Shell Plc's Efficiency in the Global Market - Research Paper Example

Contents Contents 1 Introduction 3 Part A 4 Analysis of the Market at Global Level 4 PESTLE Analysis 4 Political Forces 4 Economic Forces 5 Social Forces 6 Technological forces 6 Legal Forces 6 Environmental Forces 7 Part B 7 Industry Analysis 7 PESTLE ANALYSIS 8 Political Forces 8 Economic Forces 8 Social Forces 8 Technological Forces 8 Legal Forces 9 Environmental Forces 9 Porter’s Five Forces 9 Suppliers’ Power 9 Bargaining Powers of the Buyers 10 Barriers to Entry 10 Threats of Substitutes 10 Part 3 11 Geopolitical / international relations Analysis 11 Political Forces 11 Economic Forces 11 Social Factors 12 Technological Forces 12 Legal Forces 12 Environmental Factors 12 Part 4 13 International Development 13 References 15 Reflective Report 16 Agenda for Change 17 Conclusion 17 Appendix 18 Introduction 20th Century set the pace for global expansion as the process of globalization allowed businesses to be truly global in nature. Expansion into new markets created transnational organizations which were affected not just by their own business dynamics but also other critical dynamics of doing business. The increasing influence of politics as well as the international integration of the businesses requires a relatively bigger analysis to understand the international business. (Dicken, 2007). This report will attempt to perform strategic analysis at the global, market level and international relations theory to describe as to how Shell Plc- one of the leading organizations in the world- has operated. Part A Analysis of the Market at Global Level In this section, a comprehensive analysis of the global markets for oil will be performed including the assessment of its macro business environment. As the income level and prosperity at global level improves so does the requirement for the products like oil and Gas because they are considered as essential parts of the daily routine life. With the increasing expansion of economies of developing markets such as China, the overall demand for the oil is increasing and it is because of this reason that oil prices have became probably the most critical indicators of how the international markets perform and behave. According to some estimates, the consumption of crude oil will grow by 1.5 millions barrels per day1 thus indicating the due to slow growth in economic progress will lead to higher consumption of oil at global level. The global market for oil and related products is mainly divided into three major sub-markets including oil, natural gas as well as the marketing of these products. However, this analysis will be based on the oil and its marketing thus discarding for most part the natural gas market. At the global level, market is therefore segmented in these broader categories and as such the customers are segmented according to the above three type of activities in the market. PESTLE Analysis Political Forces The so called corporate actors now control most of the international trade taking place in the world. This aspect of international trade however, provides international organizations a very powerful role in the international political scene. This is because of the fact that most of the large organizations control large economic resources which give them relatively stronger political clout to maneuver things in their own favor.(Duncan, Webster & Switky,2008). It is important to note that the political forces in oil industry are relatively stronger as compared to other industries in the world. This is because of the fact that largest cartel in the industry i.e. OPEC is owned and operated by the Governments of large oil producing countries and as such the overall influence of political forces is relatively huge. Further, many governments view oil as one of the chief reasons for toppling the governments and creating political disturbance because oil is considered as the major factors for building a nation as an strong political force.(Falola & Genova, 2005). Such strong significance of political forces therefore requires every international player working in global market to face strong political environment of uncertainty and hostility. In countries like Venezuela and Iran, oil is used as a strong political force to maneuver international environment in one’s own favor. Economic Forces Oil is considered as the primary fuel and is used extensively for not only transport purposes but for many other purposes also. According to OPEC forecasts, the total Non-OPEC oil supply for the 2010 will be 51.53 Million Barrels per day whereas showing an increase of 0.5 Million Barrels per day whereas the OPED oil supply is 29.26 Million Barrels per day. Generally there is a decline in the overall oil supply of the world.(OPEC.ORG, 2010). It is also expected that the major oil demand will come from China as China’s overall growth rates require a consistent supply of oil to fuel its economy. Further, the demand from the growing countries is significant too and the fact that Shell Plc is present in more than 170 countries around the world indicates the overall size of the market that Shell covers. Above discussion therefore indicates that the overall market is really lucrative and expanding market. However, due to concentration of the oil reserves into particular countries, Shell may have to look for alternative reserve sources to continue to sustain its growth. Social Forces Poverty, exploitation as well as uneven distribution of income are some of the most important social issues faced by the world at large. Large corporations are now considered as exploitative forces which have not weakened the States but also brought about changes that are mostly external to the typical societies where they work. Technological forces Technology is probably the only factor in the world which is changing very fast and most of the world is now considered as captive by the technology. The rapid changes in the information technology and communication have made it easier for the firms and consumers to connect more easily. There is also a growing emphasis on the development of alternative energy technologies for sustainable fuel consumption. Legal Forces With the advent of globalization, overall legal structure and requirements have become lose and now firms can actually enter into new markets without any significant legal hurdles. With the opening of traditionally close markets like China and India, it seems that in future, legal forces will not be potent enough to challenge businesses. Environmental Forces Environmental forces are becoming stronger as there is renewed focus on the development of sustainable businesses. Large corporations are investing significant amount of their funds to contribute towards protecting the environment and reducing the harmful effects of the manufacturing and other industrial activity. Part B Industry Analysis Petroleum industry is one of the leading industries in the world with relatively generic products to offer. Industry is basically divided into two broader activities of: 1. Upstream 2. Downstream Upstream activities include exploration as well as extraction of the oil and natural gas whereas the downstream activities include the refining of the same, transporting as well as the sell to the consumers and business customers. It is important to note that both the activities are often performed separately wherein companies engaged into the upstream activities are normally engaged into the exploration side whereas the marketing and refining is done by other allied firms. This analysis however, will be limited to the upstream activities in the industry including the extraction and exploration of the oil. The activities which are purely related with the oil exploration will therefore be the main focus of the industry analysis to be performed. PESTLE ANALYSIS Political Forces A rapid change in the political environment of the world is one of the critical elements that need to be looked at. War against terror in oil rich areas such as Iraq can be a significant impediment in ensuring the consistent and smooth supply of oil throughout the year. Any unfavorable situation in countries like Iraq and Iran can create significant distortions in the world oil supply and as such it is critical that the industry must depend upon non-OPEC and other alternative channels to secure the supplies because of volatile political environment in Middle East Region. Economic Forces Volatile oil prices coupled with strong financial crisis are few of the current economic trends in the world. Due to credit crunch, the overall credit outlay to the firms has reduced and large as well as small firms are finding it difficult to obtain financing at affordable rates. Social Forces Social forces including strong corruption in oil producing countries can significantly affect the overall industry dynamics. Oil producing countries such as Nigeria are famous for the corruption specially in terms of not distributing the revenues earned through oil supply. Further growing poverty may force people to look for mass communication means of transportation thus reducing the overall demand for the oil. Technological Forces Petroleum Industry requires extensive technological support in oil extraction as well as refining of the raw materials. However, future technological shift may occur wherein new technologies will be required to produce the alternative fuel thus in future technological forces may be relative strong to influence the industry. Legal Forces Petroleum industry is a regulated industry wherein the many governments directly control the oil reserves. Saudi Arabia- the largest oil producer in the world controls all its reserves through State owned Saudi Aramaco whereas other countries also directly control the oil supply. Further, the licensing requirements for oil extraction as well as refining is also done after completing extensive legal requirements. Environmental Forces Oil and natural gas are two of the most critical sources for creating pollution in the world and it is because of this reason that there are mounting pressures on the oil companies to develop alternative technologies that can produce environment friendly fuel. In future, environmental forces will be stronger and will significantly dominate the market outcome. Porter’s Five Forces Based on the above information, a critical understanding of the oil exploration segment of the industry can be developed through performing Porter’s Five Forces Analysis. Suppliers’ Power To assess the suppliers’ powers it is important to note that supply is essentially controlled by the Governments. Firms like Shell Plc works as license holders for extraction and as such the overall supply of oil is dependent upon how much government is willing to produce. As discussed above that the industry is dominated by countries controlling large reserves of the oil therefore suppliers hold relatively larger power. However, suppliers are not generally the price givers because the overall price is determined through market forces. OPEC is the biggest supplier in the industry with significant control over the supply of crude oil in international market. Bargaining Powers of the Buyers Buyers are mostly the price takers in this industry with relatively very little bargaining power. Since oil supply is largely influenced by the few big players in the industry i.e. OPEC therefore buyers are mostly price takers. Buyers in the industry include oil refineries which purchase crude oil from firms like Shell Plc. Barriers to Entry The industry requires high capital expenditure to enter and its upstream activities are highly regulated. (Herbst,2008). High degree of regulated market therefore creates entry barriers for new entrants and the successfully entry into the market require substantial government support. Further, due to highly regulated nature of the market, the access to inputs is restricted which again creates significant entry barriers for the new entrants. Threats of Substitutes With world oil reserves decreasing and the prices becoming more volatile, there is strong probability that the substitutes will start to catch-up . Some of the substitutes include ethanol, other forms of bio-diesel as well as Hydrogen. There is already extensive research and development going on the alternative fuel technologies and bio-diesels and hydrogen driven vehicles very soon will become a commercial reality. Further, Ethanol, another type of fuel manufactured from sugarcane pulp, is also being used along with the traditional fuel therefore there is a strong possibility of substitutes to overtake the market in future. Part 3 Geopolitical / international relations Analysis The proposed country is Nigeria where Shell is already working since past many years and contributing towards oil exploration. A comprehensive PESTLE Analysis of Nigeria is detailed below: Political Forces The overall political situation in the country is relatively volatile with strong Military presence. Nigeria is therefore still a country with military leaders and loose political structure and institutions. Due to weak political institutions, the country’s overall political environment is not conducive for doing business without the strong support from the Government. Economic Forces Nigeria has one of the largest oil and natural gas reserves in the world however; it is still one of the poorest nations. Rampant corruption seems to be one of the strongest reasons as to why the overall welfare benefit of the oil revenues is not passed on to the masses of the country. (UNODC, 2010). Shell will have to cope with the difficult economic situation of the country and may not serve the local market and can only use Nigeria as a supply center. Social Factors Due to rampant corruption as well as the lax political infrastructure, overall social environment is not good. The mortality rates are high as well as health and education facilities are almost negligible. Due to insufficient or lack of good education, oil exploration firms may look towards hiring expats for more technical jobs such as engineering and I.T. related jobs. Technological Forces Due to overall poverty and lack of education, the overall state of technology in the country is not good. The country relies mostly on the external support for oil and natural gas exploration. Legal Forces Country is run by the Military and as such the overall legal environment is really tough as the legal infrastructure of the country is heavily influenced by the government functionaries. Environmental Factors Nigeria and specially Shell in Nigeria has very significant contribution towards damaging the environment of the country. Regular oil spillage as well as the illegal theft and use of crude oil is believed to have been damaging the environment of the country and Shell as such has to face strict challenge to safeguard the environment of the country.(Guardian, 2010) The overall implications of the above analysis therefore for the businesses may be relatively more volatile in nature and only businesses with strong local and international support can flourish under such environment. Part 4 International Development Considering the above discussion, our chosen firm, Shell Plc has potentially utilized the strategic framework of market development. Since Nigeria is still a poor country with very weak infrastructure and political institutions with relatively small domestic market therefore Shell Plc has basically attempted to capitalize on the large oil reserves and develop the market in unique manner. Market development in Nigeria started during 1958 when Shell Plc started to make its first commercial export from the country.(Shell.com, 2010). The firm is also the oldest oil and natural gas exploration companies in Nigeria with significant reserves to extract. Shell Plc effectively works under a joint venture with the Government owned entity i.e. Nigerian National Petroleum Company. The overall market development in the region therefore started with the collaboration with Nigerian Government and firm was able to create a unique strategic position in the market wherein it evolved under the patronage of the Nigerian Government. Firm effectively secured its supplies by exploring the untapped reserves including the deep water oil reserves of the country which Shell Plc is currently exploring. Market development strategies require that the firm must expand into new markets in order to secure either the new market for the finished product or to secure the market for raw materials. Since petroleum industry works in two different segments i.e. upstream as well as downstream therefore markets for both the markets can be different too. Nigeria therefore serves as the market for upstream activities of the industry wherein it is actively involved in the oil exploration whereas the downstream activities such as refining as well as sale in the market are done in the second phase. Thus it can be concluded that the firm entered into the new market with greater degree of success and it has developed the new market also however, its entry into the new market was significantly controversial wherein it engaged into significant political maneuvering as well as gross human rights violations. References 1. Dicken,, P (2007). Global shift: mapping the changing contours of the world economy. 5th. ed. New York: SAGE Publications Ltd. 2. Duncan, R, Jancar-Webster, B, Switky, B (2008). World Politics in the 21st Century. Illustrated. ed. New York: Cengage Learning. 3. Falola T, Genova, A (2005). The politics of the global oil industry: an introduction. illustrated. ed. London: Greenwood Publishing Group. 4. Herbst, M (2008). Oil Traders Face New Regulation [online]. [Accessed 14 July 2010]. Available from: . 5. Nigeria Country Profile [online]. (2010) [Accessed 4 May 2010]. Available from: . 6. OPEC (2010). Monthly Oil Market Report [online]. [Accessed 3 May 2010]. Available from: . 7. Shell reports record oil spillages in Nigeria [online]. (2010) [Accessed 4 May 2010]. Available from: . 8. Shell settles Nigeria deaths case [online]. (2009) [Accessed 3 May 2010]. Available from: . 9. Shell in Nigeria [online]. (2010) [Accessed 13 July 2010]. Available from: . Reflective Report The completion of the above report provided me a strong opportunity to understand and learn as to how the team dynamics specially work. This becomes relatively more important when your team is culturally diverse and rich in ideas coming from persons belonging to different cultures. First, I would like to stress that during the preparation of this report, I was able to learn the basic management principles of planning, organizing, staffing, directing and then controlling. At the initial phase of starting this report, we, as the team members, were really busy in planning the report. The planning phase actually involved as to we want to proceed with our report, what will be its contents and what is the end result that we want to achieve. A definite planning process allowed us to plan our work with end result in mind and once we were clear as to what are the actual expectations from us, we proceeded to organize our work in such a manner that it allow every member to contribute positively towards the completion of the report. What is also important to note that following a systematic process we were able to properly assign each part of the report to one of our team members which basically allowed me at least to know and understand as to how, as a manager, I can utilize the strengths of my team members? Identification of the relative strengths and their subsequent use to achieve the organizational objectives was what something I realized as important step towards achieving your goals. Directing and controlling were other two activities which basically allowed me not only to take care of the fact that work is completed but also monitor it and ensure that all of the team members are on one page regarding the overall expectations and outcomes from this project. Agenda for Change What is also critical to note that the overall work though done in most professional manner but I still believe that there was something lacking in the overall process. I believe that our mutual understanding of each other’s cultural values and how it affects our thinking patterns have been ignored by me while preparing this report. I believe that there is a lot to improve on this front and to improve the effectiveness I would be involving myself further into the activities and focus on soft skills such as understanding each others values and showing compassion besides understanding of my colleagues’ cultural as well as personal views to understand each other more fully so that we can further exploit each other’s strength to achieve the desired objectives. Conclusion My initial position on the cultural web was mostly focused on ritual and routines wherein I was focused on understanding as to what others expect from me and what behaviors I should adapt in order to make myself acceptable to the group. However, after the conclusion of the module, I feel that I am more of a part of the group now because my team members now can understand me in better manner and so does I. Appendix Oil Reserves - Top 20 Nations (% of Global) Source: http://www.marktaw.com/culture_and_media/politics/GlobalOil.html Source : http://www.opec.org/opec_web/en/data_graphs/330.htm Read More