Restructuring Shell

1. Introduction

Royal Dutch/Shell is a global group of energy and petrochemicals companies, with 104,000 employees in more than 110 countries; it is unique among the world’s oil majors and was formed from the 1907 merger of the assets and operations of the Netherlands-based Royal Dutch Petroleum Company and the British-based Shell Transport and Trading Company. In fact, it is the oldest joint venture. The business interests of the two companies were combined into a single group, with Royal Dutch owning a 60 percent share and Shell a 40 percent share.

The expansion of both companies was supported by the growing demand for oil resulting from the introduction of the automobile and oil-fuelled ships. When Exxon was merging with Mobil, Shell was no longer the world’s biggest energy company. In addition, the merger of Total, Fina, and Elf Aquitaine in September 1999 had created the world’s fourth “super-major”, after Exxon Mobil, Shell and BP Amoco.

The daily management activities of the Group are complex, and the structure through which the Group is actually managed does not correspond very closely to the formal structure. The managerial control was vested in the Committee of Managing Directors (CMD), which forms the Group’s top management team. This structure was viewed as a critical ingredient of Shell’s ability to reconcile the independence of its operating companies with effective coordination of business, regional, and functional commonalties.

The CMD identified key issues, set strategic direction, and approved major projects, and the planning department formulated the scenarios. However, most of the strategic decisions and initiatives were originated among the operating companies. The role of the planning staff and the regional and sector coordinators was to coordinate the operating company strategic plans.

Because of Shell’s management structure, in particular the absence of a CEO with autocratic powers, Shell was much less able to initiate the kind of top-down restructuring driven by powerful CEOs such as the one at Exxon, at Texaco, at Total, or at ENI. During the 1990s, a combination of forces was pushing the CMD towards more radical top-down change. The most influential of these pressures was dissatisfaction over financial performance. Investors and the financial community were putting increased pressure on companies for improved return to shareholders.

The CMD was forced to shift its attention from long-term development to short-term financial results. So that, evidence of the potential for performance improvement through restructuring was available from inside as well as from outside the Group. Shell started a change process. The new structure allowed more effective planning and control within each of the businesses, removed much of the top-heavy bureaucracy that had imposed a costly burden on the Group, and eliminated the power of the regional fiefdoms.

This new structure strengthen the executive authority of the Committee of Managing directors by providing a clearer line of command to the business organizations and subsequently to the operating companies, and by splitting central staff functions into a Corporate Center and a Professional Services organization. In place of the traditional “committee of equals”, the CMD more as an executive committee where individual members had clearly defined executive responsibilities.

There was a clear consensus within the company that was much better able to respond to the uncertainties and discontinuous changes that affected the oil industry. The elimination of the regional coordinating staffs, and the closure of some of Shell’s biggest national headquarters not only reduced cost, but seemed to be moving Shell towards a swifter, more direct style of management. The new organization had permitted far-reaching restructuring of Shell´s downstream and chemicals businesses.

2. Problem Analysis

The desire for restructuring the Shell’s organization was based on numerous factors, most importantly however to increase the company’s return on capital on the level of its most efficient competitors. It was believed that Shell’s weak performance was a result of the complex organizational structure, high bureaucracy levels and a weak influence of control. In order to overcome those obstacles, a restructuring process was inaugurated that was to accommodate several changes.

A simpler structure was desired, in which the reporting relationships would be less complex and therefore allow the corporate center to exert more effective influence and control over the operating companies. Hence, the new structure would help eliminate some of the costs and inertia of the head offices’ bureaucratic policies that had built up over time around Shell’s committee system. A further change should improve the alignment between the operating companies and their coordination. This alignment needed to be based on business sectors rather than on geographical reasons.

Most of Shell’s competitors had done so already, reorganizing themselves around worldwide business divisions forming upstream, downstream and chemicals divisions with a worldwide responsibility. For Shell, achieving integration between the different businesses within a region at this stage was less important than achieving integration within a business across different regions. However that was to be changed. During the restructuring of the company, the predominant three way matrix through which the operating companies had been coordinated since 1996, has been dismantled. In its place, four organizational elements were created to achieve closer integration within each business sector across all countries. Those comprised the business organizations, the corporate center, professional services and the operating units.

The change into the new structure was to allow a higher level of effective planning and control within each business as well as remove the top heavy bureaucracy which was a costly burden on Shell. While Shell performed significant changes on the company’s organizational operating level, it changed only little within its formal structure. The major changes involved creating a closer alignment of the service companies with the new management structure. However, in terms of managerial control the status quo remained the same.

The new structure continued the distinction between governance responsibilities, meaning ownership and control, and day-to-day management activities, the so called executive responsibilities. Therefore, the formal structure of the parent and holding companies as well as of the service and operating companies was continued without significant changes. Equally, Shell’s decentralized structure based on the autonomy of each of the operating companies vis-à-vis the Shell group was further maintained. The changes made within the organization comprised only one dimension of the organizational changes in this period.

If Shell wants to improve its financial as well as its operational performance in order to become more responsive to the variety of external forces it is encountering, the change process needs to go beyond its formal structures. The fact that internal critics are accusing Shell of being highly bureaucratic, inward looking, slow and unresponsive, mostly concerning their behavior and attitudes, provides evidence that changing the formal structure is not enough. It may rather serve as a framework. However, it is the individual, the group behavior and the corporate culture that are crucial factors to a company’s success.

The SWOT Analysis (Appendix A) and the implementation of the 7S Model (Appendix B) on Shell both demonstrate critical weaknesses of the company. While the corporate framework has been set during the change process, operations and management at Shell are highly decentralized. It still remains a joint venture with a 60% share owned by Royal Dutch and 40% owned by Shell itself with no clear leadership compared to its competitors and is still led by the Committee of Managing Directors (CMD). Latter being criticized as insufficiently and ineffectively operating in terms of management decisions is reasoned in the fact that decision making processes are rather inconsistent.

With the CMD comprising “feelers” as well as “thinkers” within the board, a clear and homogeneous message cannot be very well communicated throughout the entire company. The necessity of a revised corporate governance, may it be through individual leadership rather than a joint one, is presumably desired in order to ensure successful steering towards Shell’s future. Further restructuring activities regarding the governance and corporate culture are therefore inevitable.

3. Recommendation

According to the problem analysis mentioned before, Shell’s executive power was vested in a business committee rather than a single chief executive, which means that Shell lacked a strong individual leadership. As Shell was still a joint venture, the principle of rotating leadership between the two parent companies with fixed single terms of office for the CMD Chairman was still intact.

The problems that the company faced, were different cultures. The management styles of its subsidiary and its partners did not provide enough leadership and support in the early stages, which resulted in poor integration and cooperation. As some criticisms leveled at Shell for being bureaucratic, Shell’s structure represented the typical bureaucracy: top heavy and hierarchical. Hence, it was necessary to go through research and analysis of the company’s objective.

As the CEO of Shell Oil became a member of the CMD, Shell finalized the attempt to reorganize and unify its structure, giving all sectors and personnel the same clear commanding responsibilities. It was vital to push further the implementation of individual leadership and accountability of top management and to increase the efficiency of decision making. Therefore, it is recommended that Shell employs a simpler management structure, where the reporting relationships are clearer and allow the corporate center to exert more effective influence and control over the operating companies. Before applying a new management structure, it is necessary to communicate clear guidelines to the employees and top managers.

This task is the responsibility of the members of the CMD, in order to create guidelines and give clearly defined executive responsibilities to all regional managers. Besides, the structure should allow chief executives of the individual operating companies to make direct decisions instead of waiting for response from business committees when facing market competition and market changes. Empowering managers from individual operating companies enhances the efficiency and lowers the bureaucracy.

Business committees can play a role of monitoring the business operations rather than making decisions. In the meantime, the CMD retains its role of strategy setting. It is suggested that the CEO of the subsidiaries can become a member of the CMD. Furthermore, it is essential to understand the cultural differences and apply different management structures according to regional conditions. After changing the company structure, Shell brought in additional consultants, known as LEAP, to support the management.

Together with downsizing the administrative structure, Shell adapted a more outward looking and entrepreneurial culture in order to respond more innovatively to the changing environment. However, while some managers are more object-oriented, some are tend to be more subjective. Hence, it is recommended to invite regional managers and top executives regularly to join intercultural or leadership training and to exchange opinions.

It has been said that in the international and multi-cultural business community, there is a grand possibility for misunderstandings and poor communication. Both can result in negative effects on people and business operations. It has been said that a successful implementation of change requires a wide range of leadership behaviors. We assume that Shell adopted “People-oriented actions” (Yukl, 2006: 305) as the company needed to strengthen its changing culture and behavior. Shell created an indication of the need for change and its top management implemented the method.

Furthermore, Shell maintained people informed about the progress of change, knowing the change program is successful would make people more enthusiastic and optimistic. It is also recommended that Shell empowers individual managers to implement the change. Besides, empowering people means reducing bureaucratic constrains what can provide the necessary resources for Shell to implement change successfully. Therefore, it is suggested that the authority delegates further responsibility to individuals or teams in order to implement changes.

4. Conclusion

As Shell approached the second century of its corporate life, there is a need to reorganize the company and adapt itself to the new business environment in order to continue growing and expanding its business lines. There are some factors which are becoming important for change. Those comprise further downsizing and cost cutting, integration of management structures, as well as the adoption of individual leadership.

Shell should eliminate duplication in processes and services, like it was done in the project “One Shell”. This project was executed by Shell Petroleum Development Company of Nigeria (SPDC), Shell Exploration and Production Africa Limited (SEPA) and Shell Nigeria Exploration and Production Company Limited (SNEPCO). Under One Shell, there will be only one production organization, one development organization, one project organization, and these organizations will be sharing support services (Shell, 2008).

According to this approach, Shell will be able to reduce its costs significantly. Other improvements could be made also by creating “Business shared service centers”, which could serve to all the production companies in their specific areas. For example, one shared service center would be established for Europe, another one for Asia, other for Africa as well as for America, among others. This shared service centers business model was successfully launched by the SAP.

As a conclusion, the purpose of the organizational change management ensures that standardized processes create efficiency and prompt responses to changes, with the objective to minimize the impacts of change and improve the ongoing activities of the organization. In this case, Shell is one of the most important energy and petrochemical companies worldwide, with the right implementation of the organizational change management; it will be more successful and efficient than it is nowadays, constantly taking care of the service quality, employees’ satisfaction, positive financial results, and improvement of the day to day operations of the company.

5. References

1980s to the new millennium. Shell. [Online] Retrieved December 24, 2008 from, http://www.shell.com/home/content/aboutshell/who_we_are/our_history/1980s_to_new_century/1980s_to_new_century_22112006.html

SWOT Analysis. Mindtools. [Online] Retrieved December 01, 2008 from: http://www.mindtools.com/pages/article/newTMC_05.htm

The McKinsey 7s Framework. Mindtools. [Online] Retrieved December 08, 2008 from: http://www.mindtools.com/pages/article/newSTR_91.htm

Yukl, G. (2006). Leadership in Organizations. New Jersey: Prentice Hall.

6. Appendix

Appendix A: SWOT (SWOT Analysis, 2008) | |Before Change |After Change | |Strengths |High level of diversification of the company structure|Establishment of corporate structures allows | | |Position as one of the 3 world’s most international |executives to decide more rapidly and clearly | | |companies |Clearly defined executive responsibilities | | |Position as the world’s largest energy & chemicals |within the CMD allows higher executive power and| | |companies |personal and business related accountability | | |Highly decentralized company structure and therefore |Organizational structure that is able to respond| | |flexible |to the uncertainties and discontinuous changes | | |

Shell’s planning / management systems one of the most |that affect the oil industry | | |sophisticated and effective featuring scenario |Direct style of management (direct and | | |forecasting |uncomplicated reporting lines) | | |Leader in strategy and forecasting innovations |Focus strategy | |Weaknesses |Highly complex organizational structure |CMD is insufficiently entrepreneurial, | | |Lack of strong individual leadership |bureaucratic, inward looking, complacent, | | |Executive power vested in a committee rather than a |self-satisfied and arrogant. | | |single chief executive |

Shell still retains some relicts of its old | | |Limited autonomy of each operating company |structure. Still a joint venture rather than a | | |Shells whole strategy of vertical integration based on|single corporation | | |the concept of controlling risk through owning the | | ||downstream facilities needed to provide secure outlets| | | |for their crude oil | | |Opportunities |Expansion due to growing demand for oil resulting from|Diversification into new products and | | |the introduction of the automobile and oil-fuelled |alternative fuels may open up new markets | | |ships | | |Threats |Fierce competition with Standard Oil and new majors |Fuel prices in recent months have been | | |that are expanding rapidly and becoming significant |particularly volatile, initially rising quickly | | |global players |but subsequently falling sharply, reducing | | |

The merger of Total, Fina and Elf “Aquitaine” had |potential profit | | |created the world’s 4th super major next to BP Amoco, |The economic downturn has led to a decrease in | | |Exxon Mobil and Shell |demand for fossil fuels, possibly aggravated by | | |Growing power of producer countries because of the |changes in driving habits in response to high | | |nationalization of the oil reserves of the |fuel prices earlier in 2008 | | |international majors |Loss of market share due to late restructuring | | |Sharp rise of crude oil prices and increasing |of the Shell Group, while competitors are steps | | |volatility |ahead transforming themselves through M&A |

Appendix B: The 7S-Model (The McKinsey 7s Framework, 2008)

| |Before Change |After Change | |Strategy |Diversification Strategy |Focus Strategy and Cost Leadership | | |Long-term scenario forecast |Maximize shareholder value | | |Emphasis on generation of ideas |Greater sensitivity involving divestment of | | |Planning towards the future |unprofitable businesses, focusing on core | | | |businesses | |Structure |Joint venture (60/40) |Joint Venture (60/40) | | |

Decentralized Structure (Parent companies, |Divisional group with clear lines of | | |group holding companies, service companies |authority | | |and operating companies) |more effective executive leadership | | |Organizational structure |geographical organization | | | |flatter hierarchical levels | |Systems |Managerial control vested in the CMD but |Decentralized decision making from corporate | | |financial responsibilities and executive |to divisional levels and from divisional to | | |power dispersed through the operating |business unit levels | | |companies |

Divisions and business units have full profit| | | |and loss responsibility | |Shared Values |Being the vanguard of the transition from the role of the strategy function as planning | | |towards one where the primary roles of strategy were encouraging thinking about the future,| | |developing the capacity for organizational learning, promoting organizational dialogue, and| | |facilitating organizational adaptation to a changing world. | |Skills |Old traditions |New training for managers | |Style

|Leadership is vested in the Committee of Management Directors (CMD). Tests have revealed | | |that leadership is highly inefficient and no clear communication is found along the | | |hierarchy. 60% of CMD members were identified as “feelers” performing decisions based on | | |emotions, 40% as “thinkers” performing rational decisions. | |Staff |Staffs were considered low efficient and |Empower managers and employees | | |highly bureaucratic. |Individual leadership- Business Committees | | |Too many office employees |were replaced by Chief Executives | | | |Significant reduction in service companies’ | | | |staff |

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