Strategy and Management
Main idea: To what extent has Shell’s assumption of core competencies, needed to proceed to a diversification, contributed to Billiton’s failure? The idea explained below, indicates that the definition of core competencies relating to a diversification, is crucial in order to make it successful because it affects strategy in a very crucial way.
Part 1: Shell’s assumption: Similarities in processes are the crucial core competency Shell searched for an alternative to guarantee future sustainable growth. In order to proceed to a successful diversification, Mr. Van der Toorn declared: “It is important that we search for opportunities in industries that closely relate to the Group’s strengths. ” (p. 1056).
Similarities between oil and metal industry processes were the main rationale behind Shell entering the metals business. The choice of Billiton was due to particular preferences of Shell (international exploration and processing activities, Dutch company, vertically integrated structure,… ) Part 2: Shell’s wrong assumption as the main cause to Billiton’s failure Shell’s error: transferring their core competencies, viz. the business process
Shell’s wrong assumption of core competencies needed for a diversification into metal industry led to Billiton’s failure. For example, one of Shell’s first mistakes was to simply transfer management from Shell to Billiton. Consequently, Billiton’s processes were brought into line with those of Shell. Shell simply thought that another company would also benefit from their excellent management competencies. Shell’s error: ignoring the importance of considering the sector Shell has never even considered the gap that may exist between core competencies that exist within their company and those needed relating to a diversification.
Apparently these are two totally different ways of defining core competencies, but Shell considered them as being the same. This leads us to their second big mistake. In their definition of core competencies needed to make a diversification succeed, Shell didn’t even mention the importance of being familiar with the industry you are entering. However, we believe that knowledge of the sector is a crucial element in making good managerial decisions. Different examples illustrate that Shell’s ignorance of the metal industry also contributed to Billiton’s failure, viz.
their investment policy (p. 1057), their diversification strategy (p. 1063), their job rotation policy (p. 1063) and their postulated objectives for Billiton to reach (p. 1063). Billiton, knowing the metal sector, was rather reluctant and appeared to be right afterwards, because the decisions mentioned above were capital errors. Part 3: Gencor’s strategy: Sector-as-a-core-competency approach. The well-known saying: “One can only talk metals after at least 20 years. ” (p. 1062) indicates that one should not only focus on similarities between processes but also on the knowledge of the sector.
Gencor acquired Billiton in order to become the world’s seventh biggest aluminium firm. Gencor’s trump card relating to this take-over is definitely its knowledge of metal industry, which is expressed in its strategic moves like for example in its decision not to change the management at Billiton and in its investment policy, which obviously is quite opposed to Shell’s (p. 1071). We do believe that defining the needed core competencies relating to a diversification impacts on strategy in a crucial way.
Conclusion: We can conclude that it is really crucial to define clearly what core competencies are needed in order to proceed to a successful diversification. This was actually what went wrong at Shell. Shell’s assumption of clear and important similarities between their own and Billiton’s activities led to disappointments (p. 1057) because the differences appeared to dominate the similarities. However, due to their mistake in defining the needed core competencies, Shell acted as if it carried out a horizontal integration instead of a diversification.
Mr Herkstri?? ter, saying: “The best results will be achieved in businesses we understand. If you think of being able to diversify with only money, you will fail. If you have nothing to offer but money, a certain expertise which makes you do things better than others, don’t even start. ” (p. 1070), has brought evidence to this statement. This is also presented in the little graph below, explaining that it is crucial not only to consider similarities in business process, the importance of knowing the sector you want to enter shouldn’t be underestimated either.