Comparison of Saudi Aramco and Shell - Essay Example

Summary After the analysis of the two companies it is found that, Saudi Aramco leads a major share of the market and in fact is the largest energy company in the whole world. Shell follows the company in the list of top NGOs (Non-Governmental Organization) in the 8th position. The business approach adopted by Saudi Aramco is different from the one Shell is using. Shell is majorly concerned with gaining a competitive edge against its competitors. Saudi Aramco is fixed on fulfilling the goals it has set for itself, as this helps it to focus on attracting the target group in the market. Saudi Aramco is focused on developing new strategies and applications that will help it in achieving its ultimate goal in the industry. Technology is constantly advancing and when used by businesses, they make work more effective and efficient. Shell has placed its focus on finding new oil and gas sources, to increase its sales in the market. Business model Saudi Aramco is mainly focused on achieving its organizational goals. By achieving these goals, its customers are satisfied and continue bringing more business to them. For this reason, the company contributes and average of 86% of the total government revenue. Shell has placed its focus on finding new sources of oil and gas to increase its sales in the market. The business models are different, hence different results in performance. Managerial execution Saudi Aramco provides satisfaction to its employees and undergoes new transformation acts of retraining the employees to ensure that they are better equipped to handle their respective duties. The management of Shell has adopted a system of reward to fulfill the interests of the employees and ensure they are motivated at all times. Corporate responsibility measure Saudi Aramco uses a program that helps the employees focus on ethical behavior within the work place. To sustain itself, it has adopted a flexible and efficient organizational structure to achieve operational excellence. Shell has taken an energy efficiency approach and providing the necessary assistance to its customers. Driving forces In this industry, companies focus on demand and customer satisfaction. In addition, the industry has also placed its focus on launching campaigns aimed for building and further developing the future. Porter’s 5 Forces The buyers have a strong bargaining power because of their large numbers and the products are considered to be valuable to the consumers. The supplier power is also high because of the nature and importance of the commodity they are dealing with. There is moderate threat from substitutes in the industry and competition as well. Generic competition strategy Saudi Aramco has adopted a low cost strategy by improving research on the commodity and fulfilling its goals and targets. Shell has placed its focus on reducing the cost of electricity, thereby making the company competitive. Market sizing Saudi Aramco is targeting over 77 countries in the world. In addition, it has the largest oil reserves. It has more than enough capability of targeting large markets. Market positioning Saudi Aramco is at a higher position is the market than Shell. It is owed to the capability of Saudi Aramco to sustain large markets because of its huge reserves. RBV Analysis Saudi Aramco has an integrated value of producing crude oil. It focuses on the skill, capacity and knowledge. Shell is focused on meeting their objectives, hence making it valuable. Their products are also difficult to imitate in the market. In addition, these companies are both well organized in the manner they conduct their operations. Value chain benchmarking Saudi Aramco considered to more valuable that Shell. It is based on the difference in market positions and the markets supplies by these companies. Saudi Aramco has made huge investments in oil exploration activities. Shell is a bit lower in power, but is has adopted the use of latest technologies to help it gain a competitive advantage in the industry. Leveraging international/National/Regional competitiveness Based on the country of operation, the companies need to align their strategies in line with the markets in those countries. In USA, the companies should invest heavily in value addition on their products. In Asia, the oil companies are giving discounts on oil to their customers. SWOT Analysis Saudi Aramco has its strengths and weaknesses all evened out. It has a large market share. However, the oil reserves for oil and may run out at one point. These weaknesses are the same for all companies in this industry. Financial analysis tools Both companies are highly profitable because of the high of products that they sell. Oil is a major part of the world’s power source. For this reason, oil companies have large profit margins. ANALYSES Management Tools Business Model Saudi Aramco Shell Value Proposition Saudi Aramco has maintained a strong value proposition for achieving the goals that will influence the brand and it has adopted employer value proposition to attract its target group. The value proposition of Shell is that it provides best infrastructure and provides competitive return to its shareholders and to its customers and performing the social and environmental responsibility. They also provide fuel, chemicals, and lubricants for companies. Profit Model Saudi Aramco mainly contributes to around 86 % of the Government revenue. The fixed and the variable cost provide a positive return and it establishes relationship between the revenue and the commodity prices. Their investment prices are fixed in nature. The profit margin of the company maintains the fixed and the variable cost of the company. It increases the volatility in the earnings. The profit margin decreases the risk. The company sells in the form of barrels that is then sold to fuel stations and later to consumers. Resources Needed The resources are mainly supplemented with the purchase of the vessel on the emergency basis. Distribution is done on a large scale owing to the large number of customers it has. The refining and the marketing in the manufacture and supply of the petroleum products. The company has employed high quality extraction, refining and distribution facilities. 1 Managerial Execution Saudi Aramco Shell Plc. Organization (recruiting/ retaining/ empowering staff) It provides satisfaction to its employees and it undergoes transformation for new innovations which acts as a source in retaining and empowering its staff. It provides financial benefits and rewards and fulfills the interest of its employees. It provides a unique training program and leads up to the expectation of the employees which is the most common and popular method of recruiting, retaining and empowering of the staff. Resources (New resource investments) “The company has focused on the application and development of the appropriate technologies that are cost effective for meeting or fulfilling the business targets and discovering new resources. The company has focused on exploration of new gas and oil reserves and also in the development of the main and important projects with the application of technology for adding value to the resource holders. Policies & Procedures (Contracts) The company has the responsibility for protection of the environment and it has adopted various policies and procedures for the prevention and the adoption of the measures in the case of oil spill. The policy and procedures has been formulated for controlling the fluctuation in the price of natural gas and oil, minimizing the physical and environmental risk and for promoting legal, regulatory and financial developments. Continuous Improvement The company is focusing on continuous improvement of the health, housing service and education. The company is also focusing on promoting safety at the work place It has been striving hard to maintain its position of being considered as the largest integrated chemical and energy company and it is adopting the transformation program and development in technology for safeguarding the environment. Systems The company is emphasizing on organizing the distribution system in a systematic way for increasing the space for storage and updating the database system. The company is contributing for the promotion of resilient system. The company also uses the system for reducing the potential interference that will influence the people. 2 Rewards & Incentives It recognizes the professional growth, development and achievement of the employees and provides those benefits or advantages. Shell is involved in recruiting, training and rewarding its employees or the staff for developing the business capabilities which ensures that the business of the company has increased and developed the performance and the engagement level. Culture The corporate culture that is adopted by the company has undergone remarkable changes in framing the culture of the organization. It has focused on the creation, research and development and utilization of the knowledge for building and developing corporate culture. Shell has maintained its culture that emphasizes on diversity and improving the working environment and opportunities and it focuses on protecting the distinct culture of the employees or the staff. Leadership (How do senior managers/ executives inspire staff or solve specific operational problems) The company mainly attempt to maintain leadership for innovation in case of the energy industry. The potentiality of the leader among the young workers is developed for maximizing the organizational culture. The company adopts leadership for performing various activities. The senior leaders are responsible for monitoring and supervising the talent development process of the company. Corporate Responsibility Measures Saudi Armanco Shell Ethical Behavior (Lawsuits brought against the company) Saudi Aramco has adopted a transformation program for contributing and focusing in the ethics and increasing the operational excellence of the company for attaining success and development. The approach that is adopted for increasing the energy efficiency will assist the company in helping or providing assistance to its customers. Corporate Citizenship (charitable giving) The strategy of corporate citizenship is mainly developed for understanding the positive and tangible influence in the United Kingdom and influencing the prosperity and economic growth of the company. And enhancing the efficiency and effectiveness for protecting and safeguarding the natural environment. Since the year 1940, Saudi Aramco established a donation fund and has been giving towards local charities, research activities and health care services. The company adopts and performs the role as a corporate citizenship by involving and engaging the people for reducing or improving the impact or the influence of the environment on company and also sharing the benefit of the activities performed. Shell has implemented the Shell Foundation that give donations to NGOs across the world. Sustainability(Impact of the company on the natural environment or on the general physical/ financial/ mental health of society) The company is focusing on the sustainability by delivering a flexible and efficient organizational structure for achieving operational excellence and reliability and improvement or development in the business process. Through the donation fund established by Saudi Aramco in 1940, the company has sponsored research projects across the world on renewable sources of energy. Results from these projects are then implemented in the company for further analysis. The company purchases the products and services that help in maintaining sustainability and in order to maintain sustainability it provides training to its staff and employees. Through the Shell foundation, the company has embarked on research activities that try to find out the types of renewable energy. The company is also educating people on the need for environmental conservation. 3 Positioning Tools External Analysis Tools Driving Forces4 Driving Force Comments Open Source Development The companies in this industry are required or expected to focus on the demand of the customers for satisfying the demand of the dealers and arranging the availability of the products. The companies mainly emphasizes on recovering the gap and the differences and supervising and monitoring the activities. Advertising Networks The oil and the natural gas industry focus on launching of campaigns for building and developing the energy for future. The oil companies generally prefer campaigns and providing advertisement through T V advertisement and printing advertisement. Competition from Other Industries In case of the oil and the natural gas industry especially in case of the marketing and distribution perspective the competition among the companies are tough and severe Although Saudi Aramco is considered or regarded as the best petroleum company still it faces severe competition. The completion is regarded as the threat in this industry. New Revenue Streams The competitive analysis of the competition is required for determining the generation of revenue. The changes in the relationship of the fixed and the variable cost in case of the commodity price the revenue will influence the profit level and the break even points. Porter’s 5 Forces5 Force High/Moderate/Low Comments Buyer Power Moderate The bargaining power of the buyer in case of the oil and natural gas industry is that the product is considered as important to the customers and there is a strong bargaining power of the buyers since the number of buyers are large in case of the oil and natural gas industry. Supplier Power Moderate The oil and natural gas industry experiences a strong bargaining power of the suppliers since the extent or the degree of competition that exist among the suppliers is high and intense and the volume in which this industry deals is critical and complex. Threat of New Entrants Moderate The oil and the natural gas companies face the threat of the new entrants since the marketing and distribution network that is required is very advanced and strong and the requirement of capital is very high and therefore the barrier for the entry of new entrants is high. Threat of Substitutes Moderate The substitute in case of the oil and natural gas industry is very less and the quality of the substitute product is very low. The performance or the activity of the substitute is low and the number of substitute available in this industry is very less and therefore the threat from substitute product is very low. Rivalry Moderate The intensity or the degree of rivalry in the oil and natural gas industry is not very high since the government restricts the competition and the size of the industry is large and wide. Generic Competitive Strategy Competitor Generic Competitive Strategy Comments Saudi Aramco LOW COST The strategy that is adopted by Saudi Aramaco is on low cost strategy by improving the understanding of the system and focusing on the research and development that is cost effective in nature for meeting or fulfilling the targets of the business by discovering new resources and increasing the recovery of this resources.. Shell Plc. LOW COST .The low cost strategy that is adopted by Shell plc is lowering the electricity prices for making the company competitive and increasing the supply of gas that reduces the cost of the fuel. Market Sizing6 Saudi Aramco – Select Applications Product/service Oil and natural gas company it produces crude oil Country/region/locality Dhahran Saudi Arabia Customer profile(in this case, the type of customer to whom advertisers are marketing) It Is targeting 77 countries across the world. Demographics &Economic trends There are a total of 98 companies in this industry. A sample of five companies indicates that 30% production is high, 18% is medium and 5% is low production. The drilling company sells oil to the suppliers who sell it to the retailers. Having largest oil reserves, Saudi Aramco is engaged in the production of more than 260 billion barrels of oil production on daily basis. Saudi Aramco can acquire 20% of the market share. A large firm would be sold the equivalent of 3.4 billion barrels of oil on a monthly basis. One firm is large, two firms are medium and two firms are low. Market size estimate The market size of Saudi Aramco is 20%. The large firms take up 30% of market share. 30%*3.4 billion= 10.2. The medium companies take up 18% market share. 18%*3.4= 6.12. Small companies take up 5% market share. 5%*3.4= 1.7. Compared to the market size of Saudi Aramco at 20%, Saudi Aramco has a bigger market share. Market Positioning Maps Comments: Saudi armanco produces about 12.5 million barrels of crude oil per day7. The amount of crude oil that it produces makes it the largest oil company in the world. It is said that one out of every 10 barrels of oil produced comes from Saudi Armanco. Armanco on top of the fact that it is the largest producer of oil, it sits on a huge pile of oil. Saudi Armanco generates revenue of more than 1 billion $ per day. In the renewable energy sector shell is more active and enjoys leadership position as compared to Saudi Armanco. However, Saudi armanco is also conscious about the future of energy production and has a team of researchers researching on the condition of the use of energy in a more sustainable and better way. In the future Saudi Armanco may move in the x axis. One of the reasons behind this assumption is that Saudi Armanco has all the resources at its command to invest on a big way in the renewable energy market and the company is eager to do the same. Internal Analysis Tools RBV Analysis8 COMPANY: Saudi Aramco RESOURCE: Resource Features Yes/Somewhat/No Comments Valuable Yes The Saudi Aramco has adopted the integrated value for producing crude oil and it is focusing on building and developing the capacity, skill and knowledge in improving the process and the system. Rare Yes Saudi Arabia produces 100 patents services for the protection of its products. Hard to Imitate Somewhat It is somewhat hard to imitate as it is a large and a heavy industry which deals with the production of crude oil and petroleum and the availability of substitute is also very less therefore it is hard to imitate.. Well-Organized Somewhat Saudi Aramco is organized in such a way that it provides an effective and efficient delivery system and it includes better production, marketing and distribution system for fulfilling the needs of the end user. Value Chain Benchmarking Factor Weight Weight Justification Technology 35% Technology plays a major role in the oil and gas industry. Technology is part and parcel of an oil company. Technology usage includes the oil exploration process to the method used for drilling up that oil to refining if required to refine that crude oil to0 lower fractions of the column. The oil company has to often engage in exploration to find out new reserves of oil before the old one is exhausted. R&D 35% Research and development is an area that has been laid emphasis at by both the companies. To maintain their leadership position in the market the companies are active in doing continuous research to find out better and newer ways to extract oil, bring more efficiency and minimize waste and explore alternative sources of energy Sales & Mktg. 15% The sales and marketing is also important for oil and natural gas company as the sales will be able to generate profits only in the sales volume is of great values. The sale in the field of oil and natural gas is done through long time contracts and joint ventures. Safety 10% Safety is a very important factor for oil and natural gas company. A slight mistake or neglect on the field of safety and the whole company may be up on flames. Distribution 5% After the crude oil is produced the next important step is distribution or rather transportation of that oil to the various customers or rather countries across the world. The transport is important because a slight accident can lead to billions of dollars in loss and earn the company lawsuits and potential reputation damage. A case in point over her is BP oil spill. Weighted Overall Strength Rating 100% Factor Weight Saudi Armanco Strength Rating Score Comments Technology 0.35 10 3.5 Saudi Armanco is a leader in using technology in the area of exploration of oil reserves for using oil and extracting it through efficient and modern use of technology. R&D 0.35 10 3.5 Saudi Armanco is making a lot of investments in R&D area to maximize hydrocarbon recovery increases efficiency in exploration. The R&D investment is also focusing in expansion into higher derivatives of crude oil through fractional distillation. Sales & Mktg. 0.15 9 1.35 Saudi Armanco has been leading the sales and marketing of oil in a major way. It is the leader of the oil and gas producers in the world. It generates revenue of 1 billion dollar on a daily basis. It is said that 1 out 10 barrels of oil comes from Saudi Armanco. Safety 0.10 9 .9 Saudi Armanco has been investing a good deal and has been taking care of the safety requirements in a good way. This is one of the reasons behind the fact that there has no major accident that the company has had to deal with for a long time9. Distribution 0.05 8 .4 Saudi Armanco has had no major disasters in distributing and transporting oil in the recent years and that is the major reason behind its high score in the safety in distribution area. In addition to this fact the oil major distributes its oil all across the globe. Weighted Overall Strength Rating 1.00 9.65 Factor Weight Shell Strength Rating Score Comments Technology 0.35 9 3.15 Shell is also good at using latest technologies in exploration of oil reserves. This is evident from the fact that it ranks 8th in the list of top oil and natural gas companies in the world. However it lags behind with respect to Saudi Armanco in this regard. In the year in 2013 Shell topped the list of fortune 500 companies in the world. Shells revenue was 84% of Netherland’s GDP of that area. R&D 0.35 9 3.15 Shell has been investing a good deal in R&D especially in the renewable energy sector. It is doing investments to keep it relevant in the future10. Sales & Mktg. 0.15 7 1.05 Sales and marketing of the company has been good. It is testimony to the fact that it is one of the top 10 companies in the world in oil and gas production. In 2013 it was named as the top of the list of global Fortune 500 list of companies. Safety 0.10 7 .7 Shell has been a good company in the department of safety. Shell’s safety record has been good except the fact that it has faced a lot of controversy and safety issue over its arctic exploration project for which it had to halt its activities several times. Distribution 0.05 7 .35 Shell has been distributing its oil all over the world. Shell operates in over 70 countries all across the globe The company produces 3.2 million barrels of oil every day and has more than 30 chemical and refinery plants. There have been no major accidents in transportation of oil that it has faced over the years except the case of Alaska. Weighted Overall Strength Rating 1.00 8.4 Leveraging International/National/Regional Competitiveness COMPANY: Saudi Armanco Location Advantages Comments USA To increase its presence in USA the company should focus on decreasing the price and increasing market share through partnerships. Value Chain Improvements Comments Investing heavily in R&D The company is making heavy investment in R&D department to increase value of the company. The R&D investment is being made in the sectors of hydrocarbon extraction and increasing the top end of the distillation fraction. Profit Sanctuaries Comments ASIA For the Asia region the Oil major is providing for major discounts in order to keep up its market share and compete with products from Latin America, Africa, Asia and Russia. The oil major has a good share of this market and does not want to lose its strong foothold keeping in mind the fact that the growth in china and other Asian countries is going to boost the demand for oil11. SWOT Analysis Saudi Aramco Strengths No. 1 gas and oil company in the world. Investment in high value projects Weaknesses Sales of top line products are on the decline that will result in lessening or decline of top line growth. The replacement rate is on the decline in recent years. Opportunities Growth of countries such as china and India means that the demand for petroleum products will increase. Bio fuels and alternate energy products and is investing heavily in R&D. Threats It may happen that the reserves for oil and natural gas may exhaust someday. Global recession may result in decline of oil prices. Union strikes, certain disaster may lead to great loss of profit. 12 Suggestions for how Saudi Aramco should address its SWOT’s: Strengths: Since oil and gas reserves are bound to exhaust someday Saudi Aramco should be investing in R&D and renewable resources to secure the future of the company. Weaknesses: The refinery process and the sales should focus on increasing the sales of top line products. Opportunities: The marketing activities should focus on increasing sales in developing economies. Threats: Before reserves become 0 investments in alternate energy sector should increase. Shell Strengths No. 8 in the top 10 list of oil and gas companies in the world The employees are highly motivated Managers use participative approach Weaknesses Safety concern regarding recent controversies of Alaska Operations13 Regional managers are not that efficient. Opportunities Opportunities to increase market presence14 Opportunities to explore new areas for oil exploration There is a probability that if the operations at Alaska are successful then the company is able to get a good foot in the oil market. Threats Other companies may overtake the company in the coming years There is a chance that there may be a major accident in the coming years wiping out the profit. Financial Analysis Tools Saudi Armanco Shell (2013) Oil Industry Profitability Operating Profit Margin 214, 828 / 218, 270 0.9 33592 / 451235 = 0.07 0.037 (operating income) Liquidity Current Ratio15 1015 / 1647 0.62 30,009/ 8,34416 = 3.59 1.5 Leverage Long Term Debt/Equity Ratio 214, 828 / 218, 270 0.9 83106/181148= 0.45 0.2117 Activity Average Collection Period 214, 828 / 218, 270 0.9 *365 328 63638/451235*365 = 51.476 49 Comments: Profitability: The profit margin of the company is very less and this is evident from the fact that in oil and natural gas one to sell a lot of volume to make significant amounts of profit. In case of Saudi armanco as it is a state owned corporation this rations is not relevant. Liquidity: The current ratio of the Shell company is good is good as its current assets increase its current liability. In fact it is in a better position than the industry average. The ratio does not matter for Saudi Armanco as it is not a publicly traded company. Leverage: The leverage ratio of the shell company shows that its equity level far exceeds its debt levels which are good sign for the financial health of the company. In case of Saudi Armanco it is wholly owned by the government of Saudi Arabia. Activity: Shell has an average collection period of 51 days that is greater than the industry average of 49 days. INTERESTING INFORMATION FROM THOMSON ONE, IBIS WORLD, & MERGENT INDUSTRY REPORTS General interesting information Saudi Armanco is the largest producer of oil and lists as the top company in the list of global energy producing company. One of the 10 barrels in the world comes from the company. Shell is also a good company and comes in the position of 7 or 8 I the list of top energy companies in the world. Shell topped the list of global fortune 500 companies in the year of 2013 and is a major contributor to the GDP of Netherlands. Interesting information integrated into case analysis above (market positioning map): Saudi Armanco is investing a lot of amount in R& D activities in order to search for new sources of energy production. This may result in the fact that Saudi Armanco may move in the x axis and acquire pole position ahead of Shell. Works cited Batey, Mark. 2012. Brand meaning. USA: Psychology Press Werbach, Adam. 2013. Strategy for Sustainability: A Business Manifesto. United States of America Harvard Business Press. Forbes, The world’s 25 biggest oil companies. 2015. web. 23 February 2015. Jacobson, Rebecca. Controversy Over Shell’s Oil Exploration in Arctic Continues. 17 september 2013. web. 23 February 2015. Li, Y., Li, Y., & Pan, W. (2012). Progress in Renewable and Sustainable Energy. Zurich: Trans Tech Publishers. Helferty, Anne. 2001. Financial Analysis: tools and techniques. New York: McGraw Hill. Magretta, Joan, 2013. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Boston: Harvard Business Press. Dipaola, Anthony and Mark Shenk. Saudi Arabia Deepens Asia Oil Discount to Record Low. 6 February 2015. web. 23 February 2015. Shell, Annual report. 2013. web. 23 February 2015. Saudi Armanco, Looking ahead. 2015. web. 23 February 2015. New York times. Saudi Arabia Gas Explosion Kills 28. 19 November 2007. web. 23 February 2015. Read More