Shells directional policy matrix

Figure 20.5

Shells Directional Policy Matrix

Developed by Shell international Chemical Company to identify the areas in which they should operate The vertical axis measures the companys present competitive position The horizontal axis gives the prospect for profitable operation in that sector The criteria used are market growth rate, market quality, feed stock and environmental aspects

 Shell considered that creating a single strategy plan did not work in the changing environment. It tried to develop many scenarios based on a number of assumptions about the future environment, these could be optimistic, pessimistic and straightline Depending upon events different scenario was used

Positions in Shells Matrix

Each of the zones is described as follows: Leader - major resources are focused upon the SBU. Try harder - could be vulnerable over a longer period of time, but fine for now. Double or quit - gamble on potential major SBU's for the future. Growth - grow the market by focusing just enough resources here. Custodial - just like a cash cow, milk it and do not commit any more resources. Cash Generator - Even more like a cash cow, milk here for expansion elsewhere. Phased withdrawal - move cash to SBU's with greater potential. Divest - liquidate or move these assets on a fast as you can.

Business Sector Prospects. (Horizontal x-Axis)

Profitability prospects (or attractiveness) for businesses in the petroleum sector are judged on four criteria 1. Market Growth Rate market growth is necessary for the growth of sector profits but sectors with the highest growth rate are not necessarily those with the largest profit growth. Shell advocated a rating system for this factor where the midpoint was the average growth rate for the industry. A star rating system was used rating the growth rate from a one star to a five star. 2. Market Quality this is a difficult concept to quantify and to get to a rating for the sector. A number of questions must be answered (Shell questions) Has the sector a record of high, stable profitability? Can margins be maintained when manufacturing capacity exceeds demand? Is the product resistant to commodity pricing behaviour? Is the technology of production freely available or is it restricted to those who developed it? Do relatively few producers supply the market? Is the market free from domination by a small group of powerful customers? Has the product high added value when converted by the customer? In the case of a new product, is the market destined to remain small enough not to attract too many producers?

Is the product one where the customer has to change his formulation or even his machinery if he changes supplier? Is the product free from the risk of substitution by an alternative synthetic or natural product? A business sector rating yes on all or most of these questions would score a four or five star rating. 3. Industry Feedstock Situation Expansion of productive capacity is often hindered by the uncertainty of feedstock supply. If the feed stocks in the sector have a strong pull towards an alternative use or are difficult to assemble in large quantities then this is a plus for sector prospects and the rating is better than average. If the feedstock is a by-product of another process and the main product consumption is growing at a faster rate than that of the by-product, pressure might result due to low prices or direct investment by the by-product producer to increase its consumption. This would be given a lower than average rating. 4. Environmental (Regulatory) Aspects Business sector prospects can be affected by restrictions on manufacture, transportation and marketing of a product. If this has not been built into the forecast of market growth, it must be assessed separately. Strong positive or negative environmental pr regulatory influences must be taken into account.

Competitive Capabilities (Vertical y- Axis)

A petroleum company can be judged as strong, average or weak on three major criteria. Shell recommended reviewing these criteria in relation to significant competitors in the relevant business sector. (this axis is similar to the Business Strength axis on the GE-McKinsey matrix) Market Position The percentage share of the total market as well as the degree to which this share is secure is of primary importance. Shell looked at this factor in terms of a relative market leadership position rather than market share and rated this factor on a 5 star rating scale as follows: Leader 5 stars this type of company has market leadership and technical leadership usually accompanies this. Major Producer 4 stars this occurs where no single company is leader but there are two to four competitors are closely placed. Viable Producer -3 stars this type of company has a strong viable stake but falls below the top league Minor- 2 stars - businesses in this category are less than able to support research and development in the long term Negligible- 1 star companies with a negligible position in the market fall into this category

Major Advantage
The general technique of this model can be applied to any business with separate identifiable sectors even though it was developed for the petro-chemical industry This model works well in the petroleum industry but adaptations should be made when using it outside the industry.

Model weaknesses
The Shell DPM has been used in different industries and some practical problems have been raised.

1. There is a need to change the questions for companies not in the petroleum industry and the questions regarding the factors should be customised for the company doing the analysis.
2. Shell advocated equal weightings for the criteria on each of the axes. This worked for Shell but other companies may feel that certain factors are more important than others and therefore the weights should be adjusted accordingly 3. The environment was the fourth factor on the business sector prospects axis yet Shell often left this factor out altogether. Environment can be a very important factor as it deals with the wider question of risk 4. When using the Shell DPM methodology, it was found that the star rating system added very little value and a points allocation rating was superior.

Shells Vs BCG / GE
BCG has problem with market share as it may not inclue viable and minor producers, as will as leaders and majors. Shells is based on the concept of market leadership instead of market share. In this one can select criteria for different industry sectors and situations Mckinseys portfolio planning at GE was paralleled in Europe by Shell which pioneered the concept of scenario planning