This paper analyses the strategic business units (SBUs) of BP Solar and Shell Renewables within the alternative energy industry, which are part of British Petroleum (BP) and Royal/Dutch Shell Group (Shell), the world’s second and third largest energy companies. Environmental analysis highlights the increasing volatility of the global energy market, which is driven by factors including demographics, urbanisation, income levels, market liberalisation and demand. It indicates that the energy industry will eventually evolve towards more alternative energy sources as oil stocks diminish. In this context, critical success factors (CSFs) within the alternative energy industry will be technologies that offer flexible, low-cost alternative energy solutions at competitive prices compared with other energy sources. Resource and capability analysis over the last five years show Shell Renewables to have particular capabilities in technology, project and brand management, and partnership skills across its global operations, but BP Solar to have stronger financial resources. Analysis of their respective business strategies over the last five years show that Shell Renewables has leveraged its capabilities and dedicated reasonable resources towards its alternative energy strategy, acquiring key businesses and engaging in joint ventures. BP Solar, on the other hand, has taken a more cautious approach, investing few financial resources relative to its size, despite commanding a large share of the market. Whilst Shell Renewables is only indirectly affected by the recent oil reserve scandal brought to bear by Shell corporate, this will undoubtedly give it a weaker financial position to draw from than BP Solar. Alternately, BP has tried hard to give the public the impression that BP Solar is a key part of their future business, but so far, this has largely been rhetorical. In terms of performance, the alternative energy market is not expected to reach a competitively significant level for some 55 years. Therefore, the key to success in the alternative energy market seems to be investing in future technologies, without over-stretching the financial resource base that keeps BP and Shell in business, namely their oil-dominated energy production.
This paper analyses the strategic business units (SBUs) of BP Solar and Shell Renewables, which operate within the alternative energy industry, a sub-market of the energy market (see Appendix I for all definitions of terms). Their corporate parents, British Petroleum (BP) and Royal/Dutch Shell Group (Shell), are the world’s second and third largest energy companies. Their two main competitors, the first and fourth largest energy companies, ExxonMobil and Texaco respectively, concentrate on the oil and gas markets, continuing to ignore environmental warnings (Frynas, 2003).
The market potential for renewable energies is increasing (Appendix II). Solar and wind power industries registered 30 to 40 per cent growth rates between 1998 and 2003, employing 20,000 and 100,000 people, now worth US$1 billion and US$7 billion respectively (Teske, 2003). Alternative energy sources as a percentage of total energy supply expect to triple between 2002 and 2030 from 2 to 6 percent (IEA, 2004).
Johnson and Scholes (2002) lifecycle analysis shows the industry to be in the later stages of the developmental phase since the above figures. Whilst encouraging they are still small in relation to the energy industry as a whole. The industry has a growing number of adopters and competitors although strategies are in place for the growth phase of industry development (see 2.0 SBU Strategies).
2.0 SBU Strategies
Here, the SBU strategies are outlined although analysis is left to later sections (see 3.0 External Analysis and 4.0 Internal Analysis).
2.1 Shell Renewables
Shell’s strategy is based around a belief that solar cells will become a major energy source by 2060 (Modern Power Systems, 2001), which is complemented in Shell Renewables’ vision of being: a leading player in energy a hundred years from now (Shell Renewables, 2004a). Over the last five years, Shell has been following a strategy that fits with its Dynamics as Usual scenario, under which it expects world energy markets to move towards a sustainable and even more complex and diverse energy system. Here, energy sources will evolve gradually from coal, to gas, to renewables (Shell Renewables, 2004b).
The company believes it can gain competitive advantage over BP Solar, the market leader, through low cost, flexible, mass produced solar photovoltaic technologies that undercut competitors, in what has been one of the most expensive sources of the energy generation. It does not indicate how it will innovate although does stipulate that it has engaged in a $1 billion investment program since 2001 (Modern Power Systems, 2001) in order to achieve this position. The SBU is implementing its strategy through a joint venture agreement with Akzo Nobel in the Netherlands aimed at achieving long-term competitive advantages and acquisitions designed to boost market share in the short-term. Acquisitions include solar businesses held by Siemens and Eon. The joint venture agreement with Akzo Nobel will provide for the development of solar cell technology at low cost in what has traditionally involved an expensive manufacturing process (Modern Power Systems, 2001).
2.2 BP Solar
BP has responded through its thin film photovoltaic cells designed to reduce manufacturing costs towards a level at which solar energy will become economically competitive compared with other energy sources. As BP’s Energy Commission chairman stated: “Our goal is to eliminate the ‘Catch 22′ faced by producers of renewable technologies…without the promise of volume sales, there is little incentive for a company to make the investments that could bring down costs and make these products commercially viable on a large scale” (Chambers, 1998, p. 6). BP Solar has invested some $200 million in solar power between 1996 and 2002, which has helped it build an 18 percent market share. It has launched a large advertising campaign in the US where it puts renewable energy at the fore of its offering. However, this was heavily criticised by Fortune Magazine (2002) bearing in mind its renewable energy business was worth just $1 billion compared to BP’s total value of £115% billion (Murphy, 2002). Like Shell Renewables, BP Solar does not state how it will innovate to achieve its goals. However, unlike Shell Renewables strategy of joint ventures and acquisitions, BP Solar implements its strategy simply through large investments into its own manufacturing processes.
3.0 External Analysis
According to Porter (1985): “The essence of formulating competitive strategy is relating a company to its environment” (p. 3) in relation to the industry or industries in which it competes. This leads companies to choose one of three generic strategies – low cost, differentiation or focus – which will help them to form competitive, profitable positions within the industry. To understand the low-cost strategies that both SBUs adopted, a formal PEST and five forces analysis of the SBUs (see Appendices III and IV), the key drivers for change and critical success factors (CSFs) for the industry (Appendix V) are outlined. The major trends in the global and alternative energy industries are briefly explained.
Shell Renewables (2004a) state that the key drivers for change that shape the global energy markets include demographics, urbanisation, income levels, market liberalisation and demand. However, the company does not believe that these are central to its evolution. “By contract”, comments the chairman of the committee of managing directors of the Shell Group: “The availability of energy resources and, in particular, potential oil scarcity in the second quarter of the century, followed by gas sometime later, with transform the system” (Chemical Market Reporter, 2001). This seems plausible since all energy companies will be forced to move towards alternative energy when fossil fuels eventually run out or become too expensive to extract. The PEST and Porter’s five forces analysis help identify some immediate drivers for change although the key drivers rest with the SBUs’ ability to produce low-cost, flexible, high-output alternative energy products that excel in relation to their competitors.
3.1 PEST Analysis
Energy demand will increase by almost 60 percent with alternative energy markets having limited relative contribution (see Appendix III). Whilst proven oil reserves can answer this demand, the financial investment in infrastructure and extraction is expected to be huge, whilst rising CO2 emissions are leading to greater climate destabilisation (IEA, 2004). The IEA (2004) predict that alternative energy can make a significant contribution to 2030 global energy demand, although this will require a marked change towards a sustainable energy system underpinned by technological breakthroughs and government action (IEA, 2004). The political, social and legal factors affecting the industry, underpinned by the Kyoto Agreement (UNFCCC, 2004), is accelerating the process towards more sustainable forms of energy, requiring Shell (Modern Power Systems, 2002) and BP (Hoffman, 2004) to adapt.
3.2 Porter’s Five Forces
The bargaining power of suppliers is relatively high, driven by the small number of alternative energy suppliers and relative lack of information and product choice for buyers (see Appendix IV). Barriers to entry are high due to the large fixed costs and economies of scale required to operate within the industry. However, the alternative energy industry experiences a high threat of substitution for lower cost provision within the wider energy industry. Competitive rivalry is high, in that both SBUs are competing for a low-cost strategy, albeit through different strategies, which according to Porter (1985), can only be achieved by one company in an industry. Hence, the importance of achieving this position is critical.
3.3 Drivers for Change and Critical Success Factors
The alternative energy technologies (AETs) required for cost leadership (Macleod Institute, 2003) require the execution of 48 CSFs (see Appendix V) across four categories, namely technological, commercial, socio-political and organisational CSFs (Macleod Institute, 2003). The CSFs applicable to the SBUs are highlighted in 4.4 Realising Critical Success Factors. Competitive advantage will be achieved by leveraging internal resources, according to the resource-based view of strategy (Barney, 1991), whilst accommodating the challenges faced in the external environment, exploiting opportunities and minimising weaknesses in the process.
4.0 Internal Analysis
Johnson and Scholes (2002) state that to simply stay in business an organisation must be able to generate threshold product features by leveraging threshold resources and competences. To outperform competitors, on the other hand, meeting CSFs that will allow it to excel and achieve competitive advantage, organisations must bring their unique resources and core competences to bear. Through this analysis, success factors and performance impediments that have affected the SBUs over the last five years become apparent. However, to start, a brief financial performance and stakeholder analysis is provided.
4.1 Brief Financial Analysis
The SBUs’ annual reports are not publicly available, so their parent companies financial performance was analysed and compared since 2000 (see Appendix VI). Different financial ratios were calculated such as: return on capital employed (ROCE); profit margin; return on shareholders funds (ROSF); return on total assets; interest cover; asset turnover; gross margin; EBITDA; and others (see Appendix VI) since 2000, as well as average figures for the whole period. A financial comparison is provided below (see graph overleaf).
Shell’s ROCE is 25% on average for the last years, while BP’s is only 12%. This means that Shell is more efficient in utilising its capital employed to generate revenue (McMenamin, 1999). Profit margin is very useful when comparing stocks in similar industries (Brealey and Myers, 2000). Shell has a higher profit margin (14%) which indicates that a Group is more profitable than BP (8%). Its ROSF is more than twice higher than BP’s, which means that Shell is more efficient in using shareholders’ funds to make a profit. Looking at all other financial ratios it is clear that Shell’s performance was better than BP’s during the last years on average.
However, the chart below clearly presents that BP’s share price is higher than Shell’s during the last year (2004). Such trends occur due to the fact that investors are more confident in BP rather than in Shell, because Shell is more exposed to the current vulnerable situation in the oil market due to the conflicts in the Middle East region.
Comparison of Share Prices of Shell and BP Groups for the year 2004
4.2 Stakeholder Analysis
The most insightful outcome from stakeholder analysis (see Appendix VII) is that Shell Renewables has greater support from key stakeholders – the Shell Board, shareholders and environmental pressure groups – than BP Solar. This is largely because Shell has considerable experience in scenario planning, which has always given it an advantage over competitors in the past. Shareholders are therefore more likely to be supportive of Shell’s strategic choice to move into the renewables market, embracing such a move. Alternately, BP has been performing poorly and lacks Shell’s scenario planning ability. Since the other major oil companies have not moved towards renewable energy, BP is in a more difficult position, and is less able to encourage shareholders of the need to embrace renewable energies through its SBU, BP Solar. Whilst both companies have large tangible resources to draw on, in terms of manufacturing, distribution and marketing channels around the world, Shell’s ability to scenario plan is a strong form of intangible asset, which gives it an advantage over competitors since it is an asset they cannot simply acquire.
4.3 Staying in Business: Potential Performance Impediments
To stay in business, both SBUs must meet energy demands, requiring the financial resources and competences to discover oil and maintain reserves, since this underpins their ability to invest in alternative energy markets.
In 2004, BP had the second largest stocks, up 19 percent, whereas Shell, the third largest in the industry, suffered following admission that it had overstated its reserves by 24 percent, for which is was fined US$120 million, leaving shares down 6 percent (Barker, 2004; Berman, 2004). In response, Shell has declared that it will raise up to $12 billion through sales of its assets and invest around $45 billion to increase production (Economist, 2004), investing up to $1 billion in alternative energy, according to a report in 2002 (International Power Generation, 2002). Official sources state that it aims to have around 10 percent of the solar market and 15 percent annual growth in biomass production by 2005. BP on the other hand hopes that BP Solar, which currently holds 18 percent of the solar market, will be worth $1 billion by 2008 (European Power News, 1998).
Clearly, the cost of asset re-structuring that Shell will have to undergo will damage its performance over the last five years, not only showing the company to have underperformed compared with its results, but now providing it with a weaker financial base. This may force the company to pull some of its investment in alternative energy that it has promised over the last few years to reduce costs. These performance impediments have not been experienced by BP who, despite performing relatively poorly compared with Shell, have much deeper financial resources.
4.4 Realising Critical Success Factors
In terms of socio-political CSFs, it is clear from the external analysis that both companies benefit from an insecure energy supply, supportive government policy, growing consumer buy-in, relative environmental benefit, the emergence of carbon constraints and a net social benefit. However, whilst Shell Renewables has received a negative impression from reputational damage caused by its recent oil reserve scandal, BP Solar’s reputable advocacy of renewable energies has come in question due to a lack of financial backing relative to its advocacy statements.
In terms of organisational CSFs, it appears that Shell Renewables takes a more proactive strategy towards renewable energy, which is strongly endorsed throughout the company. A key competence lies in its long-range planning abilities, known as scenario planning, which enabled Shell’s management to capitalise upon the 1973 oil crisis by pre-buying a large number of oil fields and later, in 1915 when oil prices skyrocketed, selling off excess reserves before prices collapsed (Wack, 1985a; 1985b). This highlights its organisational learning capabilities, another primary CSF. Whilst BP also advocates renewable energy, its arguments are less compelling. Technologically, both companies are investing in most of the appropriate CSFs – feasible technological design, fit with infrastructure, high availability, high capacity factor and others – although Shell leverages its project experience and partnership skills to enact this and BP give its financial muscle.
Commercially, both companies recognise the undesirability of current energy markets, although BP Solar is more reluctant to invest until the commercial viability of doing so appears more apparent. Shell Renewables, on the other hand, puts forward a more compelling value proposition and is using its acquisition strategy to gain market access and joint venture agreements to not only build lower cost technologies but mass produce them, benefiting from economies of scale. For BP Solar the success of the last five years has come from the strong financial performance of the BP Group, which has provided BP Solar with the financial resources necessary to stay ahead in the market. For Shell Renewables, success has come from leveraging its strategic acquisitions, joint ventures and project management skills, which are targeted at building a strong base within the alternative energy market from which it hopes to leapfrog its competitors, include BP Solar, in the future.
This paper has analysed the business environment, key drivers of change and CSFs within the energy industry and more specifically, the alternative energy market. Focusing on two competing SBUs, BP Solar, part of the BP Group, and Shell Renewables, part of the Royal/Dutch Shell Group, Analysis has shown that:
The analysis of BP Solar and Shell Renewables is interesting in that it shows how the two SBUs, which currently experience fairly similar success, are taking very different strategic approaches to their entry into the alternative energy industry, based upon the different resources and capabilities of their parent companies.
6.1 Appendix I: Definitions
|SBU||A part of an organisation for which there is a distinct external market for goods or services that is different from another SBU (Johnson and Scholes, 2002).|
|Alternative energy||Alternative energy is that which comes from sources that neither use up natural resources nor damage the environment, including hydropower, solar and wind power and others.|
|PEST analysis||Identifies the political, economic, social and technological factors that influences affecting an industry.|
|Porter’s five forces||This framework helps users to analyse the rivalry between incumbents, threat of new entrants and substitutes, and the bargaining power of buyers and suppliers in an industry.|
|Critical success factors||Product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform competition (Johnson and Scholes, 2002).|
|Return on capital||A measure of the returns that a company is realizing from its capital (McMenamin, 1999).|
|ROSF||A commonly used ratio in financial analysis giving some indication of the relative profitability of a business from the shareholders’ point of view (McMenamin, 1999).|
6.2 Appendix II: Alternative Energy Markets Growth
6.3 Appendix III: PESTLE Analysis
6.4 Appendix IV: Porters Five Forces Analysis
Barriers to Entry
Threat of Substitutes
Bargaining Power of Buyers
Bargaining Power of Suppliers
6.5 Appendix V: Critical Success Factors for the commercial application of alternative energy technologies (AETs)
6.6 Appendix VI: Financial Statements
|PROFIT & LOSS ACCOUNT||12/31/2003||12/31/2002||12/31/2001||12/31/2000|
|12 months||12 months||12 months||12 months|
|mil GBP||mil GBP||mil GBP||mil GBP|
|Cost of Sales||-97,903||-103,015%||-15%,839||-42,877|
|Profit (Loss) before Interest||7,15%4||10,104||12,117||5,137|
|Profit (Loss) before Tax||7,033||9,088||11,215||4,326|
|Profit (Loss) after Tax||4,322||5,607||7,922||3,168|
|Profit (Loss) for Period||4,215%||5,556||7,861||3,083|
|Amortisation of Intangibles||15%3||15%9||499|
|Wages & Salaries||4,015%|
|Social Security Costs||306|
|Highest Paid Director||3||6||3||5|
|Number of Employees||116,300||109,150||98,000||88,100|
6.7 Stakeholder Analysis
Barker, R. (2004) An oil giant for players with patience, Business Week, 3904, p. 148.
Barney, J. (1991). “Firm resources and sustained competitive advantage,” Journal of Management, 17(1), pp. 99-121.
Berman, P. (2004) Humbled giant, Forbes, 174(10), pp. 206-07.
Brealey, R., and Myers, S. (2000). Principals of Corporate Finance, 6th Edition, Irwin McGeaw-Hill, London
Broadhurst, A. (2000) Corporations and the ethics of social responsibility: an emerging regime of expansion and compliance, Business Ethics: A European Review, 9(2), pp. 86-98.
Chambers, A. (1998) BP opens Californian solar power plant, Power Engineering, 102(4), p. 6.
Chemical Market Reporter (2001) Energy markets poised for dramatic change, Chemical Market Reporter, 260(17), p. 8.
Economist (2004) Business, Economist, 372(8394), p. 1.
EU (2004) The European Union Greenhouse Gas Emission Trading Scheme, EUROPA, http://europa.eu.int/comm/environment/climat/emission.htm [Accessed 21 November 2004].
European Power News (1998) Oil giants, European Power News, 23(5), p. 18.
Frynas, J.G. (2003) Royal Dutch/Shell, New Political Economy, 8(2), pp. 275-286.
Hoffman, A. (2004) Winning the greenhouse gas game, Harvard Business Review, 82(4), pp. 20-21.
IEA (2004) World energy outlook 2004, International Energy Agency, www.iea.org
International Power Generation (2002) Solar power by Shell, International Power Generation, 25(2), p. 7.
Johnson, G. and Scholes, K. (2002) Exploring Corporate Strategy: Text and Cases. Harlow, Essex: Pearson Education Limited.
Macleod Institute (2003) The critical success factors for the commercial application of emerging alternative energy technologies, Innovation in Alternative Energy Workshop, www.thecis.ca [Accessed 21 November 2004]
McMenamin, J., (1999). Financial Management: An Introduction. Routlege, London
Mirvis, P.H. (2000) Transformation at Shell: commerce and citizenship, Business and Society Review, 105(1), pp. 63-84.
Modern Power Systems (1997) Shell invests in renewables, Modern Power Systems, 17(11), p. 12.
Modern Power Systems (2000) World Digest, Modern Power Systems, 20(7), p. 9-11.
Modern Power Systems (2001) Shell and Akzo Nobel solar venture, Modern Power Systems, 21(11), p. 12.
Modern Power Systems (2002) First pollution trading, Modern Power Systems, 22(5), p. 3.
Rajgor, G. (2001) Earth, wind and power, Director, 55(2), p. 96-99.
Porter, M.E. (1980). Competitive strategy: techniques for analysing industries and competitors. New York: Free Press.
Porter, M.E. (1985). Competitive advantage: creating and sustaining superior performance. New York: Free Press.
Murphy, C. (2002) Is BP beyond petroleum? Hardly, Fortune, 146(6), pp. 44-45.
Power Economics (2001) Bright future for renewables, Power Economics, 5(3), p. 7.
Power Engineering (2000) Briefly noted, Power Engineering, 104(9), p. 78.
Shell Renewables (2004a) About Shell Renewables, www.shell.com [Accessed 21 November 2004].
Shell Renewables (2004b) Energy needs, choices and possibilities – scenarios to 2050, www.shell.com [Accessed 21 November 2004].
Teske, S. (2003) Solar, wind energy good for Asia, Jakarta Post (Indonesia), EBSCO database.
UNFCCC (2004) The convention and Kyoto Protocol, The United Nations Framework Convention on Climate Change, http://unfccc.int/resource/convkp.html [Accessed 21 November 04].
Wack, P. (1985a) Scenarios: unchartered waters ahead, Harvard Business Review, 63(5), pp. 72-89.
Wack, P. (1985b) Scenarios: shooting the rapids, Harvard Business Review, 63(6), pp. 139-150.
World Bank (2004) Carbon Fund, World Bank, http://carbonfinance.org/router.cfm?Page=About [Accessed 21 November 2004].
Wright, W. (2004) Anxiety grows over rising prices, Global Finance, 18(6), p. 9.
http://www.londonstockexchnage.com – Share Price Performance
http://www.shell.com/home/Framework?siteId=investor-en – Shell’ annual reports
http://www.bp.com/investorhome.do?categoryId=132&contentId=2004195 – BP’s annual reports