Structure or Oil Industry

Structure of Oil IndustryAt the present, crude oil is perhaps the most researched industry of primary products. Political determinants and unpredictable price fluctuations both contribute to the volatile nature of this industry. The majority of the top ten exporting countries are members of the Organization of Petroleum Exporting Countries which have bonded together to collectively regulate oil distribution among themselves.

Global Value ChainThe oil industry has three levels: upstream, midstream, and downstream which encompass the main segments in the supply chain. The overall production of oil is driven by global demand. The “supermajors” of oil industry are Saudi Aramco, ExxonMobil, Royal Dutch Shell, BP, Chevron, Total S.A., and ConocoPhillips.

Social and Environmental IssuesJust as crude oil prices have increased in the past decade, so have environmental, social, and practical concerns related to the industry. The oil producing companies are focusing from time to time on environmental concerns about the crude oil industry, the new global standards and policies that have emerged in regards to these issues, the extent to which these standards are effective, and the degree to which these new standards hold the ability to drive empirical change.

Porter’s Five Forces and Shell

Bargaining Power of Suppliers:Shell considers its suppliers as assets, the threat of bargaining power of suppliers for Shell is low due to partnership, supply chain management, training, and dependency. Primary strengths are, extremely high quality, asset base, talented technical personnel, strong management, and a strong balance sheet, moreover, its global spread of assets, financial strength, its people, and the depth and breadth of their operational skills, highly contributed to reduce the threat of suppliers’ bargaining power.

Bargaining Power of Customers:The Environmental issues concerning the depletion of fossil fuel resources and climate change have sparked consumer demand for “greener” fuel alternatives and put additional stress on oil companies, including Shell, to revamp their traditional diesel and petrol offerings. This demand can cost Shell to spend more on its R&D.

Threat of New EntrantsThe threat of a new entrant and rival to such a giant multinational company like Shell seems very low, because everything is diversified in the industry and for a new entrant to take on Shell could require billions of sum. Shell’s management strategy has reduced the friction of threat from the new entrants in the business by increasing minimum efficient scales of operations, its cohesive and good status with suppliers/distributors, retaliation tactics, protection of property and establishing a competitive and trustful image to its customers.

Threat of Substitute ProductsThe big issue in the oil industry is the climate change that has led the customers to demand greener products in substitute. Since oil reserves are limited and it has been estimated that the world could run out of oil in near future, this could roll over all other oil companies including Shell, which also reminds them of thinking substitutions.

Competitive Rivalry between existing playersIn any business competition, price is significant because it attracts customers, the less you price a product, the more customers you gain, yet, in competitive rivalry, in order to reduce it, avoidance to price competition is necessary which is observed by Shell. Shell is not competing on price but on how to manage strategy that would best leverage a product.