Shell

1. Introduction

One of the key challenges facing large companies in the oil and gas industry is to meet the ever growing global demand for energy in environmentally sustainable ways. The Royal Dutch Shell plc, widely known as Shell, is one of the global groups of petrochemical and energy-based companies that have managed to satisfy the demand while staying competitive in the industry. Shell explores and extracts natural gas and crude oil as well as bitumen and transforms them into various products for sale to commercial and retail customers. The group provides gas for heating, electrical power, and cooking. In addition, the group provided lubricants and fuels for transport and chemicals for coating, detergents, plastics, and many other industrial applications (Shell, 2014b). The central objective of this research paper is to analyse the strategy of the Royal Dutch Shell plc and evaluate the reasons behinds its success. The paper also explores the internal and external environment of the group as well as its strategic advantages in the global oil and gas market.

2. Company Data

Between 1907 and 2005, the “Shell” Transport and Trading Company and Royal Dutch Petroleum Company operated as the two primary companies collectively referred to as the Royal Dutch Shell Group. Operations were carried out through the subsidiaries of these two companies until 2005, when the Royal Dutch Shell plc transformed into a single company known as the Royal Dutch Petroleum Company, whereas the other one became the Shell Transport and Trading Company Limited. It is worth noting that Royal Dutch Shell plc is a public limited company headquartered in The Hague, Netherlands. The company is registered in Wales and England. In reference to company data, this section relies on the company’s financial data between 2011 and 2013. The presented information corresponds to the key performance indicators during the same period. In the same line, they reflect the company’s capabilities. As of May 2014, Shell’s market cap was at $234.06 billion. In 2013, its total shareholder return (TSR) was 8.6% as opposed to -0.25 in the previous year. TSR is the percentage difference between the share price at the start and the end of the year. The number of employees grew from 87,000 in 2012 to 92,000 in 2013. This encompasses the annual average full-time employees (Shell, 2014b). The organisation faces competition from globalised companies such as Chevron Corporation and Exxon Mobil (Shell, 2014b).

Shell’s gearing in 2013 stood at 16.1% as compared to 9.8% in 2012. Gearing is the net debt as a percentage of the company’s total capital. It indicates the degree to which the group’s activities are financed by debt. The net capital investment of the company grew from $29,803 million in 2012 to $44,303 million in 2013. Most importantly, the proved gas and oil reserves attached to its shareholders improved from 13,556 million boe (barrels of oil equivalent) to 13, 932 boe. Reserves are vital to the company because they serve as the source of future prospect. Shell had an 88% project delivery rate in 2013. Project delivery is a reflection of the company’s capability to finish major projects within the schedule and budget with reference to the targets predefined in the company’s annual business plan. Typically, Shell’s target consists of at least 20 capital projects in their execution phase. Some of the major projects that were underway at the time of this writing included Athabasca Oil Sands Project, Port Arthur Refinery, Pearl GTL, Sakhalin-2, Qatargas 4, Shell Eastern Petrochemicals Complex (SEPC), and Gumusut-Kakap (Shell, 2014a).

Shell’s innovative technology provides the company with competitive advantages that make it stand out among competitors. R&D supports the existing business platform and also facilitates future businesses. In this regard, Shell has continued to spend more than any other global gas and oil company in the R&D of innovative technology. Shell has been spending more than a billion dollars annually on R&D since 2007. In 2011, R&D expenses were $1,123 as compared to $1.318 million in 2013. In 2012, the company spent $1,304 million on research and development expenses (Shell, 2014b). In the same trend, the company planned to continue concentrating on technologies that support its businesses and reduce the environmental footprint of Shell’s products and operations. Such sustainable investment in R&D has enabled the organisation to advance technologies that help not only access new resources but also improve customer satisfaction or experience. For example, Shell uses its distinct seismic visualisation and processing software to identify previously unrevealed geological details. The company has also developed oil-recovery techniques that improve production from the fields. Furthermore, it has managed to develop lubricant and fuel formulations that perform better. R&D has enabled Shell to design and develop drilling-rig hardware that delivers oil wells faster and safer (Shell, 2014a).

Shell’s business strategy seeks to fortify the group’s position as a global leader in the gas and oil industry, while helping entities to meet their energy demand in a sustainable manner (Shell, 2014a). Social, safety, and environmental responsibilities are at the core of the company’s activities. The organisation's strengths include the project and financial management skills, the innovation and application of technology, and the management of the group’s integrated value chains. According to Shell (2014a), the company’s commitment to innovation and technology continues to be one of the central pillars in its approach to business success. As energy projects continue to expand and become technically demanding or complex, the company relies on its engineering expertise, one of the technological capabilities that shapes the success and growth of the business.

3. Reasons for Shell’s Success

Shell’s success is also anchored in its superior technological innovation capabilities (TICs). Technological innovation capabilities entail features that support and promote technology-based innovation strategies. According to several studies, there is a correlation between technological innovation capabilities and an entity’s key performance indicators (KPIs), including innovation performance, sales growth, and product performance (Guan et al. 2006; Lee et al. 2012; Prašnikar et al. 2008). Shell’s technological capability can be appraised from several perspectives, including innovation decisions, resource capability, marketing, team capability, and R&D. Team capability refers to the ability of Shell’s Project and Technology segment to secure effective management practices and an innovation culture. As noted by Shell (2014), the segment can manage internal cooperation and external communications with suppliers, customers, and its partners (Davila, Epstein, & Shelton, 2007).

Shell empowers its diversified workforce by increasing the knowledge of its teams about market inputs and technology with the help of its manufacturing and resource allocation capability. Resource allocation capability entails the capacity to manage capital investments and HR supporting innovation initiatives (Tan & Nasurdin, 2006; Ebert, Chandra, & Liedtke, 2008). Skilled human resources are one of the vital enablers of innovation. For these reasons, Shell stands out as one of the most innovative companies in the energy sector.

Strategic management and effective leadership play a critical role in the success of technologically driven companies (Bolden, Gosling, Marturano, & Dennison, 2003; Halawi, Aronson, & McCarthy, 2005). According to Davila, Epstein, and Shelton (2007), transformational leaders create an effective project team and environments that facilitate innovation by demonstrating the willingness to share risks as well as to reward or support innovative ideas. Shell’s business environment encourages innovation because employees that are highly connected or tend to collaborate are likely to form effective teams. According to Ebert, Chandra, and Liedtke (2008), innovation largely depends on connectedness and collaboration.

Corporate governance influences the way the company is led or directed and the relationships it creates with the relevant parties. Shell embraces high standards or corporate governance, which plays a vital role in it its business performance and integrity. According to Gartside, Griccioli, and Richburg (2011), leaders in contemporary companies must be groomed to lead or operate in various environments, either in terms of management skills or transformations of psychological or emotional mindsets. This thinking is in line with the observation that various centres of influence or power are rising.

Information systems and the related technologies perform a significant role in the competitive global business environment (Barney, 1991). To overcome regional limitations, executives from both emerging and developed economies are pursuing digitised systems for planning human resources and processing information (Chopra & Sodhi, 2014; Peteraf, 1993). The HR processes must be restructured in otder to achieve consistency between distributed units and also local relevance (Dimitria & William, 2014; Thomas & Lazarova, 2013; Wilkinson & Redman, 2013). Shell implemented an information technology system for its HR department known as Shell People. Shell's executives credited the system as one of the reasons behind the success of the company’s global business strategy.

The digitised Supply chain management and HR system eliminate the governance constraints and enable leaders to focus on both national and domestic levels concurrently (Auramo, Kauremaa, & Tanskanen, 2005; Thomas & Lazarova, 2013). The redesign of processes and systems to support a global and consistent platform changed the management’s approach to strategic talent-related competencies (Gartside, Griccioli, & Richburg, 2011). In this regard, non-core functions such as benefits management and payroll processing are handled through outsourcing to improve efficiency and productivity.

Besides improving energy efficiency in the company's operations, Shell supports its retail and commercial customers to manage their surging energy demands. Moreover, the Royal Dutch Shell plc is engaged in the research and development of innovative technologies that improve efficiency and reduce greenhouse gas (GHG) emissions in the production of natural gas and liquid products.

4. Strategic Analysis of Shell

Strategic analysis is the first phase or process in strategic management that implies environmental scanning or research about the organisation to obtain reliable data that serves as the input to the strategy formulation phase (Rothaermel, 2012). Strategic analysis in the international environment involves competition that goes beyond national borders. Strategic analysis can also refer to theoretical comprehension of the business environment where an entity operates, together with the understanding of the entity's interactions with its environment, in order to enhance the capacity for intellegent allocation of the resources (Rothaermel, 2012). There are several analytical tools that can be used to analyse Shell’ environment, including PESTEL, SWOT, VRIN, and Value Chain analysis (Capon, 2008; Lynch, 2008). However, the study focuses on the last two analytical frameworks.

Value Chain Analysis

A value chain can be viewed as a systematic or linear depiction of how value is added through a product’s life cycle. Porters’ Generic Value Chain model comprised a series of activities that were found to be common in a wide range of business entities (Porter, 1990). The model consisted of primary and support services. The primary activities included inbound logistics (handling raw materials and warehousing); operations (assembly and testing); outbound logistics (storage and distribution of finished products); marketing and sales; and service (Porter, 1990). On the other hand, support services included procurement, technology development and human resource development. To gain a competitive advantage within an industry, a company must clearly define its value chain (Rothaermel, 2012). Ideally, the value activities should have several traits, including different economics, representation of a significant cost proportion, and high differentiation potential. In other words, competitive advantage can be created and sustained through a low-cost and differentiation strategies. By standardising processes and technologies across the refineries, the company improved efficiency (Aspen Technology, 2010). Table 1 represent a generic value chain for Shell.

Table 1 Shell’s Global Value Chain

The Royal Dutch Shell plc is organised into three major segments: Projects & Technology, Downstream, and Upstream. (Shell, 2014a) Shell’s upstream segment explores for and extracts natural gas, crude oil, and natural gas liquids. After the extraction, the gas is liquefied and transported. The upstream business segment also operates both the midstream and upstream infrastructure used to deliver gas and oil to market. According to Shell (2014a), the upstream segment is divided into two business units: Upstream Americas and Upstream International. Upstream International covers the rest of the globe with a major focus in Asia, Africa, Europe, Russia, and Oceania. On the other hand, the downstream segment manages the company refining and marketing operations for chemicals and oil products. The operations are segmented into globally and regionally managed business units. The downstream segment provides shipping services by oil tankers and liquefied natural gas (LNG) carriers. Shell’s interest in alternative energy and carbon dioxide management are overseen within the downstream business unit.

Shell’s Project & Technology segment manages the ideation and implementation of projects. In the same effort, it drives research and innovation to develop competitive technologies. In addition, Projects & Technology provides technology capability and technological services in both upstream and downstream operations (Shell, 2014b). Most importantly, it provides strategic leadership to the group in the areas of contracting, procurement, safety and environment.

VRIN Analysis

Competitive advantages are assets, capabilities, skills, and other features of strategic management that enable an entity to compete effectively with its industry or sector (Barney 2001). The features bring the difference in performance among entities within the same industry. Observably, a competitive advantage is connected with the resources available to a firm. An internal analysis is an integral part of the situation analysis within the strategic planning process. VRIO or VRIN framework is one of the analytical tools used in this phase. Companies that have the capacity to outperform their competitors over a prolonged period are said to have a sustainable competitive advantage. For example, Shell’s sustainable competitive advantage is rooted in the company’s ability to fund research and development efforts annually (Shell, 2014b). Halawi, Aronson, and McCarthy (2005) noted that a competitive advantage could be established internally or by inducing changes in the external environment. Internally, competitive advantages are created and sustained by unique competencies, innovative capabilities, and VRIO resources. According to Barney (2001) and Peteraf (1993), resources must be valuable, rare, imperfectly imitable, and non-substitutable (VRIN) to create competitive advantages. Some of the internal resources that have VRIN attributes include intellectual property (patents, copyrights, and trademarks), know-how and organisational culture, brand equity and reputation (Barney J. B., 1991; Clark, 1997; Duncan, M.Gintei, & Swayne, 1998).

Table 1 Shell’s VRIN Resources and Value Chain Analysis

Shell’s VRIN Analysis

VRIN analysis serves as the foundation for determining competitive advantages. This section covers the key areas of Shell’s capabilities.

Value. Shell has managed to increase its reserves since the 2009 downturn. In addition, the company has been able to expand its Americas and International reserves and production. These reserves are coupled with high technology refineries, hence they increase Shell’s portfolio.

Rarity. Shell’s advanced technology, identification of detailed geological information, and extractions in deep water are some of the key aspects that distinguish the Royal Dutch Shell plc from the cutthroat competition. In this respect, the company is capable of formulating unique strategies.

Inimitability. The Royal Dutch Shell plc has a significant offshore presence. Furthermore, it has developed advanced rigging equipment that enables the company to not only deliver faster but also safer.

Non-substitutability. Shell’s integrated approach allows the company to participate in the complete value chain in the oil and gas industry. As a result, its operations in the exploration, refining, trading, marketing, and retail stations position the company as a dominant leader in the downstream, upstream, and midstream levels. The existing business structure is strategic and profitable, thus placing Shell in a non-substitutable position.

5. Contribution of Effective Leadership to Shell’s Success

Shell’s Board consist of the chairman, two executive directors, and eight non-executive directors. The company is also fully compliant with the latest Financial Reporting Council’s Governance Code. As predefined in the Code, the Board presents an annual report consisting of financial statements that are understandable and provide necessary information to the shareholders interested in assessing the company’s strategy, business model, and performance (Shell, 2014b). Shell is governed by its General Business Principles that satisfy the NYSE requirements. Also, Shell has internal procedures that can be raised by any employee with regard to auditing concerns and internal accounting. Moreover, any employee can communicate their concerns to the top management through a globally dedicated line and website without putting their position at risk. This is an illustration of the open door approach to leadership. This approach enhances transparency and improves the relationship between the leaders and workers.

Shell’s General Business Principles outline how its subsidiaries should conduct their affairs. The principles include the company’s commitment to supporting human rights and sustainable development among other things. All employees are obliged to stick to the company’s Code of Conduct, which is meant to help both employees and directors implement the company’s business rules. Besides the Code of Conduct, Senior Financial Officers and Executive Director are required to comply with Shell’s Code of Ethics, which is intended to agree with the listing of the NYSE (Shell, 2014b). A review of several leadership resources indicates that leadership is evolving to transformational leadership.