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PEST Analysis on Shell

SECTION 1: PEST Analysis

Royal Dutch Shell plc also known as Shell is an Anglo-Dutch multinational oil and gas company. It’s headquarter is located in The Hague, Netherland while its registered office is located in London, United Kingdom. Shell is the world’s second largest revenue company and it operates in over 90 countries and has 44,000 service stations worldwide. PEST analysis, “Political, Economic, Social and Technological analysis” is the external macro-environment in which a firm operates. This factors gives an impact to the organisation through the operating period.

PEST factors are usually hard to control but the changes in the external environment created a new opportunities and so analysing these factors are easier. This allows us to be ready to take opportunities as they arise. PEST analysis allows recognizing and work with changes as it happens. It also helps in avoiding factors of failure which are beyond the controls. It is useful for starting an operation in a new country or region where the macro environment is different from the normal.

Political Factor

As the analysis are done from a political point of views, the government rules and regulations of the business as which must be considered before entering the Malaysian markets. Malaysia is a constitutional monarchy in Southeast Asia which Mohamad Najib bin Abdul Razak acts as the Chief Executive. The tax policy in Malaysia is rather considerate as the corporate tax rate has been reduced to 25% which applies to both local and foreign companies. In addition, for people who are carrying on petroleum upstream operation are subject to a Petroleum Tax Income of 38% and are allowed to be paid by instalments of 5 years under the country’s law.

Economic Factor

Malaysia is a dynamic country as it is constantly evolving. With the export rate of the country was RM513.59 billion between Jan-Sept 2011, shows that there’s no problem with the economy here. Considering the rapid growth of development in Malaysia, it’s easy for Shell to contribute itself as oil and gas are the strong base of supporting service for the country’s cost competitiveness.

Sociocultural Factor

The social and cultural influences on business vary from country to country and it is very important that it must be considered. The sociological aspect of the PEST analysis involves in the consideration such as the increase of population of the country and the increase of employments. Therefore, the demand of employment by the young youth and the graduates are high as they would accept jobs considering gaining experience and also, get rid of the unemployment title, and to these, Shell can take it as advantage.

Technological Factor

Technology is vital for competitive advantage and is a major driver of globalization. As Malaysia is a country which currently emerging itself towards high-tech production-based of development. With the resourced-based vies, the strategic dimension are used for analysing the technological catch-up strategy of Malaysia. Therefore, improvement in technologies of oil in Malaysia can be taken as advantage for Shell to be established here.

After considering all of the factors, Malaysia would be a suitable destination for conducting Shell. The main reason will be the presence of world renowned petrochemical companies such as Shell speaks clearly that Malaysia’s for potential as an investment location are bright. This factor helps to shape the companies which determines the magnitude for the opportunities and threats which are faced by the organisation. This factor is remote and less easy to shape but these forces are important.

SECTION 2: Analysis of Competition

Five forces analysis is a framework for industry analysis and business strategy development created by Michael Porter. The five forces determine the competitive intensity and attractiveness of a market. Three of the five factors refer to competition from the external sources while the others refer to internal threats for the business. It is applied to several problems in order to help the business to become more profitable and also to help the government to stabilize its industries and economies of the country. It is similar with other environmental audits such as PEST analysis but, it only forces one product or range of business itself and it is divided into five forces of key areas.

Five Forces Analysis looks at five key areas:

The Threat of Entry
The power of Buyers
Powers of Suppliers
Threat of Substitutes
Competitive Rivalry

1. Threats of Entry
In general, new industries and companies would enter into the market and the output would expand, the prices would fall and the profits would be declined. The competitors always find a way to reduce new potential competitors by prosecuting strategies for barriers of entry. The barriers of entry are basically factors that are preventing new potential competitors to enter the market and compete with the firms that are already in the market. High entries of barriers are put to protect the current firms even when they are making profits. This is necessary move to reduce the number of new potential competitors in the market.

Economics scale is the cost reduction which was caused by large output, represented by the important barriers of entry. The current industries or companies may enjoy the economics of scale and they may have the advantages over the lack of sales by the new competitors. This happens because the consumer has become loyal to the brand. Brand loyalty is when the consumer prefers the product from these companies than the other company. This makes harder for the new potential competitors to enter the market. To control the economies of scale and brand loyalty, managers are prosecuting strategies to limit the number of new entries to the industries.

Shell has been in the global market since 1907 which is the 20th century. As this, Shell is protected from competitors by scale and brand-bases entry barriers. Although it has been in the global market since the 20th century, Shell will be facing a problem with brand loyalty from Petronas since Petronas is the nation’s company in Malaysia. It would seem to be difficult for Shell to overcome this brand loyalty enjoyed by Petronas but, with their reputation around the global market, Shell might just have a chance to overcome Petronas.

2. Power of Buyers

The next competitive force of the five forces analysis is the power of buyers. The power of buyers has a really huge impact on the industries. It has the power and ability to bargain down the prices changes by the firms when the prices are high. The method can be done by demanding better product and quality services. With the prices being lowered and the demand of better services, the powerful buyers actually make profits from the firms. Hence, powerful buyers should be considered and viewed as a threat. Even though, buyers are at weak position to bargains, but the power of the prices and increase of the profits are in their hands.

Buyers are most powerful when:
They are few in number and purchases in large.
They have the power to choose between products from many other different firms They can switch to other company when the costs offered to them are lower. Buyers are in a weak position when:
They are ample and only purchases in small quantities.
They have limited choices.
They cannot switch easily when offerings are made to them.
As Shell is a high profiled company to the global market, high switching cost can really reduce the power of buyers to bargains. From this event, Shell can enhance their market and over throw Petronas. Moreover, anything that lowers the switching of cost must be seen as a threat. Hence, the switching costs facing by the buyers are high and their bargaining cost are low.

3. Power of Suppliers

All suppliers in this world provides inputs to the firms. These inputs might be raw materials, partly finished product or services. The opportunity of the firm providing input or services depends on the firm’s output which is needed for them to function. Sometimes, only one suppliers provide the input which make them have the power to bargain whether they want to lower down the prices or increase the prices. This problem can be seen as a threat. In order to reduce this threat, managers of the firms must find alternative suppliers. Suppliers represent opportunities from the current companies to have the power of bargaining prices for the product they are paying.

Powers of Suppliers are greater when;
The firms purchases large quantities
The firms can choose between multiple other suppliers
The cost of switching between suppliers are low
The firm don’t need to depend on only one supplier

4. The Threat of Substitutes
Another competitive force from Five Forces created by Porter’s is the Threat of Substitutes. The threats of substitutes are when the services of different companies can satisfy the needs of the consumer. When there’s a close substitute, there’s a strong competitive threats. This happens because this limits the company to increase their prices and also this can make them change their product altogether. If the prices of Petronas increase rapidly, an substitution will occur and this is an opportunity for Shell to lower down their prices and take the profits.

If the companies have few or limited substitutes, it means that substitute are a weak form of competitive force. This can lead to other prices of products being equal and this is an opportunities for the other companies to actually lower down their prices and earn additional profit.

5. Competitive Rivalry
The final force of the Five Forces of Michael Porter’s theory is Competitive Rivalry. This is an intense rivalry between the current industries or companies which are already in the market. This is a threat that reduces the profit by the established company. It is also a threat that gives the current companies to raise their prices and also make more profits. These different factors can be determined by the intensity of the rivalry.

The nature of the product
Demand and supply conditions
Cost structure of the firms
The competitive structure of the industry

SECTION 3: SWOT Analysis

SWOT analysis is a strategic planning method which is used to evaluate the Strengths, Weakness, Opportunities and Threats of a business. It identifies the internal and external factors which help to achieve the objective or main goal of the business. This technique was credited to Albert Humphrey. These strategies should be consistent with the business level strategy of the company. Hence, as a result of SWOT analysis, the managers of the company should have identifies the set of the organisation, the business and the operating strategy that supports each other and enable the organisation to attain their goals.

Strengths: Characteristics or opportunities of the business which matches its strengths and the organisation can optimize its full potential.

Weakness: The limitations of the organisation which gives the organisation disadvantages.

Opportunities: It is the chances to improve the business’s performances.

Strength – Weakness

Shell has strong market position and it is well known to the global market. Hence, there won’t be any problem for Shell to be set up in Malaysia. Shell’s current financial investments and stable financial position helps to ensure their continuing activity for over the coming years. Shell has worked hard to improve its organisation’s reputation until it is well known now.

Shell only focuses on producing oil and gas that it does not produce any hydrocarbon production. Petronas is the main oil and gas company in Malaysia, and if Shells begins to produce hydrocarbon production, it might over power Petronas and be the main oil and gas company in Malaysia. Although the corporation tax rates were reduced by 25% in Malaysia, it is rapidly increasing every year per annum. The burning of gas from oil extracting is not environmentally accepted by the people in Malaysia. Hence, there might be a problem with the people who have concerts over the global warming and urban air pollution.

Opportunities – Threats

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Malaysia are improving and slowly moving towards the high-tech production. Hence, with this improvement of technologies, it can help Shell to operate steadily. Currently, Malaysia is facing a problem with the air pollution and there are high demands of natural gas. This is because, natural gas is lighter than air and it can easily disperse in the event of gas leaks. This is an opportunity for Shell as they are using advance technologies to help to meet with the world’s rising demand for cleaner energy for the future. Malaysia is a country which is quite rich with oil and gas. The discovery of oil and gas are still being discovered and the potential of discovering many more are still high. Shell has been in the global market for a long time and the main threats for Shell are the new companies who are competitors in Malaysia which are Petronas, TOTAL, etc. The rapid increases of the fuel prices are rising which are reducing the potential profits being made. This is because the government is putting tax to Shell products. The economic downturn which decreases the demand for fossil fuels. Threats: The changes in the environment which affects the performance of the business. Hence, causing trouble for the business.

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