I- Organizational Direction: Mission, Goals, Objectives
The objectives of Royal Dutch Shell are to achieve efficiency, responsibility and profitability in oil, gas and other related businesses and to take part in research activities and developments of new sources of energy to meet the world’s demand for energy.They believe oil and gas will be important to meet that demand for energy for years to come, and most of their investments are directed to oil and gas technology research; investing in ways to increase productivity. Their main objective is to deliver oil and gas products profitably, while maintaining a strong position in the world market for oil and gas, a very competitive environment in which a small number of players compete for the diminishing supply of these key commodities.
II. Relative Industry Position – Including financial analysis and firm-level strategy
Royal Dutch Shell is a global company involved in all the key aspects of the oil and gas industry and also to some degree involved with other energy related businesses, such as green energy. The company principal focus inside the oil industry is in three different segments: Upstream, Downstream and Corporate.
Upstream are those activities that have to do with the search and recover of oil and natural gas, the transformation and transportation of those and other commodities, such as energy produce from wind mills. Downstream are those activities related to the manufacturing, distribution and marketing of energy products, and Corporate includes supportive roles within the organization, such as accounting, finance, human resources.
Shell is a major player inside the oil industry; they are a close second to Exxon Mobil, the biggest private owned oil company in the world. Shell has proved reserves in the amount of 13.9 billion barrels of oil equivalent, and most of that oil is produced in the US, UK, Oman and Nigeria, which gives us a glimpse on how global the company is.
The company invested a lot of resources in the Athabasca Oil Sand Project in Canada, and they are currently expanding their operations there, a place regarded as the new frontier in oil and gas, and that offers good prospects for companies that have the financial backing to invest in such expensive projects.
Shell owns 42,000 gas stations globally, which makes it the largest retail-fuel network in the world, which helped the company to achieve revenues of $405,158 million for financial year ended December 2011, an increase of 15.2% over the fiscal year 2010. The operating profit of the company was $46,296 million during fiscal year 2011, an increase of 48.3% over fiscal year 2010. The net profit was $26,258 million in fiscal year 2011, an increase of 58.3% over fiscal year 2010.
III. Company Strengths and Weaknesses
As one of the oldest and most successful oil companies in the world, Shell has a extensive amount of investments in oil and gas exploration, which will help secure the company’s position as a global leader in that area for decades to come. By diversifying their energy portfolio into alternative forms of energy like solar, bio-fuels and hydrogen, Shell is protecting itself from changes in market dynamics by being less dependable in fossil fuel resources. Another benefit of this alternative energy strategy is that as “green” initiatives become of increasing concern for the general public, Shell can capitalize on that for marketing purposes.
As the company is expanding their worldwide operation to include fuel cards, credit cards, full service convenient stores, and partnership programs like the one implemented in the Netherlands to assist local tomato farmers with CO2 supply, Shell is building a wide portfolio of products and services from which to launch a more risk-averse global strategy.
Shell is a pioneer in forecasting activities, and the company is well known for their planning capabilities, which results in a company that can successfully adapt to the rapid changes in the supply and demand dynamics of the oil and gas markets, and reputation wise, Shell is usually regarded in a “good light” when compared to other industry leaders like BP and Exxon, companies that are often time portrait as villains.
Shell might be one of the most successful companies in the world today, but in an ever changing business environment where commodities prices go up and down without a notice, no one is impermeable to weaknesses, including Shell. Since fossil fuels are not renewable, Shell needs to be constantly looking for new supplies of this ever diminishing natural resource, which is expensive and comes without guarantees.
Shell is present in many unstable countries like Libya and Nigeria, which exposes Shell to risks; anytime a multinational company operates in unstable countries, the threat of nationalization is present, which usually results in big losses for the company that invested in those countries. Also, political changes are more likely to occur in unstable countries, and sometimes those changes come with revisions in exploration contracts, with the new political party in power wanting to set new rules or simply voiding existing contracts, and this can cause harm to production obligations that Shell has with its partners, which brings in even more uncertainties to these types of investments.
The “green initiatives” that the company claims to be pursuing clearly have some flaws, such as outdated exploration techniques that produce many times the amount of by-products and pollution than updated techniques, and revisions in some alternative energy projects, such as the withdraw from the wind power generation project near Blackpool (UK), have raised some questions about Shell’s commitment to “green initiatives”. Environmental groups are on the offensive, especially after the Deep Water Horizon oil spill (also referred to as the BP oil spill) in 2010, and companies that don’t have a clear proposal for the environment carry the risk of becoming villains when it comes to public perception.
IV. Company Opportunities and Threats
Oil and gas reserves might be diminishing, but they are by no means extinct, and proven reserves are still out there waiting to be explored. Shell is in a good position to explore those resources, especially in less developed countries that are just now entering the radar of big oil companies. A good example of that are countries like Libya and Iraq, places that used to be too risky to operate in, but that are increasingly becoming more business friendly.
As emerging countries like India, China and Brazil grow economically, the demand for fossil fuels also grows, which sends the price up and helps Shell in achieving record profits. Investment diversification is important, and Shell’s position as an alternative energy investor have a good chance of creating new business opportunities one day, when the price of fossil fuels becomes too high for consumers. Also, when these alternative energy investments are aligned with environmentally friendly initiatives, as it is often the case with Shell; environmental groups receive those actions positively, and become less critical of the environmental impact of other exploration processes.
For every opportunity presented to Shell, there is also a threat, for instance, fuel prices have been especially volatile in the last few years, they rise very quickly, but also falls very quickly, and this poses a challenge for companies that depend on supply contracts to survive, because the more price fluctuation there is, the more expensive it gets to meet demand, because the company needs to pay for inventory buildup and maintenance, reducing profit. The threat of nationalization, when a country takes ownership of a private company’s asset, is very real, and Shell has suffered from it already in Nigeria, where a site on the Niger Delta was taken by the Nigerian Government.
The recent economic downturn that started in 2008 decreased the demand for fossil fuels from developed countries, and adding to that, changes in habits and better fuel consumption technologies in cars in recent years also have affected the demand for fossil fuels, because the better the fuel consumption technology gets, less fossil fuels are needed for transportation. Other threats have to do with extreme weather, strikes and negative publicity.
Every time a hurricane happens in the Gulf of Mexico, for example, oil rigs and refineries that operate in the region are at risk of being damaged, causing substantial interruptions in production. And finally, environmental, public outrage over gas prices and strikes, like the one that happened in 2008 when several oil tanker workers stop working for a week, results in negative publicity for Shell, causing harm to its image.
V. Identify at least 2 alternative strategies
Oil production in 34 out of the 47 oil producing countries has reached its peak, meaning, the world is running out oil, and fast. By some estimates, by 2014 the world as a whole will have reached peak, and for that point on oil production will decrease substantially year by year, until all the resources are depleted. So Shell needs to be prepared for when that happens.
They need to start investing more money in alternative energy sources, in a way that in the future, when the time comes, they will be part of the transition from fossil fuels to new types of energy. With the distribution network Shell has in place right now, they are in a great position to capitalize the opportunities this transition will generate, but more investments need to be placed in research and development. With the major increase in the price of oil in the last few years, Shell has experienced an unprecedented inflow of record profits, and investing part of that money in the research and development of alternative energy sources will assist Shell in achieving a place among the big energy companies of the future.
Another alternative strategy for Shell would be to expand their present in non-traditional oil exploration, like the oil sands in Canada and in offshore oil production. Shell is lagging behind some of the other industry leaders when it comes to exploring those two new frontiers of oil production, and the future of oil exploration certainly lies with those companies that have the expertise to produce oil from these non-traditional ways.
By some estimates 95% of all the recoverable oil on earth has now been found, and all is left to be discovered are the hard to get oil reserves, like the oil sands in Canada and deepwater wells. And the companies that can get to the last 5% will be awarded with the last drops of this valuable economic resource.
VI. Evaluate each strategy
Investing money in alternative energy sources can be very expensive and unproductive, especially when Shell can invest money in expanding their current oil and gas business; an industry that has generated record profits in the last few years and is expected to generate even greater profits in the years to come.
Channeling that money to alternative energy sources means Shell has less money available to compete with its rivals in the exploration of current oil assets. On the other hand, not being prepared for when the world runs out of oil can be catastrophic for Shell, and although alternative energy investment might not generate good returns in the short term, in the long term it should guarantee the very existence of Shell as an energy company.
The second strategy, investing money in non-traditional oil exploration, has a huge upfront cost and a even greater barrier to entry, because there are companies that are already involved in those types of exploration and that are expert in what they do, and for a traditional company to rival them would be hard, because they already have the ownership over those assets and above all, they have the know-how in place. Further, the margin of profit in non-traditional oil exploration is substantially smaller than traditional oil exploration, by some estimates, is costs on average 40% more to produce a barrel of oil in a non-traditional way, than on a traditional one.
VII. Recommend favored strategy and how to implement
The favored strategy is definitely to increase investment in alternative energy sources, even if Shell needs to sacrifice short term profits. What is to be decided here is the very existence of Shell as an energy company in the future, and by diversifying their energy portfolio they will be better protected against the fluctuations in the energy market dynamics for years to come.
By developing new energy sources, Shell will have a competitive advantage against their rivals when it comes to technological expertise, and it might give the company a head start in the future, similar to the one Apple experienced when it launched its Ipods and Iphones; they were so ahead of their competitors that by the time the rivals had the technology to produce similar products, Apple was a step ahead, and able to produce yet another innovation, the Ipad.
Shell can achieve a similar accomplishment in the future, especially if they integrate the development of new energy sources to their other business, like transportation, which would help the distribution of future energy solutions to customer from all over the world. Implementing this alternative energy sources strategy using vertical integration will help Shell to control all levels of production, from raw materials to retail sale, which lowers the price of the energy product for the end consumer, and increases the profit margin for Shell.
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