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.
Business Sectors
In the petro-chemical environment it is not difficult to identify a business sector as these can be acknowledged as product sectors. These are distinct businesses with well-defined boundaries and substantial competition within the boundaries.
Geographical Areas
Any geographical area can be analysed but in this industry it has been found that economic blocs such as Western Europe should be measured, as there is usually a greater amount of movement within these blocs than between them.
Forecasting Period
For most petroleum-based companies a time scale of 10 years is considered, as this is the effective forecasting horizon.
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.
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.
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)
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