Shell has a long history of operational excellence which has helped it become one of the leading energy companies in the world. But changing competitive landscape as well as new technologies means there is always significant room for improvement. It is even more important to achieve operating efficiency given some of the recent unexpected developments.
First of all, the company needs to improve its project evaluation criteria and asset allocation management. It is apparent that in a hurry to put capital to use, the company didn’t adequately evaluate the potential returns of new projects such as drilling operations in Alaska and shale investments in North America which are expected to be either scaled down now or significantly restructured . Shell is in the industry where projects often require billions of dollars in capital deployment, thus, even the smallest missteps can have material impact on the overall performance of the company.
Shell also needs to become more efficient with asset management. While the company’s profitability declined from nearly $31 billion in the fiscal year 2011 to approximately $26.6 billion in the fiscal year 2012, its long-term assets and total assets increased by approximately $20 billion and $15 billion, respectively during the same period . This tells us that Shell focused on aggressive expansion while its profit margins declined. Thus, the company may benefit from divesting less productive assets which should not only improve its asset utilization rate but also profitability and liquidity. Shell’s new management has recognized the fact that the company’s asset base might have grown too fast and led to diseconomies of scale which is why it plans to sell some of the assets such as shale assets, Nigerian Delta licenses, and certain less productive refinery operations .
Water crisis may be one of the most severe crises in the near future unless drastic measures are taken. Energy companies like Shell use significant water resources and similarly, any mishaps can also cause huge damage to the environment as BP oil spill shows. The general public around the world has been becoming increasingly socially conscious and reward companies with responsible corporate social behavior. Thus, Shell should improve its efforts to utilize water resources more efficiently, especially in developing countries.
Shell should also lead the industry in investments in renewable energy. Fossil fuels are expected to remain the dominant energy source for decades to come but it also means Shell has a valuable opportunity to build a dominant position in renewable energy market and strengthen its competitive positive in the long term. In addition, this strategy will also provide significant positive goodwill to the brand. Sometimes, a company should think outside the box and even learn lessons from other industries. In this case, Toyota serves as a great example of how the company revolutionized the market for hybrid cars by being bold even though no one though the market is ready. Future is quite difficult to explain and given the concerns related to global warming, renewable energy sources may emerge as viable alternative to fossil fuels sooner than expectations. If it happens, Shell will be in an advantageous position.
Relative to some competitors like ExxonMobil, Shell has huge network of service stations which totaled 44,000 in more than 70 countries during the fiscal year 2012 . Shell may benefit from evaluating the possibility of significantly reducing the number of company-owned service stations and possibly replacing them with a franchise model. This will benefit the company in several ways. First of all, it will help the management better focus on more profitable and strategic operations and assets. Second, it will improve liquidity and profitability because owning stations requires greater capital than franchise model.