case seven Organizational Restructuring Within the Royal Dutch/Shell Group

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case seve Orgaizatioal Restructurig Withi the Royal Dutch/Shell Group TEACHING NOTE SYNOPSIS The Royal Dutch/Shell Group of Compaies (Shell) is the world s secod biggest petroleum compay (after Exxo

1 case seve Orgaizatioal Restructurig Withi the Royal Dutch/Shell Group TEACHING NOTE SYNOPSIS The Royal Dutch/Shell Group of Compaies (Shell) is the world s secod biggest petroleum compay (after Exxo Mobil). It is also oe of the world s most iteratioal busiess orgaizatios, with operatios i early 200 coutries of the world. Its preset structure is a cosequece of its historical developmet. Shell is a joit veture betwee the Royal Dutch Petroleum Compay ad the Shell Trasport ad Tradig Compay. Both paret compaies were formed with Europea bases ad their mai activities i the Far East. The case looks at Shell s orgaizatioal structure at the begiig of the twety-first cetury. Shell has developed as a highly decetralized, highly iteratioal group of atioal operatig compaies coordiated ad cotrolled from the head offices i Lodo ad The Hague. From the mid-1960s it was maaged through a three-way matrix structure. The dimesios of this matrix were the regioal coordiatio structure, the busiess coordiatio structure, ad the fuctioal coordiatio structure. Durig the early 1990s, pressure for chage had built up withi Shell. As competitio i the idustry icreased, ad as oil prices slid, there was strog pressure o the Group to improve its level of profitability. Most of the other oil majors had This ote was prepared by Robert M. Grat. 54

2 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP 55 udergoe radical restructurig ivolvig cost cuttig, refocusig, ad outsourcig. Several of the larger operatig compaies withi Shell had led the way i implemetig radical restructurig ad cost cuttig. These operatig compaies were ow puttig pressure o the corporate structure. The McKisey-desiged matrix structure was icreasigly regarded as costly, slow movig, ad top-heavy. The case describes the redesig of Shell s orgaizatio structure over the period The cetral issues cocer the local autoomy ad adaptability versus global itegratio, the role ad structure of corporate maagemet ad corporate services, ad the implemetatio of effective fiacial maagemet withi a iteratioal, multibusiess corporatio. The solutio adopted was to dismatle much of Shell s matrix structure (i particular, to dowgrade the role of the previously domiat regioal orgaizatio) ad cocetrate strategic ad fiacial cotrol ad decisio-makig authority o the ew busiess sector orgaizatios. Although the result was to icrease global coordiatio ad itegratio at the busiess sector level, the reorgaizatio left Shell with a idiosycratic ad (compared with the other oil majors) highly decetralized structure. The atioal operatig compaies still retaied cosiderable autoomy ad the power ad effectiveess of the top maagemet team were still costraied by its committee structure ad the rotatio of the chairmaship betwee Shell Trasport ad Tradig ad Royal Dutch Petroleum. The public relatios disasters of Shell s ivolvemet i Nigeria ad the Bret Spar platform raised questios as to whether Shell s reorgaizatio had goe far eough. Durig , orgaizatioal chages cotiued. I particular, chief executives rather tha committees were appoited to head up the busiess divisios, ad the US busiesses became merged ito the global busiess divisios. The result was a structure that offered much more effective global coordiatio ad itegratio withi each busiess area together with a sigificat reductio of iteral complexity. The questio was, give the icreasig eed for cost efficiecy, effective strategic directio, ad flexible resposiveess ad coordiatio, whether Shell s orgaizatioal chages had goe far eough. TEACHING OBJECTIVES The Shell case deals with strategy implemetatio, specifically with the desig of orgaizatioal structure ad maagemet systems. The case forces studets to recogize ad comprehed the key elemets of a compay whose orgaizatioal structure is uusually complex. Ideed, the Group s structure is almost impossibly complex the combiatio of the Group s joit-veture structure, its three-way matrix, ad the 200 operatig compaies has meat that few outside of Shell (ad certaily ot everyoe withi it!) have bee able to comprehed how Shell operates. Hece, this case is certaily challegig for studets. Havig recogized the cetral features of the old Shell structure ad the ew Shell structure, the task is to apply the priciples of ratioal orgaizatioal desig to evaluate the old ad ew structures. The goal of a matrix structure is to permit coordiatio across multiple dimesios: withi geographical areas, busiess sectors, ad fuctios. But the critical issue is the

3 56 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP allocatio of cotrols ad decisio-makig powers i relatio to these three dimesios of the matrix. Give the characteristics of the oil idustry, where is coordiatio most importat: withi coutries ad regios, withi busiess sectors, or withi fuctios? I the old Shell, the coutries ad regios were domiat. However, idustry chage has icreased global itegratio ad reduced the importace of vertical itegratio. At the same time the critical strategic priorities for Shell are to boost fiacial performace through cost reductio. What does this mea for the balace betwee cetralized/decetralized powers? The case allows studets to evaluate the ew Shell structure agaist these criteria. The Shell case also raises issues of orgaizatioal chage. I particular: To what extet is large-scale orgaizatioal chage possible i the absece of a crisis that threates the very survival of the orgaizatio? What are the relative roles of top maagemet, divisioal/subsidiary maagemet, task forces, ad outside cosultats i the chage process? What are the relative roles ad effectiveess of top-dow ad bottom-up orgaizatioal chage, ad how is cosesus built i the chage process? If large-scale chage is a ievitable but highly ifrequet occurrece, ad if cosiderable forces for iertia exist i the prevailig structure, how ca a orgaizatio esure that chage will be sufficietly radical? POSITION IN THE COURSE The Shell case draws maily upo chapter 6 of the Grat text ( Orgaizatio Structure ad Maagemet Systems ). This occurs i part II of the text the part that deals with the fudametal tools of strategy aalysis. The ratioale for this is that orgaizatioal desig like idustry aalysis ad the aalysis of resources ad capabilities costitutes a core area of basic strategic aalysis. I ackowledge that this is a somewhat uusual positioig most strategy texts itroduce strategy implemetatio after strategy formulatio. Hece, this case ca also be itroduced later i the course. The argumet for itroducig the case later i the strategy course is stregtheed by the fact that the questios of orgaizatioal structure that the case raises are liked with the corporate strategy of the compay the fact that Shell is a vertically itegrated, multibusiess, multiatioal eterprise, will mea that most istructors will probably wish to use this case i the later stages of their courses. Positioig later i the course also allows the istructor to take advatage of the material i chapter 16 of the textbook ( Maagig the Multibusiess Corporatio ). ASSIGNMENT QUESTIONS 1. What were the distictive features of Shell s orgaizatioal structure prior to 1995?

4 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP How well suited was Shell s structure to the competitive coditios ad key success factors i the world oil, gas, ad chemicals idustry? 3. To what extet did the reorgaizatio remedy the deficiecies of Shell s structure ad systems? 4. How far did the further orgaizatioal chages of resolve the remaiig problems of Shell s reorgaizatio? 5. What additioal chages to Shell s orgaizatioal structure ad maagemet systems would you recommed to the curret chairma of the Committee of Maagig Directors, Mark Moody-Stuart? READING R. M. Grat, Cotemporary Strategy Aalysis (5th ed), Blackwell Publishig, 2005, chapter 6. ANALYSIS 1. What were the distictive features of Shell s orgaizatioal structure prior to 1995? Because Shell s structure is so complex ad so uusual, it is importat to sped some time documetig the cetral features of the Shell structure prior to the reorgaizatio. These features iclude: The distictio betwee the legal structure ad the maagemet structure of the Group. The legal structure is based upo the compay etities (the paret compaies, the operatig compaies, ad the service compaies ad their owership liks). The maagemet structure is based upo the exercise of maagemet cotrol from the Committee of Maagig Directors, through the regioal, busiess sector, ad fuctioal coordiators, to the operatig compay heads. The joit-veture structure: owership is by Royal Dutch Petroleum (60 percet) ad Shell Trasport ad Tradig (40 percet). This structure accouts for the uusual top maagemet orgaizatio: a Committee of Maagig Directors comprisig the executive board members of the two paret compaies, with chairmaship of the committee alteratig betwee the two parets. The large umber of atioally based operatig compaies, each with a traditio of autoomy ad strog idetity with its host coutry. The headquarters structure which, i terms of owership, was based upo the service compaies ad, i terms of cotrol, was based upo the threeway matrix ad the roles of the differet coordiators. Although coordiatio ad cotrol are split three ways betwee the regios, the sectors, ad the fuctios, it is the geographical dimesio that is most importat i terms of strategic ad fiacial cotrol.

5 58 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP 2. How well suited was Shell s structure to the competitive coditios ad key success factors i the world oil, gas, ad chemicals idustry? The key features of the idustry eviromet are: It is a highly competitive, commodity busiess, subject to excess capacity i may activities ad strog dowward price pressures. Cost efficiecy is critical to profitability. Cost efficiecy is achieved through exploitig scale ecoomies, avoidig duplicatio, keepig overheads low, ad deployig the latest techologies. It is fast movig: decisio makig eeds to be decetralized, ad lies of commuicatio short. It has become icreasigly global: almost all products are iteratioally traded, ad compaies exploit opportuities throughout the world, while beig geographically selective i their deploymet of assets. These coditios have ecouraged radical restructurig amog most of the oil majors. This restructurig has ivolved the break-up of vertically itegrated structures, dowsizig of corporate headquarters, decetralizatio of decisio makig, icreased geographical focus (especially i upstream ad dowstream), ad the sale of less profitable assets ad busiesses. Shell is uusual i that it was the oly oe of the majors ot to udergo radical restructurig. Why was this? Was it because it was already well adjusted to the ew eviromet of the oil busiess, because its decetralized structure allowed gradual adaptatio without the eed for radical restructurig, or because the diffusio of power i Shell s top maagemet group preveted large-scale orgaizatioal chage? It was probably a combiatio of these. However, what became icreasigly clear durig the early 1990s is that Shell is ot well adapted to the key success factors i this icreasigly hostile busiess eviromet. I particular: Shell is ot deliverig a retur o capital that clearly exceeds its cost of capital. The implicatio is that its costs are too high. Shell combies decetralizatio with a top-heavy admiistrative structure. Shell s service compaies i Lodo ad The Hague have a total employmet that is greater tha the corporate ad divisioal admiistratio of ay other oil compay. Moreover, the cumbersome three-way matrix meas that the advatages of decetralized decisio makig are compromised by Shell s slow-movig bureaucracy, while, simultaeously, effective cetral cotrol is abset. Diffused cotrol is especially apparet i relatio to fiacial cotrol ad performace maagemet. Apparet amog the other oil majors has bee powerful top-dow pressure for profitability ad shareholder value creatio. Shell s paretal ifluece has traditioally bee orieted aroud log-term strategic plaig, sceario aalysis, ad creative thikig, rather tha the more immediate drive for cost reductio ad shareholder retur. Globalizatio is becomig icreasigly importat while the advatages of vertical itegratio betwee upstream, dowstream, ad chemicals i each coutry ad regio are becomig less importat. The implicatio is that coordiatio withi each busiess sector is more importat tha withi

6 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP 59 each coutry/regio. While the other majors have moved to global busiess divisios, Shell still has a predomiatly geographical structure. Shell Oil, the US operatig compay, does ot fit ito the overall Shell structure. Although ow fully owed by the Group, it lies outside the cotrol ad coordiatio structure of the service compaies. The Shell Committee of Maagig Directors ad the four-year rotatig chairmaship are ot coducive to dyamic leadership or orgaizatioal chage. The maagig directors are distiguished by their age ad log careers at Shell. The four-year limit o ay chairma s teure makes a logterm program of orgaizatioal chage difficult to implemet. 3. To what extet did the reorgaizatio remedy the deficiecies of Shell s structure ad systems? The dowgradig of the regioal orgaizatios i favor of the ew busiess sector orgaizatios is coducive to a more global focus ad icreased emphasis o the elimiatio of duplicatios betwee coutries. The busiess sector orgaizatios are ru by committee reaffirmig Shell s traditioal propesity to maage by committee rather tha idividual executives. The operatig compaies are largely utouched. Yet these are defied primarily by coutry, ad may spa differet busiess sectors. It appears that the ew busiess orgaizatios will ot be able to operate either strategically or fiacially as global busiess eterprises. The establishmet of operatig uits withi ad across the operatig compaies did little to resolve the lack of clarity betwee the resposibilities of the busiess orgaizatios ad those of the operatig compaies. Shell Oil of the US still remaied outside the mai orgaizatioal structure of the Shell Group. The top maagemet structures (the CMD) ad the role of the chairma remaied uchaged. The ew structure still lacked the simplicity ad logic of may of Shell s leadig competitors. Despite the dowsizig of the corporate-level staffs, Shell retaied three headquarters: Lodo, The Hague, ad Housto (Texas). It was ot apparet that the ew structure supported stroger fiacial cotrols or the impositio of a more profit-orieted maagemet approach. 4. How far did the further orgaizatioal chages of resolve the remaiig problems of Shell s reorgaizatio? Durig the fial three years of the decade, the iitial reorgaizatio was exteded i several importat ways: The busiess orgaizatios were stregtheed. The committees that headed up the busiesses were replaced by chief executives. Hopefully this would icrease the effectiveess of their strategic ad fiacial cotrol ad improve etrepreeurial vigor. Shell Oil of the US was icorporated ito Shell s worldwide orgaizatio. Chemicals was the first of Shell s truly global busiess divisios.

7 60 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP Executive authority ad accoutability was icreased. Shell moved icreasigly from collective resposibility to idividual resposibility. At the busiess level the ew busiess CEOs had clear strategic ad fiacial resposibility; at the corporate level, Moody-Stuart redefied the positio of chairma of the CMD to be less of first-amog-equals ad more of a corporate chief executive. 5. What additioal chages to Shell s orgaizatioal structure ad maagemet systems would you recommed to the curret chairma of the Committee of Maagig Directors, Mark Moody-Stuart? Oe of the observatios offered by orgaizatioal chage experts is that largescale, radical orgaizatioal restructurigs ca oly occur ifrequetly. The fear is that Shell s reorgaizatio has addressed some of the key problems of Shell s structure ad maagemet systems, but has ot goe far eough. Most of the other majors uderwet radical restructurig durig the period Now, may of them are movig o to access additioal sources of shareholder value otably through acquisitios ad mergers (BP Amoco Arco; Exxo Mobil; Chevro Texaco; Total Fia Elf). Some possibilities for further orgaizatioal chage might iclude: Mergig the two paret compaies to trasform Shell from a joit veture ito a uitary corporatio. This might reiforce top-level decisio makig ad permit the appoitmet of a covetioal CEO. Ivestig greater executive resposibility ad leadership potetial withi the positio of chairma of the CMD. This would probably require abadoig the fixed four-year term for chairpersos. Breakig the huge global busiess orgaizatios ito more arrowly defied global busiesses ad allowig these busiesses to report directly to the corporate HQ (similar to BP s structure). Note that, i respose to low oil prices ad poor profit performace, Shell has cotiued to cut costs, divest assets, ad implemet further orgaizatioal chages. I a effort to further stregthe the ew busiess orgaizatios, chief executives were appoited early i Efforts have also cotiued to icrease global itegratio. The Chemicals sector is the first of the Shell busiesses to be truly global (i.e., to iclude the US chemicals withi the sectoral orgaizatio). UPDATES ON SHELL The Royal Dutch/Shell web site ( has up-to-date reports, fiacial statemets, press releases, ad copies of speeches by seior maagers. Despite the progress made durig the 1990s i establishig a orgaizatioal structure that facilitated global coordiatio ad fiacial cotrol, Shell s structure ad maagemet systems came uder reewed criticism i 2004 followig the overbookig of prove oil reserves. Oe of the issues raised by critics was whether Shell s joit-veture status ad the presece of dual boards of directors weakeed trasparecy ad

8 ORGANIZATIONAL RESTRUCTURING WITHIN THE ROYAL DUTCH/SHELL GROUP 61 accoutability (see Shell isiders defed dual boards, Fiacial Times, April 23, 2004). By August 2004, Shell was cosiderig alterative optios for stregtheig relatios betwee its two paret compaies icludig the possibility of mergig them ( Shell s Aglo-Dutch Coudrum, by Ia Bickerto, James Boxell, ad Carola Hoyos, Fiacial Times, August 12, 2004).

case twelve Eni SpA: Building an International Energy Major

case twelve Eni SpA: Building an International Energy Major case twelve Ei SpA: Buildig a Iteratioal Eergy Major TEACHING NOTE SYNOPSIS Ei is Italy s largest ad most profitable compay. The case traces Ei s 50-year history from its foudig as a state-owed oil ad