International Business and Policy Assignment

Marketing strategy, as an integral component of a company’s marketing plan, points out the action plans to be implemented in order to enable an organization attain its stated objectives. I t is a plan which explicitly dictates how an organization will engage its rivals and customers in order to maintain a competitive edge in the market, fitting into the context of the broader corporate strategy. It thus becomes a cohesive force without which the overreaching mission statement becomes difficult to achieve (1).

Marketing strategies can be modeled along the dominance of a firm in the market. (2) Based on its position as the second largest oil company in the world with operations stretching in more than 140 countries, Shell can be classified as a market leader. Market leaders can maintain their competitive edge in three ways. Firstly, they could expand the total market. Secondly, they could protect their existing market share and thirdly they have the option of expanding their market share (2).

In expanding the total market, market leaders often look to finding novel uses for their product(s), finding new customers, or creating the need for more application of the product(s) on each occasion. Protection of one’s market share is predicated upon such conscious strategies as developing new product ideas, cost reductions, improvement of distribution effectiveness and customer service. Focusing on and targeting one or more

competitors would serve as an ideal strategy in expansion of an organization’s market share (2).

 Shell seemed to have excelled in entrenching its dominant position by protecting its market share. With the launch of new product ideas, most especially unleaded fuel, which addressed mounting environmental concerns, Shell was able to gain a commanding position as the worldwide leader. Cost reductions helped by the loosened grip of OPEC towards the early nineties and the re-emergence of demand as the controlling force also assisted in the protection of Shell’s market share. Additionally, increasing global demand for natural gas and oil and oil products, aided in part by an expanding global economy had Shell getting new customers for their products. This was helped by its presence in over 140 countries.

Porter generic strategies as advanced by Michael Porter explain that an organization’s strategic advantage lies in one of two areas: differentiation or cost advantage. () In differentiation, an organization develops a unique product that’s valued and charges a premium for it. Often substitute products are not available in the market. Organizations pioneering such products normally have a reputation for quality, creative section tasked with product development, access to cutting-edge research, and a powerful sales team. Shell possesses all these attributes. Unleaded fuel introduced by Shell represents one example of a differentiated product.

Cost leadership strategy, unlike the differentiation strategy, targets a big market. Here the organization assumes a competitive edge by offering products priced at or below average industry prices. This can be achieved by increasing efficiencies of the production processes, sourcing of large amounts of cheaper raw materials, vertical integration, and or optimization of outsourcing. (3)

Explicitly stated in Shell’s 2003 strategy for increased profitability was the adoption of the cost leadership strategy. Vertical integration through merging of the two separate businesses – Royal Dutch Petroleum and Shell Transport & Trading –was also a key plank of the group’s cost leadership strategy. Here one single entity controls all the operations of the group with the resultant increase of the organization’s competitive edge in the marketplace (4).

Improved efficiencies would contribute to the overall cost leadership strategy and was to be attained through improvements in decision-making and accountability, enhanced leadership, and simplification of the board and group managing structures.

Cost leadership strategy as a key plank of Shell’s marketing strategy has previously helped affirm the group’s position as dominant player in the oil and petrochemicals industry. This has been evidenced by its discoveries in the North Sea of huge oil and gas deposits during the recessionary period of the 1970’s. Recent moves in this direction include an exploration asset in Angola.

These marketing strategies as adopted by Shell have had the overall impact of improving the earnings of the group. Share prices of the group rose by a factor of 4 up to 2000 before registering a slight decline in the subsequent 2 years then rising again to a record high in May 2004 in the London, New York, and Amsterdam exchanges. Earnings for the group have followed a similar pattern. Net profits rose 27% to $11.7 billion (6.4 billion sterling pounds) in 2004.

Misstatement of Reserves

Reserves constitute any oil company’s most vital asset. In flagrant contravention of SEC rules, Shell consistently overstated its value of oil and gas reserves. For instance the company overstated its reserves in Norway alone by a whooping 250 million barrels. Another 4.35 billion barrels had similarly been overstated. (5) In 2004, it emerged that the company had the lowest reserves of oil among the major oil companies, just 14.5 billion dollars or 10 year reserve life. The industry average is 15 years reserve (6).

Compare this to ExxonMobil’s reserves of 72 billion barrels, with 22 billion of these “provable”. This, together with the cut of a further 500 million barrels led to the downgrading of Shell’s rating by the credit rating agency Standard ; Poors from triple A to A plus.

Additionally and more significantly, Shell had a much lower reserves replacement ratio as compared to its main competitors, ExxonMobil and BP, at just 98%.  BP had 175%.  This meant that the company was pumping out more oil than it was discovering. Stated differently, Shell was losing big time to its rivals (7).

Credit rating is designed to provide vital information to investors and lenders, giving benefits to borrowers also. Triple A rating is a credit rating normally reserved for best quality borrowers. These are the most stable and reliable companies and in this list includes governments. A plus rating categorize borrowers as higher risk than those in the triple A band. The net effect of this unfortunate occurrence was to put a dent in the reputation of the company, decreasing its credit-worthiness. (8)

Distraught shareholders filed lawsuits, the company’s shares took a nosedive, fines by financial regulators were imposed, and the finance chief and chairman were forced to quit. All these contributed to bad publicity for the company, eroding public and investor confidence in Shell. It diminished it’s stature as a world class company with credible reporting practices.

Shell’s Future

Coming on the back of the Shell scandal was an unprecedented rise in the overall profitability of the firm. As stated previously, net profit rose 27% to an all time high. This demonstrated that the fundamentals underpinning the company’s success were solid.

The reserve benchmark is increasingly becoming less and less of a consideration in gauging the prospects of an oil company. More emphasis now rests on the ability of a company in execution of large scale-projects which require years to complete. Stated differently, reserves have some meaning but they are increasingly being pushed to the periphery. Such factors as rising nationalism in oil-producing countries like Venezuela and Bolivia means that oil companies cannot book reserves thus leading to large negatives in replacement of reserves. Therefore project management has become a vital measurable. Can oil majors complete mega-projects at low costs and on time?  (9)

The future for Shell will therefore lie in its ability to successfully implement the cost leadership strategy. Getting rid of the convoluted bureaucracy that was split in England and Netherlands and which was responsible for long-delayed decision making would be the first step. The group would need to fully integrate into one entity to achieve internal efficiencies.

Secondly, companies whose strategy is driven by the cost leadership model need to have access to vast sums of capital that would enable them to engage in significant investments in capital projects. World prices of oil have quadrupled over the last seven years and it has been argued that this is due to the inability of the oil companies to meet the rising demand. Oil is now a product of demand and supply so that higher supply would push the prices down. Inability of the oil industry to meet the demand is due to less than adequate investment in both production and complex refining capacity. Shell needs to invest in these capacities as the demand is there.  (10)

Thirdly, continued emphasis on its societal marketing orientation should be made. This is a model which focuses on the promulgation of long-term benefits to the society by concurrently mitigating any negative effects associated with a product or production process while enhancing its positive effects (11)

Societal marketing orientation is intertwined with Shell’s concept of sustainable development. This is an increasingly powerful marketing strategy in light of increasing global concerns about global warming and its attendant effects. Apart from boosting its corporate image, such a strategy could lead to innovation of products and processes that are more environmentally-friendly as was the case with unleaded fuel.

Fourthly, improvements in efficiencies of the production processes need to be made. This would have the net effect of reducing costs associated with the production processes, cutting down on overheads and enhancing the cost strategy. With the appropriate technology in place, recovery rates can be pushed from the current 65% to more than 80%. Stated differently, only a third of the oil in known fields is produced. With the right technology more than twice the amount of oil currently produced from an oil field can be recovered.   (10)

Fifthly, exploration in newly discovered or promising countries such as Angola, Azerbaijan, Gabon, Uganda, and Sudan should be considered. Many of these countries have no restrictions on booking reserves thus the company’s reserve benchmark would be boosted. Secondly they possess relative political stability which would assure stable production as opposed to countries such as Iraq and Nigeria .This would also increase the amount of oil that it is pumping. The consequent increase together with the attendant rise in the reserves would shore up the replacement ratio and boost Shell’s ratings.

Horizontal integration could also be an option worth exploring. Broadly defined as the acquisition of business operations that are at the same level of the value chain as the firm in question, it is a great option for a company seeking to grow its presence in a specific market segment in a   cost-effective manner. Shell has the stated objective of attaining value growth from moving the Group towards its aspired portfolio, which includes growing the proportion of exploration and production and gas and power. Towards this end, strategic acquisitions of such utilities as power firms and gas plants in targeted parts of the world ( such as Pacific- Asia which is estimated to consume 48% of the global output) and which have the potential of advancing the group’s long term interests would be appropriate. This would have attendant benefits including economies of scale, lowered costs of running operations in foreign markets, increased synergies and market power. (12).

Also, as noted before, with the decline in the consideration of the reserve benchmark as the ultimate tool in apportioning success to a firm, Shell would be expected to continue with the objective of operating, managing risk better and cutting costs through improving energy efficiency. Similarly, development of its workforce concomitant with its strategy of hiring only the best people would greatly help it meet deadlines for its large projects efficiently. This would aid in its overall mission of being the dominant player in the market.

An intensified emphasis on cross-cultural marketing as outlined in the company’s diversity framework could also add value to Shell. Creation of lasting and long term relationships with oil-rich countries would also go a long way towards helping Shell regain its dominant position in the market.

Shell has for a long time had a strong research and development program as evidenced by the growing allocations of funds for its research activities and product development team. Innovation is a vital component for firms seeking to challenge the market leaders or grow their product portfolio. Continued investments in research and development would guarantee Shell a dominant position by enabling it, for example, to harvest oil from pools of mature basins that have not been touched by any other firm or to explore the foot of the arctic or to pioneer the decarbonization of products.

Related to this is the investment in new technologies. Rock shales, for example, may hold the key to the energy crisis. It is estimated that in U.S.A. where Utah borders Colorado alone, over 800 billion barrels of oil – over thrice the size of Saudi Arabia reserves – are contained in the rudimentary rocks found there in the form of shale. Shale is a precursor of oil and its distillation would lead to production of oil. Sadly though, the technology to make this possible is lacking. Investment in such technologies by Shell could well position it as an undisputed leader in the market in the event of a breakthrough.(13).

 All in all, the future for Shell and the entire energy industry is challenging. There is an almost insatiable demand for oil and oil products fuelled by China’s massive appetite and indeed the expansion of the global economy. On the other hand, political instabilities and uncertainties in many oil-producing countries such as Iraq have destabilized the stable flow of oil. Lack of new investments in production processes has also stymied the supply of oil in the global market. Additional challenges include the mounting concern about climate change and the often adverse effects of oil exploration on the environment.

Can the oil majors source and commit large amounts of funds needed for expansion of capacity to meet the soaring demand? Can the oil majors originate a strategy that commits them to sustainable development?             Can the oil majors pioneer newer technologies and have the courage to explore new opportunities such as distillation of hydrocarbons in rock shales?

The company that will rise to meet these challenges is the company that will dominate the market. And investments in technology will help in this respect. Does Shell have the ability to be this company? My opinion is that this indeed is the case.

Works Cited:

1.       KnowThis.com, “Principles of Marketing – Marketing Planning ; Strategy”, 2008, p.3

http://www.knowthis.com/tutorials/principles-of-marketing/marketing-planning-and-strategy/2.htm

2.       Web Marketing Strategy, “Market Dominance Strategies”,2008

http://www.nowsell.com/marketing-guide/market-dominance-strategies.html

3.       Quick MBA  – Strategic Management, “Porters Generic Strategies”, 2007

http://www.quickmba.com/strategy/generic.shtml

4.       “Vertical integration” InvestorWords.com. Web Finance, Inc. June 16, 2008 ;http://www.investorwords.com/5977/vertical_integration.html;. l

5.       Gardner, Beth “Shell Report Exposes Lies on Oil Reserves” in  the Associated Press, Monday April 2004

http://www.commondreams.org/headlines04/0419-08.htm

6.       Verdin, Mike “Shell Cuts Oil Reserves for Fifth Time”, in Times Online, February 3, 2005

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article509975.ece

7.       Fawcett, Tim “Shell’s slippery slope” in BBC News, Thursday, 18 March, 2004

http://news.bbc.co.uk/1/hi/business/3524438.stm

8.       ASX, “Standard ; Poor’s Ratings Services”, 2008

http://www.asx.com.au/investor/irs/news/sp_rating_service.htm

9.       Gonzalez, Angel “Altered Picture for Big Oil Reserves Three Years after Shell”, in Dow Jones Newswires , Friday, April 13, 2007 http://www.rigzone.com/news/article.asp?a_id=43868

10.    Hayward, Tony  “Securing the Future – an Oil Company’s Perspective”,11 June 2007

 http://www.bp.com/genericarticle.do?categoryId=98;contentId=7033952

11.    Gi-Du Kang ; Jeffrey James, “Revisiting the Concept of a Societal Orientation: Conceptualization and Delineation”, June 4, 2008.  http://ideas.repec.org/a/kap/jbuset/v73y2007i3p301-318.html

12.   Quick MBA  – Strategic Management, “Horizontal Integration”, 2007

http://www.quickmba.com/strategy/horizontal-integration/

13.   Berman, John et al, “The Black Gold Rush”, in ABC News Internet Ventures, June 16, 2008, http://www.abcnews.go.com/GMA/Consumer/story?id=5171541;page=1

;