Royal Dutch Shell PLC

ROYAL DUTCH SHELL PLC – BALANCED SCORECARD

According to Gumbus and Lussier (2006), a Balanced Scorecard (BSC) can help a business in several ways. It promotes growth because the BSC does not focus on short term goals, but instead focuses towards meeting the long term objectives of a company. It also allows performance to be monitored by comparing results to a target. Furthermore, the BSC can increase accountability.

Shell states that their main strategy is to ensure that they extract and deliver oil and gas profitably and in environmentally and socially responsible ways (Shell, 2010). All of the objectives in the BSC relate to this strategy, as each one coincides with another to for relationship which helps to meet Shells long term strategy. An example of a cause and effect relationship in the balance scorecard could be by improving company and employee relations, staff will be more motivated to work well knowing that they feel like they are part of the company. This is turn will better business processes such as reducing oil spillage. If the spillage is reduced, Shell can state this in reviews and through the media. This will win over new customers as Shell would claim to be less of a risk to the environment. In turn, by attracting new custom, overall revenue will increase.

Another example of a cause and effect relationship from the BSC is that if Shell discovers new locations of oil and gas, they can set outside set amounts of oil to turn into Biofuel. This will lead to more of their modes of transportation, including suppliers, running on Biofuel. The Biofuel can then be transported to petrol stations where its availability would increase for customers. As this would meet the needs of customers, they will attract more custom and thus undergo projects which would benefit shareholders wealth maximisation. Furthermore, implementation of this BSC will enable Shell to meet the needs of all of their stakeholders.

Meeting the needs of Shells shareholders is extremely important. With this realization, both objectives under the financial perspective of the BSC relate directly to meeting the shareholders’ needs. Maximising shareholder wealth is the number one priority of Shell, and this can be measured in many ways. By looking at the amount of dividends paid out over two years it is possible to see how well Shell is performing in relation to its shareholders. Shell must establish however that shareholders do not only want high returns in the form of dividends. Bearing in mind that the shareholders are financing Shell, they need to know that the company is performing with them in mind and not just on short term success. Implementation of the above BSC will therefore be a positive as it’s initiatives in achieving the financial objectives address long terms goals. By accepting and undergoing projects which will be not only profitable, but allow Shell to further invest in such projects will maximise shareholders wealth. Furthermore, if Shells revenue increased, it will mean that there is more expenditure available to invest in projects. By looking at different appraisal methods, Shell can distinguish which projects to accept and which to reject.

When filling up at a Shell petrol station, customers want the best value for their money. This is true for both new and existing custom. As the BSC states, Shell can meet this need by developing and providing products and services which offer value in terms of price, quality, safety and environmental impact. This demonstrates that Shell is not only aware of the cost to their customers, but also that customers are also becoming more concerned about being eco-friendlier. One of Shells BSC objectives is to increase the amount of Biofuel to customers. This shows that they are willing to become eco-friendlier because the burning of Biofuel produces less CO₂ emissions. To do this however, Shell would have to invest money into finding ways to extract and produce more Biofuel. This links into pleasing shareholders also, as projects such as this would only be undertaken if Shell knew that would be profitable from themselves and their shareholders.

Shell could also make customers feel like they are achieving value for money by encouraging customers to become part of their loyalty scheme. This could be achieved by increasing the advertising of the benefits of becoming a loyalty member. Perks such as saving 5p per litre of petrol every time you gain a certain amount of points on your loyalty£100 in a Shell petrol station is just one example of how Shell can also attract new custom as well as maintaining their current customer base.

Shells employees need to feel that they are an integral part of the business. By implementing the BSC above, one of Shells objectives would be to improve relations between the company and its employees. This can be achieved through the continual development and implementation of Shells “Transition 2009” programme. The programme focuses on reorganising the structure of Shell and expressing the changes with employees either face to face or via staff councils. By doing this it shows that Shell appreciate their staff and try to communicate with individuals as personally possible. Also involved in the “Transition” programme is the “Shell people survey” which is a questionnaire that employees are given the chance to cast the feelings on whether or not they feel part of the business. Affiliation and commitment is measured using the results and Shell can see from here whether they need to improve relations with employees.

Employees also need to feel that they are safe when carrying out certain jobs. One of the BSC objectives is to reduce staff fatalities, as the reality is that some of the jobs are extremely dangerous and life threatening. By implementing the BSC above, it demonstrates Shells desire to have zero fatalities. This can be achieved by introducing a set of safety rules to address specifically the work-time practices with the greatest risk to life. These rules will help staff to recognise the potential dangers involved in their jobs, thus hopefully resulting in a decreased amount of fatalities.

Shell defines their suppliers as their partners, thus the actions of one directly affects the other. Their suppliers need to know that Shell will treat them with integrity and honesty, and as such, effectively as employees. The BSC states that Shell wants to reduce transport emissions, and this meets the needs of suppliers as this will enable their suppliers to not only help in Shells objective of becoming “greener”, but also could reduce suppliers petrol costs if Shell will provide them with Biofuel. Another need of their suppliers is to be paid on time. One of the objectives of the business process perspective is to reduce oil spillage, and if suppliers can deliver the correct amount of oil to Shells petrol stations and depots they can ensure that they will be paid on time. This can be achieved by redrafting the procedures that suppliers must undergo when dealing with the transportation of oil. However, a problem Shell face when oil is spilt is a backlash from society.

Shell needs to ensure that they can provide a sound service to society, whilst also protecting the environment. This is linked to Shells objective of reducing oil spills, and also their objective to produce bitumen without causing significant environmental damage. By assessing the “tailings” left behind when mining for Bitumen, Shell can understand how to manage the “tailings” more effectively, reducing contamination and damage to the environment and wildlife. This shows that the BSC would show society that Shell takes external stakeholders views seriously, which is useful especially in these times where being environmentally friendly is one of the main pressures oil companies such a Shell face. Other needs of society such as local investment and creating jobs can also be met by Shell by implementing the BSC. Last year Shell recorded eleven notable discoveries of new oil and gas locations around the world, and an objective of the BSC is to continue to find more sources of oil and gas (Voser, 2010). This can be achieved by building good relations with countries that Shell operate in to allow the company to allow offshore exploration. This can create jobs in LEDC’s such as Brazil and Mexico where they have started to extract oil from new discoveries (Voser, 2010). By investing money into these countries to allow Shell to produce oil and gas, the countries are benefiting from new work plants which will help to not only produce jobs, but to also help promote Shells cause to protect the environment.

It is not only benefits which arise from implementing a BSC. Many limitations and risks can be identified if Shell was to implement the BSC also. Likierman (2006) suggests that it may be difficult for a company to analyse exactly how successful implementing a BSC can be for them. In Shells case, it could be hard to analyse the BSC’s success as there are twelve targets that they should be aiming to achieve. It would be difficult for them to measure their success on just these targets. Non-financial measures as well as other performance measures would need to be assessed to see how well Shell has done. Then, comparing these findings with those of the BSC, it may be possible to see if it has been successful. However, being a long process, it coincides with Likierman’s (2006) views. Davis and Albright (2004) state “no study has established a strong causal link between BSC usage and improved financial performance”. Thus By implementing this BSC for Shell, although it claims to increase revenue and shareholder wealth, this is only a theoretical objective. In practice however, the cause and effect relationships may differ, thus leading to a possibility of a decrease in revenue. This is also mentioned by Gould and Murphy (2005), where they question the validity of the targets used in the BSC to track the cause and effect relationships. In relation to the BSC for Shell, the targets for the perspectives are vague. These targets are just estimates, whereas if they were to use other non-financial measurements, Shells targets for the short term for example, would be considerably different to those laid out in the BSC.

“The claim that the balanced scorecard is a strategic control model that is able to handle the problem of strategy implementation also has its shortcomings” (Norreklit, 2003). This is again true for Shells BSC as it can be costly to implement and operate, especially since some of the initiatives require redrafting of procedures and the introduction of new teams which would need to be trained. This can lead to confusion of whether the BSC has indeed helped to meet its strategy of extracting and delivering oil and gas profitably and in environmentally and socially responsible ways. Also, according Norreklilt (2003), the BSC model does not monitor Shells competition or look at changes in technology. This is again a negative of Shells BSC as not one of the objectives link to the performance of their competition. This could leave Shell very narrow minded, not focusing on what developments competition is making, thus leading to a loss of market share.

From the BSC however, Shell would be looking at new technologies and procedures to help meet objectives, such as Biofuel and discovering new oil locations, but by not looking at what technologies the competition is implementing, they could again fall behind to competition in terms of market share. This would lead to false cause and effect relationships as they would indeed not be accumulating the revenue or shareholder wealth that the BSC aims to achieve. This is explained by Norreklit (2003) states that “there is not as claimed by Kaplan and Norton (1996) a cause-and effect relationship between customer satisfaction and loyalty, and between loyalty and financial results”. Again, cementing Norreklit’s theory that cause and effect relationships can be very fickle, and in Shells case, possibly unjustified.