SHELL PAKISTAN

STRATEGIC MANAGEMENT

Members:
- Abdul Ghaffar.
- Ayesha Mehboob.
- Kiran Arshad.
- Nehal Motiwala – Group Leader.
Contents
Executive Summary....................................................................................................................................... 3
INTRODUCTION ............................................................................................................................................. 4
CHAPTER NO: 01 ........................................................................................................................................... 5
VISION STATEMENT: ................................................................................................................................. 5
MISSION STATEMENT: .............................................................................................................................. 5
VALUES OF SHELL: ..................................................................................................................................... 5
GOALS AND OBJECTIVES: .......................................................................................................................... 6
SWOT ANALYSIS ........................................................................................................................................ 6
CHAPTER NO: 02 ........................................................................................................................................... 7
EXTERNAL ASSESSMENT: .......................................................................................................................... 7
CHAPTER NO: 03 ........................................................................................................................................... 8
INTERNAL ASSESSMENT: ........................................................................................................................... 8
- COMPETETIVE PROFILE MATRIX ....................................................................................................... 8
- FINANCIAL RATIOS: ........................................................................................................................... 9
- KEY RATIOS:....................................................................................................................................... 9
PROFITIBILITY ........................................................................................................................................ 9
GROWTH ............................................................................................................................................. 10
CASH FLOWS ....................................................................................................................................... 11
FINANCIAL HEALTH ............................................................................................................................. 11
EFFICIENCY RATIOS ............................................................................................................................. 12
CHAPTER NO: 04 ......................................................................................................................................... 13
SHELL’S STATEGY:.................................................................................................................................... 13
SHELL AMBITION: ............................................................................................................................. 13
BUSINESS LEVEL STRATEGIES: ................................................................................................................. 14
GENERIC STRATEGY OF SHELL ............................................................................................................. 14
COMPETITIVE ADVANTAGE MODEL:................................................................................................... 15
PRODUCT LIFE CYCLE .......................................................................................................................... 16
- INTRODUCTION STAGE: .............................................................................................................. 16
- GROWTH STAGE: ......................................................................................................................... 17
- DECLINE STAGE ........................................................................................................................... 17

1
 POTER’S FIVE FORCE MODEL: ................................................................................................................. 17
- EXPLORATION AND PRODUCTION METHOD: ............................................................................. 17
- OIL REFINERY, MARKETING, AND CHEMICALS BUSINESS: .......................................................... 18
- GAS AND POWER: ....................................................................................................................... 19
CHAPTER NO: 05 ......................................................................................................................................... 20
COMPETITIVE RIVALRY ............................................................................................................................ 20
COMPETITIVE DYNAMICS.................................................................................................................... 20
Conclusion: .............................................................................................................................................. 23
CHAPTER NO: 06 ......................................................................................................................................... 23
1) SELLING OUT: .................................................................................................................................. 24
2) CONSOLIDATION: ............................................................................................................................ 24
3) MARKET PENETRATION:.................................................................................................................. 24
4) MARKET DEVELOPMENT: ................................................................................................................ 24
5) PRODUCT DEVELOPMENT: .............................................................................................................. 24
6) DIVERSIFICATION: ........................................................................................................................... 24
- RELATED DIVERSIFACTION: ......................................................................................................... 24
- UNRELATED DIVERSIFICATION: ................................................................................................... 25
CHAPTER NO: 07 ......................................................................................................................................... 25
INTERNATION BUSINESS AND CORPORATE LEVEL STRATEGIES: ............................................................ 25
WHY EXPAND BUSINESS INTERNATIONALLY?..................................................................................... 26
WHERE TO EXPAND INTERNATIONALLY?............................................................................................ 26
HOW TO EXPAND INTERNATIONALLY? ............................................................................................... 27
CHAPTER NO: 08 ......................................................................................................................................... 27
1) RUNNING A SAFE, EFFICIENT, RESPONSIBLE, AND PROFITABLE BUSINESS: ................................... 27
2) SHARING WIDER BENEFITS WHERE WE OPEATE: ........................................................................... 28
3) HELPING TO SHAPE A MORE SUSTAIBLE ENERGY FUTURE: ............................................................ 28
REFERENCES: ............................................................................................................................................... 29

2
 Executive Summary

Shell is a superior brand name with more than 100 years history in this region, in fact the company is still
in possession of a fuel storage tank from 1899. However, the documented history of the Royal
Dutch/shell group the Indo-Pak subcontinent dates to 1903 when a partnership was struck between the
shell transporter and trading company and the Royal Dutch petroleum company to supply petroleum
products in Asia. With their key indicators of progress already soaring to new heights, Shell is committed
to dedicate all its energies, resources, and the time to bring higher value and satisfaction to their
customers, employees, and shareholders. The graph of Shell is going up every year. The ratio of profit is
increasing at good percentage. Shell is serving the people at high level of standard by going according to
the wishes of the customers.

3
 INTRODUCTION

Shell is a global group of energy and petrochemicals companies. According to the manager, “With
around 101,000 employees in more than 140 countries and territories, Shell helps to meet the world's
growing demand for energy in economically, environmentally and socially responsible ways”. The Shell
brand is one of the most familiar commercial symbols in the world. Royal Dutch Shell is the world's
largest private sector oil company by revenue, Europe's largest energy group and a major player in the
petrochemical industry. One of North America's leading producers of oil, gas, and petrochemicals, Shell
Oil Company has distinguished itself through its commitment to industry innovation. Its marketing
expertise has enabled the company to compensate for its relatively low volume of crude oil production,
as compared to its strongest competitors, by selling an equivalent amount of gasoline nationwide.
Although the company conducts business primarily in the United States, Shell also explores for and
produces crude oil and natural gas outside the country, both independently and through joint ventures
with other subsidiaries of its parent organization, Royal Dutch/Shell Group. Shell Petroleum Inc. is a
holding company that is 60 percent owned by Royal Dutch Petroleum Company and 40 percent owned
by The Shell Transport and Trading Company. Shell has five core businesses: exploration and production,
gas and power, refining and marketing, chemicals, and trading and shipping. Shell's primary business is
the management of a vertically integrated oil company. The development of technical and commercial
expertise in all the stages of this vertical integration from the initial search for oil (exploration) through
its harvesting (production), transportation, refining and finally trading and marketing established the
core competencies on which the company was founded. Similar competencies were required for natural
gas, which has become one of the most important businesses in which Shell is involved, and which
contributes a significant proportion of the company's profits. 8 Over the years Shell has occasionally
sought to diversify away from its core oil, gas and chemicals businesses. These diversifications have
included nuclear power (a short-lived and costly joint venture with Gulf Oil in the USA); coal (Shell Coal
was for a time a significant player in mining and marketing); metals (Shell acquired the Dutch metals-
mining company Billiton in 1970) and electricity generation (a joint venture with Bechl called Intergen).
None of these ventures were successful and all have now been divested. If we talk about a single
franchise, it provides:

• Oil change service

• Convenience store

• Gas

• Petrol

4
 CHAPTER NO: 01

VISION STATEMENT:

To be the market leader and deliver the best value to their; stakeholders as the manager said:

“Our vision is to reinforce our position as a leader in the oil and gas industry to provide a competitive
shareholder return while helping to meet global energy demand in a responsible way”.

In Upstream they focus on exploring for new oil and gas reserves and developing major projects where
their technology and know-how adds value to the resource holders. In Downstream their emphasis
remains on sustained cash generation from their existing assets and selective investments in growth
markets. So, overall the vision of organization is to lead the oil and gas industry and to develop itself
according to the change in demand of their customers in a profitable way but at the same time, this way
should be environmental friendly and should not cause any harm to the social values. Shell is also
working for many social causes by operating different NGOs for deforestation, betterment of education.

MISSION STATEMENT:

Manager of Shell in Islamabad defined the mission statement of Shell Petroleum Pakistan as:

“Our aim is to meet the energy needs of society, in ways that are economically, socially and
environmentally viable, now and in the future.”

Shell is basically an oil company. Its products include oils, fuels, and card services as well as exploration,
production, and refining of petroleum products. The mission of this organization is to manufacture and
supply oil products and services that satisfy the needs of their customers. Constantly achieving
operational excellence, conducting their business in a safe, environmentally sustainable, and
economically optimum manner, employing a diverse, innovative, and results-oriented team motivated
to deliver excellence. Obviously, an organization’s main purpose is meeting its profit requirement, so
Shell wants to meet the energy needs of the society with high financial performance.

VALUES OF SHELL:

“Our core values are honesty, integrity, and respect for people. The Shell General Business
Principles, Code of Conduct and Code of Ethics help everyone at Shell to act in line with these
values and comply with all relevant legislation and regulations.”

5
GOALS AND OBJECTIVES:

I. To engage efficiently, responsibly, and profitable in the industry.

II. To fairly and ethically compete within the framework of applicable competition law.

SWOT ANALYSIS
- Strength
- Weaknesses
- Opportunities
- Threats

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 CHAPTER NO: 02

EXTERNAL ASSESSMENT:

- OPPORTUNITIES:

I. New oil and gas reserves are still being found, and there is the potential to discover
more.
II. Shell`s active response to criticisms of environmentally unfriendly activities may lead to
less antagonistic relationships with environmental groups.
III. Emerging economies have a large and growing demand for the fossil fuels.

ANALYSIS:
These opportunities for Shell are there for many years, but hardly it had utilized any one of the
above.

- THREATS:

I. Fluctuation in fuel pricing.

II. Political issues in some regions.
III. Tanker strikes.
IV. High competition.

ANALYSIS:
High competition is a major point of concern for the market.

7
 CHAPTER NO: 03

INTERNAL ASSESSMENT:

- STRENGTH:

I. Diversification into products.

II. Investment in exploration.
III. Pioneer user of scenarios.

- WEAKNESSES:

I. It uses the technique of flaring and burning gas, which is quite un-friendly for the
environment.
II. They are not offering any packages to their regular customers.

ANALYSIS:
This only factor could resist the company to reach its desired position.

- COMPETETIVE PROFILE MATRIX

8
 - FINANCIAL RATIOS:

2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM
2007-12

Revenue PKR Mil 163,151 84,901 156,000 197,531 219,149 212,801 249,214 250,785 197,128 167,642 173,890

Gross Margin % 4.0 -3.5 8.3 6.1 5.6 4.4 4.6 3.0 5.4 8.4 9.3

Operating Income PKR Mil -1,643 -7,450 4,887 3,713 4,293 919 2,402 452 2,060 5,158 6,878

Operating Margin % -1.0 -8.8 3.1 1.9 2.0 0.4 1.0 0.2 1.0 3.1 4.0

Net Income PKR Mil -1,726 -5,164 2,563 1,616 906 -1,935 1,061 -1,067 911 6,765 8,140

Earnings Per Share PKR -16.13 -48.26 23.95 15.10 8.46 -18.08 9.92 -9.97 8.51 63.22 76.07

Dividends PKR 8.19 25.60 5.12 2.56 5.12 — — 3.20 8.00 16.00 34.00

Payout Ratio % * — — — 17.0 17.0 — — 19.6 — 41.3 44.7

Shares Mil 107 107 107 107 107 107 107 107 107 107 107

Book Value Per Share * PKR — — — 73.82 73.82 57.71 57.71 72.66 48.82 77.87 116.86

Operating Cash Flow PKR Mil 3,734 393 3,934 2,239 -4,173 5,621 3,669 4,453 4,631 8,503 1,721

Cap Spending PKR Mil -1,024 -613 -1,325 -2,019 -1,110 -616 -733 -1,652 -1,730 -1,880 -1,800

Free Cash Flow PKR Mil 2,710 -221 2,609 219 -5,284 5,006 2,936 2,802 2,901 6,623 -78

Free Cash Flow Per Share * PKR — -2.06 — 2.05 2.05 46.78 46.78 -39.21 48.64 56.84 —

Working Capital PKR Mil — -3,786 -3,806 -4,918 -3,951 -4,616 -3,172 -4,917 -5,252 -4,077 —

- KEY RATIOS:

PROFITIBILITY

Margins % of Sales 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM

Revenue 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

COGS 96.05 103.47 91.73 93.86 94.42 95.64 95.44 96.98 94.63 91.65 90.71

Gross Margin 3.95 -3.47 8.27 6.14 5.58 4.36 4.56 3.02 5.37 8.35 9.29

SG&A 3.67 4.13 4.63 4.15 3.36 3.48 3.01 3.27 4.04 5.39 5.29

R&D — — — — — — — — — — —

9
Margins % of Sales 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM

Other 1.66 1.57 0.82 0.37 0.34 0.63 0.71 0.09 0.11 0.33 0.43

Operating Margin -1.01 -8.78 3.13 1.88 1.96 0.43 0.96 0.18 1.05 3.08 3.96

Net Int Inc & Other -0.86 -1.14 -0.63 -0.34 -0.67 -0.43 0.01 0.04 0.14 0.33 0.32

EBT Margin -1.87 -9.92 2.51 1.54 1.29 — 0.97 0.22 1.19 3.40 4.28

Profitability 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM

Tax Rate % — — 34.45 46.93 68.02 — 56.23 295.31 61.15 — —

Net Margin % -1.06 -6.08 1.64 0.82 0.41 -0.98 0.43 -0.43 0.46 4.04 4.68

Asset Turnover (Average) — 2.16 4.28 5.48 5.00 4.53 5.83 6.32 5.15 4.17 4.26

Return on Assets % — -13.15 7.03 4.48 2.07 -4.43 2.48 -2.69 2.38 16.82 19.95

Financial Leverage (Average) — 6.27 4.07 4.87 5.95 7.27 5.62 6.56 6.34 3.83 3.62

Return on Equity % — -82.56 35.29 19.98 11.21 -28.86 15.84 -16.27 15.34 79.17 87.96

Return on Invested Capital % — -22.80 13.00 9.32 4.32 -9.84 6.69 -9.26 10.93 70.87 87.96

Interest Coverage — — — — — — — — 29.91 501.99 —

GROWTH

2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 Latest Qtr

Revenue %

Year over Year — -47.96 83.74 26.62 10.94 -2.90 17.11 0.63 -21.40 -14.96 14.64

3-Year Average — — — 6.58 37.18 10.90 8.06 4.60 -2.52 -12.38 —

5-Year Average — — — — — 5.46 24.03 9.96 -0.04 -5.22 —

10-Year Average — — — — — — — — — — —

Operating Income %

Year over Year — — — -24.02 15.64 -78.60 161.42 -81.18 355.81 150.38 3278.25

3-Year Average — — — — — -42.71 -13.51 -52.78 30.88 29.02 —

5-Year Average — — — — — — — -37.88 -11.11 3.74 —

10-Year Average — — — — — — — — — — —

Net Income %

Year over Year — — — -36.96 -43.92 — — — — 642.60 —

3-Year Average — — — — — — -13.07 — — 85.42 —

5-Year Average — — — — — — — — -10.83 49.50 —

10-Year Average — — — — — — — — — — —

EPS %

Year over Year — — — -36.96 -43.92 — — — — 642.89 —

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 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 Latest Qtr

3-Year Average — — — — — — -13.06 — — 85.40 —

5-Year Average — — — — — — — — -10.83 49.49 —

10-Year Average — — — — — — — — — — —

CASH FLOWS

Cash Flow Ratios 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM

Operating Cash Flow Growth % YOY — -89.48 901.83 -43.09 — — -34.73 21.38 3.99 83.60 —

Free Cash Flow Growth % YOY — — — -91.60 — — -41.35 -4.57 3.53 128.32 —

Cap Ex as a % of Sales 0.63 0.72 0.85 1.02 0.51 0.29 0.29 0.66 0.88 1.12 1.04

Free Cash Flow/Sales % 1.66 -0.26 1.67 0.11 -2.41 2.35 1.18 1.12 1.47 3.95 -0.05

Free Cash Flow/Net Income -1.57 0.04 1.02 0.14 -5.83 -2.59 2.77 -2.63 3.18 0.98 -0.01

FINANCIAL HEALTH

Balance Sheet Items (in %) 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 Latest Qtr

Cash & Short-Term Investments — 16.68 2.58 2.71 2.93 7.55 2.11 3.35 5.55 14.09 6.46

Accounts Receivable — 7.45 3.68 5.23 5.06 4.47 5.57 6.79 4.22 4.99 6.30

Inventory — 22.97 38.90 32.11 36.34 38.74 43.93 33.83 35.01 24.39 32.35

Other Current Assets — 20.49 18.31 26.15 30.45 24.45 21.96 27.71 24.39 20.61 20.80

Total Current Assets — 67.60 63.48 66.21 74.78 75.21 73.57 71.68 69.16 64.08 65.91

Net PP&E — 18.18 20.87 16.89 13.53 14.10 15.34 18.25 21.32 21.52 20.21

Intangibles — 0.03 0.86 4.36 2.69 2.08 1.38 0.48 — — —

Other Long-Term Assets — 14.19 14.79 12.53 9.00 8.62 9.71 9.59 9.52 14.40 13.88

Total Assets — 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Accounts Payable — — — — — — — — — — —

Short-Term Debt — 35.22 25.12 25.94 32.03 27.11 15.17 9.74 5.34 — —

Taxes Payable — 0.71 1.50 0.99 0.52 0.76 0.83 0.98 1.11 3.01 3.74

Accrued Liabilities — — — — — — — — — — —

Other Short-Term Liabilities — 41.31 48.17 52.05 50.27 57.62 65.38 73.68 76.56 70.66 68.44

Total Current Liabilities — 77.24 74.79 78.99 82.82 85.49 81.39 84.39 83.01 73.67 72.18

11
Balance Sheet Items (in %) 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 Latest Qtr

Long-Term Debt — 6.37 — — — — — — — — —

Other Long-Term Liabilities — 0.47 0.64 0.49 0.39 0.76 0.82 0.37 1.23 0.20 0.19

Total Liabilities — 84.07 75.42 79.48 83.20 86.24 82.21 84.76 84.23 73.87 72.36

Total Stockholders' Equity — 15.93 24.58 20.52 16.80 13.76 17.79 15.24 15.77 26.13 27.64

Total Liabilities & Equity 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Liquidity/Financial Health 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 Latest Qtr

Current Ratio — 0.88 0.85 0.84 0.90 0.88 0.90 0.85 0.83 0.87 0.91

Quick Ratio — 0.57 0.32 0.42 0.46 0.42 0.36 0.44 0.39 0.53 0.46

Financial Leverage — 6.27 4.07 4.87 5.95 7.27 5.62 6.56 6.34 3.83 3.62

Debt/Equity — 0.40 — — — — — — — — —

EFFICIENCY RATIOS

Efficiency 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12 TTM

Days Sales Outstanding — 12.58 4.87 3.01 3.75 3.86 3.12 3.56 3.91 4.05 5.85

Days Inventory — 37.49 28.20 25.06 26.69 31.61 27.03 23.20 25.80 28.09 27.37

Payables Period — 64.80 40.26 35.35 39.24 45.11 40.17 41.28 56.27 70.16 69.81

Cash Conversion Cycle — -14.74 -7.18 -7.28 -8.80 -9.65 -10.01 -14.53 -26.56 -38.02 -36.59

Receivables Turnover — 29.02 74.91 121.46 97.35 94.67 116.84 102.67 93.28 90.06 62.44

Inventory Turnover — 9.74 12.94 14.57 13.68 11.55 13.50 15.73 14.15 12.99 13.33

Fixed Assets Turnover — 11.89 22.03 29.20 33.32 32.78 39.69 37.75 26.03 19.45 20.07

Asset Turnover — 2.16 4.28 5.48 5.00 4.53 5.83 6.32 5.15 4.17 4.26

12
 CHAPTER NO: 04

SHELL’S STATEGY:

Shell’s strategy seeks to strengthen our leadership in the oil and gas industry, while positioning the
company for growth as the world transitions to a low-carbon energy system. Safety and environmental
and social responsibility underpin our business approach.

In February 2016, Shell completed the acquisition of BG Group, adding significantly to our activities in
liquefied natural gas (LNG) worldwide and deep-water oil and gas production in Brazil.

Shell’s strategy is now centred on creating a simpler company, one that delivers higher, more
predictable returns and growing free cash flow per share. By investing in compelling projects, driving
down costs and selling non-core businesses, we will reshape Shell into a more resilient and focused
company.

SHELL AMBITION:

 Relevant in our industry + growing value share

 Reducing our carbon intensity
 Shared value
 World-class investment case

13
 BUSINESS LEVEL STRATEGIES:

- Overall cost leadership

- Differentiation
- Focus

GENERIC STRATEGY OF SHELL

LOWER COST DIFFERENTIATION

DIFFERENTIATION

BROAD - EXPLORATION AND

COST LEADERSHIP PRODUCTION
TARGET
- DOWNSTREAMING
- GAS AND POWER

14
 DIFFERENTIATION FOCUS

- RENEWABLES
NARROW COST FOCUS - TRADING
TARGET - SHELL GLOBAL SOLUTIONS
(TECHNOLOGY SERVICES)

COMPETITIVE ADVANTAGE MODEL:

- RESEARCH INITIATIVE
AND RESEARCH CENTERS
STATE OF THE ACT TECHNOLOGY
- SPECIALISED
PROFRSSIONALS

COMPETITIVE ADVANTAGE
CORE COMPETENCY

15
 PRODUCT LIFE CYCLE

Product Life Cycle Stages:

Product Life Cycle means the changes in the sales volume of the product over the life the product. In
market there is always ups, and downs are present because this is a dynamic world. Everything will have
to finish after certain time, by finishing their life, so the life cycle of Shell is. The stages through which
individual products develop over time are called Product Life Cycle. The classic product life cycle has four
stages.

- INTRODUCTION STAGE:

At the introduction stage market size and growth is slight. It is possible that substantial research
and development cost have been incurred in getting the product to this stage. In addition,

16
 marketing costs may be high to test the market, undergo launch promotion and set up distribution
channels.

- GROWTH STAGE:

The growth stage is characterized by rapid growth in sales and profits. Profits arise due to an
increase in output [economies of sales] and possibly better prices. At this stage, it’s cheaper for
business to inset in increasing their market share as well as enjoying the overall growth of the
market. Shell Pakistan introduction stage is successfully done because it comes from the
international market and enters in Pakistan market. Now company has about 40-45.5% of market
share and still growing

- MATURITY STAGE:

The maturity stage is perhaps the most common stage; it is in this stage that competition is most
intense as companies fight to maintain their market share. Here both marketing and finance
becomes key activities. Marketing spend must be monitored carefully, since any significant moves
are likely to be copied by competitors. Shell Pakistan not yet enters in maturity stage.

- DECLINE STAGE:

In the decline stage the market is shrinking, reducing the overall amount of profit that can be
shared amongst the remaining competitors. At this stage great care must be taken to manage the
product carefully. Shell Pakistan is a brand name and company is not in decline stage because their
sale increases day by day.

POTER’S FIVE FORCE MODEL:

- EXPLORATION AND PRODUCTION METHOD:

TREATS FROM NEW ENTRANTS:

Technological advancement,
Brand Image.

17

NATURE OF RIVALRY
LEVERAGE OF SUPPLIERS: LEVERAGE OF BUYERS: Minimal
Minimal

THREATS FROM SUBSTITUTES:

Low … Huge demand supply gap
prevalent

- OIL REFINERY, MARKETING, AND CHEMICALS BUSINESS:

TREATS FROM NEW ENTRANTS:

Retail network, Global presence,
Technology investment

18
NATURE OF RIVALRY
LEVERAGE OF LEVERAGE OF BUYERS:Leverage
SUPPLIERS:Leverage neglected neglected through Vertical
through Vertical Integration. Integration.

THREATS FROM
SUBSTITUTES:Operations and
Logistics of Domestic Players

- GAS AND POWER:

TREATS FROM NEW ENTRANTS:

Nature of Business, Economy of Scale,
Global Presence, Investment in R&D.

19

NATURE OF RIVALRY
LEVERAGE OF SUPPIERS:Large LEVERAGE OF BUYERS:Long-term
and Efficient Network, Numerous Contracts, Efficient Network,
Long-Term Contracts. Licensed Technology.

TREATS FROM SUBSTITUTE:

Clean Coal and Wind, so NO
MAJOR THREAT.

CHAPTER NO: 05

COMPETITIVE RIVALRY

COMPETITIVE DYNAMICS

SHELL V.S PSO

Describe market commonality and resource similarity as the building blocks of a competitor
analysis. Explain awareness, motivation, and ability as drivers of competitive behaviors. Both
the firms are dealing with the same market. They are operating to the similar market. Their
challenges are also the same. They are competing for the same consumer market. Both the
firms are the direct rivals to each other.

20
- From Competitors to Competitive Dynamics:

Both firms use a variety of tactics to draw out and assess the competition. Shell frequently
signal its “rules of engagement,” which involves letting the competition know its rival’s
intentions and to draw the competition out and examine how it responds. To examine how the
competition responds, or to test its counter moves, Shell always bluff. Signaling and rules of
engagement in the petroleum industry are rather clear and common. As Shell was known for
marketing significantly in Karachi, in response PSO in the same market tries to come up with
some more marketing efforts. The signal: “If you want to spend more in marketing in the same
city, you are in for a bloody battle.” PSO most often responded by raising its marketing funds
along Karachi because Shell had the resources to enter a long and grueling marketing war on
the same city. If, on the other hand, rivals reacted by focusing more on further aspects of
marketing, Shell had to interpret this signal as “they wished to compete with us for business
along this city.” Of course, not all types of signaling are legal, but here are a couple of common
signals: price movements, prior announcements (“we’ll meet or beat any competitor”), media
(press releases), counterattacks/moves, announcement of results, and more.
- Drivers of Competitors Behavior:

1) Awareness:
Both the firms are aware of each other’s strategies.
2) Motivation:
Shell has the strength to action and or even response to any kind of change that PSO might adopt.
3) Ability:
The Shell as being a big company is lacking to have a dynamic flexible ability.
- Fast Cycle Market:

Shell and PSO are in a market in which competitive advantages are not shielded from imitation
and where imitation happens quickly and somewhat inexpensively. Competitive advantages are
not sustainable in this fast-cycle markets. The pace of competition in fast-cycle markets is
almost frenzied as companies rely on ideas and the innovations resulting from them as the
engines of their growth. Because prices fluctuate quickly in these markets, companies need to
introduce new or improved product faster. For example, declines in the prices of International
petroleum leads manufacturers to continuously reduce their prices to end users. Imitation of
many fast-cycle products is relatively easy.

21
- Likelihood to Attack:

1) First mover:

First movers are the companies that take an initial competitive action, either strategic or
tactical. First movers are companies that have the resources, capabilities, and core
competencies that enable them to gain a competitive advantage through innovative and
entrepreneurial competitive actions. By being first, the first mover hopes to gain a
sustainable competitive advantage, earn above-average returns until competitors
respond effectively and gain customer loyalty, thus creating a barrier to entry by
competitors.

Shell lies in this category as it is the risk taker. Any advantage gained generally will vary
based on the type of competitive action and also to the extent to which the action is
difficult to imitate because of the difficulty of imitation, first mover actions based on core
competencies is sustained for longer periods than actions based on other factors.

- Porter’s Five Forces Analysis of Shell

Porter (2008, p.80) identifies five forces that can be used to analyses the competitiveness of a
company’s industry of operation. The forces include the threat of new entrants, threat of
substitutes, bargaining power of suppliers and buyers and rivalry among existing competitors.
Royal Dutch Shell has established large scale operations in more than 80countries enjoying
economies of scale, global image with established strong brands which makes it hard for new
entrants. Therefore, the threat of new entrants is low due to the high capital requirements to
set up operations.
Threats of substitutes are high for the company. This is because oil-related products, chemicals
and natural gas produced by different companies are highly substitutable. Major competitor
products can be used as substitutes for the company’s products. Therefore, the threat of
substitutes for the company is high.
Royal Dutch Shell has embraced a vertical integration growth strategy which involves acquiring
and merging with companies at different levels of operation and therefore it has significant
influence on its supply chain. Furthermore, the company has enhanced its technological
capacity through the projects and technology segment of its business (Reuters, 2012).
Therefore, the bargaining power of suppliers is low.
Oil and gas are essential products in any economy. Economic production processes in an
economy make use of oil. This explains why in some developing countries oil supply is under
state agencies. Furthermore, the oil industry is characterized by companies coming together to
form cartels that would enable them to control the market (Bloomberg, 2012). Furthermore,
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most of the buyers of oil products buy in bulk and therefore loss of one buyer would
significantly affect the company’s revenue. Consequently, the bargaining power of buyers is
medium.

Conclusion:
Royal Dutch Shell has established strong brands recognized globally enhancing its image in the
global market. Despite the complexities and risks that are associated with the global operations
of the company, there are opportunities for the company to expand and grow its operations in
the emerging markets. The company can use a differentiation strategy to position its products
globally as superior using its brand names. To deal with the risks of globalized operations, it is
advisable that the company use strategic partnerships with the local operators in the new
markets to enhance its penetration in the markets. Furthermore, the company can establish its
competitive advantage increasing its control over the supply chain through more vertical
integration mergers and acquisitions. Lastly, to increase efficiency of the company’s operations,
there is need for re-engineering of the production process and adoption of new efficiency
technologies. International oil companies like shell is one of the largest operators in the market.
They have been the first to develop competence, and are still very strong at managing big
fields. They operate best on large scale. They have both technology and financial possibilities
for managing big risks projects and operate in a quite high profitable way. But unfortunately,
Shell have “invested less in exploration and increased operating cash flow on share
repurchases and dividends. Their production has declined since 1990s”, while 80% of reserves
are held by others. Not investing in R&D, Shell is losing the main competitive advantage they
have always had on PSO and the easiest way to gain access to their reserves. Less access to
reserves, together with lack of R&D, means that PSO can replace their reserves in an efficient
way at the moment particularly in Pakistani scenario. This means that reserve replacement
and R&D are a concern of the entire market.

CHAPTER NO: 06

There are two separate aspects, which are needed consideration for development alternative strategies.
The alternative direction in which the organization may choose to develop. The alternative methods by
which the direction of development might be achieved.

Decisions on directions and methods are not independent of each other. Now we shall discuss the
directions in which Shell Pakistan Limited may choose to develop. They are as following:

- Selling out
- Consolidation
- Market Penetration

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- Product Development
- Market Development
- Diversification (related and unrelated)

1) SELLING OUT:
In selling out if the company feels any danger about the survival of company; thecompany would like to
dispose of its assets. Shell is the biggest company of theworld. It has a strong financial position. That is
why shell does not choose suchtypes of direction even in Pakistan because it has healthy market share
in Pakistantoo.

2) CONSOLIDATION:
In such direction, the company will change the way of operation but concentrate on present state of
business. Shell is waving on this direction. The shell is waving by following factors:

- Maintaining a share in a growing market.

- Competing in a declining market.
- Improving quality.
- Increasing market activity.
- Imposing productivity through capital investment.

3) MARKET PENETRATION:
“Opportunity often exist for gaining market shares as a deliberate strategy:”

This is called market penetration. The shell is also working on this direction by providing better services
on its company operation sites.

4) MARKET DEVELOPMENT:
In market development, the company locates any new areas where it could start its business to
minimize the risk. Market development can include new market segment. Shell has no capital problem
that is why Shell is working on the directionof market development. The proof of this is that Shell has
expanded its businessmore than hundred countries. Now Shell is expanding its business in all small
and big cities of Pakistan.

5) PRODUCT DEVELOPMENT:
Shell will feel that the consolidation in their present market does not adequate opportunities after the
search for coping with changing environment. Shelldeveloped the product of CNG. This shows that shell
is also working on thisdirection.

6) DIVERSIFICATION:
Diversification means new product and new market. The two broader concepts of diversification are:

- RELATED DIVERSIFACTION:

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Related diversification means development beyond the present product and market, but still
within the broad confines of the industry in which the company operates. Shell has introduced CNG that
is the best example of related diversification.

- UNRELATED DIVERSIFICATION:

It is the development beyond the present industry into product/market, which havenot clear
relationship with present product/market. Shell is interested in other businesses e.g. petro chemicals,
coal, and metals.

We have selected two strategic options for improvement of shell performance asmaintain the
leader of quality in the customer services. For this purpose, weevaluated them, which is better
to achieve the organizational objectives.

CHAPTER NO: 07

INTERNATION BUSINESS AND CORPORATE LEVEL STRATEGIES:

A strategy through which the firm sells its goods or services outside its domestic market. Reasons for
having an international strategy are as following:

• International markets yield new opportunities

• Needed resources can be secured

• Greater potential product demand

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 • Borderless demand for globally branded products

• Pressure for global integration

• New market expansion extends product life cycle

WHY EXPAND BUSINESS INTERNATIONALLY?

Internationality is identified as one of Shell's most distinguished characteristics and someone even
regards Shell as "one of the world's three most international organizations" (Grant 2005, p.550). As one
of the leading energy companies worldwide who has a history of over more than 100 years, the Royal
Dutch Shell Group was created in 1907 through the full merger of "Royal Dutch" and "Shell Transport
and Trading". The business was run by a group of energy and petrochemicals companies. Since its
establishment, this group experienced a fast expansion all over the world, including European, North
American, and Asian areas. Oil exploration and production were developed in Romania (1906), Russia
(1910), United States (1912) and many other parts. ¼ˆShell, 2010, internet¼‰. By 1938, its crude oil
production per day accounted for more than 10 percent of the world total production (Grant 2005,
p.549).

In the 1980s it expanded overseas business through acquisition. The acquisition of 30% shares of Shell
Oil in 1985 consolidated Shell's operations and business in the U.S. market. During this period, offshore
exploration technology and projects were developed, such as the Troll in Norway and the Gulf of
Mexico.

With the collapse of Communist regimes in Eastern Europe in 1989, Shell gained access to markets in
these regions. The first operation was started in Hungary though the joint venture structure. Soon the
business expanded at a quick speed to many other Eastern European countries, including Russia. In this
time, the "gas to liquids" technology was widely applied, which played a significant role in its later
development in the following decades. The opening of its plant in Bintulu, Malaysia marked a new
chapter for Shell in terms of the liquefied natural gas production.

In the new century, Shell began to expand business into China and Russia. At Salym, Russia, some large
oil and gas projects are established and developed. In China, to meet the increasing consumption
demands for oil and gas, Shell has built a massive joint venture company with China National Petroleum
Corp. (CNPA)-CNOOC and Shell Petrochemicals Company Limited.

WHERE TO EXPAND INTERNATIONALLY?

Until the first quarter in 2010, its business across the world continues to grow in a steady and favorable
tempo. In Australia, Shell Energy Holdings Australia Ltd., and his partner Petro China International
Investment Company Ltd have reached an agreement with Australia-based Arrow Energy Limited, in
which Arrow decides to sell out his 100% shares to Shell and PetroChina at a total price of 3.5 billion
dollars (Arrow Energy, 2010, internet). The acquisition of excellent quality assets together with high
quality employees from Arrow would benefit Shell, PetroChina, as well as the Queensland Coal Seam
Gas in the long term. In the Gulf of Mexico, Shell has started his oil and natural gas production in the

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Perdido Development Project, which is characterized by the operation of the deepest offshore oil
platform. At the same time, Shell obtains permission for exploration activities in Pakistan, Egypt, Tunisia
and French Guiana.

HOW TO EXPAND INTERNATIONALLY?

- Take a Longer View into the Future:

Compared with most companies in terms of development plans, Shell used to take longer-range view on
its future development. Their strategic planning concerns about what the situation is 20 years later,
rather than 4-5-year planning employed by other companies. These plans consist of many specific and
operable responses instead of simple forecasts, aiming to deal with different situations. As the saying
goes, people who do not plan far enough for future would inevitably come into trouble at hand. Change
is constant in the market, opportunities and challenges may come at any moment. So, the company is
required to get ready for various situations in which the future unfolds.

- Take the Corporate Responsibility

Appropriate entry mode choice would accelerate the tempo of international expansion. However, a
narrow focus on the financial performance is far from enough. As an energy company, the business is
expected to be operated in environmentally and socially responsible ways, which is indispensable for its
sustainable development. And only the sustainable development could really bring benefits for the
company in the long run.

CHAPTER NO: 08
For Shell, sustainability means providing essential energy for a growing population, while respecting
people, their safety and the environment.

Sustainability at Shell touches on all areas of our operations. We aim to deliver the energy needed for a
growing population in a responsible way - respecting people, their safety and the environment.
Sustainability is essential to the longevity of our business and our role as a member of society.

Our approach to sustainability is integrated across our business activities on three levels:

1) RUNNING A SAFE, EFFICIENT, RESPONSIBLE, AND PROFITABLE BUSINESS:

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This is the foundation of our approach, which includes having global standards, processes, and tools in
place to manage safety, environment, and community involvement. We aim to continuously improve
the way we operate to prevent incidents and identify, avoid where possible and minimize adverse
environmental and social impacts across our projects and facilities. We report on our performance in
our annual sustainability report.

2) SHARING WIDER BENEFITS WHERE WE OPEATE:

Our business is planned for the long term, which means we can be part of a community for decades. We
help to develop local economies by creating jobs, sourcing from local suppliers, and paying taxes and
royalties. We support community projects that are based on the needs of the local communities.

3) HELPING TO SHAPE A MORE SUSTAIBLE ENERGY FUTURE:

In the coming decades, more and cleaner energy will be needed for economic development in the face
of growing environmental pressures. We are investing in low-carbon energy solutions and advanced
technologies, such as those that increase energy efficiency and reduce emissions. We continue to
contribute to the public dialogue on energy and climate policy. Yet, the scale of the global challenges
that the world faces are too great for one company, or one sector, to resolve. We advocate business,
government and civil society working together to better shape a more sustainable energy future.

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