Areas That Shell Oil Company Needs To Focus On In Order To Increase Its Sales and Revenue - Essay Example

Managing Competitive Advantage Introduction With the increasing levels of globalization resulting from liberalization of markets, efficient flow of information and integration of economies, the level of competition in both the local and international market has increased tremendously. This has resulted from the entry of multinational companies which have a huge financial base to segment the market, position their products strategically in the market, and create a barrier of entry to other interested investors. This has made it hard for the dominant companies to retain their competitive edge in the market. Shell Oil Company is a US based firm which has been in operations for decades. Over the years, the company has been able to strengthen its financial position. However, in the past one decade, the company has lost a margin of its market share to the new entrants in the market (Chase, Aquilano, & Jacobs 2004). In order to understand the current position of the business and determine the best strategies to implement in order to improve its competitive advantage in the market, this paper will use several models such as PESTLE, SWOT analysis, and Porters five forces analysis. This will give an in-depth insight of areas that the company needs to focus on in order to increase its sales and revenue. PESTLE Analysis Political Environment Being a multinational company, Shell is facing stiff penalties and charges from global bodies. For instance, the EU and UN have enacted strict laws to curb carbon emission. This has forced Shell to settle government pressure through offering incentives such as improvement of the economies in the countries where the firm operates. It has been found that oil can be used to gauge the economic development of the country. However, due to the increasing demand for the commodity especially in United States, the oil companies have tried to use their influence to earn support from the respective governments. However, the governments have maintained their positions especially because of the environmental issues associated with oil companies. In the past five years, Shell has tried to get engage with Climate Action Partnership in an attempt to improve its reputation. However, the government has maintained its stiff position against the company. In addition, the congress has stated that the government cannot compromise the environment in order to improve the economy. Therefore, the political environment across the world has been stiff against the firm because every government is trying to do its part in order to reduce the increasing levels of global warming. Therefore, political leaders are pushing their governments further in order to stiffen the existing rules and regulations. Environmental Forces Shell is facing a hard task of convincing the world that it can operate without releasing carbon gases in the atmosphere. With the conventional oil reserves declining very fast, the company are turning to new forms of oil reserve such as oil sands found in Canada and oil shale. However, environmental degradation has been it hard for the company to venture into these new oil deposits. The environmentalists are putting too much pressure on their governments to restrict the operations of the company in order to protect the environment. Social Environment Oil and gas firms harm both the environment and the workforce. In 2009, 20 people working in Shell Company died due to severe working conditions. This changed the attitude of the people towards the company. In Nigeria, the company’s operations have been causing gas flares, an aspect that has caused social attention of the residents and international community. Due to the company’s cost-cutting strategies, the firm has been reluctant to take actions to these issues. This is affecting the overall reputation of the company in the market. Technological Forces In the past five decades, the world has experienced a revolution in the technological field. Shell Company has used the opportunity to invest heavily in the modern technology in order to reduce the costs of operations. The drilling and extraction sector has seen huge transformation with modern technology replacing the previous strategies that were slow and costly. Currently, the greatest strength of the firm’s investment is in the smart technologies which enable the firm to make the most out of the oil and gas reserves in different parts of the world. Economic Forces Last year, oil prices reached the lowest prices in a decade. Heavy taxation from various governments across the world has made it hard for the oil company to make huge profits. Furthermore, various governments have increased their taxation rates on foreign companies operating in their countries. Others have put in place tariffs to protect the local companies. This has made the company growth to reduce tremendously. Legal Forces Environmental safety and carbon emissions regulations have increased all over the world. With various high-level meetings related to environmental protection being held in different parts of the world, laws are likely to stiffen. This is in an attempt to protect the world from the repercussion being brought by global warming. However, these laws are shrinking the operations of Shell Company, an aspect that is making it hard for the firm to expand to less competitive markets. SWOT Analysis Strengths Vertically integrated operations-Shell is one of the multinational energy companies that serve three major markets which are North America, Europe, and Asia. The company has been intensively involved in acquiring the competitors, an aspect that has strengthened its position in the market. The company has an experienced workforce-Shell operates in different markets across the world. As a result, its employees have worked in different countries, thereby, enabling them to understand the cultures of different markets. This has strengthened the company as it is able to deal with carious challenges emanating from changing of consumption behavior by the target market. Strong exploration capability- Shell has initiated different diversified projects both upstream and downstream. According to the diagram above, the company’s upstream ventures was 3.5 billion in 2013. However, it increased by 800 million to 4.3 billion. On the other hand the downstream sector was 0.9 billion but it increased by 900 million reaching 1.8 billion (Financial Times, 2015). On the other hand, the firm has increased its financial position and tried to maintain a relative stable growth on both the current and quick ratios. The diagram also indicates that the organization is able to pay all its liabilities before the end of the financial year. Extensive research in bio fuel, solar power, wind energy and hydrogen energy has strengthened the company through enabling it to diversify its market base. Furthermore, the diversification into products such as fuel cards and credit cards has helped the company to reduce the risks and uncertainties associated with concentrating on a single product. Weaknesses Human rights and environmental issues have degraded the reputation of the company in the market. For instance, when the company was criticized over the Niger Delta oil spillages, the firm’s shares dropped drastically as investors kept away from investing in the company. This gave the competitors an upper hand to stage a strong competition against the firm. The company has faced intensive scrutiny over the violation of ethical issues. For instance, the company has been mentioned in several corruption scandals. An example is when the bribes were paid on behalf of Shell Plc Nigerian branch in order for the company to get a contract. The scale and size of the company is a major weakness because of difficulties that keep on arising on relation to quality and the standards of the products in the market. The operations in different refineries differ significantly. This affects the level of administration in the company. Furthermore, working in different regimes across the world is another weakness that makes the company not to exploit the opportunity of its global presence. Opportunities Innovation and technologies offers the firm with an opportunity to expand its market base. With the increasing levels of competition in the market, the company needs to turn towards new technology in order to reduce the costs of production. The company should also shift its attention towards low-carbon energy solutions. Furthermore, new technology offers an opportunity for the firm to enhance the safety of the environment and the society at large. The increasing demand for Liquefied Natural Gas which is a clean source of energy offers the firm with an opportunity to increase its production levels (Randall 2008). The company has an opportunity of acquiring other companies in the market, merging with other major firms, or forming a joint venture with other firms. Recently, the firm has signed a memorandum of understanding with Gazprom in relation to exploration of hydrocarbon. New oil and gas reserves are being discovered in different parts of the world. The company has an opportunity to use the new found resources to expand its market base especially in Africa. Threats Constant governments’ interventions and environmental laws are threatening the production and exploration of oil and gas by the company. Each year, new strict regulations are put up by the governments and other international bodies. This poses a great threat to the existence of the company in the market. Fluctuation of oil and gas prices in the market is threatening the company’s revenues. In 2014, the prices of oil and gas dropped drastically. Although the company is yet to recover fully, such an occurrence is threatening the company’s existence. High competition from other multinational companies such as Exxon Mobil is threatening the competitive advantage of the company in the market. In addition, the company is facing a threat of substitutes from other oil-related products. Porters Five Forces Analysis Competition There is a very high level of competition in the industry although it emanates from few players. The company’s major competitor is British Petroleum. BP competitive strategy has also been acquisition, alliances, and partnerships. In the meantime, BP has secured agreements with Azerbaijan and Gulf of Mexico governments (Inkpen & Moffett 2011). This is posing a great threat to expansion strategy by Shell. Although BP has invested heavily in solar energy, Shell is still glued on oil and gas products. Threats of Substitutes With the increasing demand for alternative energy, the company is facing a stiff competition from substitutes such as bio fuels. Many firms in the market now prefer to use bio fuels because they are cheap and environmentally friendly. This is to bow down to social, environmental, and political pressures. Threat of New Entrants Currently, the threat of new entrants is very low. This is because venturing in the industry requires heavy investment. This is to set plants and install modern technologies for extraction and which will meet the quality demand in the market. Bargaining Power of Suppliers Currently, the bargaining power of the suppliers is very low. This is because the suppliers are few and many of the companies in the industry extract oil and gas products directly without the use of intermediaries. This is because the firms are focused on lowering the costs of production. Bargaining Power of the Customers The bargaining power of the customers is very low because the number of oil and gas companies is very low. Therefore, there are no alternatives other than purchasing the products from the few existing companies in the market. However, other investors are shifting towards solar energy. This is likely to increasing the bargaining power of the customers as they will be having an alternative to select from. Shell Current Strategy Currently, shell is aiming at venturing less competitive markets in order to reduce the risks and uncertainties in the market. The company is aiming at achieving this aspect through acquiring struggling companies in the market. Besides gaining a financial advantage, the strategy will enable the firm to acquire new assets, technologies, and human resources. The latest company to be acquired by this firm was BG Group Plc at a cost of $69.45 billion. This acquisition was announced on 8th April 2015 (Financial Times, 2015). In addition, there are rumors that the company is aiming at acquiring BSD Medical Corp. This is in attempt to diversify its source of revenues. The performance of the company is based on restructuring and reorganizing its operations to upstream and downstream. This is to increase the focus on competitive growth and new projects that will spearhead growth and development of the firm. In addition, the company is strategizing on improving efficiency. This is through replacing employees with machines, an aspect that will increase efficiency and achieve quality standards. Currently, Shell is struggling with several employment issues such as health, poor working environment, and safety issues. However, the firm is embarking on a major audit to identify key issues that affect the performance of the employees. This will enable the top management to come up with effective strategies that will solve these problems. This strategy is likely to change the perception of the world towards this company. Recommendations on how to improve current situation and competitive advantage of the firm The company should intensify its corporate social responsibility. The consumers are shifting their attention to companies that participates in improving the living conditions of the people who have been supporting them. As a result, in order to improve its reputation in the market which has been tarnished by unethical issues associated with the company, the firm should increase its budget towards CSR. This is to enable the firm to participate in activities such as planting trees, cleaning rivers, sponsoring young children, and constructing health centers for the local people. With the increasing levels of global warming, the world is shifting towards renewable energy. This is a sector that requires huge investment which normal investors cannot afford. Therefore, the company should use this opportunity to venture in this sector. This is because the firm has the resources and expertise to enable it to segment the market and position itself strategically in the market. As a result, the firm would have reduced the risks and uncertainties associated with focusing on few product lines. A lot of Shell’s resources have been used to advertise the firm’s products in the global media. This has been affecting the company’s financial position. In order to increase its competitive advantage without weakening its financial position, the firm should shift its attention towards social media. This will enable the firm to advertise its products and communicate with the customers directly. As a result, the firm will be able to understand the tastes and preferences of the target market and different factors that affect their consumption behavior. Therefore, the firm will be able to make changes where necessary in order to meet the market needs. In addition, social media will provide the firm with a platform to conduct research on their target market. This will reduce the risks associated with investing in uncertain markets. This will also be significant in customer relationship management. Currently, the fuel prices have decreased tremendously. With oil and gases accounting for the largest amount of sales by the company, continued fluctuation of prices is affected the competitive advantage of the company. In order to strengthen the firm’s position in the market, the company needs to diversify its products such as bio fuels. This will secure the future of the company because the world is turning towards these energy sources. This can be achieved through setting up small amount of the company’s profits towards this sector. This is to ensure that the new investment does not affect the financial position of the business. Some companies have invested heavily on the modern technologies. This is to reduce the costs of operations. However, due to the nature of oil and gas industry, they are yet to attract the attention of the customers towards their products and services. However, Shell has a large market base which is now under intense threats from these firms. Therefore, in order for Shell to increase its sales, it needs to acquire these struggling firms. This will enable the company to acquire human resources, technologies, and new product lines. As a result, the company will be in a better position to serve its customers more effectively. The current human resource strategy has failed to motivate the employees. The company is experiencing a high turnover rates with subordinates leaving the company joining the competitors. This is weakening the position of the company in the market through leaking the tactics used by the firm to the competitors. Therefore, the company needs to introduce an open office policy. The policy should be implemented by all employees who hold top positions in the organization. This will give the subordinates an opportunity to air their grievances directly without the use of the intermediaries. Addressing issues that are affecting their performance will play a significant role in improving the working environment and relationship. As a result, the employees will feel contented with working in the organization. This will reduce the turnover rates and improve the performance of the company in the market. Shell is a multinational company that depends on the exchange rates of different currencies across the world. During the 2008 financial crisis, the company suffered immensely as the values of the currencies dropped. In addition, companies reduced their rates of oil and gas consumption. People become more reserved as financial institutions increased their interest rates in order to cushion themselves from the tough economic times. Since then, the company is yet to recover its ground (Romano & Secundo 2009). Despite many attempts to diversify its operation, it remains stranded as new entrants are shrinking its market share and customers are becoming more cautious with their consumption behavior. In order to prevent the exchange rates from affecting the company’s income, Shell should introduce new cards to be used by its customers to purchase its products. The card will be in a single currency but, it will enable the customers to purchase the firm’s products at various stations by the company without having to convert into local currencies. This will offer the company with stability in the market. In order for the company to maintain its competitive advantage in the market, Shell should seek highly talented and experienced people in the society to work in the company. This is to ensure that the company improves on innovation. The company should also offer learning opportunities to its existing employees in order to update them on the modern skills that are significant in maintaining the competitive levels of the company (Lawrence & Weber 2013). Furthermore, it should redraft its incentive strategies. This is to ensure that monetary and non-monetary incentives motivate the subordinates to work harder in order to ensure that the company retains its competitive advantage in the market. This would be achieved by involving the employees in drafting the performance appraisal. This will make them feel that the process of selecting the best performing employees is transparent, thereby, motivating them to work harder. The repercussions will be felt in the overall performance of the organization. Global environmental bodies such as UNEP have been vocal concerning the operations of Shell Company in different parts of the world. In addition, the consumption behavior of the target market is changing. Industries accounts for the largest share of Shell sales. However, with the pressure being mounted on these companies by their customers to start using renewable energy in order to reduce the level of carbon emission in the atmosphere, the future of Shell Oil Company looks brink. This is because many customers want to be associated with a company that is environmentally conscious. As a result of this aspect, many automotive companies have started to manufacture electric cars in order to satisfy the tastes and preferences of the target market. This is likely to shrink the market share of the company even further. However, Shell should overcome this challenge through getting into contracts with its major clients such as mega industries on the supply of the resources. The firm should attract these companies to sign a contract through subsidizing the prices of oil and gases. This strategy will play a significant role in making the future of the company more certain. This will offer the top management with an opportunity to re-strategize before the end of the contract. Conclusion The success of Shell Company depends heavily on how the company will be able to capitalize on its current strengths and opportunities and work on its weaknesses and how to overcome the threats in the market. This will be achieved through acquisition and formation of joint ventures with other firms. In addition, the company needs to restructure its human resource strategy in order to win the hearts of the employees. As a result, the strength of the company will, therefore, emanate from its loyal employees. Lastly, the company needs to review its environmental policies. This is to ensure that it observes the global guidelines. References Chase, R. B., Aquilano, N. J., & Jacobs, F. R. 2004. Operations management for competitive advantage. Boston, MA: McGraw-Hill. Financial Times. 2015. Royal Dutch Shell PLC, RDSA:LSE profile - FT.com. Retrieved from http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=RDSA:LSE Inkpen, A. C., & Moffett, M. H. 2011. The global oil & gas industry: Management, strategy & finance. Tulsa, OK: PennWell. Lawrence, A. T., & Weber, J. 2013. Business and society: Stakeholders, ethics, public policy. Randall, S. 2008. Energy, risk & competitive advantage: The information imperative. Tulsa, OK: PennWell. Romano, A., & Secundo, G. 2009. Dynamic learning networks: Models and cases in action. London: Springer. West, D. C., Ford, J. B., & Ibrahim, E. 2006. Strategic marketing: Creating competitive advantage. Oxford: Oxford University Press. Read More