Earlier this year we in the large energy companies were being told that we had missed the boat – that the new dot.com companies were going to eat our lunch. The market capitalization’s of some of the so-called new economy companies were astronomical.
People were excitedly talking about the emergence of multi-billion - even trillion dollar companies – and energy companies like some of ours were beginning to be dismissed as dinosaurs in a sunset industry, to mix some metaphors.
Well, what a difference a year can make!
Today some dot.com capitalization’s are down ninety per cent. The air seems to have gone out of the balloon. A lot of flaky business models and concepts have been shown to be just that – flaky. Traditional business metrics – and measures of company performance – have started to reassert themselves.
I don’t want to rub salt in these wounds – far from it. I like innovation and new ways of doing things. If we can do our business better, why not? And, I would certainly not object if energy company capitalization’s were higher!
But, at the same time, I’m pleased that this rather hyped and somewhat artificial division between new economy and old economy companies is now being seen in a more realistic perspective.
It deserves to be seen through. It wasn’t a meaningful way of looking at the way companies operate or trade with each other. The energy industry has always had both high and low tech features – as do most other industries.
The point isn’t the technology – although it is a great enabler - it is the products and services you deliver to the customer.
Like everyone else I recognize that the new technologies will continue to transform our world - for the most part positively. When Gutenberg’s printing press came on the scene no one quite realized how it would revolutionize society.
It is impossible to imagine our modern world without cheap, mass-produced books. No doubt, within a very few years it will be impossible to imagine our world without cheap, instantaneous electronic information.
But, cheap is relative. You or I may think nothing of paying a few pounds for newspapers and books. For the illiterate farmer in Africa or India that is still unimaginable.
The Internet is going to make information even cheaper and eventually, even more broadly accessible. The social impact of the Internet is, over time, going to be enormous.
But, in the immediate future, the more immediate impact is going to be on way we do business.
Like many of your companies, Shell has been using e-mail and proprietary electronic trading systems for a couple of decades. We used to have a tailored IBM e-mail system – which actually survived and served us well for about 17 years – which is probably something of a record.
When the web first arrived I have to admit we followed a fairly laissez faire approach – giving our individual operating companies scope to do just about what they wanted. This reflected our management structure in the mid-90s and it led to some very interesting initiatives.
In many of our basic business processes enterprising people all over the world have originated over a hundred different initiatives in different parts of our many value chains.
Perhaps this was a bit chaotic but it allowed the enthusiasts to experiment and, in relative expenditure terms, nothing too serious was involved. More recently we have moved to exert more structural control over these developments.
As a result, today we have a wide range of online corporate and e-business plays. We also have a new organizational unit - we call it our Internet Works - to provide both stimulus and coordination to our global efforts in this area and to act as our window on a fast-changing world.
The corporate material - the ‘brochure ware’ on our Shell.com site has proved to be very effective, even winning some industry awards. Energy is always going to be a controversial industry.
We were only too painfully aware of that in the late nineties, so we decided to go for a way of operating that was as open and as transparent as possible.
This interest has helped us and we set up chat rooms where people who want to debate with us can do so. It makes interesting reading!
We don’t edit or try to take control. We’ve taken the ideas of transparency and openness fully on board – even when it is difficult. I’m not sure how this will play out but a lot of the people within Shell – particularly our younger people - are very pleased with it.
This is how we see business evolving.
We also have sites dedicated to specific interests. As Michael Schumacher worked his way to this season’s F1 triumph our Shell.com/ferrari site became amazingly popular!
On the e-business front we have initiatives in all parts of the value chain. These encompass a range of B2B and B2C plays - and they are growing all the time.
We have moved a very long way in a hurry by a process of controlled prototyping and experimentation! We don’t know what all the answers will be but we have laid enough bets to feel that we are really testing the opportunity.
Cost saving in the supply chain through B2B, Business to Business, sites is emerging as something of a no-brainer.
We are involved as stakeholders in procurement sites including Trade Ranger, which will handle the whole spectrum of energy-related goods and services, and Ocean Connect and JetA.com, which relate specifically to marine and aviation fuels.
These sites are very likely to have significant impact in the longer term. They are going to cut significant cost out of the system and streamline procurement processes.
By doing that they will redefine the value chain. I’m sure everyone here today has seen presentations showing value chains transforming into value nets. New market makers are setting up in different parts of the net.
Shell is also involved in a number of trading exchanges, Level Seas (in vessel chartering), the Intercontinental Exchange (in trading derivatives) and Houston Street.com (in physical oil) – among others.
There are said to be about 700 energy exchanges at the moment. Just as, in the early days of the oil industry, there were hundreds, if not thousands of companies, natural selection is going to take place with liquidity as a key factor. It will be interesting to see how many survive – just a handful - or perhaps up to ten?
There may be some who survive by developing specialized niches.For example - we participate in a site devoted to trading open spec naphtha in the Asian market. Definitely NOT mass market – but, within that trade, it is likely to prove a gamechanger.
Some believe that, simply by setting up an exchange, you can capture a percentage of the value passing through. Some can be captured – no doubt about that.
But, consider the valuations of the existing exchanges and the percentages they take of the value they process. So, we see the value in being involved, but let’s not get their importance out of perspective. Real value still lies with products and services – even if these are commodities.
Low unit cost exchanges will certainly benefit the energy industry. Because they are web-based they will be open to a greater number of players.
However, given that there have always been a large number of players in the energy business, and there has never been any liquidity shortage, it is perhaps difficult to see how things will change fundamentally.
What certainly does change is the efficiency of linkage to customers and counter-parties and the scope for expanding customer offers.
When we move to B2C (Business to Consumer) we are likely to see more change.
One of our interesting early developments has been a travel guide site – Shell Gesture. It is targeted at European motorists, offering trip-planning assistance. It is amongst the most popular travel-planning sites in Europe.
We have an online fleet management accounts system at euroShell.com and, like many who see the consumer finance field as a natural brand extension, we have a credit card which can be managed online at Shellvisacard.com.
In Australia we have Optibuy – a prototype consumer site which creates a community with input from other companies – and from the users themselves. It is proving very popular in the agricultural community.
How will all of these plays work out in the long term? To be honest, we cannot be sure. This whole field is developing so fast that it is impossible to answer definitively.
So, we are taking a fairly aggressive stance without losing sight of business fundamentals. We’ve always used technology platforms but learned long ago not to become too mesmerized by them. In the end it is the product – not the technology – that counts.
The people at Priceline.com learned that recently. Last month we saw the demise of their Web Home Club - a site supplying gasoline and groceries. They set up a play that, at first sight, seemed clever. They offered the best price – but gave up service, selection and convenience. They found there was no profit in it.
Back to Marketing 101!
That said, it is worth isolating which parts of the business are likely to change dramatically. E-business changes the speed at which we work. It is 24/7 - which means open all hours! - and it is changing customer expectations. They want things faster.
That means customer relationships will inevitably change. In a sense they have to become more intimate. The technology allows us to segment more and more and to really extract value from data base and customer relationship management.
The easy access to all types of information, which is the natural consequence, means that markets inevitably become more transparent and more accessible. So there will be more players and we will probably see the emergence of a lot more spot markets.
These will range from eBay-style magnetization of second hand goods through auctions, right up the supply chain.
It is worth remembering that there are many millions of small companies across the globe. They will use web markets – because they will be the only opportunity they have to play on larger, global scale.
To give a small personal example, my wife operates a greetings card business targeting corporate clients and a significant part of her sales now come from her Internet-based catalogue.
Will the myriad small businesses that are emerging change the traditional value chains? They may and, if they do, there will be profound implications for all our business relationships.
Instead of having linear value chains – from raw materials to final consumer with some cross links, we could see the emergence of even more complex and dynamic chains – these are the value nets I referred to earlier.
They can already be seen in the entertainment industry – especially pop music, in finance, in retail banking and, perhaps more interestingly, the car industry.
Global car manufacturers are rapidly changing themselves – building up their brand and service activities – and outsourcing the physical construction and delivery. They are firmly targeting the mobility customer.
Because of this new intermediaries have emerged, as have market places – almost exclusively electronic. The parts of the value net where value can be captured are changing.
We are also already seeing the rapid growth of a new style of distribution industry. In Japan that 7-Eleven outlets are no longer just convenience stores. They now generate about forty per cent of their revenue from being delivery points for goods ordered on the ‘phone or over the net.
Parts of traditional gasoline networks may well emerge as generalized delivery points - we’ll see!
Ladies and Gentlemen, I hope these remarks have given you sufficient time to recover from lunch! The Internet is now very much part of all our lives – in a way that most of us probably didn’t anticipate just a few years ago.
As I mentioned my wife’s business depends on the net. I keep in regular e-mail contact with my son who is a student in the States. When he calls it is via his computer which accesses cheap rate internet transmission.
Like many of you, I am traveling much of the time – these days the world follows in your PC! I confess I sometimes wonder if we haven’t created a rod for our own backs when I return to my hotel late at night after a long business day well out of my time zone.
There is no doubt about the many benefits e-business will allow us to deliver. But they will only be delivered if we stick to clear, value-based management. Innovation is good and we should always extend the benefit of the doubt. But it must be based on common sense and sound judgment.
What we recently saw in the dot.com markets had all the hallmarks of a classic bubble. It is good that this first learning phase is over. Now we can get down to applying these new technologies to cut costs, drive competitive advantage, and create new products and services that please our customers.
It is very exciting to be involved in today’s energy market. We have potential opportunities that our predecessors would find hard to imagine. I really believe that e-business will reshape our industry dramatically.
There will certainly be winners and losers – as ever. But, we will be delivering better products more cheaply. That sounds like sustainable business to me.
Paul Skinner, Group Managing Director & Chief Executive, Oil Products, Royal Dutch/Shell Group