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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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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