Strategy Analysis - Shell

Royal Dutch Shell is a global group of energy and petrochemical companies, employing around 101,000 people in more than 90 countries and territories worldwide. Shell is currently listed as the world’s eighth largest corporation.[1] In Australia, Shell employs around 2500 people and is broadly divided into its ‘Upstream’ and ‘Downstream’ businesses. The ‘Upstream’ business finds, develops and supplies overseas and domestic customers with raw fuel. The ‘Downstream’ business manufactures petroleum products for retail throughout Australia.[2]

The purpose of this report is to analyse the business strategy of Royal Dutch Shell. The report will address three main questions:

• What is Shell’s business strategy?

• How is Shell’s business strategy developed and articulated?

• Is Shell’s strategy appropriate for success?

The answers to the first two questions will be brief and descriptive in nature. To answer the final question, the report will analyse the Shell’s strategy using a framework of ‘the four common elements of successful strategy’, as detailed by Robert M. Grant; simple, consistent, long-term goals; a profound understanding of the competitive environment; an objective appraisal of resources; and effective implementation.[3]

Shell’s strategy is outlined in its 2009 Annual Report. The stated objective, or mission, is “to reinforce our position as a leader in the oil and gas industry in order to provide a competitive shareholder return while helping to meet global energy demand in a responsible way.”

Shell plans to achieve this through a focus on exploration for new oil and gas reserves in its ‘Upstream’ businesses and sustained cash generation in ‘Downstream’ businesses. Shell acknowledges that technology and innovation are at the core of its strategy and reinforces its commitment to minimise the environmental and social impacts of the growing worldwide demand for energy.[4]

The 2009 report outlines the following three layers to Shell’s strategy development:

• Nearer-term performance focus – continuous improvement in operating performance through streamlining operating costs and focusing on the most profitable positions; withdrawing from those businesses which are no longer operationally effective;

• Medium-term growth delivery – construction of new oil and gas resources as well as growing selective downstream opportunities; and

• Maturing next generation project options – building a portfolio of options for the next wave of growth.[5]

Shell’s strategy is underpinned by a strong commitment to health, safety, security and the environment (HSSE), as well as the continued development and recognition of its people. This is articulated in the company’s General Business Principles (GBP); a document that details Shell’s values, responsibilities and guiding business principles. The GBP is an essential addendum to the Company’s strategy because it details the principles that govern the manner in which Shell conducts its business.[6]

Shell uses two approaches for communicating its strategy; one internal, for employees, and another for external stakeholders. Company strategy is communicated externally in its Annual Report, which can be accessed in an open source via the Company’s website. Previous year’s reports can also be viewed, in addition to the GBP. Internally, the CEO articulates strategy to the Company executive via electronic mail. Subsequently, strategy is cascaded throughout the organisation through a series of business plan briefings to employee groups. These briefings are tailored to the local audience but are consistent in their themes:

• Safety – no harm to people or the environment;

• Simplify the business – exiting non-core positions across the company; and

• Sustainable growth.[7]

In examining Shell’s strategy against the four common elements of successful strategy, this report considers the recurring themes stated above as the Company’s long-term goals. The goals are simple to understand and consistent throughout all forms of strategic communication. Consequently, they meet the first challenge of a successful strategy; simple, consistent, long-term goals.

The next element of a successful strategy is a profound understanding of the competitive environment. This report will use Porter’s ‘five forces of competition’ framework to analyse Shell’s understanding of its competitive environment. Firstly, Shell has broadly negated the sources of ‘vertical’ competition—bargaining power of suppliers and buyers—through the vertical integration of its ‘Upstream’ and ‘Downstream’ businesses.[8] Consequently, this report deems it appropriate that there is no evidence of any strategy to address these potential threats.

With respect to the three ‘horizontal’ sources of competition—competition from new entrants, competition from substitutes and competition from established rivals—Shell’s main threat comes from its established rivals. It suffers little threat from new entrants due to the oligopoly of the fuel and energy industry. The capital requirement for a new company to enter this industry sector provides a significant barrier to entry and is prohibitive to most would-be competitors.[9] Shell tries to negate the threat of substitute products by encouraging technical innovation to develop alternative fuel and energy.

This way Shell is at the forefront in the development of potential substitute products. In addition, the Company seeks to invest in those substitute products that could present a threat. For example, Shell is currently negotiating a joint venture with Cosan, in Brazil, for the production and distribution of biofuel made from sugar cane.[10] The Company’s foray into environmentally friendly fuel and energy highlights another important factor in Shell’s strategy; understanding the importance of being seen as socially and environmentally responsible.

There is no better example to highlight the negative effects of environmental indiscretion than the recent oil spill in the Gulf of Mexico. The devastating effect of the subsequent environmental disaster on British Petroleum (BP), one of Shell’s main competitors, reinforces the importance of customer perception in maintaining a competitive edge over rival companies.

In analysing the third element of a successful strategy—the objective appraisal of resources—this report contends that this is an area of strength in Shell’s strategy. In evaluating its resources, the Company has recognised that there are regions or market sectors that are operationally ineffective. The strategy detailed in the Annual Report recommends exiting those regions or sectors.

Their appraisal acknowledges the company’s strengths; notably in the development and application of technology, financial and project-management skills, and the management of integrated value chains.[11] It is clear that Shell has conducted an objective appraisal of its resources and more importantly, it has used the findings in the development of its strategy. Shell has applied the strengths and weaknesses of its resource-base in the layers of strategy development detailed earlier in this report.

The best-laid strategies are of little use without the fourth element of a successful strategy; effective implementation. Considering the intended (external) audience, it is not surprising that there is little guidance regarding the implementation of strategy in the 2009 Annual Report. Whilst the GBP provides guidance on the manner in which the Company should conduct its business, the guidance is more about values and principles than it is about executing strategy.

The core guidance for the effective implementation of Shell’s strategy is contained within internal communications; starting with the CEO’s strategy message to the Company executive. Peter Voser sees improved performance in the implementation of company strategy as one of the keys for addressing Shell’s competitive performance. He reiterates the Company’s position and stresses the need to “work together to meet our targets”.

The CEO moves beyond merely stating what a successful strategy is and he communicates how to make the strategy successful. He states the importance of speed in the implementation of strategy, to ensure that Shell is operating inside the decision-making cycle of its competitors. Furthermore, the CEO calls for “sharper delivery”, with a focus on the precise implementation of strategy. He proposes a culture of continuous improvement, particularly in the areas of safety, operational excellence, cost and profitability.[12]

There is a notable consistency in his message and a clear link to Shell’s stated long-term goals. It is an important observation that Shell’s objective, goals and strategy are recurring messages in communication at all levels in the Company. Furthermore, Peter Voser’s ideas and emphasis on the swift and precise implementation of strategy are also prevalent at all levels.

In analysing the appropriateness of Shell’s strategy, this report firstly stated what the strategy is and how it is communicated. The report concludes that Shell’s strategy contains a clear objective, or mission statement, and the GBP provides excellent values and principles to guide the business. Shell’s stated goals are simple, consistent and enduring, satisfying the first of Grant’s elements of a successful strategy.

Shell’s strategy has fulfilled the second and third elements of a successful strategy through the understanding of its competitive environment and the objective appraisal of its resources. Finally, the CEO’s recurring emphasis on swift and precise implementation of strategy satisfies Grant’s fourth critical element of a successful strategy. After evaluating the Shell’s strategy, this report assesses that it is appropriate for success.

Bibliography Connell, S., Shell Oceania Technical Services Manager, e-mail 14 August 2010.

Forbes, S., Forbes.com, New York, 21 April 2010, viewed on 17 August 2010, .

Grant, R.M., Contemporary Strategy Analysis, Blackwell, Carlton, 2008.

Kassai, L. & Pals, F., ‘Shell, Cosan Plan Ethanol, Fuel Distribution Venture in Brazil’, in Bloomberg Businessweek, New York, 1 February 2010, viewed on 17 August 2010, .

Porter, M.E., Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York, 1980.

Shell, Annual Report 2009, July 2010, viewed on 14 August 2010, .

Shell, Shell General Business Principles, July 2010, viewed on 14 August 2010, .

Shell, July 2010, viewed on 14 August 2010, .

----------------------- [1] Forbes, S., Forbes.com, New York, 21 April 2010, viewed on 17 August 2010, .

[2] Shell, July 2010, viewed on 14 August 2010, .

[3] Grant, R.M., Contemporary Strategy Analysis, Blackwell, Carlton, 2008, pp. 7-11.

[4] Shell, Annual Report 2009, July 2010, viewed on 14 August 2010,