Shell Business and Management Analysis

1. Introduction

Shell is a global group of energy and petrochemical companies with a recognizable brand name and signature logo growing and expanding for more than 110 years. Shell has an average of 86,000 employees in more than 70 countries. The company formerly known as Royal Dutch Shell was formed after a merge between Royal Dutch with Shell Transport and Trading Company to form the Royal Dutch Shell Group. Moving forward a century later there was a big structural reorganization and this partnership was dismantled and Shell joined its corporate structure under a one holding company called Royal Dutch Shell plc. (Shell.com, 2019)

1.2 Shell Vision statement

“Shell is an International Energy Company that aims to meet the world’s growing need for more and cleaner energy solutions in ways that are economically, environmentally and socially responsible.” (Shell.com, 2019)

1.3 Shell Mission statement

• “Shell's purpose is to power progress together with more and cleaner energy solutions.” (Shell.com, 2019)
• “Shell believe that rising standards of living for a growing global population are likely to continue to drive demand for energy, including oil and gas, for years to come.” (Shell.com, 2019)
• “Technology changes and the need to tackle climate change means there is a transition underway to a lower-carbon, multisource energy system.” (Shell.com, 2019)

Shell publications does not have an official vision and mission statements which are labelled as such. The above statements were derived from their website as it satisfies its intended purpose. The vision statement has a positive connotation that is associated with the direction of the company. Furthermore it satisfied the requirement of a vision according to (De Wit & Meyer 2010) the “basic principles that guides the strategic decision-making; direction, legitimisation; motivation; point-of-departure".

The mission statement doesn’t clearly identify the stakeholders from shareholders, customer, employees, and suppliers to communities. However it delivers a clear image of the products being supplied to all of those stakeholders. Shell indicates in the mission “energy” as the commodity being delivered, underneath that umbrella there are products like chemicals, rubbers, service stations and maritime shipping.  (Shell.com, 2019)

1.4 Shell Goals

• “To provide a world-class investment case. This involves growing free cash flow and increasing returns generation, all built upon a strong financial framework and resilient portfolio”. (Shell.com, 2019)
• “To thrive in the energy transition by responding to society’s desire for more and cleaner, convenient and competitive energy”. (Shell.com, 2019)
• “To sustain a strong societal license to operate and contribute to society through a shared value approach to our activities”. (Shell.com, 2019)

Shell keeps those goals in mind when making strategic decisions such as the acquisition of the BG Group that made them the second largest company in the field of LNG (liquefied natural gas). (Bousso, 2016)

As well as when Shell are selling their non-core business such as selling the mining company Billiton in 1994 (Blainey, 2010). Or disposing of all of its shares in Shell entities in New Zealand in an effort to simplify its portfolio and re-shape the company into a world class investment. (Shell.com, 2019)

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2. Shell Strategy

Shell has stated that “Our strategy is to strengthen our position as a leading energy company by providing oil, gas and low-carbon energy as the world’s energy system transforms. Safety and social responsibility are fundamental to our business approach. Shell will only succeed by working collaboratively with customers, governments, business partners, investors and other stakeholders.” (Shell.com, 2019)

Shell concentrated on the following three strategic aspects to strengthen their leadership position in the industry. They are: Portfolio and Financial Management, Operational Efficiency, and Sustainability

2.1 Portfolio and Financial Management

Shell has adapted a financial strategy of having multiyear macroeconomic cycles with multi-decade investment and returns programmers (Shell.com, 2019). This is achieved by having diverse product groups that are cost effective, while monitoring the long term trend of the industry and investing in long term high margin ventures. Given the price volatility of Shell products, the organization reevaluate and redistribute its investments constantly. The flexibility of having a diverse product range provides stability and ability to maintain relatively low gearing ratio of 15-25% (Shell.com, 2019). Furthermore to achieve better returns and growing free cash flow per share Shell has adapted capping capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions. (Shell, 2016)

2.2 Operational Efficiency

Shell has adapted the strategy of increasing profit margin through cost minimization to deliver quality products in the most competitive price level. To achieve this goal a restructuring of the company which will be explained in a later section was bound to happen, the purpose of this restructure is to reduce the bureaucracy and simplify business processes across all of Shell (Aspentech.com, 2018). Furthermore Shell adapted the strategy of standardization by creating Shell Business Operations (SBO) which are five service centers that are spread across the globe to offer centralized IT, customer service, finance, finance operations to all the companies with the Shell organization. (Shell.com, 2019)

2.3 Sustainability

A substantial portion of Shell goals remains to be sustainability. Sustainability in Shell is defined as “providing more and cleaner energy solutions in a responsible way." Shall divide Sustainability performance to three categories based on the time frame of achieving that goal. In the short terms it is delivering energy responsibly, doing no harm, respecting people, their safety and their environment. Shell prides itself by working closely with the communities, non-governmental organizations (NGOs), and United Nations Development Programmes. Sustainability in the medium term is the promotion of ecologically green energy such as the Liquefied Natural gas which is considered a cleaner energy source as well as investing in biofuels, solar, wind and hydrogen. On the long terms Shell has invested heavily in research and development (R&D) programs to achieve sustainability as they have made the commitment of reducing their carbon footprint to comply with the Paris agreement. Furthermore they have intended to reduce 50% of the carbon footprint by 2050. (Shell.com, 2019)

3. Shell Strategy Analysis

To evaluate the strategy of Shell with its advantage and disadvantages we evaluated opportunities and threats in the environment, as well as the strengths and weaknesses of the organization. This is called the SWOT Analysis (Investopedia 2017; Weihrich 1982).

3.1 Strengths:

• The flexibility to peruse long term ventures like deep sea excavations of emerging basins in which hydrocarbons has been discovered but no production process has been started, this kind of investment will have a higher margin of profit with higher risk attached to it. Or peruse existing assets which can generate value quickly with a lower profit margin. (Reports.shell.com, 2019)
• Ability to research and invest in Biofuels and other types of clean Energy like solar, wind and hydrogen. (Shell.com, 2019)
• Capability to spread the risk by diversification of products such as credit cards, petrol cards, chemicals and oil products. (Shell.com, 2019)
• The adaption of the “Scenario” learning tool to keep up with the future and have the competency to quickly adjust to the volatile market in different situations. (Shell.com, 2019)

3.2 Weaknesses:

• Large dependence on oil and gas sources that are considered dwindling source of energy.
• The size of Shell and being spread across different countries with numerous geopolitical backgrounds creating instances of lower accountability standard, this will be explained more in details later on.

3.2 Opportunities

• Opening new market sector by developing new product lines and technologies
• Shift in political climate has the potential of providing new supply opportunities like the fields in Iraq. (Paul, 2005)
• New oil and gas fields are being discovered that Shell has a competitive advantage of developing due to the advance deep water excavation technology. (Shell.com, 2019)

3.4 Threats

• The price volatility of oil, Shell core product, affects the market share value and pushes the operation department to cut cost with might be considered as drastic measures.
• The climate change and its effect of already existing production facilities.
• Political issues that cause destabilization to the already existing infrastructure and operations.

After analyzing the SWOT analysis, the advantages of the strategy that was adapted by Shell (Portfolio and Financial Management, Operational Efficiency, and Sustainability) are evident for the people connected to Shell organization from customer, communities they operate within, shareholders, employees and suppliers.

Shell has partnered with national oil companies through operated Joint ventures and non-operated joint ventures. For the non-operated joint ventures Shell expected those companies to adhere to the policy on health, safety, security, environment and social performance (HSSE&SP) or equivalent standards. While for the operated joint ventures like Petroleum Development Oman (PDO, Shell interest 34%) there is a stricter compliance process and independent auditing. Those regulation assisted the PDO to conduct carbon and energy benchmarking and to cooperate on the application of the energy efficiency surveillance software which resulted in energy and cost savings. While for Badr Petroleum Company (Bapetco) which a joint venture between Shell and the national oil company (NOC) Egypt General Petroleum Company (EGPC) there was a push to reduce its greenhouse gas emissions to a reasonable level in addition to to develop numerous solar and gas saving prospects. (Reports.shell.com, 2019)

Shell strategy has afforded the organization the ability for external growth. There was multiple example of this expansion the highlight of which was buying BG Group, a UK oil and gas production company making it the second largest oil and gas company after Exxonmobile. This horizontal diversification enabled Shell to have a bigger market share with 25% additional guaranteed oil and gas reserves, adding 20% to production, consolidating resource and providing new undeveloped projects in Brazil, Australia, East Africa (Whitehouse, 2015). However we cannot ignore that Shell strategy promoted internal growth by creating its New Energies business to focus on exploring and developing commercial opportunities in renewable energy, such as wind and solar. (Shell.com, 2019)

Shell did not have the narrow focus of financial responsibility merely but extended it to emphasis on generation and application of ideas. Therefore there was a shift from the more conventional focus of strategy that was planning, to the primary role of strategy is to encourage thinking about the future, develop the capacity for organizational learning, promote organizational dialogue and facilitate organizational adaptation to a changing world. This promoted new learning tools such as the  planning for “Scenarios” of what will be happening in the future within 20 years rather than the more traditional company forecast that is done typically on 5 year old basis. This learning tool has been used and implemented by different organizations as it facilitates decentralization by equipping the employees within an organization to make better decision in a more appropriate timely matter for an increasingly volatile market. Furthermore given that Shell strategy didn’t center on financial bottom line only, it included a vision of sustainability therefore there was a push towards investment in Research and development R&D of a budget of $986 million in 2018. (Shell.com, 2019)

One of the biggest drawbacks of the sustainability strategy set by Shell is setting a high moral ground in the organization and not living up to it. The sustainability strategy on occasions contradicted the operational efficiency strategy which in its core requires maximization of profit margin. Moreover due to the diverse portfolio of Shell and being spread out across various geopolitical and economical settings, compliance to different regulations proved to be challenging and the standards are not always met. It was evident that keeping a strong social license is not constantly upheld despite being one of the fundamentals for Shell business strategy. One of those occasions are the oil spill from a Shell oil field in Bonga, Nigeria (Morrison, 2014). In this occasion Amnesty international has claimed that Shell has falsified records to minimize the scale of the problem and try to divert the blame from its operation. Another incident is the Brent Spar, a plan to dispose of a giant North Sea oil platform in the depths of the Atlantic. This produced uproar from Greenpeace (Oliver, 2014). In both of those occasions there was a backlash towards Shell which hurt its bottom line. This shows how the boundaries between the customers and the companies became more permeable. This demonstrated the importance of the reputational strategy as it had a direct relationship to the value market share.

4. Shell Organization Structure:

Royal Dutch Shell Group was a highly decentralized company. Shell consisted of various service and operation companies that vary in size.  Almost all of the operating companies operated within a single country as they were mostly national subsidiaries. Some had activities within a single sector such as exploration and production, gas, coal, refining and marketing. While others operated across multiple sectors. The top management team of the Royal Dutch Shell Group consisted of the Committee of Managing Directors (CMD). The CMD comprised of 5 team members three-member Management Board of Royal Dutch Petroleum and the Chairman and Vice Chairman of Shell Transport and Trading. The CMD linked together the two parent companies and the group holding companies. The combination of diffused executive power at the top together with the operating authority and financial responsibility dispersed through each of the operating companies separately meant that Shell was highly decentralized organization. (Grant, 2002)

Even with the decentralization of Shell as a cooperation, there was a need to get the most technological and economical benefit from the connection of all of those companies. This was doable with the help of McKinsey & Company, in which a three way matrix structure within its service companies was created to manage its operating companies and to establish a link between all of those branches (Grant, 2002). Divisional structure in which geographical based decision making was proven to be insufficient as there is a sector influence that needs to be accounted for. The functional structure as well it did not account for the geopolitical influence so there was a need for a more complex structure.

Shell had predominate bottom–up approach in planning. The operating team took the lead in strategic decisions and initiatives within the borders of compliance to the strategy that formulated by the CMD. Like any hieratical organizations the major projects had to be approved by the CMD.  While the planning department formulated the scenarios that were the drive behind strategy of the company. (Grant, 2002)

According to (Grant, 2002) the described organization structure made the running cost of the Royal Dutch Shell Group too high. This combined with the decrease of the oil prices in the early 1990s and the increase of the nationalization of the oil and gas producers, motivated a restructure of the company. Changing the business from a geographically-based to a primarily business sector-based structure with each business having its own CEO eliminating the consensus-based decision making with greater individual leadership. The strategic business unit (SBU) transitioned from being geographical based to sector or product base. Each of those sectors adapted the Integrated Network Model (De Wit & Meyer 2010).

Due to the change in the strategy of the company to prioritize Portfolio and Financial Management, Operational Efficiency, and Sustainability a shift in the structure was bound to happen to a flatter structure reducing the hierarchical levels to have a quicker response to volatile market pressures. This solidifies the argument Chandler (1962) had made in his book ‘Strategy and Structure’ where a change in the corporate strategy led to changes in the corporate structure.

5. Organisation of the 21st Century

Organizations nowadays is no longer defined by the physical workplace or the quantity and titles of the people within that organization. It extends further than that to include the culture of the company from innovation, to learning initiatives, to work life balance, as well as the patterns of behaviour within its stakeholders from its customers, suppliers, partners, competitors. It is worth observing that this culture cannot be achieved without having a proper infrastructure and leadership module.

Advancement and innovations nowadays are more frequents and evolving than ever before. This is solidified by the Sixth Kondratieff Cycle and The Cybernetic Era theory (Grinin and Grinin, 2013)  in which it is anticipated that there will be a breakthrough in medical technologies which will be capable to combine many other technologies into a single complex of MBNRIC-technologies (med-bio-nano-robo-info-cognitive technologies). The backbone of all of those technologies are the engineering companies. Given that most of the innovations come from those types of companies and that technology is the primary force acting to shape and nurture the society according to Karl Marx. Therefore there was a need for a shift in the organization structure to keep up with fast pace of innovation and gain the competitive advantage.

For that to happen the organization had to be restructured to be more agile. This entitled being more flexible, giving a common sense of purpose within the organization, promoting flatter hierarchies and more fluid structures to have sufficient autonomy to question established ideas and develop new working practices. Foster a hands on governance approach were the decision would be delegated to the relevant team to free up the higher management for the strategic decision. For engineering companies in particular there was a need to create active partner and ecosystem as most innovations are based on ideas already established or applications already existing. The basis of all of those factors was knowledge sharing of experiences and information.

In volatile, uncertain, complex and ambiguous (VUCA) conditions, organizational learning in which the process of planning, execution, and reflection is mandatory, fast decision have to be made. Hence more companies are investing in learning based on activity, experimentation and role play to provide the knowledge before the actual market demands an action. Shell has been one of the leading companies in creating “Scenarios” in which “they have been developing possible visions of the future since the 1970s, helping generations of Shell leaders explore ways forward and make better decisions” (Shell, 2019). Another hurdle that organizations nowadays have to deal with is constant introduction of disruptive technology. Therefore organizations have to keep clear vision of where they have a competitive advantage and rapidly adjust accordingly. This vision has to be shared between all the employees as the decision making is distributed across different departments to make sure all of those decision aligns with the company vision and strategy. In this flat organization structure accountability will be distributed therefore there should be information transparency and performance orientation.

Organizations can be perceived as organism as they adapt to changing environments and they have needs and they influence, and are influenced by their environment. Therefore, It is clear that adaption of an agile structure is the most beneficial in high change, externally focused environments

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