Strat Assign1 Shell

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STRATEGY DYNAMICS AND INTERNATIONAL BUSINESS

MBL923-P

ASSIGNMENT ONE

ANALYSIS OF SHELLS MARCH 2010 STRATEGY UPDATE

DUE DATE 16 APRIL, 2010

Compiled by: PTA0509A

Group Member Student Number Contribution

Hough, E. 7222-401-0 100%

Pillay, J. 7043-482-4 100%

Mabena, M.J. 7080-027-8 100%

Nkadimeng, M. 7137-119-2 100%

Sali, N.T.G. 7221-612-3 100%

Nkhumeleni, M.B. 7222-541-6 100%

Khalo, L.T. 7222-624-2 100%

Lamula, N. 7222-635-8 100%

Labuschagne, J.J. 7723-991-1 100%

Mtwisha, L. 7726-463-0 100%

Nkwaira, C. 7221-862-2 100%


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ANALYSIS REPORT OF SHELLS STRATEGY UPDATE 2010

ii

INDEPENDENT ANALYSIS REPORT OF SHELLS STRATEGY

UPDATE 2010

Author PTA0509A

Addressee/To Chairman of Shell

Date 16 April 2010


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TABLE OF CONTENTS

1 INTRODUCTION........................................................................................................................1

2 STRATEGY DYNAMICS ...........................................................................................................1

2.1 HUMAN RESOURCES.................................................................................................................12.2 TECHNOLOGY ..........................................................................................................................1

2.3 PRODUCT/BUSINESS PORTFOLIO...............................................................................................2

2.4 INNOVATION............................................................................................................................3

2.5 BRANDING ...............................................................................................................................4

2.6 SUPPLY CHAIN.........................................................................................................................5

2.7 MARKETING PORTFOLIO...........................................................................................................6

3 CONCLUSION.............................................................................................................................7

4 REFERENCES.............................................................................................................................9

ANNEXURE 1: BCG MATRIX .......................................................................................................10

ANNEXURE 2: ANSOFF MATRIX ................................................................................................12

ANNEXURE 3: DELTA MODEL...................................................................................................13

ANNEXURE 4: SPACE MATRIX...................................................................................................14


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1 Introduction

This report analyzes and critiques Shells strategy update of 2010. Seven strategy dynamics are

identified and each is analyzed using international strategic business models. Focus is placed on the

priorities for 2010 which are; competitive performance, profitable growth and sharper delivery.Based on the challenges faced by the gas and oil industry of higher prices, escalating demand of

customers in energy and tighter specifications and regulations from governments, the 2010 strategy is

reviewed to identify if Shell responds to these challenges with innovative ways and a strategy that

will sustain their profitability and competitive advantage.

2 Strategy Dynamics

2.1 Human Resources

There is no doubt that activities such as exploration and marketing require competent people.

Analysis using the Resource Based model reveals that Shell must be applauded for the manner in

which they are marshalling resources towards the achievement of their objectives. Not only are they

recognizing the critical importance of people in the accomplishment of objectives, they empower

employees by investing heavily in their development through the offering of a full range of technical,

operational and compliance training. Compliance training comes in handy as Shell is operating in a

highly regulated environment and failure to comply may result in heavy penalties that could impact

on the bottom line (profits) or worse still, could lead to contractual obligations or licensing issues

from the host countries. This underlines Shell business integrity of training their staff to comply with

legal issues in different countries where Shell operates.

It is evident that Shell cannot deliver on new projects such as the Athabasca oil sands if they do not

have the capabilities to do so. However, this is adequately addressed through the provision of project

management and project engineering training thereby providing the much needed expertise to its

employees. What Shell is doing is in line with the resource based theory which suggests that a firms

unique resources and capabilities provide the basis for a strategy (Clardy, 2008).

The strategy of downsizing is commendable if one looks at costs implications. The same cannot be

said if one looks at the potential loss in skills acquired over the years.

2.2 Technology

The resource based perspective highlights the need for a fit between the external market context in

which a company operates and its internal capabilities (Rodruguez and Rodriguez, 2005). This

resonates well with Shell as there is an appropriate fit between the technologically driven market and


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the highly skilled scientists and engineers who are responsible for inventing the technology and using

it. This is evident in the development of Shells proprietary coal gasification technology, a

technology that converts coal into a cleaner burning synthesis gas which was then licensed

worldwide.

A significant portion of the worlds oil and gas resources are located in challenging environments

such as deepwater, which require innovative approaches to extract. Shell, through the use of

advanced technology has been able to operate safely and environmentally responsibly in these areas.

Resultantly, lawsuits or penalty costs or heavy fines are reduced. This leaves Shell with capital

which can be used resourcefully towards growth investment projects such as oil sands.

However, Shell should be wary of continuous deployment of technology where cost inflationary

pressures exist as well changes in tax regime, dimensions which could impact on the profitability.

The nature of this industry and the competition dictates that similar types of technology are employed

even though the extent to which the resources are utilizeddiffers. An example that comes to light is

the Shells Smart Fields technology, an underground sensor and the ExxonMobil Remote Reservoir

Resistivity Mapping (R3M) technology. Through the sale of Shells liquefied natural gas (LNG)

technology to India and China, where both these countries have large coal reserves and little domestic

natural gas, Shell plays a very important role in the reduction of local air pollution. Shells

commitment to the strategic objective of being environmentally responsible is again evidenced by

such moves.

2.3 Product/Business Portfolio

The Boston Consulting Group Box (BCG Box) was used to review Shell's 2010 portfolio dynamic

(Harding and Long, 1998). Shell has sold $30 billion non-core dog portfolio Products/Businesses in

2009 as part of its complexity reduction and strategy of profitable growth and competitive

performance. It appears that Shell over diversified its portfolio when world economic conditions were

good. The portfolio is not strong enough to sustain profitability through a sustained recession.

OPECs hold on world oil prices have cushioned the drop of Shells profits due to the lower oil price,

but it has also revealed inefficiency in the management of production cost in some refineries,

chemical assets and marketing in poor networks and low volume markets. The question is if Shell

would have continued with the status quo portfolio if there was no recession. The current More

Upstream & Profitable down stream" strategy does not consider the risk and effect a world recession

will have on short term and long term strategic investments.


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Lubricants appear to be a cash cow for Shell from their downstream portfolio. Continued investment

emerging markets like India, China and South America illustrates Shells confidence in the growth

potential vs. its mature markets. The decision to pull out of 21 African countries unfortunately may

not maintain or increase their 2% market leader position. This will allow competitors like TOTAL to

establish an even stronger position in Africa when a turnaround does come. Chinese infrastructure

investment into Africa is also going to stimulate demand in the long term.

The $140 billion investment over the last 5 years for its top 12 upstream portfolio projects like

Natural Gas Qatar, Oil Sands, Australia gas, Deep Water Gulf Mexico, oil projects in Iraq, joint

ventures with Arrow energy limited and Bio-fuel production with COSAN - all aim to build future

upstream market share and change current question marks in the portfolio to Stars. Once these

projects start full production they will become Shells new Cash Cows. These investments have thus

far delivered $70 billion to shareholders.

Based on above we can see Shell is adapting its portfolio strategy to better time its capacity in line

with world current and forecasted demand. It's reviewing and accelerating change in the way

resources are deployed with its entire product /business portfolio to ensure shareholder profitability.

2.4 Innovation

Three tests applied by C.K. Prahalad and Gary Hamel to determine core competency - were used in

analyzing Shells innovation as a competitive advantage (Prahalad and Hamel, 1990). Shells

technology centres are focusing on innovation, research and product development, which gives its

products a core competency. The following core competencies, but not exhaustive, are as a result of

Shells innovative initiatives, and will be subjected to the model tests: liquefying natural gas by

cooling and transport it to customers; conversion of natural gas to liquids (GTL); extraction of

bitumen from mined oil sands and conversion to synthetic crude oil; and the formulation of FuelSave

gasoline.

Relevance: Competency should give customers something that strongly influences them to choose

the product or service. Shells innovative technology thinking is assisting to shape the energy future

and makes it an industry leader in technology and innovation. Shell is seen to be squeezing more

from its existing resources, and investing into developing new and unconventionalalternative energy

sources and CO2 technologies thus creating unique selling points which give its customers value for

money. There is adequate capacity of scientists and business experts through R&D programmes and

Shell is continually working towards finding innovative ways to help meet rising energy demand.


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Difficult of Imitation: The core competence should be difficult to imitate.

Shell created entirely new technologies, such as those needed for alternative fuels, which may

become part of the worlds energy in the longer term. Shells core competencies highlighted above

and its ultimate products, oil and gas are similar to those of its competitors (e.g. BP andExxonMobil), similarity - implies that its products can be imitated. Shell however, has competitive

advantage on the FuelSave by being first in the market. In the strategy is not indicated how Shell

protects its core competencies where trademarks are used as brand identification.

Breadth and Application: Core competency should be something that opens up a good number of

potential markets. Investing in R&D and innovation helps Shell to make projections on the potential

markets which will have impact on the financial growth on both the Upstream and the Downstream

businesses. The FuelSave formulation which was launched in various countries created new markets

and Shell needs to develop strategy to defend and sustain.

Based on the above, innovation does not pass all the three tests of the model of core competency as

its competitors have equivalent expertise. This expertise will only aid in making it more difficult for

the new competitors to enter the market. Shells technology, project-delivery capability and

operational excellence will remain its key differentiators.

2.5 Branding

There are four empirical indicators of the potential of a firms resources to generate sustainedcompetitive advantage (Barney, 1991). These are valuable, rare, imperfectly imitable and non-

substitutability. Shells brand aligns to all these four indicators. Using the resource based model, it

can be seen that the Shell brand, unique as it is, can be used as a resource that can help to achieve

strategic objectives. Shell is capitalizing on its high brand awareness, which is global, to introduce

new products and enter new markets. The rolling out of a new product such as FuelSave to new

countries will be easier to achieve through this strong brand awareness. One strategic objective that is

achieved through this brand awareness is that of cost cutting as Shell uses less marketing expenses to

introduce themselves in new markets.

Shell is ensuring its brand maintenance by employing a strategy of prioritizing personal and process

safety as well as putting an acceptable remuneration structure in place. This will go a long way in the

production of quality and reliable products. It is this reputation for quality that will bring the desired

emotional connection as it relates to customers on an emotional level. This is a highly valuable aspect

of the brand. They are leaving no stone unturned as they are focusing more on maintaining asset

integrity, a strategy that will also enhance the quality of products produced.


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Recognizing that the Brand can easily be diluted by the high number of operational spills as well as

fatalities, the company is embarking on measures to reduce these spills and safety measures to

minimize fatalities. Surely consumers will dissociate themselves from a company that turns a blind

eye to fatalities as it seeks profitability. It is therefore commendable that Shell is displaying a high

degree of consciousness in this regard. Clearly Shell is aware of the brand liabilities that can be

incurred due to lawsuits, product failure or questionable business practices. This awareness is

exhibited in the manner in which they integrate environmental and social factors into the way they

plan, design and take investment decisions on major new projects. For an example the controlling of

the highly toxic CO2 emissions addresses the concerns of both governments and customers.

On the contrary, Shells strategy of pulling out of downstream businesses in African countries might

adversely affect the brand. People are affected in two dimensions-that is they lose the employment

opportunities which could have lifted them out of poverty and people are starved of much needed

cheaper fuels. These consequences can easily dilute the brand. Shell can address this problem by

following the same strategy employed in the USA whereby they are moving out of unprofitable retail

markets by moving behind Shell branded sites in the wholesale supply model.

It is therefore imperative that Shell continues to strategize correctly on branding as competitors such

as BP and Exxon Mobil posses strong brands that could derail Shells accomplishments of strategic

objectives.

2.6 Supply Chain

The Delta model provides an insightful view into the intimacy and connectivity of a networked

economy that offers opportunities based upon the structure of the customer relationship (Hax and

Wilde, 2003). An adaptive process that is essential for this relationship is the operational

effectiveness of the supply chain.

The Shell 2009 strategy depicted the supply chain activities as new opportunities to reduce cost

which involves the monitoring of supplier risk, negotiations reflecting new market conditions and

lower price and improved service quality.

Shell realized that transportation of Ethylene Oxide (EO) in the European markets by road and rail,

requires extreme care and extensive risk mitigation measures and that they were losing to competitors

in those markets. The System Lock-In is evident where backward-integration was implemented

through a pipeline connection which enables supplies of EO to flow directly between the two

facilities under carefully controlled conditions thus ensuring that EO producers and their customers

have access to good logistics both for raw materials and finished products. As stated by Giuseppe


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Seccomandi, ERCAs General Director A co-location plant will take our surfactant production and

supply chain operations to the next level and give us an important competitive advantage over the

smaller non-integrated producers across Europe.

Shell is correctly using their supply chain as one of their major strategic driving forces. They areproviding a low cost infrastructure, which is a proved internal capability for new product

development this will assure the proper renewal of the existing product line, and the securing of

distribution channels. The Best Product positioning of the Delta model is successfully addressed in

Shells strategy.

The element of Total Customer Solutions in the Delta model provides an overall measure of

performance relevant to total customer share, which needs to be satisfied in as much a comprehensive

way as possible. Shell is again addressing these requirements in their 2010 strategy where both their

combined chain that includes them, their customers and their key suppliers by providing Global

Solutions. They assist their customers to maximize value from highly complex supply chains by

helping them to design and optimize the logistics of their incoming raw materials, finished product

deliveries and transfer of intermediates. Shell intends to revise the global procurement strategy and

increase the global market share but that is not indicated how that will be implemented especially in

countries such as China and India where there are regulations and attitudes of customers towards

quality and low cost to consider.

The most demanding strategic position of the Delta model is the System Lock-in where the full

network as the relevant scope, the gaining of complementors share as the ultimate objective and the

system of economics as the driving force are implemented. Shell does not at this stage reached a

System Lock-in positioning. Shell needs to consider the full network in which they are operating

and pursue linkages with product complementors to enhance their strategy. They are starting to move

away from a commoditized product-centric mentality to that of providing Total Customer Solutions

but additional attention needs to be focused on enhancing their total product offering to their

customers.

2.7 Marketing Portfolio

Using the SPACE Matrix model, we notice that Shell falls into the aggressive quadrant of the SPACE

Matrix Graph. This shows that Shell has a strong competitive position in the market with rapid

growth.

Market Penetration - The market portfolio of Shell is diverse and it operates in more than 100

countries. Shell is exiting areas where it sells smaller volumes of products but they focus on higher


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return areas where it has scale and a technological advantage such as their refineries. As an example

they sold their New Zealand marketing operations which have little exposure. Shell is implementing

a highlyfocusedaggressive market penetration strategy, ensuring they are addressing markets where

there are high growth markets.

Market Development Shell is differentiating itself with products such as V-Power and FuelSave.

As indicated in the strategy these are key areas in their downstream market on which they will focus.

Product Development Shell has partnered with Cosan in the delivery of bio-fuels. By using this

bio-fuel in Formula-1, and various other marketing campaigns, they are aggressively marketing to

ensure their first-mover advantage.

Forward, Backward and Horizontal Integration The strategy clearly identifies wholesale

channels, trade mark licenses and agreements with other distributors as options that will be

implemented. This will reduce overall marketing costs, effectively increasing operating profits.

Diversification Although the company has diversified into the credit card area to develop value

propositions for their customer segments, the proposed strategy does not refer to how this section of

the market will be addressed.

Using both the SPACE matrix and Ansoff analysis, it can be concluded that Shell is correctly

implementing an aggressive marketing campaign which is in line with the models used. The issuing

of trade mark licenses although reducing operating costs can however have a negative effect on

Shells marketing exposure. The sale of 3 production licenses in Nigeria and the review of

ownership options in 21 African countries will have also a negative impact on the perception of Shell

in this developing market and may lead to increased marking costs when Shell decides to continue

production in this area it seems that Shell is trying to chase short term profits from assets sales and

not pursuing long term growth in a developing market. Shell is however very clever in creating a

web-site which their customers can access to determine the best lubricant for their equipment and

vehicles with already over 2.5 million users.

3 Conclusion

Shells strategy for 2010 does not indicate the vision or mission and the value proposition cannot be

clearly depicted. The 2010 priorities are specific and one is able to pick up the challenges the

company face. The downstream restructuring of disposing of assets might be a challenge if the assets

are not perceived as value generating by interested parties.


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As the oil and gas industry is under huge pressure due to the global financial recession and increasing

demands on energy, the goals stated in the Shell strategy is only focused on the long term and that

might lead to competitors to strategize and develop opportunities which will focus on short term

goals. The strategy needs to indicate the alignment with the national strategies so as to give a picture

of how the overall goals and objectives can be achieved.

All the models and approaches used in the critique of the Shells strategy highlighted the fact that for

Shell to be competitive, it needs to have capabilities which can be sustained. Shell thus needs to

align their strategies in such a way that they are prepared for global changes that take place as it is

operating in dynamic industries and the world.

The results of the internal environment analysis highlighted that the strategy does not indicate the

mission and the vision of the company. The broad scope does not specifically indicate the alignment

with the other national strategies whereby specific challenges will be addressed.

On the external environment, the industry analysis depicts that the global financial crisis has created a

new challenge for Shell. Additional external challenges are increases in demands of cleaner gases

and tighter specifications from governments. The Shell strategy indicates how they intend investing

in innovative solutions which are focused on long term goals but some challenges needs short term

solutions.

It was depicted within the strategy that the core competencies and capabilities within Shell are placed

within the Technical centers and that these centers play a vital role in innovation and product

development. These resources share information with other experts so that they can develop

sustainable solutions to face challenges such as greener emissions. Shell Global Solution centers

provides business and operational consultancy, technical services, licensed technologies and research

and development expertise to the energy and processing industries worldwide, thus providing value

to Shells customers.

The Shell 2010 strategy is a natural progression from its 2009 strategy and indicates Shells

commitment to react to changing market and world conditions by updating and changing their focus

areas to address these challenges.


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4 References

Barney, J. 1991. Firm resources and sustained competitive advantage, Journal of Management,

17(1) : 99-120.

Clardy, A. 2008. Human Resource Development and the Resource-Based Model of Core

Competencies: Methods for Diagnosis and Assessment, Human Resource Development

Review, 7(4) : 387-407.

Harding, S. and Long, T. 1998. Proven Management models. Hampshire: Gower Publishing

Limited.

Hax, A.C. and Wilde, D.L. 2003. The Delta Model a New Framework of Strategy, Journal of

Strategic management Education, 1(1).

Prahalad, C.K. and Hamel, G. 1990. The Core Competence of the Corporation, Harvard Business

Review, May-June : 1-15.

Rodriguez, J.L. and Rodriguez, R.M.G. 2005. Technology and export behavior: A resource based

view approach,International Business Review, 14(5) : 539 557.

Royal Dutch Shell PLC. 2009. Annual Report and Form 20-F for the year ended December 31,

2009. London: Royal Dutch Shell PLC.

Royal Dutch Shell PLC. 2010. Royal Dutch Shell plc updates on strategy to improve performance

and grow [online]. London: Royal Dutch Shell PLC.

Available from:

[Accessed 12 April 2010]


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Annexure 1: BCG Matrix

Strategic business units: Relative market share Market growth rate

Upstream Americas Our Upstream

Americas business searches for and

recovers oil and natural gas across

the Americas. Many of these

activities are carried out as joint

venture partnerships, including with

national oil companies. Upstream

Americas includes our oil sands

operations such as the Athabasca Oil

Sands Project, which extracts

bitumen from oil sands in Alberta,

western Canada, and converts it tosynthetic crudes. Our wind power

business is also part of this

organisation.

Medium to high

Number 2 of the big 6 in USA

Short term some improvement

Long term increasing

Upstream International Our

Upstream International business

searches for and recovers oil and

natural gas outside the Americas.

Many of these activities are carried

out as joint venture partnerships,

often with national oil companies. The

Small to medium compared to other

international (Saudi Arabia) oil

producers

Short term some improvement

Long term increasing

Turning exploration into production

with barrels identified for construction


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business also liquefies gas and is

active in gas to liquids technology

12 upstream startups best portfolio

in industry.

After startup will look for synergies

Downstream Our Downstreambusiness includes Oil Products, which

refines, supplies, trades and shipscrude oil worldwide andmanufactures and markets a range ofproducts. These include fuels,lubricants, bitumen and liquefiedpetroleum gas for home, transportand industrial use. The Downstreambusiness producespetrochemicals for industrialcustomers, including the rawmaterials for plastics, coatings anddetergents used in the manufactureof textiles, medical supplies andcomputers. The business alsoincludes our activities in biofuels andsolar power. It leads our CO2management activities across thecompany.The global network of Shell Trading

companies encompasses Shells

trading activities in every major

energy market around the world. We

also manage one of the world's

largest fleets of liquefied natural gas

(LNG) carriers and oil tankers.

2nd

largest world refinery capabilities Refinery has very low margins and is

coupled to economic conditions,

therefore reducing portfolio.

Gas has very low demand coupled to

economic conditions but has a

positive growth.

Downstream however provides stable

capital and will therefore be focused

by pulling back in certain countries.

Source of cash for upstream.

Tai8hg cost outs

Selling non core

Investment in growth opportunities

Manufacturing change

Marketing pulling back from some

countries, focusing in others. Not

focused, fewer markets. Leveraging

brands. Leaving retail enter

wholesale supply

Refining improvement by asset

sales and improved major sites

Chemicals -

Projects & Technology Our Projects

& Technology business manages

delivery of Shell's major projects, as

well as driving the research and

innovation to create technology

solutions. This includes our coal

gasification technology. It provides

technical services and technology

capability in both upstream and

downstream activities, including

advanced exploration and production

information technology for Shell and

for third parties. It also oversees

safety and environment performance

and procurement processes across

Shell

High especially with increased

markets in alternative energy


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Annexure 2: Ansoff Matrix


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Annexure 3: Delta Model

ProductProduct+

Customer

Product+

Customer+

Complementor

Competition based on System Economics

Complementor lock in enhance a companys offering

Competition based on Customer Economics

Reducing the customers cost or increasing profits

Competition based on Product Economics

Best Product Porter View, Cost Leadership,

Differentiation


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Annexure 4: SPACE Matrix

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