Running head: SHELL’S HYDROGEN STRATEGY
Kaplan University
Graduate School of Business and Management
GB580 Strategic Management
Unit 4: Shell’s Hydrogen Strategy
Prepared by Team D:
Denise Leighton
Lidany Ramos
Kevin Saldanha
Rajani Tenepalli
Lyle Vikre, Jr.
December 30, 2011
Professor Dr. Lisa Bardill
SHELL’S HYDROGEN STRATEGY
Abstract
The goal of this paper is to complete a strategic business analysis of a company in the
energy industry. The company chosen is Shell, one of the largest energy companies in the world.
Shell’s strategic decision to invest in hydrogen fuels and become a leader in this space has
helped Shell differentiate itself from its competitors. The main aim of blue ocean strategies is not
to out-perform the competition, but to create new market space, thereby making the competition
irrelevant (Kim & Mauborgne, 2005). It has not only captured market needs such as reducing
the dependence on oil and helping the environment, but also created a new product offering by
partnering with key auto manufacturers. Its vision is to create a hydrogen economy by
leveraging its existing infrastructure to bring hydrogen fuel to local markets.
A strategy canvas is included which compares Shell’s current hydrogen strategy with its
competitors in the market. There are six factors which indicate where Shell is currently investing
compared to its competitors. The six stages of the buyer experience cycle are also included
which outline all the levers companies can pull to deliver exceptional utility to its customers.
When implementing blue ocean strategies, there are often blocks to utility. These hotspots need
to be removed in order to deliver exceptional utility to customers. Shell’s blocks to utility as well
as a plan to remove them are included. The three tiers of noncustomers is an important segment
when it comes to companies trying to maximize the size of their blue oceans. A detailed
explanation of the different tiers of noncustomers for Shell as well as Shell’s strategy to attract
them is included.
SHELL’S HYDROGEN STRATEGY
Introduction
With the continued growth of the global population, the demand for energy has increased
exponentially. Countries are scrambling to ensure their citizens an uninterrupted supply of energy
and they are realizing that dependence on hydrocarbon based fuels is not the answer. The energy
industry has long enjoyed the benefits of fossil fuels but with environmental issues like global
warming and resource depletion mounting, it is looking for new strategies to not only increase
revenue, but at the same time improve the environment. One strategy being explored is the
switch to hydrogen fuel, which is a cleaner alternative and available in abundance.
Royal Dutch Shell plc., commonly known as Shell is one of the largest energy companies
in the world with headquarters in The Hague, the Netherlands, and regional bases in Houston and
Tokyo (Shell, 2007). A few years ago they had a vision that entailed a world that used alternative
energy to fuel vehicles, and hydrogen was an important component of the portfolio of energy
sources and fuels. In 1999, Shell Hydrogen was created in an effort to look for business
opportunities involving hydrogen fuel alternatives. The purpose of the new Shell entity was to
build a global hydrogen economy by bringing hydrogen fuel out of its industrial settings into the
everyday lives of people, to places where consumers can access it as a fuel for their vehicles
(Shell Oil, 2007). Shell was thinking outside the box when they decided to alleviate dependence
on finite fuels, and address important issues like air pollution.
Strategy Canvas
Shell is an industry leader when it comes to hydrogen based fuel. A strategy canvas was
used to compare its hydrogen strategies with those of its competitors based on six factors as
shown in Fig. 1.1. It shows where Shell is currently investing in and what customers can expect
to receive, compared to Chevron and ExxonMobil.
SHELL’S HYDROGEN STRATEGY
Global Refueling Stations
To date, Shell Hydrogen is certainly the front runner in the pursuit and development of
hydrogen fuel in a retail setting. The group has partnered in opening six refueling stations in the
United States, three in Europe, two in Japan and one in China while its competitors Chevron and
ExxonMobil have partnered seven and one, respectively, in the United States only (Fuel Cells,
2000). In addition to the operating stations, Shell Hydrogen has plans in the near future to open
three more in the United States and one in Europe. This is a strong indication of the commitment
Shell Hydrogen has taken in building an infrastructure to bring hydrogen into the lives of people
and to places where consumers can access it as fuel for their vehicles (Shell Oil, 2007).
Fuel Price
The current retail price of a kilogram (equivalent to a gallon) of compressed hydrogen
fuel at a few Shell stations is $3.49 whereas a majority of the stations are not charging while the
concept of hydrogen as an alternative fuel is in its demonstration phase. ExxonMobil, on the
other hand, is charging approximately the same at $3.51 per kilogram and Chevron is charging a
high $3.56 per kilogram at its Chino, California location (Alt. Fuel Prices, 2011). Currently,
hydrogen fuel-cell vehicles and refueling stations remain to be considered emerging
technologies, thus there is no across the board U.S. standardization for hydrogen fuel pricing.
Fuel prices may be free at one station whereas another may charge.
Fuel Delivery
Shell Hydrogen has taken the first step in obtaining a major competitive advantage in the
delivery of hydrogen fuel to its refueling stations. In May 2011, Shell in partnership with Toyota
opened the first U.S. refueling station, located in Torrance, California, to pull hydrogen from an
existing, active pipeline. Other stations, including those of Chevron and ExxonMobil rely on fuel
SHELL’S HYDROGEN STRATEGY
to be trucked in, stored on site and often have wait times for fueling. Shell states that four
vehicles can be fueled simultaneously within five minutes and the facility is capable of
disbursing up to 100 kilograms of hydrogen over a twelve hour period (Hsu, 2011). Although
Toyota plans to market the first hydrogen powered vehicle in 2015, the Torrance station is
currently planned to be used during the demonstration program in which no fuel charge is
incurred by the consumer.
Devotion
Shell’s commitment in developing and promoting hydrogen fuel for future consumer use
can be seen in the number of projects finished and planned for the near future. At the present
time, Shell Hydrogen has twelve operating projects globally with an additional four projects
planned. Chevron and ExxonMobil currently have seven and one operating projects, respectively,
and another two planned by Chevron.
Promotion
Shell Hydrogen has had a long relationship with General Motors, Hyundai Motor Co.,
various governmental municipalities and utility companies and most recently Toyota. Many of
their stations have educational visitor centers for public awareness of hydrogen fuel and fuel-cell
vehicles. Chevron has partnered with Hyundai Motor Co., Ford Motor Co., utility companies and
governmental municipalities while ExxonMobil has partnered with BP, Shell and Chevron. Shell
Hydrogen promotional efforts have greatly outpaced the efforts of Chevron and ExxonMobil.
Strategy
The strategy of Shell Hydrogen is to broaden its expertise, make the public more aware of
the application and use of hydrogen fuel by initiating and encouraging hydrogen-based products.
SHELL’S HYDROGEN STRATEGY
Secondly, Shell is actively supporting technological development essential for rendering
hydrogen accessible to a broader market (Shell Oil, 2007).
Chevron Technical Venture’s strategy is to be a leader should hydrogen be adopted in the
fuels portfolio, in addition to leveraging hydrogen as an extension of existing businesses and to
ensure that the business is positioned to participate in hydrogen technologies and related
regulations and legislation (Hydrogen Reporter Briefing, 2005).
Buyer Utility
It is imperative that businesses ensure their customers or buyers of their products get
exceptional utility. Shell Hydrogen focuses on delivering exceptional utility to their customers as
shown in the buyer utility map in Table 1.1. Shell partners with auto manufacturers like General
Motors to ensure their product reaches more customers, its filling stations have 10 times the
capacity of other fuel stations and each station can fill 4 cars at a time (Thibaut, 2011). This
provides customers more options to choose in terms of hydrogen powered cars and also saves
them time while refueling. Hydrogen based cars can store up to three times as much energy as
conventional natural gas, and it will take cars twice as far as the ones that are running on
gasoline (Love To Know, 2011). This helps customers get more value for their money.
The vehicles that use hydrogen have fewer maintenance costs. With hydrogen, there are
reduced operating costs, considerably less moving parts with no oil changes every 150 hours
which results in fewer trips to the garage (Fuel Cell Markets, 2011). Hydrogen is also great for
the environment in which the customers live. Hydrogen has less emission and the only
byproducts are water and heat (Fuel Economy, 2011).
SHELL’S HYDROGEN STRATEGY
Blocks to Utility
When implementing a blue ocean strategy such as hydrogen fuel, there could be some hot
spots or blocks to utility that need to be removed to deliver exceptional utility to customers.
Understanding customer needs and implementing solutions that not only fulfill those needs, but
also provide additional benefits is the key to winning the strategy battle. Shell faces a number of
blocks to customer utility as they endeavor to introduce the concept of hydrogen fuel to their
customers. Mostly, due to the fact that their customers have been using hydrocarbon based fuel
for decades and it can be challenging to make changes to a system where the majority of vehicles
on the road rely on fossil fuels and the infrastructure to deliver that fuel is already in place.
There are four major blocks to customer utility that Shell faces as they push forward in
introducing hydrogen fuel to the public. First of all, they have to create a need for this product,
and in doing so, integrate the concept with the automotive groups. Who could use the alternate
fuel, if cars didn’t run on it? Secondly, many potential customers are unaware of the new
product offering and there is a need to make the public aware of the vast benefits of using this
new product. Third, there are infrastructure challenges and Shell needs to determine how to
encourage technological development in an effort to make hydrogen fuel available to the
majority of gas stations across the globe (Shell Oil, 2007). Fourth, hydrogen production remains
an expensive process which makes hydrogen fuel consumption expensive to customers and an
increase in consumption is necessary to lower the costs.
Shell’s blue ocean strategy to offer customers a more cost effective, more efficient, more
environmentally friendly product was a risky venture, but without risk comes little return. The
company’s focus on the benefits of hydrogen fuel to the earth over the long run is what makes
hydrogen fuel so exciting. Additional blocks to utility come in the form of “uncertainties”.
SHELL’S HYDROGEN STRATEGY
These two uncertainties are the pace at which hydrogen fuel will take off, in both technology and
in regulations in the energy system; and the world’s response to growing political and economic
volatility (Shell, 2011).
Removing Blocks to Utility
It is important to devise a plan to remove blocks to utility in order to deliver exceptional
utility to the customer and successfully execute that plan. There are many alternatives to improve
buyer experience and these alternatives could also be used in combination to further increase
utility.
Creating Need
Shell’s number one priority is to create need for its product and this is one of the blocks
to utility. Hydrogen fuel as a hydrocarbon alternative is relatively new concept for customers.
These customers have to be convinced that hydrogen fuel is beneficial and the fuel of the future.
Partnering with auto manufacturers to increase production of hydrogen fuel based cars will be a
great way to increase need for the product. It will also ensure that hydrogen fuel based cars will
be introduced in all major markets so customers have the opportunity to walk into car dealerships
and test drive them. Partnering with existing independent filling station owners to include
hydrogen fuel will also expand reach of the product. This expansion is necessary to increase
product visibility in the market.
It may also be useful to partner with large corporations or existing top customers and
provide them incentives to promote the product to their employees. For example, Shell could
provide discounts to the employees of a large corporation on hydrogen fuel purchases. This will
motivate those employees to buy hydrogen fuel based vehicles and also to market the product to
their friends and relatives. Creating surveys and getting feedback from the market is also a great
SHELL’S HYDROGEN STRATEGY
tool. The good feedback that is received can be posted in major newspapers or websites, so
potential customers can notice what other people are thinking which may prompt them to
consider the product.
Public Awareness
Creating public awareness is very important when trying to get customers to buy a new
product. The general public has been using hydrocarbon fuel based vehicles for a long time. It is
a challenging task to convince people to make changes especially when they have been using one
product for years. However, with the many benefits of hydrogen it should be fairly easy to
convince customers. There are many customers who are unaware of hydrogen based fuel as an
option. Shell has to set up a marketing campaign that advertises the benefits of hydrogen. Its
excellent advantages like its availability, being a cleaner fuel and low emissions are great
examples to win customers. It is not a surprise that people want to help save the environment so
their kids and future generations can inherit a better world. Hydrogen fuel helps in this regard
and an effective campaign will help turn noncustomer into customers. Advertising the
disadvantages of hydrocarbon based fuels like its contribution to global warming and the nation’s
dependence on foreign oil will further strengthen hydrogen fuel’s importance.
Improving Infrastructure
A good infrastructure is a key component of a successful business. Its efficiency will not
only help save costs, but will also increase market share. One of Shell’s blocks to customer
utility is inadequate infrastructure. Shell has invested in filling stations, but it is nowhere close to
the hydrocarbon based fuel’s filling stations. Shell has to rapidly increase the number of their
stations if they want to increase utility to their customers. Since they have hydrocarbon fuel
based stations, they can leverage that infrastructure to add their new product to increase product
SHELL’S HYDROGEN STRATEGY
awareness and also save costs. Adding new dedicated filling stations will also improve the
infrastructure. They will also need to invest more in research and development, to come up with
new ways to store and transport the fuel. They will also be able to leverage their existing
transport network to save costs.
Lowering costs
One of the biggest blocks to utility for Shell is the costs associated with production of
hydrogen based fuel. This can also be attributed to the existing demand for hydrogen based fuel
which is very low. By improving on various blocks to utility described above, Shell can increase
the number of their customers and also market share. This way they can bring their production
costs down. Leveraging most of their existing hydrocarbon fuel based infrastructure will also
help them bring costs down. They can also increase their production locations so they can
localize production in many markets which can help them lower their transportation costs. They
can even partner with or acquire companies that are focused on hydrogen based fuel to lower
costs.
Three Tiers of Noncustomers
For Shell it is an imperative to turn non-customers into customers. In Shell’s 2011
Biofuels brochure it reports that road transport accounts for about 17% of energy-related Carbon
Dioxide (CO2) emissions and that Global transport fuel demand is set to rise by 45% between
2006 and 2030 (Shell Biofuels, 2011). To cope with increasing demand, Shell will need all the
sustainable transport fuel options available to it. Shell fully realizes the need to encourage the use
of hydrogen fuel and other fuel alternatives, in order to remain competitive in the energy
industry. But Shell is not blind to the reality that Fossil fuels will be the main source of energy
SHELL’S HYDROGEN STRATEGY
for years to come and that electric and Hydrogen fuel cell vehicles will be important in the
longer term.
Shell’s focus should be on the three tiers of noncustomers. The first tier are “soon-to-be”
noncustomers who are on the edge of the market, waiting to jump ship, second tier are “refusing”
noncustomers who consciously choose against the market and the third tier is “unexplored”
noncustomers who are in distant markets (Kim & Mauborgne, 2005). The first tier of
noncustomers includes those customers looking for alternative fuel choices and who do not yet
use Shell products. The second tier includes those who cannot afford Fuel cell vehicles because
they are currently far too expensive for most consumers to afford, and they are only available to
a few demonstration fleets. The third tier of noncustomers would include car owners of the future
who would find themselves driving hydrogen fuel-cell vehicles. Shell has experienced increased
sales of hydrogen fuel as they have partnered with car companies like GM and Toyota to
introduce vehicles, fueled by hydrogen power, to their already successful line of products and
services.
First Tier Noncustomers
With the advent of recent technological improvements, non-hydrocarbon fuel based
vehicles are fast gaining popularity in the mainstream auto buying industry. These models have
gone a long way to the point of developing many different types of vehicles such as hydrogen
fuel based, hybrid and battery electric powered vehicles. All these types of vehicles are good
alternatives to hydrocarbon fuel based vehicles in their capacity to save the environment and
reduce dependence on foreign oil. This is where first tier noncustomers are important as they
could choose with any alternative.
SHELL’S HYDROGEN STRATEGY
Shell has to step up its marketing campaign and inform noncustomers why the Shell
hydrogen option is a better one. In addition to noncustomers who want, non-hydrocarbon fuel
based vehicles, customers of hydrocarbon fuel based vehicles also fit into this category. Some of
their concerns could be unavailability of filling stations in their area or not knowing the
advantages of hydrogen fuel. By closing these gaps, Shell will be able to convert first tier
noncustomers into customers.
Second Tier Noncustomers
In an effort to create yet another avenue for sales of hydrogen driven vehicles and attract
second tier noncustomers, Shell began developing a relationship with Ferrari in1999. Sports car
enthusiasts, interested in speed and performance, would normally choose against fuel efficient
vehicles. Shell teamed up with Ferrari in an effort to encourage sports car enthusiasts to drive
hydrogen fueled vehicles. According to Stefano Domenicali, Ferrari Formula One team’s
Sporting Director, the introduction of hydrogen fueled vehicles was a partnership made in
heaven. Domenicali stated that it was actually one of the most successful partnerships in
motorsport history (Shell Global, 2011).
Shell and Toyota teamed up to open the very first hydrogen fueling station in the United
States. The most intriguing part of this new endeavor was the fact that the hydrogen fuel was
coming directly from an active, industrial hydrogen pipeline. This demonstration station, as it
was called, was created to encourage yet another solid relationship with sports car enthusiasts.
Shell, together with Toyota, would more easily be able to encourage the sale of hydrogen fuel, by
working closely together. It was actually the first time Shell ever partnered with an automotive
manufacturer in an effort to promote a demonstration station (Sports Car Illustrated, 2011). Both
Toyota and Shell felt that this partnership would increase sales of hydrogen powered vehicles:
SHELL’S HYDROGEN STRATEGY
their assumptions proved to be fruitful as potential customers flocked to the demonstration
station.
Third Tier Noncustomers
Car owners of the future are going to be driving hydrogen fuel-cell vehicles and it is
going to occur quicker than we think. There are currently approximately twenty-nine auto
manufacturers conducting research on fifty-five hydrogen fuel-cell vehicles with many planned
to be available in the marketplace by 2015. A large portion of these auto makers, such as GM,
Toyota, Ford, Honda, BMW and Mercedes Benz, have held strong competitive positions in the
auto industry for decades. These auto makers have stepped up efforts in bringing the hydrogen
fueled vehicle to market as soon as possible.
The future of hydrogen cars is not a pipe dream, as there are already many hydrogen
fueled vehicles on the roads worldwide (Hydrogen Cars Now, 2011). In 2007, Honda announced
that it will start leasing the FCX Clarity to a limited number of southern Californians in a few
years. The terms of the lease will be for a three year term at $600 per month including service,
maintenance and insurance (Hybrid Cars, 2007). It will probably be ten or twenty years before an
average consumer would be able to purchase a hydrogen fueled vehicle because of the high price
tag, but leasing would be a current possibility.
A major obstacle to the adoption of fuel cell vehicles is the lack of infrastructure to
produce, distribute and sell hydrogen fuel. Major oil companies such as Shell and Chevron are
pushing forward with the development of an infrastructure so that it comes to fruition sooner
rather than later.
SHELL’S HYDROGEN STRATEGY
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