Innovation and Risk Management: An Analysis of Oil and Gas

This report provides a comprehensive analysis of innovation and risk management within the oil and gas industry. It begins by differentiating between invention and innovation, emphasizing the latter's significance in the industry. The report explores the implementation of innovation, using Shell Oil Company as a case study, and highlights the importance of an innovative culture, partnerships, and strategic planning. Various innovation models are discussed, including first to sixth generation models, with a focus on the open innovation model's relevance to the oil and gas sector. The report also addresses systematic risk management, introducing the Pinwheel Risk Management Action Framework used by Shell. It concludes with recommendations for fostering innovation and managing risks effectively within the industry, making this a valuable resource for students on Desklib.

Running Head: Innovation and Risk Management 1
Innovation in Oil and Gas Industry

Innovation and Risk Management 2
Executive summary
The oil and gas industry is the rich source of innovation by its history, and proper use of
technology in the business operations. In the business operations of oil and Gas Company, it can
be seen that innovation has great importance in everyday activities. This is the sector where the
process of innovation has a significant impact not only on the companies but also on the
economy of the country. This report will differentiate the concept of invention and innovation
and identify the importance of innovation in the oil and gas industry. Further, the report will
describe various models of innovation which are important in the business. Innovation is the ore
part of the company’s mission and internal cultural. The models of innovation will also be
applied in the oil and gas industry cases in this report. There are some challenges involved in
creating innovative culture in the business so, report will focus on the risk management system
and describe the role of systematic risk management in the business activities.

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Contents
Executive summary.........................................................................................................................2
List of figures...................................................................................................................................3
Differences between innovation and invention...............................................................................4
Key differences............................................................................................................................4
Implementation of innovation in energy industry........................................................................5
Models of innovation.......................................................................................................................6
Innovation model in oil and gas industry cases.........................................................................10
Role of Systematic risk management............................................................................................11
Pinwheel Risk Management Action Framework.......................................................................11
Recommendations..........................................................................................................................13
References......................................................................................................................................15
List of figures
Figure 1: First and second generation models.................................................................................7
Figure 2: Third generation model....................................................................................................8
Figure 3: Fifth generation model.....................................................................................................9
Figure 4: Sixth generation model..................................................................................................10
Figure 5: Pinwheel Framework.....................................................................................................12

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Differences between innovation and invention
In current time, technology is changing on the continuous basis in the business
operations. Now, various improvements are done in the technologies in order to make new
inventions and innovations in the every part of the life. But, it must be noted that there are some
differences between innovations and inventions. So, it is important to understand the concept of
inventions and innovations based on their definitions.
Invention-
The term ‘invention’ refers to the act of designing, discovering and acting a specific
method, device or process which is not invented earlier. This is generally a scientific idea based
on the experiments and researches for turning into tangible objects. The invention can be used
for developing new product or improving any old product in the new one. Various countries are
imposing various rules to have copyrights on the products.
Innovation-
Innovation can be described as the transforming the idea into reality. Innovation is
considered as the changing process to add the values in various products and services to satisfy
the customers. Companies adopt the process of innovation to meet up the necessities of the
consumers by providing them better quality products. Innovation includes creating new product,
process, service, and technology based on the requirements of present market. The procedures of
innovation are useful in developing new ideas based on the demands of consumes (Barreau,
2002).
Key differences
There are some differences in the process of innovation and invention and those are
described below:
 The invention is basically connected with the development of new product. On the other
hand, innovation is related to adding innovative values and implanting change in already
existing product.

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 Invention is all about new and innovative ideas based on the theories and on other side;
innovation is all about practically execution of new ideas.
 Invention requires scientific skills but innovation basically requires various sets of
strategic, technical and marketing skills (Surbhi, 2016).
 Invention generally takes when new idea comes in the mind of scientist. Apart from this,
innovation takes place when there is the need of improvement in the existing product or
any new product.
 Next, invention is the process of single product. On the other hand, innovation is about
the process or combination of various products and services (Sheffer, 2011).
 The inventions can only be done in research and development department of the company
but, innovation is connected with all the divisions of the company effectively.
Implementation of innovation in energy industry
The energy industry has a vital part in the context of global economy. The prices of oil,
gas and other sources of the energy impact economies of various countries. So, it is well known
that the oil and gas industry is the important aspect for the expansion and growth of the countries
in terms of economy. In the oil and gas sector, innovation is essential for the success and growth
of the organizations. For the discussion in the report, SHELL Oil Company is taken. SHELL Oil
Company is the famous oil and gas company in UK which is operating since 1897 and now it is
the largest company in all over the world. It is analyzed that there is strong relation between
innovation and successful companies. Innovation in the oil and gas industry is focused on
increasing the population along with the safety and security of the operations (Shell, 2017).
Basically, innovation is about identifying new ways and availability of materials in the changing
scenario. The oil and gas company has to deal with the challenging environment so it needs to
ensure safety and security of the employees. There are some ways to implement the innovation
successful in the oil company like SHELL Oil Company (Pree & Louw, 2008).
 Initially, it is essential for the company to have the portfolio of innovation. To achieve
the growth and success, balanced portfolio is one of the key essentials. It includes perfect
combination of radical innovations and investments for the innovation process.
 Next, it is crucial to develop an innovative culture for the success and growth of Oil
Company. In the oil and gas industry, there is the importance of talent, measurement and

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finding partners. Although, it is challenging for the company but with the innovative
culture, company can achieve this level. Innovative culture provides the opportunity to
the company to achieve high profile projects. The innovative culture includes the
development of tolerance of risk and failure (O'Raghallaigh, Sammon & Murphy, 2011).
 Further, innovation focuses on using smart people in the business by the company.
Various innovative companies work in partnership with various companies for
innovation. In case of Oil Company, partnership is important due to long lead times and
high costs incurred in the oil and gas advancements. SHELL Oil Company has done
partnership with various suppliers and partners to gain competitive advantage in the
industry (Berkhout, Hartmann & Trott, 2010).
 At last, the process of innovation is involved in gathering various ideas through the steps
of idea prioritization, experiments and decision making process by which company can
grow in market. The process of idea collection allows the company for the development
of the business. For the advanced innovations, company focuses on various operation
models i.e. corporative venturing, incubators, design thinking and open innovation.
By adopting the above discussed fundamentals, SHELL Oil Company will achieve higher
level of projects along with the innovative ideas. Company will have strong competitive
advantage with proper, careful planning and well defined strategy (Osinovskaya & Andronova,
2017).
Models of innovation
The innovation in every sector depends upon various models as it is not the process of
one model. There are various models of innovation which are important for the successful
implementation of the innovations in any business sector. The description of various models of
innovation is given below:
First and second generation model-
Initially, there is first generation model of innovation which shows simple linear structure
of technology push era. The technology push is focused on the assumption that the innovations in
terms of technology can be done based on the manufacturing, applied research, marketing and
engineering to get successful results.

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Further, second generation model of innovation is focused on the market pull era. This
innovation model identifies the market demands significantly. This model basically identifies
and generated new ideas for the business operations in the market along with the research and
development so that the needs of the customers can be fulfilled. This model focuses on the
customers’ need rather the developing the products by the scientific advances (Verworn &
Herstatt, 2002).
Figure 1: First and second generation models
(Source: Preez and Louw, 2008)
Third generation model-
This model is considered as the coupling or chain-linked model of innovation. The
specialty of this model is that this is based on the interaction and feedback from the customers
and other people so that need of innovation can be identified effectively. This model basically
focuses on the innovation process with the combination of interaction between science and
technology. So, this model has various independent stages of innovation.

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Figure 2: Third generation model
(Source: Preez and Louw, 2008)
Forth generation model-
Forth generation model of innovation is considered as the parallel or integrated model
having the objective to replicate the high level of incorporation with the various companies. The
model shows various important functional areas overlapping between the various departments
and actions of the company. This model basically analyzes the concept of external incorporation
of the company with various suppliers and government agencies.
Fifth generation model-
This model is known as networking model of innovation. According to fourth generation
model, innovation is the process of distribution of networking which is important for
implementing the changes in the companies. Innovation needs different inputs such as
universities, suppliers, customers and competitors to get effective outputs. Fifth generation
model is concerned with the introduction of innovation procedures. It is focused on
communicating with the whole networking system to enhance the effectiveness and to gain
competitive advantage by the strategic actions (Tidd, 2006).

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Figure 3: Fifth generation model
(Source: Preez and Louw, 2008)
Sixth generation model-
The sixth generation model of innovation is considered as the open innovation model
including paradigm shift. This model supports the process of open innovation by which company
can achieve competitive advantage in the business operations. This can be done by relying on the
internal ways to operate in the market and engaging with the external factors to get better
position in the market (Chesbrough, 2003).

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Figure 4: Sixth generation model
(Source: Preez and Louw, 2008)
Innovation model in oil and gas industry cases
In the various cases of oil and gas sector, most effective and suitable model will be open
model of innovation. Open model of innovation includes the strategy adopted by the company to
improve the innovation efficiency of the business operations. Open innovation is effective to
gain competitive advantage so companies in the oil and gas sector must manage this effectively
while implementing this model. There is the need to implement various employment methods,
models of interaction, pattern of knowledge, and selection of external patterns for the teamwork.
In case of oil and gas industry, company can adopt various routes in terms of open
innovations. The activities in the open innovation can be defined as the distribution by various
departments of the company or centralized process. The team of open innovation is focused on
setting and motivating the process of open innovation. The first route in the open innovation is
strategically driven process or top-down process. This process has allowed the company to
collect the feedback based on various initiatives and actions (PWC, 2013).

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Role of Systematic risk management
Based on the research, it is observed that there are many sources of risks available in the
business which can negatively impact on the business process. There are wider ranges of
catagories that affect uncertainly on the projects. For understanding the different aspects of the
risk, it is crucial to assume the risk as the systematic process. Risk in the business can be
classified as the people, political, customers, suppliers, partners, financial and market risk (Van
et al, 2007).
Pinwheel Risk Management Action Framework
The Pinwheel shows how SHELL Oil Company has better align its strategy, planning and
risk process to enhance the performance and governance in the industry. This framework is used
by SHELL Oil Company to reveal how high management and other employees work together
with the ongoing strategy of the company. The Pinwheel action framework of SHELL Oil
Company includes continuous exchange of the relevant information between the business units,
top management and staff members.

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Figure 5: Pinwheel Framework
(Source: Shortreed, 2003)
This process includes an in-depth analysis of the trends. To evaluate the business
intelligence, the review of external factors and forces is done. Company conducts PESTEL
analysis and focus on some areas i.e. Political and regulatory, economic, social and consumer,
technological, environmental and legal. Along with this, SHELL Oil Company also evaluates the
business competitors. In the business intelligence process, company focuses on the actions to be
competitive in the industry. For SHELL Oil Company, it is an opportunity to redefine the
objectives, strategic priorities and aspiration, vision and mission. The clarity in the objectives
and vision is important. Vision of SHELL Oil Company is to be best company in the oil and gas
industry based on the strengths, high dividends and providing high quality customer experience.
Further, by the Pinwheel framework, SHELL Oil Company defines its goals and
objectives along with the clear and finish line of goals. Further, next step is to develop the