Royal Dutch Shell Organizational Complexity

Abstract

Royal Dutch Shell is a vertically integrated oil and gas company with 83,000 employees operating more than 52 subsidiaries in 70 countries. RDS uses a global matrix organizational structure based on seven executive branches that support four business divisions. These divisions serve as the top level of a reporting structure for Shell’s subsidiaries. Subsidiary companies are used to meet the specific geographic and operational demands of Shell’s diverse business operations. Each subsidiary has an executive structure that loosely matches that of the corporate structure. The model has the advantage of streamlining the flow of information to the appropriate business divisions but requires each subsidiary to report up multiple channels. This will be discussed later, in more detail. The following case is made that RDS’s current organizational complexity and configuration are an appropriate match for their business environment.

1: How complex is your organization internally? Place your organization on the following chart. Defend your responses and reference sources.

Overview

RDS is a global company operating in 70 countries with more than 52 subsidiaries. The 2018 SEC 20-F report reveals over 1000 registered businesses under the RDS group (“Annual Report,” 2019). Of these, only about 52 are common brand-recognized businesses. Some well-known names in the US are Jiffy Lube, Pennzoil, Raizen, and the BG Group (“Shell Subsidiaries,” n.d.).

See Organizational Chart Here.

Shell uses a global matrix structure to aggregate information from their subsidiaries to the proper business units within the executive group at RDS corporate headquarters. RDS organizes these units by market and industry: Upstream Markets, Downstream Markets, Projects & Technology, and Integrated Gas & New Energy.

As shown in the organizational chart, an executive branch represents each of these market segments. Additionally, Shell has three executive divisions that support the function of the overall business: Finance, Legal, and Human Resources.

Horizontal differentiation

Beneath the seven executive divisions, Shell has further subdivisions (also shown in the org chart). For example, John Abbot, the Downstream Director, has three direct reports (also executives) that support his role. These are Trading and Supply, HR Downstream, and Retail. Each executive division has two layers except for the Legal Director. From experience, this does not mean the legal director does not have a support staff, rather that he (Donny Ching) will liaise directly with the general counsel in each subsidiary.  This layering of the executive team adds vertical as well as horizontal differentiation.

At the highest corporate level, Shell consolidates broad operational responsibilities into comparatively few categories which might suggest a low degree of specialization. However, the argument should be made for high specialization in this case because of the intent of the overall design. The corporate divisions are categorized by competency or industry. Additionally, the 3^rd layer in the executive team has more specific responsibilities within these categories. In this third layer, the business units are subdivided into 24 positions representing more granular competencies relating to the business unit.

This results in a high level of specialization, which indicates subsidiaries likely have multiple reporting channels.  For example, the CEO from Subsidiary A may report to the CFO, Upstream Director, and Projects and Technology Director at RDS Corporate. The organizational chart indicates that it would not be unusual for the CEO of a subsidiary to have at least five upstream reporting channels. Using task specialization in this way facilitates business continuity within a given competency.  It also likely gives the executive team a more accurate composite picture of the overall performance of the company in the given area.

I should note here that after extensive research and a phone call to RDS media relations, I was unable to determine if there are regional representatives for different geographic locations ie. Director of Vietnam. Because the organizational structure is divided the way it is, there may be an additional layer between the subsidiaries and the executive team. If so, it is likely a supporting role to the competency of a specific division rather than a region ie. Director of Downstream Markets- Vietnam.  

Vertical Differentiation

RDS’s org structure is high in vertical differentiation. This may be more out of necessity than design. The size of the company requires that very broad data sets from a variety of locations and operations be channeled into simpler consolidated data sets. This aggregation is imperative for financial reporting, tax preparation, and securities and exchange reporting.  

The vertical layers of RDS listed below are also reflected in the organizational chart. The assumption here is that subsidiaries are large enough to support a full executive team which is common in the subsidiary model. The organizational chart shows a representative sample of the organizational structure of a subsidiary with its executive team reporting to Shell headquarters.

Vertical Layers

• Board of Directors
  • RDS CEO
  • Executive Team
  • Executive Support Team (RDS Directors)
  • Division Directors (Downstream, Upstream, New Energies, Projects and Information)
    • Subsidiary CEO
    • Subsidiary Exec Team (CFO, CHRO, CIO, General Counsel)
    • Subsidiary Directors (Likely competency-based and multiple positions ie. Director of Sales, Director of Purchasing and Supply, Director of Safety)
    • Subsidiary Operations Managers (Could be multiple positions, ie. HR manager, Operations Supervisor)
    • Subsidiary line managers (1-3 layers, ie. Manager, 1^st Assistant, 2^nd Assistant)
    • Subsidiary laborers and support staff

If we assess RDS corporate as a separate company, we might say they have a very consolidated hierarchy. However, a laborer in a subsidiary would have a minimum of 9 layers (likely many more) to reach an executive level at the corporate office. When looking at the composite structure of the organization, it appears to have high vertical differentiation.

Typology and Configuration

Symmetric (typology)

RDS’s global matrix structure is high in both vertical and horizontal differentiation  which indicates the organizational complexity is symmetric. There is a high degree of parallel processing along vertical reporting channels. As information moves up the organizational chart, it is aggregated into larger, simplified data sets to be used at a macro level. Conversely, moving down from the top, processes are broken into subunits still reporting along vertical channels but broadening through the use of subsidiaries.

Matrix (configuration)

An organizational matrix combines elements of both functional and divisional approaches (Daft, 2016). This means tasks are allocated by specialization or skill along with the ability of groups or subsidiaries to operate as a self-contained business unit (Daft, 2016). This is useful in companies with global operations that are subject to varied cultural and regulatory demands. The matrix approach seeks to provide overarching cohesion as well as operational flexibility.

#3: Does your organization’s complexity fit its structural configuration?

The global matrix structure is an effective way of managing large companies with multi-faceted operations because it allows a cohesive corporate strategy to dictate broad operational goals while smaller divisions tailor their approach to match the environment (Daft, 2016). This is an appropriate configuration for the symmetric organization typology. This is also appropriate for the turbulent environment in which Shell operates.  

#4: Is there “fit” across the organization’s components? What do we know now about how our organization aligns across these categories? What would make them more effective? Should your organization change its structure based on its complexity?

Previous research on the environmental complexity in which RDS operates indicates there is an appropriate match between the turbulent environment, symmetric organizational complexity, and matrix configuration. As such, no change in the structure is required or recommended.  Here is a short recap on the previous findings that built a case for the environmental complexity analysis. 

“Shell operates in a turbulent industry. RDS is actively streamlining its operation to strengthen its financial position for future turbulence while investing in new oil exploration and alternative energy sources. Maximizing highly-profitable assets acts as a buffer against volatility and helps fund future investment in sustainable energy. This approach is both efficient and effective. Shell is also wisely leveraging the power of technology to increase the speed of decision making in an uncertain environment (DiGloria, 2019)”

While it appears that Shell is effectively matching is structure to the environment, this does not mean that Shell will not have headwinds that will affect its structure. Shell’s issues will likely stem from volatility in gas prices, weak sales demand, and global economic slowdown. Particularly, the natural gas division which has been a primary revenue source in the past is continuing to decline from oversupply (Gilblom, 2019).  We can see some of these factors at work in the most recent earnings report. The structure is currently working well in that even though Shell missed earnings in July, they increased cash flow (Gilblom, 2019). This suggests that the current configuration allows them to maneuver somewhat effectively even in an economic slowdown.

Review

In conclusion, it is not likely that Shell will be able to consolidate information any further at its top levels. However, it is conceivable in the very long term outlook of say 20 years, that Shell will further restructure its subsidiaries and shift into new alternative energy markets. This will likely not change the macro shape of their organizational structure. As such, RDS will increase efficiency by making micro-changes to how tasks are handled and more specifically to the layers of middle management where redundancies most often occur.

References

“Annual Report 20-F” (2019) Retrieved from http://annualreports.com/HostedData/AnnualReports/PDF/NYSE_RDS.B_2018.pdf

Daft, R. (2016). Organizational Theory and Design (12th ed.) . Cincinnati, OH: South- Western College Publishing. ISBN-10: 1285866347 | ISBN-13: 978-1-285-86634-5

Digloria, N. (2019, September 27). Royal Dutch Shell Environmental Complexity  Retrieved from https://orgtheory.home.blog/2019/09/27/royal-dutch-shell-environmental-complexity/

 “Executive Team” (n.d.) Retrieved from https://www.theofficialboard.com/org-chart/royal-dutch-shell

Gilblom K. (2019, July 31) Shell Profit Misses as Slowing Economy Hurts Gas, Chemicals. Retrieved from https://www.bloomberg.com/news/articles/2019-08-01/shell-profit-misses-estimates-after-natural-gas-price-slump

“Investors Handbook 2018” (2018) retrieved from https://reports.shell.com/investors-handbook/2018/company-overview/our-businesses-and-organisation.html

 “Shell Subsidiaries” (n.d.) Retrieved from Google search (embedded link)

 “What we do.” (2019) Retrieved https://www.shell.com/about-us/what-we-do.html