Blog - Page 2 of 8 - Porter's Five Forces

Shell Company Overview: The Shell company is a global oil and gas to chemicals company based out of London, England. With almost 100,000 employees worldwide, the company prides itself on being one of the world's 6 supermajors. The company has grown into its current form by gradually acquiring other energy companies around the globe, including oil companies in Africa, Latin America and Europe. It is the largest distributor of refined petroleum products in the world, with over 25000 gas stations globally. The company has recently begun to focus on greener initiatives such as investing into new forms of clean energy production like solar panels and wind turbines. This is part of their plan to meet its goal of reducing carbon emissions by 50% by 2050. Shell Competitive Rivalry: One of the major challenges that Shell faces in the coming years will be facing increased competition from Asian companies such as China National Offshore Oil Company and PetroChina. These companies have been increasing their global presence as China's economy continues to grow, and as a result, are looking for opportunities to expand into new areas. They are already the largest oil company in China, and have their eyes set on establishing themselves globally, which they believe is the best place to do business. Another big challenge for Shell will be competing with other similar companies in an increasingly crowded market, meaning that it needs to maintain its competitive edge against competitors such as Exxon Mobil Corporation, Chevron Corporation, BP plc and, Total SA. Shell's size makes it easier to compete globally than if it were a smaller company, but also harder to manage all of its employees around the world. Shell Bargaining Power of Suppliers: Shell benefits from having large suppliers that are based in countries that are politically stable, that have low tariffs, and no regulations to hinder trade. They do not engage in many long-term contracts with suppliers, but rather focus on working with a select few for the best pricing options. This gives them bargaining power over their suppliers, because if they attempt to increase prices too much Shell can simply begin using another supplier. The same applies to suppliers trying to negotiate pricing. If they attempt to lower their prices too much Shell may just find someone else who would be able to provide the same quality product at a better price, keeping them competitive with other suppliers. The downside is that Shell can't hold long-term contracts with all of its suppliers, which means it's harder for them to negotiate prices or improve working relationships. Shell Bargaining Power of Buyers: Shell has very little bargaining power over buyers living in the developed world, who typically work on long-term contracts and don't tend to switch suppliers often. Shell's primary buyer demographic is composed of gas stations and other energy-related retailers, which means it needs to have high-quality products and good business practices in order to maintain its consumer base. In those cases where Shell does have lower bargaining power, it is able to overcome this by focusing on providing a higher level of customer service that makes customers more willing to stick with their supplier. Shell Threat of New Entrants: The threat of new entrants into the energy industry is very low due to the fact that it is capital intensive and requires a large amount of technical expertise in order to successfully extract oil in an efficient manner. These factors limit the ability for new entrants to easily enter into the market, making it harder for them to compete with established companies like Shell. However, there has been some concern over the ability for renewable energy sources to replace fossil fuels, which could make Shell less profitable over the next few decades. This will depend on how quickly renewable forms of energy are able to take off in a big way, and whether or not this has an impact on the demand for oil. Shell Threat of Substitutes: There are many types of substitutes that could potentially replace oil, which will depend on how much of an impact renewable energy sources have over the next few decades. The rise of electric cars based on lithium-ion batteries has caused some concern for Shell's profits because electric car batteries are made out of materials that must be mined from the ground in countries like Chile and Tibet. This means that the main ingredient used in electric car batteries could become scarce over the next few decades, causing a drop in its demand. Shell Porters Five Forces Conclusion: The energy industry is competitive and largely dominated by a few large players like Shell, but new renewable forms of energy such as electric cars could provide some challenges for the company in the future. Shell has had problems with environmental safety over the past several years. It was responsible for one of the worst oil spills in history and continues to be a target of environmental activists. This has led to a decrease in demand for Shell's products, which could become even more problematic if renewable forms of energy become available as substitutes for oil.