Royal Dutch Shell Group Strategic Management - Essay Example

Section A This section will explore the Royal Dutch Shell Group’s (Shell) approach to strategic management in the year 2000, and will attempt to come up with meaningful conclusions whilst providing suggestions for the organisation for its future. Strategic management is that function of an organisation where decisions and plans are made, which reflect the long-term objectives of the organisation, and are independent from decisions made on a daily level (Stahl & Grigsby, 1997); “It is the pursuit of superior performance by using a strategy that ensures a better or stronger matching of corporate strengths to customer needs than is provided by competitors” (Ohmae, 1982 cited by Joyce & Woods, 2002, pg8). These definitions highlight both the internal and external roles of strategic management in terms of the organisation. Further definitions will be given in following sections. Shell’s approach leading up to the new millennium was mainly internal, with massive restructuring of the organisation through divesting unprofitable business areas, eliminating unwanted bureaucratic levels of administration, and placing more power in the hands of a few executives, with the main control and authority coming from the corporate centre consisting of the committee of managing directors (CMD). This was established by flattening the organisation’s structure and resulted in minimising the channels of communication between the corporate centre and the operating companies, thus making reporting less complicated. By 2000, Shell’s management structure consisted of the corporate centre as the central authority, with executive officers from each of their business units reporting directly to the corporate centre. The operating companies in turn reported to the business units. This constitutes a flatter organisation structure with a strong central leadership where the overall objectives and goals of the organisation are clearly communicated through the different entities, and problems facing the operating levels in different geographical regions can be effectively made known to the corporate centre for further strategic actions (see Dubrin, 2004; Mullins, 1999). In effect, it can be safely assumed that Shell was headed towards an authoritative style of management starting from the corporate centre and continuing down through the executive offices of the business units and finally the operating units. A simpler structure is also helpful for the management in assessing more clearly employees’ performances in order to carry out appraisals and give rewards (Mullins, 1999; Brooks, 2006). This is evident from the fact that Shell could award annual pay raises more in line with performance after the restructuring, as each member of the organisation, especially in the executive divisions was given a certain amount of independence and consequently, a degree of accountability (case, pg 141, 142). This accountability gives employees added motivation to perform well and goes in line with the social recognition level of Maslow’s hierarchy (see Mullins, 1999; Brooks, 2006; Schein, 2004). This also creates a culture that is focused on organisational goals, and in performing towards these goals (Schein, 2004). An authoritative structure however, may result in a strong culture that may not be receptive to change (Mullins, 1999; Schein, 2004). The fact that Shell could transform themselves into their new structure is because of the already flexible and decentralised structure they had before the changes were enforced. A strong central authority may pose the danger of excessive manipulation from the corporate executives in terms of decision-making, which may cripple the lower operating units by giving them less autonomy. This is especially problematic as the operating units are the vital entities that deal with the end users, the customers, on a daily basis, and not having the power to make decisions may ultimately result in customer dissatisfaction (Mullins, 1999; Fritz, 1996). This is true particularly for the new millennium due to increasing globalisation, and the subsequent increase in demand to satisfy a global customer base. Hence the notion that the Shell Group ‘is a prisoner of its own illustrious past’ holds true, as the organisation seems unwilling to change the way they operate at the corporate level. Although they have been successful in eliminating unwanted lower levels of administration, their historic concept of the committee of managing directors at the centre may still hinder prospects for progression. As the case suggests, while their competitors have effectively managed structural changes, mergers and acquisitions according to the demands of the industry, Shell is still in the act of catching up because of its relatively slow progression into the future, which is probably due to possible complacency at the corporate level. This may call for a deeper analysis into the corporate centres’ environments, both internal and external. The case confirms that after the successful restructuring, every business unit has been encouraged to be competitive with respect to its own product range in its own environment. This can be done through various strategic concepts like PEST analysis, which analyses the political, economic, sociological and technological aspects of any given environment that influence how a business emerges or operates in that environment (Kotler et al, 2008). The same can be done for Shell’s corporate centres to find out if their corporate operations are in line with existing demands of their environments and if change is needed within the CMD in that if a new approach is needed in the way authority is rotated amongst them. One suggestion would be for a complete merger of the two organisations that comprise the Royal Dutch Shell Group in order to facilitate more influential leadership that integrates the interests of both organisations, and may also result in an increase in shares and satisfied shareholders. This may also have repercussions all the way down to the operation units where more autonomy may be the answer for operation level problems. Section B Response to question 2 This section introduces and investigates into the strategic management techniques employed by the Royal Dutch Shell Group in order to counter their relatively poor performance records in the global economy, starting in the mid 1990’s to the early part of the new millennium. It is evident from the case that the Group was headed in the right direction in terms of restructuring the organisation from a diffused and decentralised structure to a more divisionalised, flattened and authoritative structure (Sadler, 2003). To delve deeper into the way the company designed and implemented its strategy, it is important to understand the very essential nature of strategic management and decision making. Strategic management is simply the function of making decisions on a strategic or corporate level (see Stahl & Grigsby, 1997). These decisions are vital to the survival of any organisation and may require disposal of vast amounts of resources; are normally different from routine decision making in that they address new issues which are not represented in the way things are done on a regular basis; and they will eventually change the way other, lower level decisions are made (Stahl &Grigsby, 1997; Ansoff, 2007). In case of Shell, the main issues requiring strategic decision-making were primarily attached to its extremely complex structuring that divided authority into too many bureaucratic departments, which hindered the corporate offices’ levels of communication and strategy implementation on their operating companies. The far-reaching visions and goals of the committee of managing directors (CMD) may not have been communicated accurately through the various channels to the ‘downstream’ operation companies, which were under the supervision of the service companies. The underlying problem with such distribution of power is the possibility of the service and operating companies making decisions on the lower level, which may not deliver results in conjunction with the organisation’s overall objectives (Fritz, 1996) and this may also result in backlashes from the company’s shareholders who are linked to the company strategically (Stahl & Grigsby, 1997). In any case, a complete restructuring seemed the only option to tackle these issues. The purpose of structure in an organisation is to “define tasks and responsibilities; work roles and relationships; and most importantly, channels of communication” (Mullins, 1999, p520). For Shell, the primary concern was clarity of communication between the corporate centre and the operating companies, so a flattened structure with simpler and clearer reporting relationships was introduced. This way, as is evident from the case, the corporate centre would not only have more control and influence on the operating companies, the organisation would also benefit from cost reduction resulting from ending the bureaucracy that complicated its structure. As a result of the flattening of the organisation, a number of executive positions were eliminated, which not only cut Shell’s costs of employment but also placed more responsibilities in the hands of fewer executives, thus “increasing employability and decreasing bureaucracy” (Stahl & Grigsby, 1997). Another important feature of this restructuring is that Shell was able to identify the business areas that were not profitable for the organisation and eliminate them (see Mullins, 1999). This could be achieved mainly because of a shift of focus from geographical regions carrying out a range of business functions to individual business units spread across vast geographical areas. This, again, helped Shell to broaden individual departmental functions rather than having multiple departments. This move is a classic example of a decentralised structure as explained by Mullins (1999), where an organisation’s structure is made horizontal by eliminating multiple vertical levels. This forms a kind of paradox for Shell, as the organisation’s structure was decentralised to start with, as focus was given to group decisions and not on decisions made by a single authoritative individual or entity at the corporate centre. However, this approach was not effective due to the multiple layers. So in effect, Shell had to decentralise from an already decentralised structure, where more autonomy was given to the operating companies, whilst a clear role of authority was communicated and executed from the corporate centre. This forms a mixture of a decentralised, horizontal structure and a centralised authority, with fewer channels to communicate through. This approach has been profitable for the organisation and can be classified as an ‘emergent strategy’, where the strategy is made as a matter of urgency in response to external factors or poor performance (Stahl & Grigsby, 1997). This kind of strategy may not necessarily reflect the overall corporate objectives that the organisation originally formulated, but may be directed towards the fulfilment of these objectives (Stahl & Grigsby, 1997; Sadler, 2003; Ansoff, 2007). The 21st century may bring about more challenges for Shell due to rapid globalisation and focus given to the concept of ‘culture’. Shell’s restructuring has helped the organisation through the crises it went through during the early to late 1990s, which were focused mainly on internal factors of the organisation. Due to its already decentralised structure, the change came about gradually and with relative ease due to its flexibility to change (case pg 129, 130; Mullins, 1999). The 21st century, however, may bring about more external factors into play like cross-cultural management issues, where many researchers argue that most global organisations fail in recognising and responding to cultural and local governmental demands, due to a degree of ethnocentrism from the organisations’ centres (Hofstede, 1997; Keeley, 2001). This would definitely be an issue for Shell’s now centralised authority if they do not educate themselves in these matters. Globalisation demands a global presence and competitive advantage in the global market (see Keeley, 2001), and to achieve this Shell may have to increase autonomy of their operating companies even more to make decisions based on local issues of their foreign subsidiaries, and also invest more in expatriation and in finding host country nationals to manage their local businesses (Evans et al, 1989; Hofstede, 1997; Keeley, 2001). Response to question 3 Strategic management is said to be one of the most difficult aspects of a business as there is no clear definition available to rationalise its functions (Joyce & Woods, 2002). This is because one of the features of strategic decision making is that these decisions are not always concurrent with decisions made on a routine basis by lower level management (Stahl and Grigsby, 1997, discussed earlier). For a complex organisation like the Royal Dutch Shell Group, different strategic decisions have implied certain advantages and disadvantages in their implementation. Strategic management is concerned with a wide range of corporate interests which ultimately have an impact on the organisation’s overall performance. Some of these corporate interests are the formal structure of the organisation; the function of Human Resources Management; marketing etc (see Scullion, 1995; Robbins, 2003; Mullins, 1999). Some of these need deeper understanding from managers to ‘sense, communicate and respond to the need for change within complex multinational enterprises’. Central Planning: Within organisational structure, Schein identified two different forms of organisation – Formal and Informal organisations, where a formal organisation is “the planned co-ordination of the activities of a number of people for the achievement of some common, explicit purpose or goal, through division of labour and function, and through a hierarchy of authority and responsibility” (1988, cited by Mullins, 1999, pg90). The functions and activities mentioned in this definition, according to Mullins, is what makes up the structure of the organisation. The informal organisation on the other hand is part of the formal group, but is the entity that provides satisfaction of employees’ social needs, and provides them with a sense of personal identity and belonging (1999). This may imply the behaviours of different work groups within the formal structure of an organisation. Child (1988), emphasising on the importance of a good structure, says that the quality of an organisation’s structure will affect how well the requirements of the different functions of an organisation will be met. This brings us to the dimensions of organisational structure. Robbins (2003) suggests that organisations are layered, and that policy making, work execution, and the exercise of authority and responsibility are carried out by different people at varying levels of ‘seniority’ throughout the structure. This division of work brings about the argument of ‘centralisation’ or ‘decentralisation’, where decentralisation is mostly applied if there is an increase in the organisation’s size, or if the company diversifies its product range and if it is spread across geographical locations (Mullins, 1999). Centralised planning and authority refer to policy being made from a central corporate level of authority as discussed in earlier sections. Central planning and implementation carries some advantages in that it is easier to implement a common policy for the organisation as a whole; it provides a consistent strategy across the organisation; it prevents sub-units becoming too independent; provides easier management control; facilitates improved and quicker decision making which is otherwise delayed in diffused authority style management (Robbins, 2003; Mullins, 1999). Centralisation also carries some disadvantages like limited decision making power closer to the operational level; limited responsiveness to local circumstances; higher levels of customer dissatisfaction; and lower motivational levels amongst staff (Mullins, 1999). Most of these findings can be confirmed in the case of Shell, where a centralised authority has definitely improved executive performance levels and further decentralisation in the lower levels has enabled better communication between corporate and operational levels. Local Initiative may refer to the extent to which local operational units at different regional locations use their own initiative in making decisions (Scullion, 1995). This aspect is more closely studied within the Human Resources function, and in cases of multinational companies, the International Human Resources (IHRM) function. Studies suggest that no matter how well strategy is communalised in an organisation, it is vital to consider local issues of any foreign subsidiary in implementing policy (Scullion, 1995; Adler, 1997; Hofstede, 1997). This may include cultural factors (see Hofstede’s cultural dimensions, 1997), local governmental laws, economical factors etc (see PEST analysis and Porter’s five forces cited in Kotler et al, 2008). Keeley (2001) suggests that the best solution to such issues would be to find host country nationals to manage local workforce in order to attain competitive advantage in the global economy. Another practice of organisations is expatriation, but this is an expensive process involving extensive training and repatriation blues to consider (Scullion and Starkey, 2000). For Shell, the future may bring about increased investments in international research for effective implementation of strategy at the operational levels. Transnational Networks may refer to networks of business units spread across nations. The business units represent one or more function or product range but in multiple nations. The advantage of transnational networks is that they facilitate transfer of core competencies from one region to another within the business unit to attain competitive advantage (Bartlett and Ghoshal, 1995). This is because of the superior knowledge that multinational companies bring to the foreign market (Kogut, 1993). The complexity of the Shell group’s operations across the world may be complemented by such transfer of competencies, especially in the new millennium due to globalisation. Managers in multinational enterprises can take advantage of the above three factors to predict, analyse and act according to changing scenarios in their respective industries, in formulating and implementing strategy. This is evident from the case of Shell, where drastic measures were taken to counter the many issues the firm was facing. Strategic management, in all its dimensions, is represented within this case, which deals with organisational restructuring to institutional divestments. It can only be assumed that the future will bring more complexities to the multinational enterprise because of extensive multiculturalism and the constant evolution of technology. This can only mean that organisational change is a constant process, or an oscillation in the words of Fritz (1996), and strategic management will remain a volatile but the most vital aspect for an organisation to realise its ultimate goals. References Adler, N. J. (1997) ‘Global Leaders: A Dialogue with Future History’, International Management, 1 (2): 21-33 Ansoff, H.I. (2007). Strategic Management. Palgrave McMillan: New York Bartlett, C.A. (1995). ‘Changing the Role of Top Management: Beyond Structure to Processes’, Harvard Business Review Jan-Feb: 86-96 Brooks, I. (2003). Organisational Behaviour: Groups, Individuals and Organisation. 3rd ed. Pearson: Harlow Child, J. (1988). Organisation: A Guide to Problems and Practice. 2nd ed. Paul Chapman: USA Dubrin, A. J. (2004). 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