Page 2                                                           The Sun                                                                       Volume 2, Issue 5


Rent and The Galaxy (continued)

Please
take note

The month of May is
dedicated to...
Rick Siegel

The Galaxy will be
back on June 17th with
Galactica III,
the Learning and
Growth Planet.

Shell dealers must have
fax machines by June
1999 in order to receive
invoices, customer
statements, etc. Please
advise your Sales
Consultant so we may
record the appropriate
number. You are
encouraged to purchase
a plain paper fax machine
that distinguishes an
incoming call from an
incoming fax.

     This poses a challenge to integrated
oil players: how to achieve required
returns on capital in a low-cost crude
environment. Any scale benefits will
quickly erode as major competitors
make their merger deals. What low
crude prices mask, and scale economies
cannot overcome, is the fact that big oil
is under threat from the dynamics of
what is termed Value Migration
the
flow of shareholder value from increasingly
outmoded business designs to innovative
business designs
that are better calibrated
to satisfied customer priorities.

     Some of the smaller players in the
industry are nimble specialists focused on a
slice of the value chain. These upstarts have
enjoyed superior returns and captured value
from the integrated giants. Several robust
new business designs have emerged:
· Bottom Feeders: Firms that buy low-cost
   divested assets and work them harder,
   more creatively, and at a lower cost.
   Tosco, the largest and most profitable
   independent oil company in the United
   States, has emerged from nowhere over
   the past 10 years, taking advantage of
   integrated majors' focus on core areas
   and consequent shedding of assets at a
   bargain price.
· Quick-Stop Retailers: These players
   understand that service stations are
   not just about selling gas. Customers
   also want consistent, high-quality service
   and merchandising, and delivering that
   package can maximize retail margin at
   each site. QuickTrip, a rapidly growing
   U.S. independent with revenue
   approaching $2 billion, focuses on low-
   price fuel and strong convenience retailing
   as core compo-nents of its offering. Most
   U.S. ma-j ors view QuickTrip as the
   pacesetter in retail fuel marketing.
· Loss Leaders: Firms that use low-cost

    fuel as an additional draw for a diverse
    retail offering. Hypermarkets in Europe
    have pummeled, the majors achieving
    gasoline retail share in ex-cess of 50
    percent in France and more than 30
    percent in Britain. Wal-Mart, Costco,
    and large grocery chains have begun to
    do the same in the United States,
    positioning some of the most powerful,
    innovative retailers head4o-head against
    the increasingly outdated business design
    of integrated oil.

    Yet despite these advantages, history
suggests that the recent round of mergers
probably will not lead to a significant
reinvention of business designs.
For one
thing, the companies face the enormous task
of integrating two operations and two cultures,
which tends to distract them away from
customers, markets, and competitors. In
addition, combined companies invariably
grow more complicated, diffused, and risk-
aversed. Real change, incorporating new
ideas and perspectives, becomes harder to
implement.

    Finally, newly merged companies also have
significant revenues, profits, and assets tied up
in their existing business designs. They become
anchored to the old ways of doing business,
since reinvention often cannibalizes existing
profits and capital, and renders a portion of
existing assets obsolete.

    So should other oil companies, large or small,
join the merger wave? This seems justified only
if a combination serves to create or enable an
innovative business design. Rather than seek
what now may be a mediocre acquisition, most
firms should seek to reinvent their business
model
to reflect the new com-petitive environ-
ment. Otherwise, they risk being stuck in the
middle, squeezed between the early movers in
the merger game and the aggressive upstarts.


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