Analysis Of The Royal Dutch Shell - Essay Example

 PERFORMANCE STRATEGY AND ENVIRONMENTAL ANALYSIS OF THE ROYAL DUTCH SHELL Environment, performance and strategies of the Multinational companies need to be improved in order to survive in the competitive scenario. The major challenges faced by MNCs to strive in the competitive global market are in the area of market and sales, financial resources, cultural and ethical differences and management (Crook et al. 2011). In this context, the performance of The Royal Dutch Shell which is one such MNC listed among the top ranking MNCs can be used to show how the financial and operational strategies can be improved in order to increase the revenues and sales. Royal Dutch Shell commonly known as Shell is an amalgamation of two companies Royal Dutch Petroleum and Shell Transport and Trading and its headquarter is in Hague, Netherlands. Founded in 1907, Shell is now one of the largest Oil and Gas producing company with annual revenue of about US $ 421.105 billion (2014) with total assets of US $ 353.116 billion and providing employment to nearly 94000 employees worldwide (Shell.com, 2015). The purpose of the project is to provide a detailed analysis of the financial and marketing strategies used by the MNCs to grow in terms of revenue and production. Shell is chosen because it has undergone a number of changes and has undertaken different strategic plans in the recent years. 1.0 SWOT analysis of Shell 1.1. SWOT financial strategies used by Shell to improve their performance. Shell has been experiencing dynamic growth in the recent years, but at the same time, there is some momentum loss in the operational delivery, so, the company should emphasis on it in order to increase sales and revenue. The major challenges faced by Shell are the environment risks, risks involved in acquisitions and targets and the market risks in the developing countries like price and demand fluctuations. SWOT analysis is therefore used to determine Shell’s external and internal environment and performances in the past and future. According to Panwar, Kaushik & Kothari (2011), the major strength of Shell is its vast markets in North America, Europe and Asia and the growth of the Shell is mainly based on integrated gas and deep water resources. These resources will enable them to meet the increasing global demand for the energy and energy resources. Shell has strong exploration capacity due to which there has been increase in their number of projects and hence, expansion of market. The major weaknesses of Shell are the environmental and health issues due to the growth in pollution and global warming (Crook et al., 2011). The cases of oil spillage are serious issue and also the shift of the consumers demand towards cleaner technologies to reduce pollution is a serious problem. In terms of opportunities, Shell is innovating newer technologies and low carbon solutions so as to ensure product standard and cleaner environment. The company has been benefitted by the rise in the global demand for the Liquefied Natural Gas and therefore, there is an opportunity to expand in other economies. The threats faced by Shell are mainly oil price fluctuations in the global market, high competition, product substitution and stringent governmental rules and regulations regarding environmental concerns (Colborn et al., 2011). 1.2. Operational strategies. The successful performance of a company depends on the organization structure, its external and internal environment. Shell has its own service stations, wide market, and transport and trade network, energy efficient technologies for production like solar panels. The company also works with collaboration with government, society and industry which enables them to provide best quality products and services (Hill, Jones and Schilling, 2014). 2.0. Social and Ethical Issues for Evaluation of Economic Impact There are certain social and ethical factors that are needed to be emphasized because they have been known environmental activists for their mistakes. There are constant questions regarding the use of the technologies used by Shell and whether they are environmental friendly or not. Looking at the global climatic change, it was assumed that a reputed company like Shell would take the matter seriously but it has not been the case. Shell has not taken any initiative till now to divert towards cleaner technologies of production and exploration (Gaughran et al. 2015). The incidence of oil spill and crude oil pipe leakage had also been recorded earlier, which are major environmental concerns. Shell has been breaching pollution consensus limits regularly and hence, it became an urgent need to use energy efficiency technologies for exploration and divert to cleaner renewable fuels (Hitt, Ireland and Hoskisson, 2012). They have been making investments in renewable resources recently, but a company like Shell whose worth is measured in terms of production and oil reserves this is a huge challenge. Seeing the need of the hour, Shell has been primarily focusing on the reduction of local environmental pollution for which they have been seeking newer renewable oil and gas products (Shell.com, 2015). It is believed that a well established company like Shell will meet the environmental challenges soon without even harming their production volume and revenues (Crook et al. 2011). It is expected that the company will act wisely in a responsible way and abide by the social and environmental laws to ensure efficiency in their operation. 3.0 Environmental Analysis of Royal Dutch Shell The company’s overall performance is influenced by a number of environmental, political, social and economic factors. The PESTLE Analysis is one of the appropriate methods to analyze the health of the company and find out the relevant ways to improve the management and efficiency of the company. The PESTLE analysis can be understood from the given figure. Figure 1: PESTLE Analysis (Source: Terziovski, 2010, p.894) Political Factors: Though Dutch Shell has been working in cooperation with the UK government, there have been certain agreements in the recent years with Shell and the Government to change the senior managers for better management of the corporation (Slack, 2015). In oil and gas companies, the role of the government is dominant and it is only because of its support they can expand their market and undertake innovation and technological advancement in this sector (Gaughran et al., 2015). Economic Factors: The major economic factors that show a company’s performance are; prices, annual revenue, total assets, debts, capital stocks, equities to the shareholders, share earnings, dividends paid etc. The current revenue of the company is about $ 421,117 million with total assets of $ 353,208 (Reports.Shell.com, 2014). Shell has been facing competition in the global market mainly from the oil producers of Russia and Ukraine. There has been fall in the oil prices over the past years due to growing number of oil exporters which has resulted in significant loss of revenue. As a consequence, reports say that the company is reducing their employment to cope up with the revenue losses (Terziovski, 2010). The earnings of Shell in the second quarter have fallen to $ 3.1 Billion from $ 5.1 billion in last year which meant earnings per share have also fallen. Shell is therefore expected to cut down their investments in the future as it expects a further downward shift in the oil prices. (Reports.Shell.com, 2014) Social Factors: The Shell being a leading oil producer in the global market is supposed to have good social connections in the global platform with other MNCs, but it is not so. Thus, in order to expand and enhance their business, Shell and its management team should look into the ways to make ties and incorporate with other oil corporations in the market with the help of the government. This can also help them to reduce competition and even provide opportunities of seeking innovations and knowledge from others. Technological Issues: Technology is an important factor that determines a company’s productivity and progress. There have been no major technological improvements undertaken by Shell in the past decades. Hence, there is a need to make such innovations which will raise the productivity without affecting the cost. The challenges faced are regarding drilling and exploration techniques especially offshore drilling. Though there have been improvements in deep water and ultra deep water technologies of exploration, more expertise and equipments are needed for operational efficiency and safety (Panwar, Kaushik and Kothari, 2011). Legal Issues: Shell has been facing criticisms in the legal front from human rights activists for the past years because of its oil extraction techniques and spillage occurrences in Nigeria and environmental issues of contamination, explosions, leakages and other such toxic events. Earlier in 1990s, it has been criticized in Africa due to the protests of the Ogoni and Dutch government, who found Shell guilty of violating human rights including inhumane treatment and arbitrary arrest for which they had to a hefty fine. They have been criticized for its gas flaring technologies and Shell’s deliberate responses to oil spills (Teece, 2010). These series of incidents over the past years have badly affected the company’s reputation and safety records. Shell has been also getting repetitive warnings from the UK Health and Safety Executive regarding the bad state of affairs in its oil platforms of North Sea. Shell is therefore making efforts to introduce environmental friendly policies and gain back the support of the campaigners by following the rules and guidelines of the UK government. The company is also looking forward to find some efficient technologies and friendly resources of oil extraction and drilling in these areas. Environmental Issues: Shell has been less successful in cutting down the rate of air and water pollution caused by its activities. There have been ecological damages caused by Nigeria’s Delta ecosystem due to drilling sludge, construction of roads, dams, canals required for companies infrastructural development. As a result, there have been frequent oppositions from farming and fishing communities in the delta. Shell is also facing oppositions from global platform for its new hydraulic technology of 3 Drills wells in Egyptian Desert, as it is estimated that this will contaminate the ground water. Shell is therefore making efforts to gain confidence in the Egyptian market by promising that they will come up with less toxic chemical ingredients so that depletion of groundwater can be stopped. (Brinckmann, Grichnik & Kapsa, 2010). Despite of such environmental questions faced by Shell, the US government has shown faith in them and gave the green signal for initiating drilling and gas exploration activities in Arctic region so as to explore the region’s potential. It has been reported that Shell will come up with containment equipments and would provide less risks to wildlife and the Arctic ecosystem (Gaughran et al. 2015). This is a step taken by the USA so as to reduce their dependence on oil imports. Apart from SWOT analysis, the PESTLE analysis is also important to understand the performance of a company in all aspects. It gives an insight picture of the company and analyzes the various aspects of the company that would help the management to take important decisions and actions for better performance. 4.0 Past Financial Performances of Shell and Future Implications Shell’s financial performances have been remarkable over the past years with increasing revenues and production in the global market. There have been plans to carry on investments in the technological innovations, development of newer and cleaner sources that will be beneficial in meeting the global demand along with reduction in carbon emissions (Terziovski, 2010). The lower oil prices over the last year also challenges the financial condition of the company as it now have lesser resources to spend on technology, innovations, and newer projects. The stiff competition faced from other oil producers and substitution of the non renewable resources to renewable resources is also a major threat (Brinckmann, Grichnik and Kapsa, 2010). The financial performance can be analyzed from the Shell’s Business segment (Upstream, Downstream and Corporate) revenues over the past years. The revenues rose from $ 86 million in 2012 to $ 161 million in 2013, but there has been some fall in 2014 as revenues were $ 115 million (Reports.Shell.com, 2015). On the other hand, revenue earnings over the geographical area (Europe, Asia, Africa, USA, and other American countries) showed a gradual decline from $ 472, 156 millions in 2012 to $ 451,236 in 2013 and further to $ 421, 110 million in the year 2014. This figure clearly shows that the fall in the oil prices in the global market, as well as global concerns for reducing pollution by replacing fossil fuels with alternative sources are having a serious impact on the company’s earnings (Reports.Shell.com, 2015). There has been subsequent decline in the production of the Shell subsidiaries, its joint ventures from 1,196 BOE in 2012 to 1,125 BOE in 2014 (BOE is the natural gas volumes after converting oil into correspondents using a variable of 5800 scf per barrel). The net capital investment of Shell also experienced a fall of about 45% in the year 2013, whereas the shareholders earnings were increased by 13% in the year 2014 compared to 2013 (Finance.yahoo, 2015). The current scenario of the company in financial aspect can be presented by studying the data of major key statistics like valuation measures, profitability, income statement, management effectiveness and cash flow statement. The current market capital of Shell is 97.92 billion and the profit margin is estimated as 3.98 % with operating margin of about 5.5 %. The net revenue of the company stands at $ 338.33 billion with gross profit of $ 63.79 billion (Finance.yahoo, 2015). The outstanding debt of the company is 52.94 billion and the debt equity ratio is 29.54 which not a good sign for the company. The return on the assets is 3.17% and returns on the equity are around 7% ,whereas the operating cash flow of the company is 35.58 billion at present (Reports.Shell.com, 2014). Shell is facing intense competition in the global market along with environmental and social challenges, so, it has to undertake relevant strategies to maintain themselves as leader in the global market. It is believed that they are good players in the global stage in terms of technology, project delivery capabilities and in operations and management. According to Colborn et al. (2011), Royal Dutch Shell are also focusing on the risk management and are adopting distinctive technological approach to increase their upstream and downstream production that will generate cash and enhances profitability. Shell also has potential for growth in future due to recent strategies by its leaders like exploring the reserves in Arctic, Kazakhstan, Nigeria and Iraq which will increase their production in the future (Brinckmann, Grichnik & Kapsa, 2010). Conclusion The main objective of the study is to provide an analysis of the external and internal environment of the MNCs and the financial as well as operational strategies they are required to undertake to strive in the competitive market. The study is based on the performance of the UK based MNC Royal Dutch Shell, a leading company in Oil and Natural Gas based products. The SWOT analysis is used initially to understand the financial and operational strategies used by the company but the overall performance can been studied after PESTLE analysis. This study gives an overview that although Shell is financial strong and has huge potential for growth but at the same time they has been facing number of challenges regarding social, environmental and legal issues. Shell is capable enough to overcome these challenges as it has been developing their management skills, delivering large projects, adopting environment friendly technologies of production and investing in the newer fields for further growth. References Brinckmann, J., Grichnik, D. & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. Colborn, T., Kwiatkowski, C., Schultz, K., & Bachran, M. (2011). Natural gas operations from a public health perspective. Human and ecological risk assessment: An International Journal, 17(5), 1039-1056. Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J. & Ketchen Jr, D. J. (2011). Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of applied psychology, 96(3), 443. Finance.yahoo. (2015). Royal Dutch Shell PLC (RDSB.L). Retrieved from https://uk.finance.yahoo.com/q/ks?s=RDSB.L Gaughran, A., Heuvel, A ., Ritsema, G. & Hassink, E. (2015). Is Royal Dutch Shell responsible for irresponsible operations of Shell Nigeria? Retrieved from http://www.theecologist.org/News/news_analysis/1809728/is_royal_dutch_shell_responsible_for_irresponsible_operations_of_shell_nigeria.html Hill, C., Jones, G., & Schilling, M., (2014). Strategic management: theory: an integrated approach.Boston; Cengage Learning. Hitt, M., Ireland, R. D. & Hoskisson, R. (2012). Strategic management cases: competitiveness and globalization. Boston; Cengage Learning. Panwar, N. L., Kaushik, S. C. & Kothari, S. (2011). Role of renewable energy sources in environmental protection: a review. Renewable and Sustainable Energy Reviews, 15(3), pp. 1513-1524. Reports.Shell.com. (2014). Annual Report. Retrieved from http://reports.shell.com/annual-report/2014/servicepages/downloads/files/entire_shell_ar14.pdf Shell.com. (2015).Our strategy. Retrieved from http://www.shell.com/global/aboutshell/investor/strategy.html Slack, N. (2015). Operations strategy. New Jersey; John Wiley & Sons, Ltd. Teece, D. J., (2010). Business models, business strategy and innovation. Long range planning, 43(2), 172-194. Terziovski, M. (2010). Innovation practice and its performance implications in small and medium enterprises (SMEs) in the manufacturing sector: a resource‐based view. Strategic Management Journal, 31(8), 892-902. Read More