The Royal Dutch Shell Organizational Restructuring Process - Case Study Example

Organizational Restructuring Within the Royal Dutch/Shell Group A Case Analysis Table of Contents Executive Summary 2 Introduction 2 Literature Review 4 Case Analysis and Discussions 7 Shell’ s Organizational Structure Prior to 1995 7 Shortcomings of Shell’s Structure 9 Remedy of Deficiencies through Re-organization 11 Organizational Changes of 1997-2000 13 Recommendations for further changes 13 Conclusion 14 Bibliography 16 Appendix 17 Executive Summary This paper deals with the analysis of the Royal Dutch Shell restricting analysis. The paper begins with a brief introduction of the case. In this section the case is introduced in brief and all the major issues being discussed in the case are highlighted. After introducing the case we go forward to analyze the literature which is available to us regarding restructuring process in an organization. The strategic changes which take place when an organization is restructured are discussed in this section and we also discuss the tools and techniques available to us for the implementation of these strategic changes for the organization. The next section deals with the analysis of the case. The analysis begins by listing down the organizational structure being followed by the organization before 1995 when restructuring took place. This is followed by the shortcomings of this organizational structure. The changes which were done by the organization as result of these shortcomings in the organizational structure are discussed next in the case. The benefits which were obtained by the firm as a result of these changes are also discussed. The last section of the report deals with recommendations to the Shell group in order to make the process of restructuring much more efficient. The paper concluded with the conclusion section which provides us with all major learning’s that have been obtained from the case. Introduction Royal Dutch Shell PLC is a multinational joint venture corporation comprising two founding companies, Royal Dutch Petroleum Co. of The Hague, Netherlands. And Shell Transport and Trading Co., PLC, of London. Although starting as rivals, the two companies merged in 1907 as Royal Dutch/Shell Group, which acquired producing concerns in the Middle East, the Americas, and Eastern Europe, including Romania and Russia. It is engaged mainly in oil and natural gas. At present its five business segments are as follows: 1) exploration and production (E&P), an upstream activity that explores, recovers, and produces oil and natural gas worldwide; 2) gas and power, where it liquefies and transports natural gas to customers, as well as turns natural gas into cleaner-burning synthetic fuels; 3) oil sands, where bitumen is extracted and converted into synthetic crude oils; 4) oil products where a range of petroleum-based products are sold for domestic, transportation and industrial use; and 5) chemicals, which produces petrochemicals for industrial use. The case deals with the organizational changes that the company had to go through. The global oil industry was awakened to the rude developments in the macro economy with nationalization of its assets in the Middle East, drop in the oil prices and increased competition among the various oil majors. Shell did not go through these changes in the 70s and had to undergo restructuring of its business in the mid 1990s. The case discusses how the company used to have a complex regional matrix system with multiple reporting lines. Compensation system of the employees was modest and it was always on the expected lines – all the employees were usually awarded modest annual raises. The business was tightly linked to the market and the regions. This system had very limited amount of accountability. The accountability was diffused throughout the matrix structure of the organization. The ROACE generated through this system was not satisfactory to the shareholders. It was at this point of time that the company decided to undergo a major transformation of the way things were done in the company. The case deals with these changes which occurred in the organization. The first thing which was changed by the organization was the reporting structure of the organization. The formal matrix reporting structure of the organization was replaced with the hierarchical structure in which clear accountability was assigned for each role to a person. Each unit is now headed by a CEO who is personally accountable for the success of the business as a whole. This restructuring was done to make the company more fast and agile. As accountability was more pronounced, people could be easily identified for failure of a task – which was not possible in the matrix structure which was followed earlier. Changes in the organizational structure of the organization were also followed by changing the culture and behaviour of the employees at the organization. During the tenure of the CEO Moody-Stuart; downsizing of the group was also carried out on a large scale. Various refineries were shut down and other was downsized in order to reduce the cost structure of the organization. In short the case familiarizes us with the various aspects of restructuring of an organization. It takes us through the various ups and downs that an organization has to face during the process of restructuring. We will analyze the case according to the theoretical concepts available to us and look at the restructuring effort of the Shell group and also analyze what more steps can be taken by the organization to make itself more effective and profitable in the oil and gas industry. Literature Review The concept of restructuring of an organization is a very late addition to the vocabulary of management. Restructuring may be defined as the term for reorganizing the legal, ownership, operational or other structures of the company. This is usually done with the intention of making the organization more profitable or better organized to deal with competition or the changing market needs of the economy. This restructuring is also sometimes known as the corporate restricting or the financial restructuring. (Society of Management Accountants of Canada, 1999). Organizational restructuring signifies the realities of corporate world. It is usually done by organization to compete better in the world. It helps the top management in formulating new strategies and implementing them. A brief history of organizational restructuring is provided in the table which is added in appendix 1. The process of restructuring in any organization involves the process of formulating new strategies in order to compete better. The difficult task is not to formulate new strategies but to implement them. The issue in most of the companies is not poor strategic intent but the difficulty invariably has been in knowing how to effect these changes in the organization. (Bartlett, 1987).Given the significance of this area, the focus has now shifted to implementation of the strategy rather than formulation; which is now considered as easy job as compared to implementation of the policy changes decided. (Hussey, 1998) There are various tools and techniques such as SWOT, industry structure analysis and various generic strategies for the formulation of new strategies. But there is a dearth of models which can be used for the purpose of implementation of these strategies which is a very essential concept during restructuring of an organization. (Alexander, 1985) Waterman et all claims that effective strategic implementation in any restructuring process involves managing the relationship among seven major factors – strategy , structure , systems , style , staff , skills and subordinate goals. (Waterman & Peters T.J and Philips, 1980).These is also called the essential seven S for implementing new strategies in any organization. Roth et al (1991) identified six main factors which they consider as essential for implementation of new global or domestic strategies. These factors were identified as co-ordination, managerial philosophy, configuration, formalization, and centralization and integrating mechanism. (Roth & Schweiger, 1991).The research of these authors conclude that global and multinational research strategies formulated by the companies need to be executed in different methods. Another framework for strategic implementation has been suggested by Yip (1992).This framework argues that there are four factors which are important for formulation and implementation of strategies by a company. These four factors were identified by him as organizational structure, culture, people and managerial processes. (Yip, 1992) Hrebiniak (1992) carried out work to study the strategic implementation in multinational and global organizations. He claims that the factors which should be considered as important by these organizations are somewhat different form the organizations which operate in a local area. The factors which were considered as important by him for the success of global organizations were leadership, facilitating global learning, developing global managers, having a matrix structure and working with external companies. (Hrebiniak, 1992) On the basis of the above discussion of various frameworks provided by noted authors we can come to the conclusion that 11 key factors are important for the effective implementation of a new strategy by an organization. These factors are – strategy development, environmental uncertainty, organizational structure, organizational culture, leadership, operational planning, resource allocation, communication, people, control and outcome. Some of the key variables which are considered an important for strategy implementation are shown below in the diagram .This diagram shown the key variables which should be controlled by an organization for the successful implementation of a new strategy. This diagram has been shown in the next page. Source: (Okumus, 2001) The Organization structure of an organization is the key to understanding how various tasks in an organization are formally divided, grouped and coordinated. (Stephens, 2007).Six key elements have been identified as the key for designing the organizational structure of an organization. These elements are identified as work specialization, departmentalization, chain of command, and span of control, degree of centralization in an organization and formalization that is prevalent in the organization. Some of the common organizational structure which has been identified by Stephens et all has been the simple organizational structure, bureaucracy, the matrix structure, the team structure and the virtual organization. The matrix organizational structure is usually characterized by dual chain of command. The strength of matrix organization lays in the fact that multiple complex and interdependent activities of an organization can be easily co-ordinate with the help of a matrix structure. This structure for an organization provides better communication among the various departments and more flexibility. The major disadvantage of this form of organizational structure has been the power struggle created by it and the lack of clear reporting authority. The lack of a single boss also means that there is reduced amount of accountability in the organization with the adoption of this form of organizational structure. (Daft, 2009) The team structure; also known as the horizontal organizations are the new organizational structures which are being adopted across the world. The main feature of this type of organization has been the breaking down of departmental barriers and decentralized decision making at the level of a team. In a large organization; team structure can complement a bureaucratic system of organization. Using teams in a bureaucratic system allows the organization to be flexible as well as efficient. (Ricky W. Griffin, 2009). The above section of literature review provides us with the basic theoretical framework under which the analysis and the discussion of the case will take place. The analysis of the case and solutions to the case questions have been provided in the subsequent sections. Case analysis and Discussions Shell’s Organizational Structure prior to 1995 The Royal Dutch/ Shell group of companies was comprised of four types of companies: The parent companies The group holding companies The service companies and Operating companies. As we can see that Shell group of companies did not have a single owner .They were in fact comprised of a number of joint ventures among more than 200 oil companies. Some of these companies were even listed differently in the different stock exchanges. This feature essentially allowed these companies to combine their unique experiences and expertise. They were also able to take on large business ventures all across the world as they had experience in conducting business all across the world. This feature however led to decentralized decision making in the company and also caused the overlapping of many resources. Some of the resources were present in excess to the company whereas many of the operating companies had to suffer due to lack of resources. As we have seen in the later stages of the case, many refiners and product lines were shut down to make the organization more efficient. These refineries and product lines were not actually needed by the company and were a perfect example of the wastage caused due to overlapping of resources among the various companies which formed the Shell group. Shell was basically following a matrix organizational structure prior to 1995.The definition and feature of this type of an organization have been provided in the previous section. Shell’s management control consisted of a group known as the Committee of Managing Directors. (CMD) which formed the groups top management team. The CMD was the link between the formal structure and the management structure of the organization. The CMD was also responsible to act as a link between the two parent companies and the various group holding companies. The matrix structure of organization was created by the firm in 1960s.This organizational structure was considered as the main reason for ability of Shell to reconcile the independence of its operating companies with effective co-ordination of business, regional and functional commonalities. Shell’s flexibility due to the organizational structure being followed at the organization enabled the company to adjust to a changing oil industry without the need for any discontinuous change. The three dimensions of this matrix were represented by the principal executives of the service companies who were designated as co-coordinators. The matrix structure followed by the organization prior to 1996 is shown in the following figure – Source: (Grant, 2002) Thus the senior management team consisted of the following: Committee of Managing Directors Chairman Vice-Chairman Three other managing directors Principal Executives of the Service Companies Regional Coordinators Sector coordinators Functional Coordinators. Shortcomings of the Shell’s Organizational Structure Before 1995, Shell basically followed a matrix structure of organization as we have discussed above. This structure of organization allows better coordination among the various departments. This form of organization structure should be adopted by the company when it has multiplicity of complex and interdependent activities. This allows for better communication among the various organization departments and thus more flexibility. However technical and economic realities of the oil business limited the efficiency of this matrix structure. The matrix organization structure was adopted by the organization largely due to the varied companies which were a part of the Shell group and the different controlling authorities. However following this command and control structure meant that decision making was decentralized. The executive powers in the case of Shell were vested in a committee rather than an organization. This decentralization proved to be a bane for Shell organization. Due to this process of decentralization it was never accurately defined as to who was responsible for taking the final decisions. Other competing firms of the organization such as Exxon and BP had clearly defined leaders. In the time of crisis as was seen by the oil industry during the 1970s as a result of very low oil prices; it is better to have responsibility of decision making in the hands of a single person. A committee might not be able to make the tough decisions which are required to make in these circumstances such as downsizing. Decentralization of the decision making process in the absence of a single decision making authority also led to decisions taking a lot of time .Decisions which should have been taken quickly for the organization to be competitive were delayed and took a lot more time than in other organizations. This leads to the loss of competitive edge of the company as compared to its rivals. Because of the management structure being a matrix structure and the absence of a CEO; Shell was not able to initiate top down restructuring which was initiated by powerful CEO’s of other oil major companies. Combined with diffused executive powers at the top of the organization, the other challenge provided by the matrix organization was highly dispersed financial responsibility among the 250 operating companies of the organization. As the financial responsibility was dispersed in the organization, it was difficult to make a single individual responsible for improving the financial health of the company which was denigrating at the time due to a combination of external and internal factors. The focus of CMD had always been long term. This was another shortcoming of the organizational structural design. A CEO will give equal attention to both the short –term and long term objectives of the firm which will keep the firm in good financial health. Shells organizational structure was accused by many to be highly bureaucratic. The structure was top heavy and hierarchical .There were various different command levels in the organizational structure , there was duplication of service companies at various levels. Apart from this, Shell USA had an organization structure which was completely different from the rest of the organization. In this type of bureaucratic organization, information had to be processed through various different levels of organization. This made information a very difficult to obtain commodity in the organization. Due to lack of information the organization couldn’t be nimble enough to react to market changes in a quick manner. Another problem which has been associated with Shell’s structure was that it caused duplication of jobs. Because of the structure being geographically organized, many functions which were completely identical in nature were repeated in many different countries.eg – There was not a single E&P division but a multitude of E&P divisions in different countries. This form of structure caused excessive decentralization of the organization and thus increased the overhead expenses of the firm. Vertical Integration was achieved by Shell just like all the other oil majors to gain a good control of all the upstream and downstream activities. This proved to be a boon during the good times but a huge financial and organizational burden for the firm during the bad times. Vertical integration creates the company’s organizational structure more bloated and decreased the amount of flexibility available to the organization. Remedy of deficiencies through Re-organization Shell went through two different stages of re-organization. The first stage of re-organization was done in 1995-1996 which was followed by the second stage of re-organization in 1997-2000 in order to solve the problems which were not addressed in the earlier reorganization process of the organization. We will discuss the changes that took place at a result of these changes at all levels of organization. Environmental Context – The oil industry during this time was marked by nationalization of oil reserves of various international majors. The power of OPEC countries as oil producing cartel had significantly increased. The new nationalized oil companies were expanding rapidly. The old competitors of Shell were also restructuring their organization and bringing in major changes in the way they carried out their activities. Shell was also facing financial difficulties at this point of time. Strategic Content and Strategic Outcome - One of the major and far reaching changes; which were bigger than the organizational change of Shell during this time was the change in strategic content of the firm and the strategic objectives of the firm. Initially the CMD of Shell was concerned only with long term strategic planning. This long term planning was encouraged throughout the organization by the company. The goals of the company were re-oriented around maximizing the value of the shareholders. In order to do this the company may have consider long term planning in some cases and short term planning in some other cases. Changes in Organizational Structure – De - layering of the organization was done during 1995-1996.With the help of professional service companies, the company was now re-organized into a three level organization. This change in the organizational structure was aimed to improve the slow decision making process of the organization. The new structure will allow information to flow quickly within the organization which makes decision making process much fast and efficient. The organizational structure was made less complex and more agile and nimble. Each member of the CMD was made responsible for overlooking a business sector. This ensured accountability and a less complex structure. As each member in CMD was responsible for a particular business, the final accountability of the performance of the business unit lied with this particular member of the CMD, rather than the committee as a whole. This allowed the concerned person to take tough decisions regarding his business sector which might be necessary for the growth of the sector. The new organizational structure of the company is shown below – Source: (Grant, 2002) As we can see from the figure the organizational structure of the firm was made much more linear after the restructuring. Clear lines of reporting were now identified and people with authority were clearly appointed. This kind of structure was needed to increase the efficiency of the organization. Organizational Culture Changes – Shell understood that no process of business process restructuring is complete without changing the attitude and behaviour of the people. Mere structural changes will not help the organization to sustain the changes that have been made unless they are backed up with a change in the way people think in the organization. Shell initiated a number of changes and initiatives in order to bring about these changes. External consultants were roped in to bring about these changes apart from the internal change management team which was called as LEAP; short for Leadership and Performance Operations; As a result of these initiatives by Shell management development and organizational development activities of the firm were considerably increased. Organizational Changes of 1997-2000 The period from 1997 to 2000 was marked by downsizing and cost cutting. The CEO wanted to make to organization a very lean and agile organization. For this purpose, a large amount of workforce which was deemed unnecessary for the operation of the company was removed. Many national head offices in Europe along with one of the towers at London Shell’s office were closed down by the firm. Many business opportunities available to the firm were sold off if they were deemed not fit to get the required returns. Investment decisions were now being made only after analyzing the profitability and efficiency of the various projects. The downsizing significantly reduces the costs of the firm and made the organization more swift and direct. Moody-Stuart who was the new chairman of CMD, pushed individual leadership and accountability of top management. The purpose of this exercise was to increase the efficiency of decision making and to make it as quick as it was in the competitor companies. Various business committees which were responsible for taking decisions in the organization were now replaced by chief executives. Members of the CMD were made more accountable and clearly defined responsibilities were now provided to each member of the CMD. Integration of the structure of different business units was done during this time. One notable change was integrating Shell Oil Inc of USA into the global structure of the company. Shell USA was acting as an independent entity till now. It was brought under stricter control of the CMD. The different sectors of the company were now integrated along with the E&P division of the Shell group. Various support functions of Shell oil were now made part of the Professional Services organization. Thus the entire structure of the firm was unified and was brought under the same command and control. This increased the accountability due to clear line of responsibility being now established and also increased the efficiency of the firm. Recommendations for Further Changes One of the major changes which will be assisting the Royal Dutch/shell group in restructuring its business process will be implementation of ERP. ERP stands for Enterprise Resource Planning. ERP is a term which is generally used to refer to software systems that can manage all the information functions of the company and integrate its data sources. (Esteves, 2006).ERP implementation process is usually closely associated with the process of Business Process Reengineering. The major advantage provided by this system is the seamless integration of information across the organization. There will be many challenges which will be faced by organizations such as Shell which is basically an amalgamation of various organizations. But the advantages provided by the proper implementation of ERP packages across the firm will far outweigh the costs required to implement the system. Implementation of the system also requires benchmarking of the practices followed by Shell with the best in the market in order to make the company come at par with other oil majors or to exceed them . Other changes which can be implemented for the next round of restructuring will be to try and create as much of a virtual organization as possible. A virtual organization is characterized by massive outsourcing of the activities and keeping quality check on the organizations to which the processes have been outsourced. In this way, the number of employees and overhead of the organization will drastically reduce. This process is characterized by retaining the core activities of the organization which form its core competencies and giving away other activities outside the organization. The next logical step for the company in the next round of organizational changes will be to try and make the organizational structure flat. A flat organization removes the unwanted middle managers and functional managers. This makes the process of doing business much simpler. This ensures that top management does not remain cut off from the ground realities .Making the organizational structure flat makes the organization quick to react to any changes in the external environment and adapt to changes quickly. Team Responsibilities are a very effective way for Shell to gain the advantages of a matrix organization while making its structure more linear. Shell as an organization has been used to making decisions by committees. These committees should be replaced by teams. These teams should not be made only at the top management level but should be prevalent at all levels of the organization. Members of the team should have clearly defined roles and targets which have to be achieved in a given time frame. This will make the teams fast in conducting their actions and much more responsive to the needs of the organization. The case does not discuss any effort on the part of the organization to constantly improve its quality.TQM philosophy should be adopted by the organization which makes quality improvement not a onetime process but a constant improvement process. If this philosophy is adopted by the organization, it will never be caught off guard and will not have to change drastically in response to external changes. Constant quality improvements will necessitate constant changes in the strategy and structure of the organization to keep the organization ahead of the competition. Conclusion The case of Shell Incorporation provides us with an insight in to the organizational restructuring process. It provides us with a background of the conditions which necessitated this re-organization process. This process was necessitated by external factors of the organization. Through studying of this case and its analysis we have come to know of the various steps being followed in the re-organization. The mistakes committed by the Shell group come to light through the case. Another important thing that we learnt is that change is a constant for any firm. The matrix organization structure which was credited as being the reason due to which shell was able to come up with new managerial changes faster than the competitors had to be abandoned by the company in the wake of changes in the external environment of the organization. Through literature review which was done before the analysis of the case, we also come across the various strategic implementation tools and techniques which have been suggested by various authors. The case analysis; in-short takes us through the difficulties being faced by the Royal Shell group and how restructuring of the organization helped it to fight these difficulties and make the organization more agile and swift. In the end we have provided some key recommendations which can be employed by the organization for making its organization more effective. Bibliography Alexander, L. (1985). Successfully Implementing Strategic Decisions. Long Range Planning Vol 18 No. 3 , 91-107. Bartlett, C. a. (1987). Managaing Across Borders : new strategic requirements. Sloan Management Review Vol 28 No.2 , 7-17. Daft, R. L. (2009). Organization Theory and Design. New Delhi: Cengage Learning. Esteves, J. a. (2006). Enterprise Resource Planning Systems Research: An Annotated Bibliography. Communications of AIS, , 2-54. Grant, R. M. (2002). Organizational Restructuring Within the Royal Dutch/Shell Group. Hrebiniak, L. (1992). Implementing Global Strategies . 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Structure is not Organization. Business Horizons Vol 23 No 3 , 14-26. Yip, G. (1992). Total Global Strategy. London : Prentice Hall. Appendix 1 Source: (Soucey, 2007) Read More