International Business: A Case Study on Shell Essay Sample
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International Business: A Case Study on Shell Essay Sample
Shell is among the leading oil companies in the world. This makes the company a candidate for case study involving international business practices. In concurrent sections of this paper, Shell’s performance between 1999 and 2003 will be investigated and reported accordingly. In addition, the company will be compared with competitors in the industry. The paper is divided into three distinct sections. The fist section shall report on the company’s marketing strategy and performance, the second with the issue of misstatement of oil reserves, and the third with Shell’s future performance.
Multinational Marketing Strategy and Performance (1999-2003)
The period between 1999 and 2003 was iconic for the company and the oil industry in general. In 1999, the industry was experiencing decreasing energy prices at the global market, a situation that had been occasioned by slowdown of American economy since 2000, and increasing global supply that was suppressing prices. International players were therefore faced with a challenging situation of developing mechanisms that would save their dwindling businesses. Shell was not spared either. As it will be illustrated in later sections, the company was being forced to sell some of its assets in order to cushion itself from losses.
The end of the period was marked by increasing oil prices that slowly began to change industrial fortunes. The world started seeing sharp increase in demand of oil in the international market. This was especially influenced by rapid economic growth in China, India, and other fast developing countries (Fuller 2007). At the same time, the industry was faced with production challenges in source areas. Indeed, this was the period that Iraq, a major player in the international market started experiencing production challenges as a result of the war. Other countries like Nigeria and Venezuela were also beginning to have production challenges. Given that Shell is a big player in those areas, its production in the company were beginning to feel the pain. Some of these production challenges are still present. Shell has been undertaking the necessary steps to address these challenges, some of which are included in the last section.
Shell has been participating in the international markets through joint venture with other companies. This is practices in many of its establishments and business processes, from exploration to marketing. By taking this move, the company is able to invite companies with greater comparative advantages in its fold. The end result includes vast expansion productivity, and thus higher profits in the long run. Through the use of joint ventures, the company is able to concentrate on its competitive areas, and thus increase productivity. In the end, the company is able to get greater productivity benefits.
This is especially aided by the escaped costs that would have been met in the absence of joint ventures. In the case of exploration and drilling in developing countries, the company has been joining hands with local firms in joint projects (Robert 2001). In this regard, Shell helps companies in developing nations to improve their business processes to the international standards. This also helps developing nations to quickly reach targets in production capacities, which means increase in national oil revenue that is used for vital public services such as education, healthcare and social security. These joint ventures also aid in the development of leakages with other smaller industries in respective countries. This scenario allows more people in developing countries to take part in their societies’ economic development process. Shell takes this approach of joining hands with local populace as part of it global corporate social responsibility (Greene 2000).
Between 1999-2003, Shell was involved in an elaborative process of selling assets in order to meet several organisational goals (David 2004). Among other things, Shell was selling some of its assets to meet the goal of providing cash back to investors. The company made a cash back promise to its shareholders but was experiencing problems with its finances. Assets that were being was just the ones that were not making money for the company. It therefore made more sense, because keeping the assets would lead to losses that could lead to decrease in company profits. This move had equally been supported by Shell investors and the board of directors. The company also had plans for buying back its own shares from the stock market. This was also to be financed with the funds coming from asset sales. This measure had a long time value for the company, because it could resell the shares when there was more need of finance. This process of selling non performing assets and using the money to purchase company stock leads helps create value from items items and facilities that were taking money from the company. In addition, the use of some of the funds to issue cash back to investors serves as sweeteners that entice shareholders to keep their investments with shell (Robert 2000).
The measures taken by the company in its operations helped improve profitability in the the period between 1999 and 2003. Indeed, earnings per share increased from € 0.11 per ordinary share in 1998 to € 2.86 per ordinary share in 2002. The sharp rise in company performance resulted to endearing the company to investors, who most likely embarked on putting more money in the company. Keeping capital market satisfied with company helps with injection of new capital. In the overall profitability, the company had been performing way above industrial average, which is also important in ensuring satisfied capital markets.
Shell has also been following aggressive decentralisation in its organisational structure (Hall 2000). Each of the company’s many operations are operate with total independence from the headquarters. In this regard, respective management can develop strategies that are unique to local markets. In addition, Shell has a tradition of employing the locals to management establishments. The cultural understanding held by the local people helps in designing strategies that would see smoother operations. The independence accorded to individual facility or establishment also creates a culture of responsibility in the management. The decentralised management systems also helps create competitive rivalry between managers in different markets but dealing with similar Shell product lines. These managers embark on the process of improving their performance to outdo their colleagues. The only outcome sin this case ends up being increase in productivity of each market segment and eventually that of the conglomerate. The company is thus set to increase its competitiveness in the long run. this makes it more necessary for the company to continue using decentralised management system—the most appropriate management criteria in the increasingly competitive industry (Peter 2001).
Issues Surrounding the “Misstatement of Reserves”
In 2004, the company was accused of consistently lying to the shareholders on the amount of oil and gas reserves controlled by Shell and its affiliate companies. This is a tactic that is popular among players in the industry because of the impact on company shares and lines of credit available. Given that the period was occasioned by increased oil and gas prices in the world, communicating to capital markets that the company has bigger oil reserves is quickly taken to mean increased revenue in the future. In addition, the announcement leads to competitors understanding the dominance threat posed by the announcing company. In the case of Shell, shareholders took the announcement to mean that their investments in the company was completely safe, and therefore destined to make decent return in the future. This was completely morally wrong for the company investors. Upon the announcement, it is possible that many individuals embarked on buying company shares in order to benefit in the future, meaning that a wide range of people were affected. Other than investors, the wrongful disclosure on the amount of reserves held by Shell must have sent competitors to develop mechanisms to help in the development of ways to deal with the announcement. This could have meant spending lots of resources in order to match Shell competition. Competitors were therefore reallocating resources from some important processes to new ones, and thus got exposed to Shell-induced losses.
Pressure from the industry, investment analysts and authorities resulted to the company management owning up to their wrong doings (Jean 2001). These were shameful times for company management and committee of directors. As it turned out, Shell had overestimated its oil and gas reserves by a staggering 2.3 billion barrels. This was among the largest misstatement of reserves ever reported in the industry. Many investors, industry players and the general public were astonished by this revelation. Authorities were also stunned by the revelation and therefore embarked on fining the company accordingly for its wrong doing. After admitting its wrong doing and stating the amount it had overstated reserves, the company was found to have 14.5 billion barrels of oil and gas in its fields. This amount was to last for just 10 production years, meaning that the company had to embark on the process of increasing exploration processes in order to avoid running out of business in just a decade. The 14.5 billion barrels was among the lowest in the industry. In this case, the company has to develop better systems that would improve position in the industry. The lower position in the industry could have resulted to misstatement of revenues in order to show how competitive the company had been.
Shell’s action of misstating oil and gas reserves led to creditors worrying about the company operations and competitiveness. As a result, Standard & Poor, a rafting agency, ended up downgrading Shell credit rating, which was taken from A to AA plus (John 2007). To investors, banks and other credit provides, the downgrade meant and increase in risk. People and institutions were therefore choosing to invest in other companies and industries. For Shell and its affiliate companies, the lack of capital meant that they had to work extra harder to get the much needed capital for projects that would help increase productivity and competitiveness. Shell action thus led to loss of public trust that the public had over the company. This was an unfortunate move, because potential well qualified employees could end up working for the competition. Indeed, competition is happy to use Shell actions in order to get all the best labour force. Worse still, Shell risked loosing employees already in the labour force that did not agree with the ethical standards that were being practice by their employer. The loss of talented employees is dangerous for the company’s long term success, as competitors take advantage.
Other than loosing respect to competitors, employees and general public, Shell ended up exposing itself to regulators that were quick to undertake serious investigations ( John 2007). Being subjected to rigorous investigations lead to the management reducing their commitment to other affairs of the company. For instance, the time that respective company officials were spending with investigators could have been utilized in developing and implementing strategies that would serve the company well in the long run. However, lots of time was lost with the authorities. Being in the news media on daily basis regarding the situation is also embarrassing for the company, let alone increasing the loss of public trust on the company. Wasting valuable company time did not end with this specific case—company activities were to be closely scrutinised by authorities for some time. As a market leader and among the oldest firms in the oil industry, Shell was tasked with the responsibility to ensure best practices, especially among the newer market entrants. The unethical measures taken by Shell management was therefore setting a bad precedence. However, the measures taken against Shell by respective authorities was to serve as a lesson to rest of players in the industry.
The Future of Shell
Shell is determined tom maintain is position as a global market leader in energy and petrochemicals. The increasing competition in these industries is forcing Shell to reinvent itself in the process of keeping its position. Among the ways being used to position the company includes penetrating to the fast developing countries, especially BRICS (Brazil, Russia. India, China and South Korea—Campbell 2001). Other developing countries are also being targeted for future development. Considering the greater interest that competition has in these markets, Shell is ensuring on quick entry, which helps in better positioning before aggressive competition sets-in. The company is further embarking on entering into joint ventures with local firms, which is an approach that has been one of Shell’s competitive advantage. These joint ventures have been done with both private investors in these countries and with public institutions ( Laherrère 2004). However, the type of venture is hugely influenced by government regulation in respective countries. Failure to meet ownership guidelines set by respective governments could lead to loss of contracts. Indeed, oil companies, including Shell, have seen governments failing to [provide contracts. The are other instances where the company assets have been taken over state governments. This calls for Shell to be keen on terms of contracts before embarking on undertaking the process of investing in these countries.
Shell intends to achieve this goal through the use of talented individual in its labour force and the new ones being attracted to the company. This is based on the understanding that highly productive employees are part and parcel of the company’s competitive advantage (Knott 2004). The management at Shell should understand that keeping the current labour force well motivated will lead to their stay with the company, as well as helping attract new ones. the current labour management procedures should therefore be enhanced and improved. For instance, better pay packages and high quality working environments should continue to be part of the process. This would lead to attracting talented labour force from competition, other industries as well as fresh ones. Upon hiring new staff, the company should embark on requesting current employee to help their new colleagues to learn internal work processes. Passing the most important work ethic and organisational culture to subsequent generation of employees would lead to improvement the quality of labour force in the long run, and therefore guarantee productivity and competitiveness in the long run.
Shell is also in the process of innovating its product line in order to meet the ever changing consumer needs (Hall 2001). The current debate on global warming and increasing energy prices are also contributing factors that the company intends to address. With regard to climate change, many people in the world are convinced that hydrocarbons from oil, Shell’s primary product, is the primary cause and therefore reducing petrol consumption. At the same time, these individuals are looking for other sources of energy. Just like other oil majors, Shell is feeling more obliged to embark on looking for other sources of energy that would be less damaging to the society. this is illustrated in the large amount of funding it has provided for research and development in collaboration with other interested parties.
In improving the management process of the company’s large global enterprise, Shell is keen on continuing to decentralised decision making processes (Cromwell 2007). This is in line with the globalisation pressure, which calls for players in the international market place to meet consumer needs through most efficient means. This would be achieved through provision of more freedom to management in each of the company’s many facilities and establishments. By undertaking this measure, Shell employees will be able to make decisions that will suit with local conditions, and thus increase local competitiveness. At the global level, this measure will mean increased performance, because the global player will be operating in most inefficient manner in all localities.
This reports has highlighted international business practices and policies that have influenced or affected Shell. First has been the aspect of performance at the turn of the century, that is between 1999 and 2003. This was a period of rapid change in the oil industry, because it marked the end of cheap energy and ushered a challenging era of expensive energy resources. As a result, players in the industry were forced to rapidly change their business practices in order to survive in an increasingly competitive industry. Like several other major players, Shell was able to withstand the challenges. The second issue has been that of misstating oil reserves. This issue resulted to the company’s credit rating being downgraded from AAA to AA plus, as well as confidence from members of the labour force. The third issue is that of company’s future. The strategies being developed and implemented are successfully putting the company in the right competitive position that will prove beneficial in the long run.
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