * Price of Competitor’s product
* Price premium for better servicePlacement: Shell plc has established a ‘Product Placement Council’, it makes contract with dealers concerning the placement of the product. Promotion: Shell plc has its own magazine ‘Spirit’. The types of advertisements which Shell plc has adopted in Asian markets are as follows: Informative Advertisement: It is a kind of strategy that builds a good image of product in the mind of the targeted customer.
Shell used this strategy when it launched its Shell Helix CNG oil in Asian market. Shell advertised through T.V., news paper, internet, billboard etc. Persuasive Advertisement: This is a kind of advertisement includes comparison among its competitor’s product. Features of these comparisons are purity, viscosity, efficiency and performance. CALCULATION AND INTEPRATION OF RATIOS:
REFERENCE 2Liquidity ratios: it means the ability of company to meet it short term obligations. Calculations:In MillionsDEC 31, 2011 SHELL PLC BP PLC Current Ratio: Current Assets = 119777 = 1.17 %97584 = 1.16% Current Liabilities 102659 84318
Quick Ratio: Quick Assets = 71034 = 0.69% 58125 = 0.69%Current Liabilities102659 84318Cash Ratio:Cash + M.S. = 11292 = 0.11% 14355 = 0.17%Current Liabilities102659 84318
Current Ratio| | 1.17%| | | 1.16%| | | 1.35| | | | | | | | | | | Quick Ratio| | 0.69%| | | 0.69%| | | 0.85| | | | | | | | | | | Cash Ratio| | 0.11%| | | 0.17%| | | 0.43| | | | | | | | | | |
According to the calculation Shell PLC and BP PLCappears to be good in paying off their debts out of their current assets. While quick ratio drawn the result that both companies are blow the standard of 1:1 but according to the calculation both companies are able to pay off their debts within a year. Cash ratios of both companies are blow the standard which is 5:1.
Profitability Ratios: refers to the amount of profit earned by the company.
In Millions Dec 31, 2011 SHELL PLC BP PLC
Gross Profit Margin: Gross Profit56195 11.95% 39817 = 10.60% Sales470171 375517Net Profit Margin: Net Profit 30918 = 6.58% 25700 = 6.84%Sales470171 375517
| | | | | | | | | | | | | | | | | | Gross Profit Margin| | 11.95%| | | 10.60%| | | 1.35| | | | | | | | | | | Net Profit Margin| | 6.85%| | | 6.84%| | | 0.85| | | | | | | | | | |
Calculation of Gross profit margin shows that Shell PLC has been earning more profit then BP PLC. Net profit margin of both companies shows its good performance after deducting expenses.
CONCLUSION:According to the calculations it seems to be both companies are of the same level but shell plc is doing little bit good performance. Both companies can easily pay off their outstanding debts out of their most current assets but they have much ideal money in their hands which could be used in further investments and more profits can be earned. Calculation of Gross profitmargin shows better performance of Shell PLC as compare to BP PLC. And the net profit margin of both companies is showing better performance.
RECOMMENDATIONS:Recommendations are based on the above analysis and identification of the primary and secondary objectives. Main steps of planning could be: * Establish objectives* Planning* Decide the approach* Implement* Review the progressFollowing are the recommended Financial Strategies for Royal Dutch Shell plc to meet its objectives: * Should reduce 1000 employees* Reduce product portfolio* Carry out business in those areas where oil producing is maximized The company shall continue to focus on reducing the market portfolio and selling non-core activities to maintain price sustainability. REFERENCE 3 *
* The company shall use core financial competencies mentioned above to implement these strategies such as use retained profits to invest in improving the quality of manufacturing marketing. Following are the recommended Marketing Strategies for R