Analysis of the External Environment of the Royal Dutch Shell Plc - Case Study Example

Analysis of the External Environment of the Royal Dutch Shell Plc Executive Summary Royal Dutch Shell plc is headquartered in The Hague, Netherlands and has diversified its business operations in over 140 countries while offering employment opportunities to over 112 000 employees. The company was listed as the world’s largest corporation in 2009 following its net worth of $26.277 in 2008. The company is a private multi-sectoral corporation that is involved in exploration and production of oil and natural gas as well as technological services. The paper below discusses the external environment of the Royal Dutch Shell plc. The analysis will entail the application of Porter’s five forces and the PESTEL frame work. Some of the recommendations that the company can apply in improving the business function include incorporating the measures necessary to streamline and maintain its current leadership status in the industry and offering training and support programmes to prepare employees on the challenges associated with working in new environments for enhancing performance. Analysis of the External Environment of the Royal Dutch Shell Plc Royal Dutch Shell plc is headquartered in The Hague, Netherlands and has diversified its business operations in over 140 countries while offering employment opportunities to over 112 000 employees (Datamonitor, 2011; Jonker, et al., 2009). The company was established in 1907 through the union of the Royal Dutch petroleum firms that came together to be known as Shell Transport and Trading Company. The company is a private multi-sectoral corporation and structured into various business units. These units are divided into five categories namely; exploration and marketing, refining and marketing, power and gas, chemical processing and shipping/trading. The company is recognised as the leading player in oil industry. The vision statement of the company indicates that the company is a global group of petrochemical and energy companies. The company aims to consistently achieve the needs of the community through application of methods that are socially, economically and environmentally sustainable. The objectives of the company are; engaging profitably, responsibly and efficiently in oil, oil products, chemicals and other services necessary to meet the global rising demand for energy. Effective strategic planning of a company requires a detailed knowledge of the internal and external environments in which the business operates in. The PESTEL framework and the Porter’s five forces provides the most efficient frame work that acts as the checklist for the ascertaining the direction that the business is taking in achieving its obligations. Porter’s Five Force Analysis The industry in which the company operates is characterised by numerous barriers to entry as well as drawbacks to the continuum of operations. The external forces that affect the company according to Michael Porter include the bargaining power of the suppliers, bargaining power of the consumers, threat of new consumers, threat of substitutes and the rivalry between the existing players as seen in Appendix 1 (Ivythesis, 2008; Porter, 2008). The forces that exert the significant impact on the company include the power of suppliers and rivalry from the competitors. The other three forces i.e. the threat of new entrants, the availability of substitutes, and the power of buyers, have minimal impacts on the company. Threat of the New Entrants Most of the new entrants in the oil industry are discouraged by the numerous conditions and requirements that characterises investment into the oil industry. The high cost of infrastructural facilities and expensive equipment for setting-up such a company requires enormous investment in capital that most of the new entrants lack. Most of the sources of the raw materials for production are normally located in remote locations or in unstable countries with high security risks or dubious government restrictions. This is enough to divert the attention of the potential investors to other industries that have opportunities with lower risks. This lowers the competition levels for the Royal Dutch Shell plc Datamonitor, 2011, cites this as one of the reasons explaining why the industry is characterised by low numbers of prominent players in the market. The company improved its reputation among the consumers through efficient management to prevent them from shifting and changing their loyalty to the new entrants (Ross, 2009). Some of the mechanisms that the company apply in leveraging its image include; enhancing the efficiency of its internal operations, improving its relationship with the suppliers and distributors, improving insecurity in the risky regions that it has invested, and creation of a trustworthy and reliable image for the sake of their customers loyalty. Threat of substitute products The threat of substitutes occurs when customers decide to switch preference from one product to another due to the perceived differences in product features or the quality of services offered. The prominent factor that controls the threat of substitutes is variation in price. The threat of substitutes is not significant in the oil industry because the oil prices are controlled by an independent body, OPEC (Organisation of Petroleum Exporting Countries). The impact of the threat of substitutes force in Royal Dutch Shell plc is felt through consideration of the various uses of oil or the other services that the company offers. For instance, oil is used in the production of plastics; implying that the sale of plastic will be affected by the price and the quality of the products that can be used to replace plastics. The main use of oil is production of energy. Some of the energy substitutes that affect the energy industry include photovoltaic, geothermal, nuclear power, coal, hydroelectric power and wind. However, most of the substitutes have minimal impacts on the company because they are affected by regulatory restrictions. For instance, nuclear power is subject to international opposition where people fear that application of the mechanism will lead to destructive motives such as manufacture of nuclear bombs. The hydro-electric energy sources are also facing wide opposition as its production compromises the principle of environmental/water conservation (Stephanie, Jennifer and John, 2009). The geothermal sources are limited by geographical factors as they are situated in rough terrains that are not economically viable for reliance. The major substitute that may pose a significant threat to the company is coal. However, this will only be possible if the new and efficient technology of coal production succeeds. Competition/Rivalry among the Existing Players The energy sector/oil industry is highly competitive because it is commodity-based i.e. all industry players relies on oil as the primary raw material. The rivalry has been enhanced by the fact that the industry has continued to grow exponentially with the Jonker et al. (2009), asserting that the 2008 growth rate was 1.9%. According to Ivythesis, (2008), the prominent competitor for the Royal Dutch Shell plc is ExxonMobil. ExxonMobil’s competitive threat is related to the fact that it applies the same business strategies that are applied by the Royal Dutch Shell plc. However, the company outsmarts ExxonMobil due to its higher production levels. Additionally, competition is leveraged through effective company management that ensures production of high quality products (Daft, 2010). Being a commodity based industry, the competitiveness of the company is dependent on its capability to reorganise its structures and apply cost-effective measures that would not affect the products prices or be affected by the set market prices. Bargaining Power of the Suppliers The suppliers in the oil industry are normally oil mining companies and extraction firms. The company leverages the power of suppliers through treating them as team members to company growth. The company’s diversified status and the immense resources that it is associated with attract many oil suppliers and shareholders. The company exerts control over suppliers as it better positioned to pay promptly for rendered services such as machineries. Bargaining Power of the Consumers The bargaining power of the buyers in the oil industry is minimal because the prices are controlled by an independent regulatory body (OPEC). Although the company does not possess the price power, it applies other mechanisms necessary for upholding the company loyalty. Such include offering incentives, efficient management of the supply chain, offering value added and efficient services and partnering with other firms in offering quality products and efficient services (Jones, 2011; Martin, 2002). PESTEL Analysis According to Hopp and Dreher (2013), PESTEL stands for political, economic, social, technology, environmental and legal factors as elaborated in Appendix 2. The factors may be out of control for the internal business structures although it is eminent for the company to be aware of them to enhance business, product development and strategic planning. Political and Legal Factors The political factors that affect the business position of Royal Dutch Shell plc include wars and conflicts, government policies, terrorism, government leadership and political trends (Morrison, 2006). Any action by the government of the resident country has a high impact on the business direction of the company. The political factors are eminent in the determination of whether the company’s branches in different countries would be able to survive the challenges of the political situation within the region. Oil industry is subject to direct government control; with most of the resources being the source of instability and political conflicts in many countries e.g. Nigeria (Datamonitor, 2011). This means that these are losses that the company should be prepared to overcome for it to maintain its dominance in the oil industry. The company operations are affected by different legislations such as European Union, International laws, the government and trade legislations. For instance, the UK, Europe and other western countries imposed an embargo on trade with Iraq which has abundant supplies of oil resources. This implies that the Shell group of companies was unable to extract oil from Iraq; forming a barrier to the business expansion of the company. The employment laws also vary depending on the country of operation. For instance, the health and safety standards, wages and the redundancy policies differ, implying that the company has to undertake extensive research on such issues as well as apply them, even if they are unfavourable to the business objectives. According to Stephanie, Jennifer and John (2009), the current legislation on carbon dioxide emission will impart directly to the business proficiency of Shell Group of companies. The enactment of the congestion and toll charges such as the UK and Germany enhances the use of diesel while promoting the use of petroleum. Such legislation has affected markets for the Shell Group of Companies. However, the political factors may be of benefit to the well established companies such as Royal Dutch Shell plc because most of the governments prefer working with established companies over new entrants or small oil dealers. The company experience, since its establishment in 1907, indicates that the management has interacted with numerous political institutions in different countries. This has enabled it to develop the capacity to adopt the required business practices required for maintaining a viable business bond with such governments. The company will be required to adhere to the rules of the resident country if it is determined to overcome the political intrigues and utilise them for economic gains. This means that the business will have to correspond to the laws of such states and respect the governance norms and principles. Technology Some of the technological factors affecting the business operations of the Royal Dutch Shell plc include research funding, internet, transportation, software changes, applicability of technology and information and communications (Roy, 2011). Employing advanced technology has enabled the company to enhance its competitiveness through improving the quantity and quality of goods and services. Efficient utilisation of technology has enabled the company to significantly reduce the effect of the outside threat such as new entrants, rivalry and the negative attitude from the buyers. Technology has also been applied in the internal restructuring of the company in a bid to leverage operations and counter the negative impacts of low production or failure to provide the customers with the quality they deserve. Technology, especially information technology, has also enabled the company to successfully establish different branches world wide. According to Whitfield, 2011, the most significant role that technology has played in enhancing the Royal Dutch Shell plc is offering the corporation the capability to exploit oil in the deep seas. However, although technology has promoted the competiveness of company, the benefits have also been received by the rivals; increasing their competitiveness. This is an indication that the company will be required to invest more for it to sustain its position in the future business environment. Integration of technology systems in the company has also led to loss of jobs, especially for the people engaged in manual roles. If applied at a wider perspective, people are still losing jobs in other companies due to technology. This reduces the number of consumers for the company products, leading to reduced market size. Economic Factors Some of the economic factors named by Kew and Stredwick (2005), as having an impact on the business position of the company includes the economy trends in different regions, taxation issues, trade and market cycles, international monetary and trade, internal cash flow, internal finance, job growth/unemployment, interest and exchange rate. The economy of the country where the company invests determines the sustainability and stability of the success of the company. The economy of the country determines whether the company will attain the capability of attracting investors and shareholders. Majority of the share holders in many companies are country residents that should be economically stable for them to invest promptly in the company. Economic stability is also related to the security level of the country. Most of the countries that are economically stable possess adequate security structures. Unfortunately, most of the oil reserves occur in regions with poor economies as well as unfavourable security. Efficient investment activities in this industry are affected by economic actors i.e. most of the production projects are viable in countries with economic stability (Whitfield, 2011). Countries with poor economies possess poor infrastructural as well as technological facilities; indicating that the cost of running the company will be high. Unfortunately, most of the oil deposits occur in such countries e.g. the Middle East countries. The company will be forced to spend huge finances on laying down the necessary facilities to enhance its operations making the process expensive and ineffective. Investing in energy industry is also not economical because of the low value of the dilapidated refineries which are only suitable for exploration. The demand for oil in the third world countries is low because of the low income rates of the population. This leads to possession of low numbers of private motor vehicles that lowers the demand for oil. Social and Cultural Factors The social factors that affect the company include trends in consumer buying patterns, fads, health, advertising and publicity, religious factors, publicity, earning capacity, staff attitudes, organisational structure, occupation and living standards (Ross, 2009). Social factors have a low impact on the business position of the company. This is because application of energy products is not determined by societal factors; their use depends on the level of needs of the community. Lifestyle changes such that of the US has led to preference of more luxurious lifestyle that prefers cars with large car engine sizes that consume more petrol. Countries that have a high number of educated people have the tendency to adhere to the ethical standards that discourage the excessive use of oil products. For instance, Japan has a high number of educated graduates (75%). This has made Japan raise the standards of vehicle production that are economical and fuel efficient. Some busy towns such as China are pedestrianising most of the busy areas (Ross, 2009). Recommendations The mission of the company should incorporate the measures necessary to streamline and maintain its current leadership status in the industry. The company should also undertake constant auditing of its internal processes to identify how well they harness the external environment for economic gain. More research is required for the company to avoid the challenges related social and cultural factors. Training and support programmes should also be enhanced to prepare the employees on the challenges associated with working in new environments (Brooks, Weatherston and Wilkinson, 2004). This avoids failure in overseas assignments. Conclusion Royal Dutch Shell plc was formed through the amalgamation of the Royal Dutch Petroleum that came together under the umbrella of Shell Transport and Trading Company of the UK in 1907. The external environment of the company can be analysed through focus on The PESTEL framework and the Porter’s five forces. The Porter’s five forces include the bargaining power of the suppliers, bargaining power of the consumers, threat of new consumers, threat of substitutes and the rivalry between the existing players. PESTEL stands for political, economic, social, technology, environmental and legal factors. The company should focus on enhancing employee motivation and internal assessment to ensure that any external force does not negatively affect the performance of the company. References Brooks, I., Weatherston, J. & Wilkinson, G. (2004) The international business environment, London, FT Prentice hall. Daft, R.L. (2010) Understanding the theory and design of organisations, London, South-Western Cengage Learning. Datamonitor (2011) Royal Dutch Shell plc: Research and Markets, viewed 30 March 2012 from . Hopp, C. & Dreher, A. (2013) Do differences in institutional and legal environments explain cross-country variations in IPO underpricing? Applied Economics, vol. 45, no. 4, pp. 435-454. Ivythesis, (2008) DutchShell Porter’s five forces, viewed 30 March 2012 from . Jones, G.R. (2011) Organisation theory, design and change, London, Pearson. Jonker, J., Zanden, J. L., Howarth, S., & Sluyterman, K. E. (2009) A history of Royal Dutch Shell, Oxford, Oxford University Press. Kew, J. & Stredwick, J. (2005) Business environment, managing in a strategic context, London, CIPD Martin, J. (2002) Organizational culture: mapping the terrain, Thousand Oaks, CA, Sage. Morrison, J. (2006) The international business environment, Hampshire, Palgrave. Porter, M.E. (2008) On competition, Boston, MA, Harvard Business School Pub. Ross, C. (2009) ‘Time for Innovation in LNG’ Petroleum Economist, vol. 76, no. 6, p. 11. Roy, S. (2011) ‘Competitiveness in Service Sector’ Global Business Review, vol. 12, no. 1, pp. 51-69. Stephanie, S. P. H., Jennifer, D. O., & John, H. H. (2009) ‘Historical, practical, and theoretical perspectives on green management: An exploratory analysis’ Management Decision, vol. 47, no. 7, pp. 1041-1055. Whitfield, M. (2011) ‘Companies, technology and environment’ Chemistry and Industry London, vol. 21. Appendices Appendix 1: Elements of Industry Structure Source: Porter, 1985, p.6 < http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&ved=0CFMQFjAE&url=http%3A%2F%2Fwww.stanford.edu%2Fclass%2Fmsande473%2F483primerV3.doc&ei=rx32UOzJBsrirAec4oGIDg&usg=AFQjCNGsOIqwYVSuuEokceAtl2G45i-3-g&bvm=bv.41018144,d.bmk> Appendix 2: PESTLE Analysis Source: http://www.rc-businessmaster.com/business-planning/pestel-analysis-external-environment/ Read More