It was clear from the outset that the restructuring was extremely complex involving a multitude of difficult issues in the areas of portfolio choice (which businesses were to remain with Shell and which would be offered for sale) and the reporting structure of the organisation. Which part of the business was to be divested, how this business interacted with other businesses and the legal affairs attached to this divestment (may be through establishment of new legal entities).
Identification of Critical Success Factors is crucial and they MUST be ‘done well’ in order to ensure successful achievement of the strategies (in the case of Shell the strategy was corporate restructuring). These are often determined by: external forces, for example legislative requirements, customer expectations; or internal issues, such as resource allocation or skills mix.
Critical success factors for the implementation of change in structure:
- Standardisation of infrastructure and process to achieve cost efficiency.
- Team organisations to overcome the compromise between the speed and quality of deliverable products and services.
- Clarity of roles and responsibilities to improve operational effectiveness.
- Management of business units’ expectations to facilitate understanding of scope, cost and timing.
- Continuous improvement initiatives to sustain the associated structure. This is done to achieve its goals and to provide flexibility of services while efficiently managing the cost of its delivery.
Therefore to gain success in the implementation of change of the group’s operating structure the company has to consider the following factors:
- Expertise in order to enable any successful restructuring within the Shell Group.
- Planning of change is vital to any corporate restructuring. A careful plan should be created to make sure the present structure corresponds with present and future market conditions as well as the environment within the business.
- Communication within high level of hierarchy should be frequently undertaken to evaluate the success of the new structure as well as the performance after the reorganisation. Provision of strategic clarity that would focus on end results, rather than the means of achieving them would provide understanding and means of gaining agreement on the true objectives that directly contribute to the achievement of the Mission Statement
- Building common vision through communicating to all levels of hierarchy. New structure implies some dramatic changes. Therefore a new common vision should be created to make it easier for staff and management to adapt to these changes. Development of Corporate Mission Statement would be helpful as this statement describes the organisation's fundamental purpose and philosophy, and should have a clear meaning to everybody. In simple, jargon-free language, it states the overall objectives for the organisation.
- Change of culture – restructuring and a new common vision will tend to bring new culture. This will have to be cultivated by managing individual and group behaviour of the employees through managerial guidance and incentives.
- Continuous learning between and within the areas to ensure rapid development and accumulation within the time horizon.
- Sharing of function expertise, product related knowledge and side specific know how and experience will enable to maintain new organisational structure and also obtain a competitive advantage.
- Problems of adaptation should be eliminated, as if they fail to adapt, contracts are bound to be incomplete and increase even more when the uncertainty raises. Therefore efficient co-ordinating mechanism should be applied.
- Co-ordination can also be achieved by standardisation – in effect, automatically by virtual standards that predetermine what people do and so ensure that their work is co-ordinated.
- Distribution of costs and benefits used to be joint. This issue should be communicated within the organisation to avoid any points of conflict and resolved in the best interests of employees.
Thus Shell needed a project structure that:
- Combined all required areas of expertise so that all relevant aspects and dimensions were adequately covered
- Facilitated interaction and brought together the required areas of expertise so that all learning between and within the areas to ensure rapid development and accumulation of specialised, process specific know-how
- Could act fast as to realize the ambitions within the time horizon of less then one year. (dynamic markets)
Although the Shell group had an emphasis on simplicity, accountability, and clear lines of authority, compared with its leading competitors Shell’s structure remained complex. Thus, no matter how much restructuring the group undergoes the coordination will be hard to improve.
However, Shell being such a large multinational organisation can actually gain from its complex structure. In the way that can enable the Shell Group employees to share the functional expertise, product related knowledge and side specific know how between the organisational divisions as well as sharing certain activities. Not only can this reduce costs of production and research, but also improve general performance, as well as create a long term competitive advantage.
How feasible it is to implement change to the organization’s North American operations?
We will first discuss the major issues that need to be considered here and then we will analyze them to make a reasonable conclusion.
The first point here is that the two parent companies that is Royal Dutch petroleum company and the Shell transport company, each have their shares separately listed on the stock exchanges of Europe and USA and have separate board of directors. So USA operations are not managed by the parent company in the UK. Also according to the shell’s three-way matrix, geographical dimension has been the most important consideration and most of the strategic planning was at national or regional levels. Planning at shell was almost bottom up meaning that operating companies in each country had their own strategic plans and the role of the planning staff and regional coordinators was just to coordinate these plans. Therefore these factors definitely indicate that any sort of change that needs to be initiated must be originated by the operating companies themselves due to the bottom up process and too much decentralization at Shell and therefore any change from the top management will be difficult to administer or implement. The management structure of shell gives the CEO of the company very less powers and makes it even more difficult to initiate any sort of change. what is needed here is a more systematic method and approach and giving more powers to the CEO of the company or to the committee of managing directors.
There are other universal factors that can be viewed for any change to take place and need to be considered for effective change management. The change should be done in a systematic and planned way and must be done gradually. No one likes change and there is always resistance to it but if the people of the company are made to believe a certain change is going to benefit the organization and is necessary and essential then any sort of change will be welcomed. There needs to be a culture of accepting change and that can be only achieved due to effective communication between the staff and the top management. The attitude of the employees must be progressive and acceptable of development and changes in the way business is conducted.
Coming back to the original argument is change feasible???? Whether it is or is not depends on why that change is necessary and this needs to be weighed with the hassles and costs of not undergoing change. Yes change is definitely possible and can be implemented if done in planned way but the feasibility can only be done by weighing the pros and cons of change that we will consider in the next paragraph
Reasons for change can be varied and is dependent on two issues: the first one being the benefits and reasons for change and the second one being the practicality of change. Another point that should be considered is the length of the change process. All this will help us in our discussion of feasibility.
We will now consider the organizational structure of shell which we have mentioned in previous sections and will get to the changes but before that I would like to make some things clear.
The changes:
- The shift from a predominantly geographical organized structure to a primarily business sector organized structure.
- The elimination of over 100 corporate positions
- The sale of headquarters in London
- Redesign in terms of c-ordination and control
Causes for Change:
- To retain its position in the world market
- To offer adequate returns to shareholders
Let us now look at some of these changes on detail and their respective benefits.
Between the 1970’s and 1990’s, the World’s biggest oil companies, Shell inclusive had to witness a drastic change to the petroleum industry and its operations. The growing power of the oil producing countries and the additional fundamental change with respect to the nationalization of oil reserves, gave oil companies like Shell enough reason to doubt their organizational structures. The whole structure of vertical integration was based around the idea of minimizing risk via controlling downstream facilities needed to provide secure sources for crude oil. Unfortunately for Shell, major oil companies saw this need for change early enough and underwent far reaching restructuring involving reorientation of goals, greater selectivity of strategies, staff lay offs and delayering. Shell was the only major oil company not to undergo a similar restructuring process. The failure to do so could have stemmed from the fact that Shell’s belief in its flexibility had allowed coping with the industry shift without the need for a discontinuous change. Also because the absence of autocratic powers residing with the CEO of other oil majors, the scale of top down restructuring needed were unattended to at Shell.
Eventually, during the 1990’s a mixture of various reasons brought this aspect of restructuring the organizational setup into light. The most demanding reason was dissatisfaction over poor financial performance as compared to other oil majors. The cost of capital was barley covered by the return on equity, the long term rates of return were below stated targets and its margins were under pressure. This is when Shell began its restructuring process which eventually led to getting rid of its old matrix structure. Even though initial efforts, i.e. restructuring among the operating companies in the Canada, US and UK provided evidence of cost savings, the final result was still far from evident.
During 1995-1998 Shell created a new structure, where Formal setup was not really affected. The major changes took place in management structure. Shell created four new elements: Business Organizations, Corporate Centers, Professional Services and Operational Units- all of which were interconnected and supported each other. Multiple reporting among these business organizations and the power of regional sectors were eliminated. That allowed Shell to tighten the control processes and made the communication system less complex, thereby making the line of command clearer. Shell has also undertaken the process of global integration of its businesses, moving from local responsiveness and regional business divisions.
Despite cost-cutting, downsizing and global integration, any performance gains from the reorganization and restructuring were offset by the continuous change in the oil and gas industry environment. This showed that making Shell less complex, less bureaucratic and more flexible did not help it to stand up to the huge influence of the external factors it faced.
The continuous and regular rotation of the CEO did not help the company to build a good platform for better functioning of the top-management. As a result, the company could not possibly have long-run plans taking into account future business environmental changes. Since each new CEO would preferably argue his or her own view of the company’s future to the CMD. It also shows that Shell was operating just according to its short-run plans rather than following the long-term path.
On the other hand, by splitting company on divisions and areas those divisions are operating at, Shell became more sensitive to external environment, because since businesses have there own environment they can adopt to these changes quicker without having any affect on other divisions as well as on the whole Group.
The most important change in this new structure according to our views is for Shell to make the CMD redundant and choose a single CEO, giving autocratic power to one individual. This would allow greater flexibility and quicker decision making which is a very important aspect in this dynamic oil industry. The company’s employees call for guidance by one leader, who must device both the long term goals and the short term strategy. This is very evident from the example of BP’s John Browne, who has single handedly been changing the rules of operations of the petroleum industry. This is something that has lacked in Shell for a very long time. Every organization needs leadership, and these needs are mentioned below:
- Building confidence
- Building enthusiasm
- Cooperation
- Delivering results
- Forming networks
- Positively influencing others
- Using information efficiently and distributing this information effectively
As discussed, this new structure organizes the company into five operating companies independently, although they draw on a common network of service companies and comply with the same set of principles. With this Shell realized the need to enhance internal as well as external business processes by digitizing all major businesses. This would allow Shell to greatly cut down on paper work and staff, thus reducing cost by a substantial amount. It would allow the company to improve communication with governments and partners world wide. This measure has been undertaken with the help of IBM with a view to make this organizational structure sustainable and competitive in the future.
This part of the report has been concentrated on the few things that need to be changed in this new structure to allow Shell to be capable of adapting to the new environment. As new developments take place, for example, the greater emphasis on Russian Oil fields, pioneered by BP and the reducing reliance on OPEC, it would be important for decision making to be quick, decisive and for the responsibility to be limited to the top level. Individual leadership would mean a major change in the cultural and working environment of the company but would surely benefit them in the long run.
As of present, even though this new structure is much more flexible and adaptable than the matrix of the 1970’s, 80’s and early 90’s the need for a separate corporate center to facilitate the CMD is in our view inconsequential. By installing a single CEO, Shell would not only be able to drastically cut down on the corporate expenses but also allow for greater reporting directness. This would allow for further decentralization and independence of operating units.
