Academic Paper On Application of Porter Five Forces
Academic Paper On Application of Porter Five Forces
Academic Paper On Application of Porter Five Forces
0 Introduction
industry sector. In this article, the five forces framework is applied to understand the
dynamics of the oil industry. The external environment which influences the business of
dependent on the underlying industry dynamics. Shell is a global group of energy and
petrochemicals companies with around 93000 employees in more than 90 countries and
territories.
competitive structure of that industry. Organizations use various methods to carry out
industry analysis and one of the most influential and popular method is using Porters
1979. This framework is used to determine target markets, frame market entry strategies
such as raw materials, service suppliers, components and expertise. The capital that is
and how they are able to have an influence to ensure that the transactions are in their
favor. If they have a strong power, then the organizations may have to pay a higher
price for their product or service. Vice versa, the organizations can get a favorable
deal.
The bargaining power of the customers - The bargaining power of the buyers has a
key role to play in the how the profits of an organization take shape. The bargaining
power of the buyers increases when there are more products in the industry, when the
number of buyers is less, buyers are aware of the market rates and trends and when
The threat of entry of new competitors A market which has become successful will
attract new entrants and hence, the competition gets tougher. Some instances when the
threat of new entrants increases is when licenses and regulations are simpler, when
customers do not have much brand loyalty, when the investment required to set up a
company is low
The threat of substitute products or services If there are substitutes available in the
market, then customers can easily opt for substitutes when they want to. Substitutes
may not always be direct competitors. Threat of substitution is higher when products
do not offer unique benefits, when it is easier for customers to switch and when brand
loyalty is low.
The intensity of competitive rivalry If the intensity of the competition is high, then
organizations are forced to enhance their product/services or reduce the costs where as
if the intensity is low, then companies can earn more profit. The intensity is high when
Shell is a leading energy company of the world and operates as an oil and gas
Dutch Shell plc which is incorporated in England and Wales. The headquarters of the
company are in Hague. The value chain of Royal Dutch shell extends from extraction
of crude oil and natural gas to marketing and trading of cleaner fuels. Thus it operates
in both downstream and upstream segment of oil and gas industry segment. The
upstream segment consists of exploring of oil and gas fields which requires technical
economies of scale.
The scale of Royal Dutch shell is enormous (as will be for any company that exists in
the entire value chain of oil and energy sector). The company operates 30 refineries,
9000 kilometers of pipelines, 2500 storage tanks, 250 distribution facilities, 43,000
service stations and supplies approximately 11,000 tones of bitumen fuel products to
territories. Shell partners with different companies in different nations and continents.
complicated. For instance Shell partners with Saudi Armaco in a venture called
Motiva. Motiva is a joint venture for refining in marketing in the United States of
America. Motivas sister company is Shell Oil Products which is owned by Royal
Dutch Shell plc. Royal Dutch Shell plc is the second largest integrated oil company in
The large scale and scope of Shell means that it can have a significant role in
influencing the dynamics of the industry sector. For example a company like Shell
will directly influence the rivalry among existing competitors. We would also see how
the five forces influence the strategic evolution of a large company, which is expected
of the world.
The energy industry and the oil and gas segments get significant coverage from
prestigious business papers and periodicals like the economist, Wall Street Journal
and Financial times. There are lot of analysis done about the sector by consulting
firms like McKinsey, BCG, Bain, EnY, PwC and others. Some of the reports and
white papers published by such consulting firms are available on the internet and are
used to understand the dynamics of the industry structure, by using the five forces
framework. The research papers published on various topics and issues relevant to the
oil and energy industry are another important source of analysis. These papers are
published in industry specific journals but were researched using the internet search
engines. Some more relevant papers may have been missed out due to restricted
The information about the company is available in the annual reports of Shell and the
company website. The management discussion and analysis section of the annual
report is a useful section of annual report which can help in understanding the past
strategy and vision of the company management. But corporate managers are in a
principal agent relationship with the shareholders of the company and the views
expressed by them are likely to be prone to certain errors and biases. A more neutral
analysts. A decent amount of analyst coverage can be gathered from the internet
To apply the five forces framework in the oil and gas sector, scholarly articles which
mention some of the fundamental elements in the Porter five forces framework were
researched. For example there are journals and periodicals which have explored the
effects of economies of scale in the oil and energy sector. There are other articles
which mention how scale leads to an entry barrier in the industry. The preference was
given to academic and scholarly articles but some amount of information on the sector
has been gathered from prestigious financial papers and magazines like the
The overall approach was to identify the more fundamental elements in each of the
five forces and to research them individually. For example to understand the threat of
new completion in the oil and energy industry scholarly articles and business
journalism was researched pertaining to topics like role of patents and rights in the oil
and energy industry, switching costs for consumer of oil and gas industrial products,
role of brand equity in retailing and marketing of finished energy products, capital
requirements in the drilling and exploration industry segment (upstream) and capital
new competition can be further explored by understanding the access of a new player
brand or product and the industry profitability which will make the industry
The past strategy of Shell (as understood from the analyst coverage and management
discussion and analysis in the annual report) is evaluated in the light of the five
underlying forces as we have understood them. Some comments are made about what
the future of Shell can be, using the past and the industry dynamics (as understood
The suppliers to a company like Shell would consist of suppliers of rigs, pipelines and
other such instruments and service companies for operations like drilling. Although,
the suppliers for a company like Shell, can be large companies in themselves, the
company which is present in both upstream segment and downstream segment. Since
Shell is one of the largest Oil and Gas Company in the world, it is unlikely that any
suppliers would have any significant bargaining power with Shell. The global
presence of Shell, the financial strength of its balance sheet and its range of expertise
in upstream and downstream segment makes the threat of the bargaining power of
suppliers insignificant. Supplier concentration ratio is lower in the oil and energy
industry as compared to the firm concentration ratio (oil and gas sector consists of few
large companies).
The annual reports of Royal Dutch Shell Oil Company, often mention the network of
suppliers as an asset rather than a threat in the management, discussion and analysis
section.
only one entry barrier. Other entry barriers like patents, rights, legal status often vary
a lot from region to region. The sunk cost of starting an oil and energy industrial units
are high, which is another entry barrier. Customers often do not have a lot of loyalty
towards particular energy products, thus a new cash rich company can threaten the old
barrier to entry which varies globally. The importance of scale and scope in the oil
industry can be gauged from the fact that mergers and acquisitions tend to go up in the
and large companies feel they can lower their operations cost by acquiring small
The significant technological expertise needed in the oil and energy industry is
another entry barrier. Leading oil companies are able to negotiate favorable joint
venture contracts, as their partners value the expertise and project management skills
of large companies.
The need for scale and scope which is evident from the five forces dynamic also
reflects in the organization structure of Shell and other oil companies. Most
companies in this industry tend to have a strong central staff with decentralized
Alternative fuels are typically mentioned as possible substitutes for oil and energy
fuel products. Alternative fuels consist of solar power, wind and hydroelectricity and
nuclear power. Shell has been aligning its strategy with evolution of alternative fuels
to become a more diversified energy firm (Dean, 2007). The project management
Another threat of substitute for a company like Shell is from the product of other
leading oil companies. Retail customers switch easily to the company that offers the
best prices for its product. The relationships with industrial consumers are not so
easily dissolved.
For some energy companies, natural gas can be a threat as a substitute product for
automotives instead of crude oil (Hekkert, 2003). Since Shell is a diversified oil
company with large percentage of revenues from both oil and gas industrial segments,
The buyers of oil and gas energy products do not differentiate between products of
different leading companies and are essentially buying commodities. They demand
better prices or contract from the oil companies. Thus the leading oil companies have
rather limited pricing power since there are only few large companies capable of
providing energy fuels to the customers, but the products they offer are not
The competitive rivalry depends (among other things) on exit barriers. The exit
barriers are particularly high in oil and gas industry as the sunk cost of investment is
very high. An oil refinery that is not operating does not have any other capability that
can be utilized for creating shareholder value. The cyclical nature of the industry often
In the industry rising oil and gas prices do not always translate to high profits
(Economist, 2007). For example the oil prices shot up to $110 a barrel in 2007, but
during the quarter in which the price spike happened, most oil companies reported a
loss (Financial Times, 2007). The profits of oil companies are also affected by
exchange rate fluctuations. A large company like Shell can manage the exchange rate
fluctuations better.
In the long run oil and gas industry has been very profitable. The stock prices of Shell
recovered within a year after a serious accounting scandal in 2004, when Shell was
made to reevaluate its proven reserves (Financial Times, 2005). Sustainable high
prices of oil may boost the value of companies like Shell as it did in the 1970s
(Economist, 2005).
The threat to future profitability of oil and energy companies (including Shell) can
come from depletion of existing reserves, high cost of resources and poor access to
7.0 Conclusion
The management discussion and analysis in the last few annual reports of Shell,
partnership skills and project management expertise. The reasons for the same are
evident from the industry dynamic that emerges from the five forces analysis. The
threat of suppliers is low and entry barriers are high in the industry. Yet the
competition from existing players is high and consumers easily switch to more value
for money products. There is also a threat from alternative fuels, and the world would
gradually move in that direction. Thus Shell is wise in positioning itself as an energy
its alternative resources strategy by mergers, acquisitions and joint ventures with
alternative energy players. Thus Shell is combating the threat of substitute products
Thus Shell is moving towards becoming an even more diverse energy company thus
Shell would mitigate the increasing power of buyers as well. Some of the mergers or
acquisitions have not worked as Shell may have envisioned them and shell has backed
out of quite few of them (Shell International, 2010; Financial Times, 2008).
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