Shell is a global group of energy and petrochemical companies. Its headquarters are in The Hague, the Netherlands. It was founded in 1907. The parent company of the Shell group is Royal Dutch Shell plc, which is incorporated in England and Wales. They have around 93,000 employees in more than 90 countries and territories. The company has worldwide proved reserves of 14.1 billion barrels of oil equivalent. The company operates 43,000 gas stations (the world's largest retail fuel network). Shell produces refined products and chemicals at 30 refineries, transports natural gas, trades gas and electricity, and develops renewable energy sources.
Shell helps to meet the world's growing demand for energy in economically, environmentally and socially responsible ways. Shell Oil Company is the United States-based subsidiary of Royal Dutch Shell, a multinational oil company ("oil major") of Anglo Dutch origins, which is amongst the largest oil companies in the world. Approximately 22,000 Shell employees are based in the U.S. The head office in the U.S. is in Houston, Texas. Shell Oil Company, including its consolidated companies and its share in equity companies, is one of America’s largest oil and natural gas producers, natural gas marketers, gasoline marketers and petrochemical manufacturers.
Shell is the market leader through approximately 25,000 Shell-branded gas stations in the US which also serve as Shell's most visible public presence. Shell Oil Company is a 50/50 partner with the Saudi Arabian government-owned oil company Saudi Aramco in Motiva Enterprises, a refining and marketing joint venture which owns and operates three oil refineries on the Gulf Coast of the United States. It also holds 80% of an exploration firm called Pecten that explores and drills in various offshore locations including the oil basin near Douala, Cameroon in cooperation with the French government-owned Elf Aquitaine
Shell has five core businesses: * Exploration and production (the "upstream"). * Gas and power, refining and marketing (the "downstream"). * Chemicals, trading and shipping.
IDENTIFYING RELEVANT INDUSTRY FACTORS
1- Market Size and Growth Rate
It is the fifth-largest company in the world (and the second-largest energy company) according to a composite measure by Forbes magazine and one of the six oil and gas "super majors". In 2010 its revenue was $368.056, its show the maximum market share. Shell has grabbed the market and gets the opportunity because of the demand. The year 2011 started well, with the start up of new LNG at Qatar gas 4, and the restart of refinery catalytic crackers at the Port Arthur at end-2010 and at Pernis in February 2011.
These projects, combined with the expected 2011 start-up of Pearl gas-to-liquids in Qatar, and new oil sands upgrading capacity in Canada, underpin Shell’s production and financial growth targets for 2012. Because of all these opportunities, shell grab’s its customer attention and get the maximum market share.
Comparison with its Competitors:
Shell: The oil sector accounts for about 13.3 per cent of FTSE 100 in the UK. SHELL is one of the largest players in this sector. Shell’s Crude oil production in 2000 stood at 2,274 thousand barrels per-day .Shell's Natural gas production available for sale at 8,212 million standard-cubic-feet per-day .Shell's oil product sales at 5,574 thousand barrels per-day.
BP: BP's crude oil production in 2000 stood at 1,928 thousand barrels per-day, Gas production at 7,609 million cubic-feet per-day.
Total: Total’s crude oil production at 3,240 thousand barrels per-day. Gas sales at 14,471 million cubic-feet per-day.
Exxon-Mobil's liquids production in 2000 stood at 2,600 thousand barrels per-day Exxon-Mobil's natural gas production available for sale at 10,300 million cubic-feet per-day Exxon-Mobil's refinery throughputs at 5,600 thousand barrels per-day Exxon-Mobil's petroleum product sales at 8,000 thousand barrels per-day.
Shell at growth Stage:
Shell has wide range of industries in all over the world such as in Belgium, Netherland, Hong Kong, United Kingdom, Denmark, Canada, Indonesia, and also in various other countries. Shell is at growth stage because:
* Shell is widening its industry into various other countries such as Belgium, Netherland, Hong Kong, United Kingdom, Denmark, Canada, Indonesia, Pakistan it has become established in these countries. * It has growing number of customers.
2- Buyer needs and requirements In shell the customers’ comes first. In 2010 shell was ranked as 2nd in production and in revenue because of catering its customer demand and innovation. It continuously seeks to provide products with outstanding quality at a reasonable price to satisfy their customers' needs. Shell is continuously investing a lot in its research and development department to cope up with the rapid change in technology and to enhance the quality of its products to satisfy its customers. Shell mainly focuses on providing quality products to satisfy its customers. Shell involved in two business activities Business to consumer
Business to business The customers are the individual person who use fuel for their vehicles to move on and other business are like transport companies or industries who need fuel to run their operation .And it is full filling both need with its quality products. Shell’s differentiated fuels are used in more than 40 countries to meet the individual needs of its customers. Different products are there for different needs of customer like: * Air Compressor oils = Shell Corena
* Bearing & Circulating oils = Shell Morlina * Gas Compressor oils = Shell Gas Compressor Oil * Gear oils = Shell Omala * Grease = Shell Gadus * Hydraulic oils = Shell Tellus * Motorcycle oils = Shell Advance Shell specialists ensure that the full requirements of every application are thoroughly understood. Product and service recommendations are based on an integrated understanding of the interaction between the equipment, customers, its operating characteristics and the lubricant to ensure they are well matched for optimum efficiency.
3- Production Capacity: The petroleum industry is overcrowded because of its huge competition. The main competitors are: * Total * Exxon * Saudi Aramco * British petroleum * Local competitors They have competitive advantage than other because of their reasonable price,quality and innovative technology
4- Pace of Technology Change: New technologies mean new innovations for shell. The pace of changing technology plays a very important role in petroleum industry. Industry players like Exxon and total have advance technology but shell has competitive advantage because of: Innovation is the foundation for shell's new technology concepts. Shell has introduced advance environmental technology products: * Shell Thermo plusBio10
* Shell Fuel Oil Plus * Shell is working to help meet the world’s rising demand for energy. Advanced technology is helping them unlock new energy resources and squeeze more from existing oil and gas fields. * New drilling technologies and techniques have extended the reach of wells to more than 10 kilometers. They have developed snake wells that are horizontal and can turn corners to asses’ small pockets of oil * Shell has also designed special metal casings called expandable tubular that help them to build longer wells. * Shell’s Smart Fields® technology integrates digital information systems with the latest drilling, seismic and reservoir monitoring techniques to better manage our operations.
5- Vertical Integration Shell is vertically-integrated and is active in every area of the oil and gas industry, including from initial search for oil (exploration) through its harvesting (production), transportation, refining and finally trading and marketing.
6- Product Innovation Shell developed more efficient fuels and lubricants that help their customers to go further on less.
Lubricant: Energy-efficient lubricants for vehicles improve fuel economy. Shell Rimula R6 LE is the latest lubricant. It reduces friction in the engines of trucks and buses, leaving a protective coating on engine parts.
Fuels: Cleaner engines with less friction are more fuel efficient. Their scientists have developed an advanced fuel economy that better prevents the build-up of engine dirt, reducing friction and raising fuel efficiency.
Home heating products: Shell Thermo Eco-Ultra is their Home Heating product designed for lower fuel consumption and cleaner burning. When you use it in a modern condensing boiler, it can reduce CO2 emissions by 30%
Shell from time to time produces new products for its customers. It invests a lot in its research and development department to produce innovative products for its customers.
7- Degree of product differentiation As in oil industry the main products that all the companies provide are same. But shell differentiates its product on the basis of its quality and innovation. It also provide value added services like Gas and fuel cards, Route & journey planner and Gas and petrol station locator etc. They work to deliver cleaner burning and more efficient fuels. Their products and services are also designed to meet the needs of businesses from the construction industry to aviation, chemicals to shipping.
8- Core Competencies: The Shell is one of the largest and oldest firms operating in the petroleum industry. Shell has five core businesses: exploration and production (the "upstream"), gas and power, refining and marketing (the "downstream"), chemicals, and trading and shipping.
9- Economies of scale The cost advantage is that a business obtains due to expansion and due to its vertical integration. Shell has achieved its economies of scale for their customers in terms of quality and by performing its scenario analysis in 1980, but not in terms of cost because the cost of oil and lubricants is regulated by the government.
Comparison with its Competitors: Saudi Aramco’s: Saudi Aramco’s access to the world’s biggest and most accessible oil reserves give it an unassailable cost advantage over Shell, Exxon Mobil, whose production costs per barrel are at least three times those of Saudi Aramco.
ExxonMobil: With the competitive advantages of superior products, global scale, rapid deployment of best practices and focused marketing strategies, ExxonMobil Fuels are a formidable competitor in the dynamic marketplace.
10- Experience and learning Curve:
Shell is one of the mature companies which keep on learning from its experiences and bringing innovations in its technologies to meet future needs. Shell is opening up new energy resources and squeezing more from existing resources to help power the world's economies through its previous experiences and advanced technology.
1. Government stability When the government is unstable then it affects the oil companies adversely. World energy markets are becoming more volatile due to the threat of geopolitical instability. As far as SHELL is concerned, there has been government stability issue when it comes to countries like IRAQ and other OPEC countries where war has been going on for long but the rest of the countries it operates in experienced no such big off an event. As in UK the government is stable and supporting the oil industry and reducing trade barriers which helps to flourish the business. Taxation policy:
UK government's imposed £2 billion tax raid on the UK North Sea oil and gas industry recent year's Budget. Companies will now be taxed at between 62-81% on their UK oil and gas field profits. Industry body Oil & Gas UK claimed that it will decrease investment, increase import, high prices, and low demand, make travel and shipping more expensive, lower growth, low labor supply and drive UK jobs to other areas of the world.
2. Foreign trade regulation: Foreign trade regulations consist of tariffs, quotas, embargoes and export subsidies. This affects the decision making and sales of the company by creating hurdles in trade between two countries.UK trade consists of the movement of goods and services within the European Union (EU), of which it is a member, and to non-EU countries. International trade in the UK is assisted by UK Trade & Investment (UKTI). This government organization focuses on enhancing the competitiveness of UK companies through overseas trade and investments. It also aims at continuing to attract high-quality foreign direct investment (FDI).
Government, European Union, International laws, trade legislation all affects the way a company conducts business. For example the US, UK and Europe placed an embargo on trade with certain countries such as Iraq, which is rich in oil supplies. Therefore Shell is unable to extract, supply, or operate any kind of business operations in Iraq. Should Shell have any intentions to develop market growth strategies into this region such restrictions would impact the company’s business plan and Shell should neglect this as a possible objective.
1. Gross domestic product (GDP) It refers to the market value of all goods and services produced within a country in a given period. The Gross Domestic Product (GDP) in the United States contracted is 1.30%
Oil prices can be increased and it will also increase the price of other products.Shell stoked up the heated debate about the high cost of fuel on the forecourt today, after reporting it made profits of nearly 1.6m an hour over the last three months.
2. Interest Rates: The interest rates effect Shell that it increases the cost of the products. The interest rate of U.S.A is 0.25%. The Graph shows the fluctuation in the interest rate of U.S.A.
3. Inflation Rate:
The inflation rate in United States was 3.8 %t in January of 2011. The diagram below shows the inflation rate from year 2008 to 2011.
* In 2011 inflation increased which also increased the oil prices. * The demand or consumption of oil decreases with increased price of products and inflation rate.
4. Unemployment: In 2011 the unemployment rate in U.S.A is 9.1%.This highly effect on Shell, because as the rate of unemployment increased the purchasing power of people decreased and this effected on the consumption of oil. Because of the unemployment people don’t have that much income to spend and they only focus on the basic commodities to full fill their needs. This decreases the sales of petrol and other products which affected the oil industry badly. The graph shows the employment rate:
5. Disposable income: As the inflation rate increases the disposable income of UK citizens is decreasing year-on-year. The average family had £174 a week left to spend after meeting all of their essential outgoings, down from £183 due to inflation. If the disposable income decreases people will automatically stop spending on other luxury products, lessen their travelling which affects the sales of Shell. As we have seen the profit of Shell were reduced after the inflation.
6. Consumption based economy: The UK economy is more a consumption based economy. The more emphasize is on individuals not on family system. Because of which they don’t save more and spend on their own luxury and require cars which have larger engine sizes and therefore consume more petrol, enjoy more travelling and racing cars activities. Also the emergence of electronic money made the UK economy more consumption based as it allows customer to spend before although they don’t have need for the product.
Social and Cultural Factors:
In UK the income distribution is equal then other countries and they have usually small families. Both male/female earn for the family so they have enough to spend on the luxury items. So they purchase quality and costly products for their cars and consume more petrol by travelling.
2. Income distribution:
In UK the income distribution is equal and they have good pay packages. The companies also provide with the facility of fuel cards. This affects Shell positively by increasing the sales. 3. Life style Trends:
Lifestyle for example in the UK they possess are more luxury lifestyle and require cars which have larger engine sizes and therefore consume more petrol. People are more concerned about the quality of the products they are using for their cars and as well as people in these countries use petrol in their vehicle rather than CNG.
4. Attitude to work:
Shell has started its functions in different countries because: * The wage rates are less * More opportunities to grab the market share * People are devoted to their work * People are agree to work for more than 10hrs (the people of these countries has less job opportunities that’s why they are agree to work for longer period) * Low taxes and quotas * Flexible regulations
5. Level of education:
UK population consists of a large number being educated people they will have different preferences towards a more healthy society and ethical environmental issues will determine their requirements. They focus on quality products for their cars and for safe environment so they prefer Shell which provides best products for them. Shell has mostly educated customer and the advantage is that they can understand the innovation, alteration and modification as well they easily adopt the product.
Shell has operated its functions more than the 90 countries and the most countries are new develop as well the labor has ability to learn new skills. Educated labor has vital role in the development of Shell because they can handle the advance technological machineries as well they can generate the innovative ideas as well services.
1. Government Focus: UK Governments have been supporting the expansion of the oil industry in one form or another for many years. They encourage the oil companies in research sectors and provide funds. They also introduce policies to save fuels for future. As petroleum sector is providing government with good revenues.
2. Speed of technological change The oil industry is rapidly adopting the technological changes. Shell is the largest investor in research and development among the major international oil firms. In 2009 Shell spent nearly $1.2 billion on the research and development of technologies that are used to produce: * More and cleaner energy
* More efficient fuels and products for our customers * Cost savings on labor, storage, payments and time. * Saves time as it is being a crucial element in business terms. * Sales and stocks are easily monitored, recorded and reported faster and easier. * New drilling technologies and techniques have extended the reach of wells to more than 10 kilometers.
Innovation is always being the foundation for shell's new technology concepts. Shell was the first one to introduce advance environmental technology products like Shell Thermo plusBio10 & Shell Fuel Oil Plus. The new methods of exploring and extracting the resources are taking over rapidly. Traditional handling of pumps at the gas stations is replaced by digital handling. But still the technology obsolesce rate is low in oil industry as compared to other industries.
There are many laws related environmental issues in U.S.A:
Clean Air Act (1970):
Sets goals and standards for the quality and purity of air in the United States. By law, it is periodically reviewed. A significant set of amendments in 1990 toughened air quality standards and placed new emphasis on market forces to control air pollution.
Clean Water Act (1972):
Establishes and maintains goals and standards for U.S. water quality and purity. It has been amended several times, most prominently in 1987 to increase controls on toxic pollutants, and in 1990, to more effectively address the hazard of oil spills.
Shell, set up operations in the 1950s and since then, the land, water, and air has been polluted to such a great extent that the Ogoni people livelihood was threatened. After more than thirty years of Shell Oil threatening their way of life, the Ogoni people finally organized and began to protest. After that Shell had decided that the political unrest and bad press was not worth the effort and pulled out of Ogoniland. After the incident Shell emphasizes on environmental legislation, government permission and licenses. Shell try’s to follow the bureaucratic procedures and apply for licenses and permission from the government’s authorities before they can perform any drilling in the search for natural resources, such as fossil fuels.
As environmental issues are major concern for companies like Shell since their business is reliant on natural resources. Because materials such as oil cannot be replaced once used up. These materials are of limited supply. The burning of oil gives off harmful emissions and damages the environment.
1. Competition law: The competition laws which Shell is considering: * Shell company and in every Joint Venture company under control must follow the laws. * We seek to compete fairly and ethically and within the framework of applicable competition laws; we will not prevent others from competing freely with us. * Shell companies act in a socially responsible manner within the laws of the countries in which we operate in pursuit of our legitimate commercial objectives.
* Shell companies do not make payments to political parties, organizations or their representatives. * Don’t proceed with an import if there is any doubt about its legality * Don’t get involved in any aspect of business with a country that has been sanctioned by the country of your nationality or citizenship * Don’t attempt to take restricted goods into a country without properly declaring them to the Customs authority. * Don’t attempt to import prohibited goods.
Main legislations regarding competition laws are:
* Competition Act 1998 * The Fair Trading Act 1973
2. Health & safety:
The health and safety procedures Shell using are: * Shell aims to do no harm to people and to protect the environment. You should treat others fairly and with respect. * In our downstream business we invested $1 billion in 2010 alone to improve the safety and reliability of our refineries, chemical plants and distribution facilities. * Procedures for making immediate reports of workplace injuries, unsafe work practices or conditions, or any other type of safety environmental hazard. * Shell has proper working environment in which employees can work for long time. * Shell has proper medical allowances as well health insurance of their employees * On their petrol pumps they don’t allow their workers to work more than 9hrs.
Main current legislation covering the downstream oil sector is:
* Control of Major Accident and Hazards (COMAH) regulations 1999. * Health and safety legislation (including licensing of petrol stations).
3. Employment law:
Shell has 93,000 employees in more than 90 countries. And the employment law varies from country to country differences such as wages, health and safety standards, redundancy policies etc.
Potential strengths: * Investment in exploration * Research in biofuels * Diversification in products * Use of scenarios for future * Reputation Potential internal weaknesses: * Search for replacement supplies * Environmentally unacceptable activities
* Political situation in Nigeria * Commitment to alternate requirements
Potential external opportunities: * New oil and gas reserves found. * Moving across rich areas in reserves. * Relationships with environmental groups. * Emerging economies. * Diversification into new products. Potential external threats: * Fuel prices * Political issues in Nigeria * Oil tanker strikes * economic downturn * Weather DRIVING FORCES:
Are the driving forces causing demand for industry’s product to increase? Growing use of internet will increase the demand for products because more and more people will purchase products online. The shell company will grow more and more so it will operate in more and more countries so demand will be more. The industry growth rate will either decrease or increase the demand because if it grows demand will be more but demand will decrease if it decreases. Take the example of Pakistan where CNG has overtaken the oil industry. Product innovation like Caltex has brought oil which cleans the engine so this is a new product and the demand will be more and more.
This depends on the driving forces. The marketing innovation such ads can have effect on the demand of products. When majors firms enter there is demand for their products because they bring something new. So when they leave the demand for products of remaining firms increases. When there will be changes in cost efficiency then there will be more demand because the customers will get other items on less cost so if you are providing in our case if shell is providing products which are cost efficient so there will be more demand for products. When more and more firms will enter the market and when risk of doing business decreases there will be competition and demand for products of new oil companies will increase.
The demand of products of shell will decrease a little because of other companies entering the market.
Are driving forces making competition more intense or less? Growing use of internet will make the competition more intense because companies selling on the internet will be more profitable. The shell company l will grow more and more so it will operate in more and more countries so the competition will be more and more intense. The industry growth rate will either make competition strong or weak if the industry is growing more and more companies will invest and they will try to give shell a tough time. Product innovation will make competition more intense because this depends on the driving forces.
The marketing innovation such ads can have effect on the demand new companies will come with more new and advanced products. When major firms enter there is intense competition. New firms coming will increase competition till they survive. If they fail and leave the competition will decrease .When there will be changes in cost efficiency then there will be more competition because the customers will get other items on less cost so if you are providing in our case if shell is providing products which are cost efficient so there will be more competition when more and more firms will enter the market and when risk of doing business decreases there will be competition.
Will driving forces lead to higher or lower industry profitability? Growing use of internet will lead to higher profitability because companies selling on the internet will be more profitable. The shell company will grow more and more so it will operate in more and more countries so the profitability will be more and more intense. The industry growth rate will either make profitability more or less because if the industry is growing more and more companies will invest and they will try to give shell a tough time. In the beginning the profitability will be less because there will be competition.
Everyone will be looking to be the best so they will lower their prices. Product innovation will make profitability less in the beginning because few customers will use the product in the beginning. When they use and when they feel it is well enough then they will buy it more often then profitability will increase. Advertisements and other marketing concepts can increase profitability because if those ads are attractive enough then people will buy the product but these ads cost a lot so the profitability achieved will be to overcome the cost lost in these marketing ways. When major firms enter there is intense competition.
New firms coming will increase competition till they survive so the profitability will decrease .When there will be changes in cost efficiency then there will be more less profitability in the beginning because the customers will get other items on less cost so if you are providing in our case if shell is providing products which are cost efficient so there will be less profitability because the prices are very low. when more and more firms will enter the market and when risk of doing business decreases there will be less profitability
ANLYZING THE NATURE AND STRENGHT OF COMPETITIVE FORCES:
1-Rivalry intensifies more frequently and more aggressively industry members take actions to boost market standing:
a) Marketing Tactics Promotion “Advertising is any paid form of non-personal presentation and promotion of ideas, goods or services by an identified sponsor.” Objective of Advertising: Shell Shell adopts the same strategy. It advertises both on electronic and print media to keep its customers well informed. The company has also started a magazine named “Spirit” to promote its products. Kinds of Advertisement:
There are different kinds of advertisements which a company may adopt during the PLC. Shell also requires advertising its products in order to create awareness about the new or already existing products. The types of advertisements which Shell has adopted are as follows: Informative Advertisement: “The type of advertising which is done during the introduction stage of a product is known as informative advertising.” Shell adopted this strategy when it launched its Shell Helix CNG Oil.
It adopted all kinds of media to inform the public about the new product. Shell advertised through Television, News Papers, billboards, etc to build a good product image in the minds of the customers. Persuasive Advertising: “The advertising done to compete with the competitors and to create more demand of the product in comparison to the competitor’s products, is known as persuasive advertisement.” Shell also adopts such strategy to compete with its competitors. Comparison features include purity, viscosity, efficiency and performance. The different kinds of media used by Shell are:
* Television * Radio * Internet * Telephone Service * Newspapers * Magazines (Shell has its own magazine “Spirit”) * Billboards Viral messages Refer to marketing messages that are passed from person to person through their Social Networks. Shell uses emails for viral message and marketing by offering customers gifts. A new marketing campaign by oil giant Shell focuses on green driving and ways to reduce the environmental impact of motorized vehicles. SHELL promotion expert suggests the strategy has been developed in response to problems experienced by BP, which has lost almost half its value since the drilling rig explosion and is often considered to have fought a difficult public relations battle. Writing in Marketing Week, Joe Fernandez notes this marketing campaign is Shell's biggest for a decade.
"The brand wants to disassociate itself from the aftermath of the Gulf of Mexico oil spill, which has affected rival BP badly and threatens to taint other oil companies by association," Customer loyalty may be the focus of the tactic, as fuel hikes and negative publicity surrounding the fossil fuel sector may have caused client attrition.
b) Strong dealer networks Shell has some 300 distribution facilities and more than 3,000 storage tanks in around 70 countries. They move products through Europe and the USA through 9,000 km of pipeline. Their global fleet of around 7,000 Shell-owned or contracted trucks travels over 1.7 million km every day and makes a delivery somewhere in the world every seven seconds. The distribution network of Exxon is still stronger than Shell, it has 11000 fleet as compared to Shell’s 7000 travelling around 3.9 million Km every day. Exxon has around 650 outlet distribution facilities more than double of Exxon. The global supply chain and the worldwide presence of Shell are exhibited in appendix B, which shows the rampantly growing market of Shell around the globe.
c) Product innovation The three basic goals of shell include Innovation, Groundbreaking technologies and Emerging technologies. Energy efficient fuels and lubricants are being developed. * Developing valuable expertise
* Alternative fuel * The Shell has implemented the methodology to use the enzymes eating straw, oil squeezed from algae, and wood chips turned to liquid. Shell is pursuing all of these in the development of better biofuels that could see CO2 reductions and a sustainable alternative fuel source that does not compete with food crops. * Managing Emissions
* They are committed to preventing spills from happening and to containing and properly cleaning up any spills that do occur. They have been working hard to reduce the emissions of local pollutants – like NOx, SO2 and VOCs – from their operations.
2-Rivalry intensifies as number of competitors’ increases and becomes equal in size and capability.
The main competitors of SHELL are * BP * EXXON * CHEVRON * MOBIL These companies are satisfying the same customer need with same efforts by bringing new innovation in their process and it has also captured the market share so the competitors are giving a tough time to SHELL. Although local competitors are sometimes giving tough time to shell.
3-Rivalry is usually weaker when there are less than 5 competitors or else so many that impact of one company’s action speed thinly across industry. The level of competition with Shell is very high as the competitors are very strong. Shell has main competitors as well as the local competitors. As they are more preferred in their country. The diagram below shows the differences in the companies:
| Shell| BP| Exxon| Chevron| Fiscal Year-End| December| December| December| December| 2010 Sales | £244,437.4| £195,565.1| £247,714.0| £132,465.5| Year Sales Growth| 32.6%| 24.0%| 23.4%| 19.4%| Net Income| £13,010.1| £2,404.0| £19,689.3| £12,297.1| Year Net Income Growth| 60.8%| 42%| 58.0%| 81.5%| 2010 Employees| 97| 79,700| 83,600| 62,000| Year Employee Growth| 99.9%| 0.7%| 3.6%| 35.1%|
Rivalry is usually stronger in slow growing markets and weaker in fast growing markets Oil and Petroleum industry has slow industry growth rates and high exit barriers rate. For a period of almost 20 years, no new refineries were built in the U.S. Refinery capacity exceeded the product demands as a result of conservation efforts following the oil shocks of the 1970s. At the same time, exit barriers in the refinery business are quite high. The level of rivalry is strong with Shell between less numbers of players in industry.
Rivalry increases when products of rival seller become more standardized and which switching cost from one brand to another is low. In petroleum industry all players have similar product to offer to people from the same segment that is fuel or petroleum products. They differentiate themselves in little what they do like customer services and the efficiency of fuel. Overall they target one or the same. It won’t cost any switching cost for a customer to get the engines filled from any station. May be if petrol station of some other brand is near could have low switching cost.
POTENTIAL ENTRY OF NEW COMPETITORS:
1) Pressure of sizeable economies of scale in production or other areas of operation: Many of the large oil companies merged to improve economies and scale of production, as a hedge against the volatile crude oil prices, and to reduce the overly large reserves of cash by reinvesting. Amoco and BP merged in 1998, Mobil and Exxon in 1999, Petrofina and Total in 1999, and then with Elf Aquitaine in 2000. Texaco and Chevron merged in 2001, Phillips Petroleum and Conoco merged in 2002.
The findings suggest that thesemergers generally reduce costs by eliminating redundant facilities and personnel.The mergers increased the product and service offerings and thus strengthened the economies of scale of merged firms. All the big firms including Shell have achieved economies of scale in petroleum industry that it’s very difficult for any new firm to enter into the international level. Many companies may entre but on local level only.
2) Low unit cost because of learning curve effect or experience: All the major players in the petroleum industry have reached to a point where their fixed cost has dropped down to some extent. They have been in these industries for decades, and have achieved economies of scale. These giants have well established their feet and are still grabbing the best possible opportunities so it would be difficult for new players to enter into market.
3) Brand preferences and customer loyalty. Brand preferences would depend on the image and product quality of brand to its customers. Customer who wants efficient fuel would prefer the existing companies over new entrant. Basically a relationship based on loyalty has developed between consumer and firm and once the firm succeed to maintained these relationship it would create difficulty for new entrant. Loyalty based programs or benefits are also offered by the companies to its customers to acknowledge them. And Shell emphasizes to maintain the quality of its products.
4) Capital Requirements In petroleum industry the capital investment is high so new entrants will have difficulty raising the capital needed to start such a large corporation in order to meet the existing competition of such big oil companies. The need for specialized equipment, employees, land will cost a lot. 5) Access to distribution channels
Infrastructure, such as logistics and transportation that Shell already acquires is vast spread and took years to build. All the distribution channels are highly expensive and well established. New distribution channels are difficult to establish. It is difficult for new entrant to get access to these channels.
6) Regulatory Policies: In U.S.A the regulatory policies are very strict regarding taxes and operational activities like Environmental, Exploration, health & Safety, Production issues have strict regulations to be followed. Which may create hurdle to entre in the industry if the firm entre in that country. But the firms competing with Shell are mostly not U.S.A based. Like Saudi Aramco is Saudi based company.
COMPETITIVE PRESSURE FROM SELLERS OF SUBSTITUTE PRODUCTS
1) Whether substitutes are readily available and attractively priced. Substitutes for the oil industry in general include alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even nuclear energy. Remember, oil is used for more than just running our vehicles; it is also used in plastics and other materials. When analyzing an energy company it is extremely important to take a close look at the specific area in which the company is operating. By the emergence of CNG it’s the most preferred substitute of petrol.
The effect of CNG on Petrol sales could be seen as: * By 2010, imports are to be meeting up to a third or more of the U.S.A total gas demand, potentially rising to around 80% by 2020. * There are currently 9000 CNG stations worldwide with approximate growth seeing 1,700 new stations being built on average every year. * Pakistan has become the first in Asia and third in world after Argentina and Brazil in terms of housing over 1,450 CNG stations
2) Whether buyer view the substitute as being comparable or better in terms of performance. Buyers have different views about substitutes available for petrol/fuel. In Eastern countries more emphasize in on environmental friendly products because there rules are very strict so buyers will prefer the commodity that is free from health and environmental hazards. People in Asian countries prefer products that are cost effective. CNG can be preferred on the basis of:
* Cost effective. * Availability. * Performance. * Repair and maintenance. * Value.
3) How much it costs end users to switch to substitutes CNG industry is growing day by day and it is directly affecting on the petroleum industry. The switching cost is not so much high, it costs 20,000 to 30,000 apexes, to switch from petrol to CNG. But now cars have in built CNG system too. Various signs are showing that competition is strong from substitutes.
COMPETITIVE PRESSURES FROM BUYER
1) Buyer cost of switching to competitive brand or substitute is low. The threat of substitutes is high when the buyers are willing to substitute, relative price performance of substitutes and the switching cost of substitutes. In the era of environmental awareness and the government regulations there is propensity for buyer’s willingness to buy substitutes to oil. However the price of other fuels compared to Oil is high and buyers may incur more cost and there for reduce demand.
Therefore price performance of substitutes compared to oil and oil products is not a substantial to SHELL and Petroleum Industry at least in the short and medium term even the high price of oil in recent times compared to historical price of oil in earlier periods. As well the cost of switching to substitutes is substantial to many buyers or buyers segments. Therefore SHELL and Petroleum industry do not face intense threat of substitutes even there are substitutes for the Petroleum Industry products.
2) If the numbers of buyers are small and customer is important to seller, bargaining power is high. The numbers of buyers of shell are high so the bargaining power is low. But still Shell emphasizes customer satisfaction with the brand and products.
3) If buyer demand is weak and seller are trying to secure additional sales of their product. In case of Shell’s we can see that oil product sales at 5,574 thousand barrels per-day .The demand of petroleum product always increases. As the technology is increasing the use of petroleum products is increasing.
4) If buyers are well informed about seller’s product and cost of its product. The prices of petroleum products are set by OPEC and the federal government. The prices are mentioned through the websites. Shell makes sure that our marketing efforts are undertaken responsibly. The petroleum industry is very important sector of a country any fluctuation in the price is quickly spread through electronic media.
5) Buyer, pose a credible threat of backward integration. There is no as such threat from buyer because being in petroleum industry needs high investment so it does not pose that much threat to players in market.
6) Buyers have discretion in whether and when they purchase the product. Petroleum products are highly consumable product and buyers are not discrete about the purchase. It has been consumed on daily basis. As world is now being a global village and travelling from one city, country to another is increased.
COMPETITIVE PRESSURE FROM SUPPLIER’S BARGAINING POWER
1) Whether item being supplied is readily available from many suppliers. In case of petroleum product the main supplier or producer of oil is OPEC countries which are few in number and the petroleum and its related product are not that easily available from other suppliers.
2) When few large suppliers are primary source of a particular item. The main supplier or producer of oil is OPEC countries which are few in number .So they have power and can charge high prices.
3) Whether it is difficult or costly to switch purchases from one supplier to other. In case of Shell the switching costs are high between suppliers which increase bargaining power of Suppliers. The main supplier or producer of oil is OPEC countries which are few in number. And the other firms operating in the industry also have well established linked.
4) Whether it makes good economies sense to integrate backward Integrate backward is a form of vertical integration that involves the purchase of suppliers in order to reduce dependency.
It is very important for all firms to develop different scenarios and what actions should be taken based on each scenario. Successful firms always have a defined action plan for financial growth, financial decline, good and bad public relations (PR), site construction, workers unions, product failures, competition and even individual customer complaints and compliments. To develop a good plan for various scenarios, firms should conduct a SWOT analysis.
This allows the firm to understand its strengths, weaknesses, opportunities, and threats for which to develop its scenario plan around. A firms should seek to focus on its strengths more so that its weaknesses and identify all possible threats. With a strategic management and marketing team, a firm should be able to conquer most threats through frequent promotion on its strengths. One of the strength of shell is its scenario planning .They focus on scenario planning a lot for its future strategies and unseen factors.
Environmental Ranking Chart:
Shell has been using energy scenarios for almost forty years to explore possible developments in the future of energy and to test strategies against those shifts. Decision makers us these scenarios to gain insight into the uncertainties ahead that concern them most, and explore the ways in which discontinuities might unfold. Scenarios enable better decisions today which will drive better performance in the midst of greater uncertainty. Scenarios for the energy system differ from traditional forecasting techniques because they offer a long-term analysis from different perspectives.
The approach is critical because the rate of change depends on the time needed to develop new equipment, obtain permits to deploy, and also for the lifecycle of existing capital stock and equipment to expire. It takes on average three decades for a new technology to emerge in the energy system and reach a maturity level whereby it can deliver around one per cent of global energy provision. Given that it can take a long time for the energy systems to evolve, the choices we make today influence the way the energy system plays out over the next 20 to 30 years. To develop scenarios, it is important to consider a range of different elements including consumer choices, government policies, and the availability of energy resources and developing technology trends.
However, before we factor in these variables there are three elements in the energy and environment space that cannot be overlooked. Shell calls these the Three Hard Truths: n Global energy demand is accelerating in developing economies, notably in the East.
By 2050 the UN forecasts that the global population will grow by 50 per cent to 9 billion people, which will see energy demand increase from current levels of around 250 million barrels of oil equivalent a day to around 300 to 400 million barrels a day; n Conventional sources of energy supply will struggle to keep up with demand growth; and n More energy means more emissions at a time when climate change looms as a critical global issue. Within the boundaries of our Three Hard Truths, society and governments exercise choices, leading to many possible outcomes for the energy system
Process Innovation Globalization Technological Factor New rivals
Political Instability Economical Factor Market Equilibrium Product Innovation
Scenario 1 Scenario 2
Scenario 3 Scenario 4
For centuries, globalization has progressively knitted together the world and created unity out of great diversity. Shell Oil symbolizes the process. The products are well well-established in the international market and consumed.
Globalization has transformed into a “buzzword.” It is reckoned as the reason of many of the world's problems as well as a solution. Optimists look forward to a global village, linked together by the Internet, and profited from ever-increasing material well being. The impact of globalization will become deeper after the WTO agreement. There are ongoing negotiations on WTO and there are high chances of agreement on it. By such move the globalization increases and this will impact oil industry in a positive way. Entering the WTO also increases the competition in the oil industry, which is a big challenge to the domestic oil refinery sector.
The price decrease of oil products also increases the demand for oil products. Research and investigations for development and industrial know-how review of the innovations and inventions related to the oil industries and exchange of technical and scientific information and industrial experiences with the competent local and foreign institutes in the field of petroleum operations will be boomed after the WTO and internet advancement. Globalization has been a huge increase in salaries due to which people have more disposable income to spend. So people will prefer more traveling and will prefer more luxury products that increase the demand for oils industry.
With greater access to internet, the seduction of consumerism becomes hard to resist, and the demand for unrestricted globalization inevitably follows the attraction for new and ever more advanced consumer goods. Globalization after WTO increases the imports and exports which deals in ports, shipping, international warehousing and other aspects of international trade which ultimately benefits the oil industry. Internet usage decreases most of the profits of oil industry. After the emergence of internet travelling is less preferred which indirectly affect the oil industry. If the internet usage is restricted or new technologies are not developed. Then the oil industry can gain more profits.
WTO Is Signed
More competition between oil companies
More travelling and market will be open for competitors to entre
Oil prices decreases and demand increases
Less internet usage more travelling
People will travel to see their relatives friends and for shopping and other activities
More oil consumption and increase shell sales
Ultimately positive impact on oil industry and shell
After the WTO agreement trade increases and the oil consumption increases while the oil prices reduce.
As Globalization in increasing it have positive impact on oil and petroleum industry. The local availability of imported cosmetics and fashions, imported drinks and confectioneries these have all become important to those who have sufficient disposable income to purchase such items. As such internet have made items available and reduced the travelling cost to purchase them as it’s available at your door steps.
But on the other hand have increased the oil consumption. The Impact of Internet, which estimates that the increasing power and number of computing devices and consumers effectively leads to a combined gross impact that increases the approximately 78% spending. One sign of the Impact is the development of technologies like Webex, high-definition video conferencing over flat-panel displays, Skype, Google Earth, Wikimapia, etc.
These are not only tools to empower individuals with capabilities that did not even exist a few years ago, but these capabilities are almost free. Furthermore, they exhibit noticeable improvements every year, rapidly increasing their popularity. And the dependency on these tools increases as the time changes. Sharing of knowledge has become easier between the professional on energy and different studies. The same internet changes can even apply to tourism. Google Earth and WikiMapia are very limited substitutes for traveling in person for vacation.
However, as these technologies continue to layer more detail onto the simulated Earth, combined with millions of attached photos, movies, and blogs inserted by readers into associated locations, a whole new dimension of tourism emerges. Imagine if you have a desire to scale Mount Everest, or travel across the Sahara on a camel. You probably don't have the time, money, or risk tolerance to go and do something this exciting, but you can go to Google Earth or WikiMapia, and click on the numerous videos and blogs by people who actually have done these things. See through the eyes of someone.
The possibilities are endless once blogs, video, and Google Earth/WikiMapia merge. I will be the same as being there yourself. It will open up possibilities to people who could never manage to be there themselves. Now a day’s people more rely on skype and facebook rather than going and meeting their loved once. With the emergence of such more technologies people will more dependent on them and travelling will not be the priory then.
WTO agreement is signed
Increased trade. Exports and imports, more cars
More disposal income. People will more focus on luxury activities.
More internet.Google Earth, WikiMapia, Skype and Facebook usage increases
Less travelling but increases marketing opportunity and awareness. People will be forced to travel by creating awareness
Impact on oil industry and shell
The term ‘globalization’ means integration of economies and societies through cross country flows of information, ideas, technologies, goods, services, capital, finance and people. But in case of Nigeria globalization has negative impact because of Cross border integration. In fact, some people fear cultural and social integration even more than economic integration. Limiting ourselves to economic integration, one can see this happen through the three channels of (a) trade in goods and services, (b) movement of capital and (c) flow of finance. Besides, there is also the channel through movement of people Globalization has been a historical process with pro and cons. During the Pre-World War I period of 1870 to 1914, there was rapid integration of the economies in terms of trade flows, movement of capital and migration of people.
The growth of globalization was mainly led by the technological forces in the fields of transport and communication. There were less barriers to flow of trade and people across the geographical boundaries. Indeed there were no passports and visa requirements and very few non-tariff barriers and restrictions on fund flows. The pace of globalization, however, decelerated between the First and the Second World War. The inter-war period witnessed the erection of various barriers to restrict free movement of goods and services. Most economies thought that they could thrive better under high protective walls. Of course money is trickling through this system.
But whatever development indicators we look at, oil has not, according to an IMF report, contributed in any significant way to the average standard of living or the life chances of Nigerians. And, paradoxically, the oil-producing Niger Delta has experienced a decline in those indicators. Oil at $70/barrel is making air travel more expensive for cost-conscious businesses. I happen to believe that $70/barrel is the optimal price for oil for the US, where the economic drag is not enough to cause a recession, but the price is high enough for innovation in alternative energy technologies to accelerate. Nonetheless, economic creative destruction always has casualties that have to make way for new businesses, and airlines might bear a large share of that burden.
Nigeria and other OPEC countries save the Oil resources
People will not travel more
Environment free from pollution and resources could be use for years.
Internet usage banned in countries more travelling and dependency on internet decreases
Oil consumption decreases and resources will be saves for years
Sales will not be increased but resources could be used for years.
Growing use of internet will increase the demand for products because more and more people will purchase products online. The shell company will grow more and more so it will operate in more and more countries so demand will be more. The industry growth rate will either decrease or increase the demand because if it grows demand will be more but demand will decrease if it decreases. Take the example of Pakistan where CNG has overtaken the oil industry. Product innovation like Caltex has brought oil which cleans the engine so this is a new product and the demand will be more and more.
This depends on the driving forces. The marketing innovation such ads can have effect on the demand of products. When majors firms enter there is demand for their products because they bring something new. So when they leave the demand for products of remaining firms increases. When there will be changes in cost efficiency then there will be more demand because the customers will get other items on less cost so if you are providing in our case if shell is providing products which are cost efficient so there will be more demand for products.
When more and more firms will enter the market and when risk of doing business decreases there will be competition and demand for products of new oil companies will increase. The demand of products of shell will decrease a little because of other companies entering the market. The decreases globalization will increase the prices of oil as it will be limited resources and people will not travel more will prefer to stay at home for social networking and shopping.
WTO is not implemented OPEC countries don’t corporate
Internet technologies emerge. People more dependent on the internet tools rather than other technologies
Oil consumption decreases and prices increases because of less competition
Reduced profits for Shell
The two driving forces are:
1. Government stability/ government instability
2. High purchasing power/ low purchasing power