“To whatever you aspire, ego is your enemy.”
— Ryan Holiday
The following posts will track my progress through MBA 617 Organizational Theory. This is my final semester of grad school and the joy and excitement I feel is sure to leak out in the compositions.
Nathaniel Digloria
MBA 617
October 9, 2019
University of Alaska Fairbanks
Abstract
This document is the culmination of individual research on Royal Dutch Shell (RDS). It combines findings from the following related work.
While much of this document is repurposed from previous research, it is unique in that it presents a problem. This problem is likely one of the most important long-range macro issues facing Shell today. To solve the problem three solutions are proposed and their practical application is examined. The expectation is that with the proper strategy and execution, Shell will continue to be a dominant operator in the energy sector.
History
Shell began in 1833 in a small antique shop in London. Shell was named when founder Marcus Samuels started importing exotic shells from the Far East for resale (“Company History,” n.d.). Marcus Samuels passed the company to his sons, who began to experiment with the transport of bulk oil using steamships. Now 185 years later, Royal Dutch Shell (RDS) is a publicly-traded company headquartered in The Hague, Netherlands. Shell is engaged in the exploration, development, production, refining, and marketing of oil and natural gas. RDS also manufactures chemicals and has a business interest in alternative energy ventures (“What we do,” 2019). They are a dominant operator in the oil and gas industry, with a market valuation of $42.3bn (Muspratt, 2019).
Goals and Mission Statement
Mission
“Shell’s purpose is to power progress, together with more and cleaner energy solutions. We 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. At the same time, technology changes, and the need to tackle climate change means there is a transition underway to a lower-carbon, multisource energy system (“Royal Dutch Shell,” 2019).”
Vision
“To make a difference through our people, a team of dedicated professionals who value our customers, deliver on our promises, and contribute to sustainable development (“Royal Dutch Shell,” 2019).”
Social Responsibility
Research indicates that Shell is one of the most responsible and future-oriented oil companies operating today (Nastu, 2010). The company acknowledges the changing environment of energy production and consumption and is actively restructuring to facilitate this change. Additionally, Shell is actively supporting green initiatives in line with its vision of sustainable development (Frynas, 2010).
Operational Strategy
Shell’s operational strategy is to integrate complementary systems and processes to increase efficiency (“Royal Dutch Shell,” 2019). This efficiency allows Shell to allocate resources to research and development. Shell prides itself in financial and operational management that has allowed it to navigate the competitive and sometimes volatile energy market. More recently, Shell has been positioning itself for a peak in oil production and demand between 2020 and 2040 (Ball, 2018). To prepare for this, Shell has been selling assets that have a high cost of production and repositioning itself as a supplier of electricity (Ball, 2018). This willingness to alter its business model shows awareness and humility about a changing market.
Macro-view
Royal Dutch Shell is an integrated oil and gas company (IOC) with 83,000 employees operating more than 52 subsidiaries in 70 countries. IOC’s operate in the upstream and downstream oil market. Operations include discovery, extraction, production, refining, and distribution (Business Dictionary, n.d.). Shell is the second largest IOC behind Sinopec China. RDS operates in a highly competitive market with competition from three types of oil and gas entities: integrated, private, and national.
Stakeholders
A company as large as RDS has an impact on many different stakeholders. One might even say a company this big has the general public in its stakeholder group. For the sake of discussion, I have reduced the list to its primary constituents.
Organizational Structure
As shown in the organizational chart, RDS uses a global matrix organizational structure based on seven executive branches that support the four business divisions previously mentioned. These divisions are the top level of the 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. This model has the advantage of streamlining the flow of information to the appropriate business divisions but requires each subsidiary to report up multiple channels. The other three executive branches support the overall function of the business: Finance, Legal, and Human Resources. This primarily mechanistic structure facilitates the organization of a very large operation. Shell’s use of subsidiaries provides operational flexibility, which it might not otherwise have.
Corporate Culture
Shell’s stated organizational values are as follows.
“Shell’s core values are honesty, integrity, and respect for people. The Shell General Business Principles, Code of Conduct, and Code of Ethics help everyone at Shell act in line with these values and comply with relevant laws and regulations. We also strive to maintain a diverse and inclusive culture within our company. (“Our Values,” n.d.)”
Business Leaders
Shell’s executive team is made up of industry professionals. The general impression from reading their bios is that they operate with a high degree of professionalism and seriousness (“Leadership,” n.d.). Some of this is due to the size of the company and how it is affected by global events. To help explain this, consider the recent drone attack on one of Saudia Arabia’s oil refineries that resulted in millions of dollars of losses (Rasmi, 2019). In addition to the requirements of operating a conventional business, RDS has international security and political factors to consider. Finally, Shell’s primary business is extracting and refining fuel. This suggests a mechanical process environment with multiple controls (Daft, 2016). Controlling errors and worker safety is a top priority. This may contribute to an overall sense of seriousness within the company.
Public Perspective
As with most oil companies, Shell receives mixed reviews from the general public. Some editorials have described RDS as “a planetary death machine” (Monbiot, 2019). Other public coverage paints RDS as one of the best of the oil-producing lot when it comes to considering the environment and preparing for climate change (Souza, 2016). Forbes ranks RDS #66 in the list of best places for women to work and #166 in diversity employers (“#227 Royal,” 2019). Shell is likely to continue attracting a great deal of differing opinions and criticism.
Employee Perspective
RDS employees are active enough on job posting sites that it was possible to get a representative sampling of how current and previous employees perceive the company.
Employees ranking RDS on comparably.com gave it an overall B+ rating. This put it in the top 35% of 1,292 similar companies in the US (“Royal Dutch,” 2019). Glassdoor.com had a much larger sampling of 4700 reviews, where 78% of employees would refer the company to a friend, and 91% approve of the CEO (“Shell Reviews,” 2019). Positive comments mentioned the work environment, and negative comments consistently mentioned bureaucracy and slow decision making. This is not a surprise given the size and complexity of the organization.
Review of the Culture
The data seems to suggest that RDS is a reasonably good employer with a professional and somewhat serious corporate culture. They must monitor global political events, and their actions have a widespread impact. Sometimes the subject of heavy criticism, Shell seems to be aware of its responsibility to the environment and is making some effort to show social responsibility.
Environment
Competitive Environment
Regulatory Environment
Economic Conditions
Organizational Problem
Peak Oil Demand
The concept of peak oil originated as a factor of production. Namely, the point at which the oil reserves of the world would reach a maximum volume of extraction. After this peak, it was surmised that the world would slowly run out of oil. With the introduction of new drilling and fracking technology, those theories had to be dismantled. The concept is now one of consumption demand (Lynch, 2018). Shell’s research team agrees and expects demand to peak between 2020 and 2040 after which there will be a transition to electric power (Ball, 2018). It is encouraging that Shell is aware of this, but it remains unseen how well they can truly adapt to this change. Also, the variability of future demand is unknown, and the majority of Shell’s operations still rely on oil production and distribution. Any rapid change would be too challenging for Shell to manage.
Critical Evaluation
Innovation
There is a case to be made that RDS knows the value of innovation. 185 years in business, and many adaptations and expansions have proven Shell’s ability to look forward and make adjustments. However, technology has increased the rate and scope of innovation (Daft, 2016). Innovation is now a continuous endeavor. Shell has the infrastructure, resources, and likely time to shift out of natural gas and oil production into alternative energy. The problem is the rate and variability of this change. Shell must innovate in lockstep with the market. This is harder than it sounds when you consider the size of the operation as well as competition from other producers.
Natural Gas and Oil
Analysts expect natural gas and oil prices to remain low for the foreseeable future. While Shell has been divesting itself of some natural gas assets, low prices set against the high cost of production may affect profitability as well the price Shell can get when attempting to recoup losses on natural gas fields (Orland, 2019). Despite its dominant financial position and substantial 2018 profits, Shell’s Q2 profit surprised to the downside (25%) on lower oil prices and weaker demand (Agnitori, 2019). This highlights the connection between the market price environment and profitability. Natural gas production represents the largest potential liability to RDS’s profits.
Alternative energy
Shell’s ability to compete in the alternative energy market will have a very direct impact on whether or not the company survives a future decline in oil demand. Investment in alternatives is expensive and requires ongoing capital infusion. To help put this in perspective, Shell recently signed a deal with Ionity to provide 500 charging points across Europe by 2020 (“EDF Renewables,” 2018). This deal represents only 500 of 43,000 Shell fuel stations. Because of the size and timing component of the change, Shell must walk a line between risk and relevance. To stay relevant, they must stay solvent and actively participate in the global transition to electric power.
Recommendations: Three interrelated approaches
The following recommendations are intentionally interrelated. Rather than present alternative solutions to the same problem, these approaches may be implemented in tandem. A multi-pronged approach is often useful for tackling complex and broad issues. Also, these recommendations are based on RDS’s life cycle stage. The size and complexity of RDS indicate it is in the elaboration phase. This means the company is mature and the way forward is likely through revitalization or streamlining and small-business thinking (Daft, 2016). The recommendations below are followed by an implementation section that explains the concepts in more detail.
Recommendation #1: Transformation plan
Companies that are as large as RDS commonly lack the ability to be nimble in rapidly changing environments (Daft, 2016). One change at the corporate level may affect some or all of the 50+ subsidiaries in different ways. Also, the problem of peak oil demand implies that a shift is needed in how resources are allocated. Where should reductions be made first? How should they be timed? This recommendation will facilitate change in a proactive rather than a reactive manner. A transformation plan is a change forecasting model that is adjusted by the introduction of new information. Changes in oil demand and supply, as well as analysts forecasts, will change the outputs. The model is a roadmap of how, when, and where the company will start the transformation to become a dominant supplier of alternative energy. As the market changes, the outlook for future performance will change. If the forecast for natural gas remains low while the outlook for oil improves, it will shape the reduction of natural gas assets or operations and allocate profits from oil to new energy solutions. In short, it is a living model that helps RDS interpret changes in the market and measure those against a timeline. What makes a transformation plan important is that it allows RDS to maximize revenue from existing operations yet simultaneously update its plan for the future.
Recommendation #2: Workforce Analysis and Action plan
It is not a new idea that companies want to reduce labor inefficiencies. With 83,000 employees, identifying redundancies and waste is challenging and necessary. This is a top-down look at the organization. It is a corporate initiative that should be coordinated with each subsidiary. The goals are as follows.
Recommendation #3: Map strategic M&A path with a global perspective
RDS should implement a strategic merger and acquisition plan to shift into the global electric power market. This recommendation has three benefits. It capitalizes on RDS’s existing expertise operating subsidiaries. It allows RDS to leverage the power of small company thinking. Finally, it allows them to shift into a new market without bearing the brunt of trying to keep pace with developing technologies.
The research described earlier in the text indicates that electricity will be a primary power source of the future. Alternatives to oil are gaining traction. These alternatives may be outside of the scope of Shell’s core competencies. Shell is in a financial position that allows them to acquire or merge with companies that are operating on the edge of new technological developments in alternative power. One of Shell’s current strategic goals is to increase free cash flow through divestiture and operating efficiency. This new cash may be allocated, in part, to investment in Shell’s future as a producer and supplier of alternative energy.
Implementation
As previously mentioned, the recommendations are complimentary. This three-pronged approach is designed to practically position Shell for future surprises as well as provide the flexibility to adjust to a future decline in oil consumption. Each of these recommendations deserves a deep analytical report of its own. The following section looks at the practical application of the recommendations and assesses potential challenges. At most, it is a cursory view of the implementation process and provides a rough timeline.
Transformation Plan
Feasibility and Relevance
Developing a transformation plan requires a considerable amount of data. Once the data is sorted and organized, it must be complemented with insights to be converted to useful analytics. The following list is an example of the sort of data that would facilitate this plan.
Shell already organizes much of this information using their Agile technology, which compiles and categorizes data based on programmed rules (Riggins, 2017).
Implications for Managers
Managers at all levels of the organization may take part in organizing the data for reports. Because the transformation plan is a roadmap, it may not result in immediate action that is passed back down to managers.
For the plan to be useful, it needs to be more granular than just high-level reporting. An example may help explain this. Shell has 43,000 fueling stations. If RDS evaluated their high-level performance overall, the data might not be useful in the context of facilitating change. A high-level report might not indicate regional or market-specific factors requiring change. Subsidiary executives and regional managers of Shell stations may be assigned the task of breaking down the market by geography or performance. Then these performance areas may be examined for causal relationships with the factors of demand, supply, and alternative solutions. The importance of this is that poor performance in (say) California might be related to increasing demand for electric while poor performance in another area may be related to a completely different set of factors. This type of granular analysis will rely heavily on contributions from different management tiers within the corporation.
This may sound like a daunting task. However, most companies are already familiar with or monitoring these sorts of reports as an ongoing management practice. Many good executives already know their market well.
That makes this transformation plan more practical than it might seem on its face. The plan is about taking this data and using it to create a map or at least a contingency plan to guide RDS in the long term. Finally, the transformation plan is built on a rolling five-year time frame. Financial modeling past five years is notoriously problematic, so as the model gets further out, more inaccuracy should be expected.
Workforce Analysis and Action plan
Feasibility and Relevance
Workforce management is not a new concept for companies. However, Shell’s complex matrix business structure requires parallel reporting up vertical channels. The size of Shell’s global operations makes it likely to have pockets of inefficiencies and redundant roles. Most mature companies are already tracking their productivity against their labor hours. This is one-way companies decide how to allocate capital to different business divisions. Less profitable divisions with less opportunity will likely get less new capital for expansion unless there is a perspective that doing so will change the situation.
Say, for example, Shell fueling stations have a low sales per working hour compared to a Shell refinery in Nigeria. This does not mean that RDS will sell the fueling stations. However, it does help Shell identify where and how to allocate resources to focus on profitability. When used in conjunction with the transformation plan, Shell has actionable information. For example, Shell may use its analysis of the fueling stations to evaluate where to invest in electric charging stations. In the same analysis, Shell may identify overpopulation of stations in certain cities and sell some of the stations to streamline or free up capital to invest in the conversion to electric.
Implications for Managers
Managers at higher levels in the organization might compare how management-heavy subsidiaries are and then make a case as to why that is or why it should change. For example, maybe Shell stations in India have 35% more overhead staff than Shell stations in the United States. Whether or not Shell should reduce overhead positions then depends on further analysis. Maybe the geographical distances or multiple languages in India justify this added cost, but maybe they do not. Maybe India is overstaffed because labor is cheaper and no one is paying close attention to the situation.
Middle managers may be called on to perform this job analysis at a location or regional level and will likely assist in defining positional roles and explaining various operational functions. These individuals likely have a much better understanding of day to day operations, and because of this are invaluable in identifying redundancies and overstaffing.
These managers may also assist in workload monitoring. This may be performed qualitatively or quantitatively. Sometimes it is as simple as interviewing employees to ask them what they do in a day, or visiting offices and asking questions. Other companies take a more quantitative approach and monitor computer usage and employee location. This is a more invasive tactic that may lead to morale issues, but it will help the company define where they can reduce operating costs.
Map a strategic M&A path with a global perspective
Feasibility and Relevance
Mergers and acquisitions (M&A) are one way a company can enter a new market that might otherwise take years to enter. M&A also allows companies to make use of new technologies outside of their sphere of expertise. The other benefit worth mentioning is that buying the right company can increase profitability.
This is an ideal way for Shell to position itself for a decline in oil consumption. By selecting the right partners, Shell can protect profits while expanding its potential. This approach is aligned with Shell’s current plan to divest itself of underperforming, high-cost assets. Currently, these funds are being used to pay dividends, buy back shares, and increase free cash flow. Going forward, Shell may use this cash to fund investment in alternative energy partners. Finally, acquisitions of smaller businesses allow Shell to leverage the power of small company thinking (Daft, 2016). This means that smaller companies serving niches in new industries can give Shell nuance and flexibility to respond to market changes.
Implications for Managers
Most M&A strategy will be driven at an executive level. At the top management level, M&A involves the following executives.
This case study does not go so far as to indicate which companies Shell should consider. However, it does seek to identify practical strategies that align with Shell’s current financial and operational position. Also, this recommendation is based on common sense in that it allows Shell to focus on what it does best, while simultaneously tapping into new alternative energy technology.
Conclusion
This document is an accumulation of research on the Royal Dutch Shell company. It is intended to be a review of previous research. A problem was presented and addressed giving consideration to Shell’s competencies and market strength. The three-pronged plan is designed to allow Shell to maximize revenues from current operations while seeking to stay relevant for a future of alternative energy solutions.
Appendix
References
Agnihotri G. (2019, September 11) Royal Dutch Shell needs to get this right. Retrieved from https://seekingalpha.com/article/4291091-royal-dutch-shell-needs-get-right
Ball, J., (2018, January 24) Inside Oil Giant Shell’s Race to Remake Itself For a Low-Price World. Retrieved from https://fortune.com/2018/01/24/royal-dutch-shell-lower-oil-prices/
“Bonds and Credit Rating Information” (2019) Retrieved https://www.shell.com/investors/financial-reporting/debt-information/bonds-and-credit-ratings.html
Business Dictionary (n.d) Retrieved from http://www.businessdictionary.com/definition/integrated-oil-gas-company.html
“Diversity and Inclusion” (n.d.) Retrieved from https://www.shell.com/careers/about-careers-at-shell/we-are-one-team/diversity-inclusion.html
“Electricity” (2019). Retrieved from https://www.shell.com/energy-and-innovation/electricity.html#iframe=L3dlYmFwcHMvcG93ZXJfcGxheWVyLw
“Company History” (n.d.) Retrieved from https://www.shell.com/about-us/our-heritage/our-company-history.html
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, October 3) Royal Dutch Shell Organizational Complexity. Retrieved from https://orgtheory.home.blog/2019/10/03/royal-dutch-shell-organizational-complexity/
DiGloria, N. (2019, September 27) Royal Dutch Shell Environmental Complexity. Retrieved from https://orgtheory.home.blog/2019/09/27/royal-dutch-shell-environmental-complexity/
DiGloria, N. (2019, September 21). Royal Dutch Shell SWOT. Retrieved from https://orgtheory.home.blog/2019/09/21/royal-dutch-shell-swot/
DiGloria, N. (2019, September 14) Royal Dutch Shell – Organizational Efficiency and Effectiveness. Retrieved from https://orgtheory.home.blog/2019/09/14/royal-dutch-shell-organizational-efficiency-and-effectiveness/
“EPA proposes updates to air regulations for oil and gas to remove redundant requirements and reduce burden.” (2019, August 29) EPA Press Office. Retrieved from https://www.epa.gov/newsreleases/epa-proposes-updates-air-regulations-oil-and-gas-remove-redundant-requirements-and
“EDF renewables and Shell invest in New Jersey offshore wind” (2018, December 19). Retrieved from https://www.shell.us/media/2018-media-releases/edf-renewables-and-shell-invest-in-new-jersey-offshore-wind.html
“Electricity” (2019). Retrieved from https://www.shell.com/energy-and-innovation/electricity.html#iframe=L3dlYmFwcHMvcG93ZXJfcGxheWVyLw
“FERC” (n.d.) ferc.gov. Retrieved from https://www.ferc.gov/industries/oil.asp
Frynas, J. (2010, February 1) Oil industry’s increasing focus on CSR. Retrieved from https://www.petroleum-economist.com/articles/corporate/company-profiles/2010/oil-industrys-increasing-focus-on-csr
“IOGP” (n.d.) Retrieved from https://www.iogp.org/policy-and-issues/
“Leadership” (n.d.) Retrieved from https://www.shell.com/about-us/leadership.html
Lynch M. (2018, June 29) What Ever Happened To Peak Oil? Retrieved from https://www.forbes.com/sites/michaellynch/2018/06/29/what-ever-happened-to-peak-oil/#7d713a91731a
Mandler, A. (2019, June 01). U.S. Regulation of Oil and Gas Operations. Retrieved from https://www.americangeosciences.org/geoscience-currents/us-regulation-oil-and-gas-operations
Monbiot, G. (2019, June 26). Shell is not a green saviour. It’s a planetary death machine. Retrieved from https://www.theguardian.com/commentisfree/2019/jun/26/shell-not-green-saviour-death-machine-greenwash-oil-gas
Muspratt, A. (2019, May 01) The World’s Biggest Oil Companies in 2019. Retrieved from https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-and-gas-companies
Nastu, P. (2010) BP, Shell Lead Oil/Gas Sustainability Ranking. Retrieved https://www.environmentalleader.com/2010/03/bp-shell-lead-oilgas-sustainability-ranking/
Oller S. (2018, Octber 12) Shell recommits and returns ro U.S. retail. Retrieved from https://www.cspdailynews.com/fuels/shell-recommits-returns-us-retail
Orland K. (2019, August 22). The $30-billion exodus: foreign oil firms keep bailing on Canada’s energy sector. Retrieved from https://business.financialpost.com/commodities/energy/the-30-billion-exodus-foreign-oil-firms-are-bailing-on-canadas-energy-sector
“Payments to Governments” (2019) Retrieved from https://www.shell.com/sustainability/transparency/payments-to-governments.html
“#227 Royal Dutch Shell” (2019) Retrieved from https://www.forbes.com/companies/royal-dutch-shell/#5681f36326ed
“Our Strategy” (2019) Retrieved from https://www.shell.com/investors/shell-and-our-strategy/our-strategy.html
“Royal Dutch Shell: number of employees 2006-2019 | RDS.A.” (n.d.) Retrieved from https://www.macrotrends.net/stocks/charts/RDS.A/royal-dutch-shell/number-of-employees
“Royal Dutch Shell” (2019) Business overview. Retrieved from https://reports.shell.com/annual-report/2017/strategic-report/strategy-business-and-market-overview/business-overview.php
“Royal Dutch Shell Work Culture Score” (2019) Retrieved from https://www.comparably.com/companies/royal-dutch-shell/work-culture
“Shell Reviews” (2019) Retrieved from https://www.glassdoor.com/Reviews/Shell-Reviews-E5833.htm
Souza M. (2016, July 8) Oil giant Shell shows its love for millennials in leaked plans to dominate planet’s energy. Retrieved from https://www.nationalobserver.com/2016/07/08/news/oil-giant-shell-shows-its-love-millennials-leaked-plans-dominate-planets-energy
“What we do.” (2019) Retrieved https://www.shell.com/about-us/what-we-do.html
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 3rd 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
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
Abstract
The following research examines the environmental complexity of the oil and gas industry in relation to Royal Dutch Shell (RDS, Shell). This industry is highly complex, highly competitive, and subject to volatility. RDS has expertly navigated this environment for over 100 years. There is no indication in the financial data that this will not be the case going forward. Even more promising is the continued willingness of Shell to embrace innovation through the use of technology and the pursuit of alternative energy solutions.
How turbulent is your company’s environment, and how well do you believe that they adapt to it?
The oil and gas industry is affected by many factors that have the potential to make the environment very turbulent. The primary contributors are:
The longevity and size of Royal Dutch Shell are indicative of its ability to navigate this turbulence, and willingness to innovate to stay relevant. RDS has accomplished this through sound financial planning and business strategy.
#1
The following list breaks down the elements of the environment that affect the sustainability of RDS’s operations.
Industry (Competitors, industry size, competitiveness, related industries)
Raw Materials (Suppliers, manufacturers, real estate, services)
Human Resources (Labor market, employment agencies, universities, unions)
Financial Resources (Stock markets, banks, private investors
Market (Customers, clients, potential users):
Technology (Techniques of productions, computers, information technology, e-commerce)
Economic Conditions (Recession, unemployment rate, inflation rate, growth):
Government (City, state, and federal laws, regulations, taxes)
Sociocultural (Age, values, beliefs, education, religion, work ethic, consumer and green movements)
International (Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rate)
#2
Is the organization internationally diversified? If yes, where are they currently (regional or by country, could be broken down by product distribution or brick and mortar locations, etc…? Who are their major competitors? What markets should they expand to?
#3
How complex and unpredictable is the organization’s environment?
#4
Does your organization’s strategies and goals fit their environment?
The research suggests that RDS maintains strategies and goals that fit their business environment. As previously discussed, 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.
#5
Did your organization align across the environment, strategy type, and organizational goals?
RDS’s goals and strategies are aligned with the environment it operates in. Continued success will depend on how well they can adapt to future market changes, and if they will successfully position themselves as a dominant producer of electricity.
Where do you think the organization should go now? Do you predict changes in their environment?
As previously discussed, the organization should continue to use its financial strategy to streamline operations and increase cash flow which will fuel investment in alternative fuels. While the environment is unpredictable, the demand forecast for oil is likely accurate as reliance on oil isn’t something that appears to be changing anytime soon. The primary factors to monitor are the political environment, specifically, trade wars as well as the price of oil.
References
“About Shell Bitumen” (2019) Retrieved from https://www.shell.com/business-customers/bitumen/about-shell-bitumen.html
“About Us” (2019) Retrieved from https://www.shell.com/about-us.html
Ball, J. ( 2018 January 24,) Inside oil giant shell’s race to remake itself for a low-price world. Retrieved from https://fortune.com/2018/01/24/royal-dutch-shell-lower-oil-prices/
“Bonds and Credit Rating Information” (2019) Retrieved https://www.shell.com/investors/financial-reporting/debt-information/bonds-and-credit-ratings.html
Business Dictionary (n.d) Retrieved from http://www.businessdictionary.com/definition/integrated-oil-gas-company.html
“Diversity and Inclusion” (n.d.) Retrieved from https://www.shell.com/careers/about-careers-at-shell/we-are-one-team/diversity-inclusion.html
“Electricity” (2019). Retrieved from https://www.shell.com/energy-and-innovation/electricity.html#iframe=L3dlYmFwcHMvcG93ZXJfcGxheWVyLw
Energy Information Administration (2019, September 10) Short-term energy outlook. Retrieved from https://www.eia.gov/outlooks/steo/report/global_oil.php
“EPA proposes updates to air regulations for oil and gas to remove redundant requirements and reduce burden.” (2019, August 29) EPA Press Office. Retrieved from https://www.epa.gov/newsreleases/epa-proposes-updates-air-regulations-oil-and-gas-remove-redundant-requirements-and
FERC (n.d.) ferc.gov. Retrieved from https://www.ferc.gov/industries/oil.asp
Hancock L. (2019, January 31) USW reaches tentative agreement with shell oil company to set contract pattern for oil sector. Retrieved from https://www.usw.org/news/media-center/releases/2019/usw-reaches-tentative-agreement-with-shell-oil-company-to-set-contract-pattern-for-oil-sector
IOGP (n.d.) Retrieved from https://www.iogp.org/policy-and-issues/
Kauflin, J. (2018) The Best Places To Work In 2018. Retrieved from https://www.forbes.com/sites/jeffkauflin/2017/12/06/the-best-places-to-work-in-2018/#4299fed0742e
LeSage, Jon (2017, November 10) Shell gears up for peak gasoline, transition to new business model. Retrieved from https://www.usatoday.com/story/money/energy/2017/11/10/shell-gears-up-peak-gasoline-transition-new-business-model/842845001/
Mandler, A. (2019, June 01). U.S. Regulation of Oil and Gas Operations. Retrieved from https://www.americangeosciences.org/geoscience-currents/us-regulation-oil-and-gas-operations
“Manufacturing Locations” (n.d.) Retrieved from https://www.shell.com/business-customers/chemicals/manufacturing-locations.html
“Oil refining market worth over $7 trillion by 2024” (2018, July 12) Globe News Wire. Retrieved from https://www.globenewswire.com/news-release/2018/07/12/1536385/0/en/Oil-Refining-Market-worth-over-7-trillion-by-2024-Global-Market-Insights-Inc.html
Oller S. (2018, Octber 12) Shell recommits and returns ro U.S. retail. Retrieved from https://www.cspdailynews.com/fuels/shell-recommits-returns-us-retail
“Payments to Governments” (2019) Retrieved from https://www.shell.com/sustainability/transparency/payments-to-governments.html
Pitatzis, A. (2016, May 23) Retrieved from https://energyroutes.eu/2016/05/23/porters-five-forces-model-for-oil-and-gas-industry/
Poole, C. (2018, June 6) The World’s Largest Oil & Gas Companies 2018: Royal Dutch Shell Surpasses Exxon As Top Dog. Retrieved from https://www.forbes.com/sites/clairepoole/2018/06/06/global-2000-oil-gas/#31f51621d1b0
Rapier, R. (2019, August 29) How The Trade War Impacts The Oil Industry. Retrieved from https://www.forbes.com/sites/rrapier/2019/08/25/how-the-trade-war-impacts-the-oil-industry/#395beb685ed2
Riggins, J. (2017, Jauary 4). How Shell Oil Is Taking DevOps and Agile to the Cutting Edge. Retrieved from https://thenewstack.io/shell-gives-new-meaning-devops-agile-scale/
“Royal Dutch Shell: number of employees 2006-2019 | RDS.A.” (n.d.) Retrieved from https://www.macrotrends.net/stocks/charts/RDS.A/royal-dutch-shell/number-of-employees
Sharma, R., (2019, August 28) OPEC vs the U.S.: Who controls oil prices? Retrieved from https://www.investopedia.com/articles/investing/081315/opec-vs-us-who-controls-oil-prices.asp
“Shell creates two e-commerce sites” (2000, January 19) Retrieved from https://www.campaignlive.co.uk/article/shell-creates-two-e-commerce-sites/119972
“Shell to divest another $10B in assets over 2 years” (2019, February 1). Retrieved from http://www.kallanishenergy.com/2019/02/01/shell-to-divest-another-10b-in-assets-over-2-years/
Shell Investors Handbook 2014-2018 (2018). Retrieved from https://reports.shell.com/investors-handbook/2018/upstream/exploration.html
Shell Investors Handbook 2013-2017 (2017). Retrieved from https://www.netobjex.com/wp-content/uploads/2019/01/shell_investors_handbook_2017.pdf “Shell pays Nigerian govt, agencies $6.397bn …pledges greater corporate transparency” (2019, April 2) Retrieved from https://www.shell.com.ng/media/2019-media-releases/shell-pays-nigerian-govt-agencies.html
Shepher D., Raval, A., Dempsey, H., (2019, September 25) Saudi Arabia’s oil output bounces back after attacks. Retrieved from https://www.ft.com/content/636cba08-df8e-11e9-b112-9624ec9edc59
“Strategy” (2019). Retrieved from https://www.shell.com/media/news-and-media-releases/2019/management-day-2019-shell-strongly-positioned-for-the-future-of-energy.html
“What percentage of the global economy consists of the oil and gas drilling sector?” (2018, September 10) Retrieved from https://www.investopedia.com/ask/answers/030915/what-percentage-global-economy-comprised-oil-gas-drilling-sector.asp
Overview
The data suggest a very positive outlook for Royal Dutch Shell (RDS). Their financial position appears strong enough to withstand continued volatility in the energy market. Consolidation strategies combined with the divestiture of low return assets should increase operational and economic efficiency. RDS should exploit opportunities for electric power production and reduce its carbon footprint following their aggressive timeline.
| Strengths | Weaknesses |
| Financial Stability Industry Experience Innovation | Size (reduces flexibility) Stale Assets |
| Opportunities | Threats |
| Alternative energy Carbon Footprint Asset restructuring | Peak Oil Demand (oil oversupply) LNG and Crude Prices Volatility |
Strengths
Weaknesses
Opportunities
Threats
Conclusion
Shell is a viable company with strong earnings and financial resources to continue operating. Shell is proactively managing underperforming assets. The unknown variable is decreasing demand and excess supply. Complicating this further, alternative energy and carbon reduction initiatives will likely drive increased regulatory oversight and force oil companies to invest in alternative revenue streams.
References
Agnihotri G. (2019, September 11) Royal Dutch Shell needs to get this right. Retrieved from https://seekingalpha.com/article/4291091-royal-dutch-shell-needs-get-right
Company History (n.d.) Retrieved from https://www.shell.com/about-us/our-heritage/our-company-history.html
EDF renewables and Shell invest in New Jersey offshore wind (2018, December 19). Retrieved from https://www.shell.us/media/2018-media-releases/edf-renewables-and-shell-invest-in-new-jersey-offshore-wind.html
Electricity (2019). Retrieved from https://www.shell.com/energy-and-innovation/electricity.html#iframe=L3dlYmFwcHMvcG93ZXJfcGxheWVyLw
Lynch M. (2018, June 29) What Ever Happened To Peak Oil? Retrieved from https://www.forbes.com/sites/michaellynch/2018/06/29/what-ever-happened-to-peak-oil/#7d713a91731a
Muspratt, A. (2019, May 01) The World’s Biggest Oil Companies in 2019. Retrieved from https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-and-gas-companies
Oller S. (2018, Octber 12) Shell recommits and returns ro U.S. retail. Retrieved from https://www.cspdailynews.com/fuels/shell-recommits-returns-us-retail
Orland K. (2019, August 22). The $30-billion exodus: foreign oil firms keep bailing on Canada’s energy sector. Retrieved from https://business.financialpost.com/commodities/energy/the-30-billion-exodus-foreign-oil-firms-are-bailing-on-canadas-energy-sector
Sheetz, M. (2017, August 24) Technology killing off corporate America: average life span of companies under 20 years. Retrieved from https://www.cnbc.com/2017/08/24/technology-killing-off-corporations-average-lifespan-of-company-under-20-years.html
Shell profits plunge on lower oil prices (2019, August 1) Retrieved from https://www.bbc.com/news/business-49189416
Shell sells oil sands assets as boss warns on clean energy challenge. (2017, March 9). Retrieved from https://www.theguardian.com/world/2017/mar/10/shell-sells-canadian-oil-sands-as-boss-warns-of-losing-public-support
Shell to divest another $10B in assets over 2 years (2019, February 1). Retrieved from http://www.kallanishenergy.com/2019/02/01/shell-to-divest-another-10b-in-assets-over-2-years/
Strategy (2019). Retrieved from https://www.shell.com/media/news-and-media-releases/2019/management-day-2019-shell-strongly-positioned-for-the-future-of-energy.html
Royal Dutch Shell tries to reckon with climate change (2018, December 8). Retrieved from https://www.economist.com/business/2018/12/08/royal-dutch-shell-tries-to-reckon-with-climate-change
Royal Dutch Shell
Royal Dutch Shell is a publicly-traded company headquartered in The Hague, Netherlands. Shell is engaged in the exploration, development, production, refining, and marketing of oil and natural gas. They also manufacture chemicals (Royal Dutch Shell, 2019).
Exploration
Shell engages in exploration worldwide for oil and natural gas in conventional oil reserves and other tight rock, shale, and coal basins. Exploration focuses on supply development as well as bitumen extraction for conversion to synthetic oils (Royal Dutch Shell, 2019).
Operations
Shell’s international operations include refining fuels, processing chemicals, and a global transportation system to facilitate distribution. Products that are processed and sold include gasoline, diesel, heating oil, aviation fuel, marine fuel, LNG, lubrications (engine oils), bitumen, and sulfur (Royal Dutch Shell, 2019).
Alternative Energy Solutions
Shell processes ethanol from sugar cane through a joint venture in Brazil. They also pursue the development of low emission energy solutions such as hydrogen, wind, and solar (Royal Dutch Shell, 2019).
Operational Strategy
Shells operational strategy is to integrate complementary systems and processes to increase efficiency (Royal Dutch Shell, 2019). This efficiency allows Shell to allocate resource to research and development. Shell prides itself in effective financial and operational management that has allowed it to navigate the competitive and sometimes volatile energy market. More recently, Shell has been positioning itself for a peak in oil production and demand between 2020 and 2040 (Ball, 2018). The prepare for this, Shell has been selling assets that have a high cost of production) and repositioning itself as a supplier of electricity while the demand for oil is still increasing (Ball, 2018). This willingness to alter its business model shows awareness and humility about a changing market.
Efficiency Rank
Shell is a high performer in its industry and based on the following method has a weighted scoring of 3.8 out of 5 on the efficiency scale.
Method
To develop an accurate efficiency ranking, criteria were established to measure Shell against competitors in the industry. Each criterion received a weight. The weight is based on the measurement’s value in the context of efficiency.
Criteria
Profitability: How profitable is the company compared to its peers? Both gross revenue and net profit were considered. Because profitability is vital to efficiency, it is given a 40% weight in the scoring.
Results
Shell ranks fourth in revenue ($322bn) behind competitors Sinopec, Saudi Aramco, and China National Petroleum. However, Shell’s 2018 net income ($24bn) ranks second behind Saudi Aramco (Mussprat, 2019). Shell scored a 4 out of 5 on the profitability scale.
Environmental impact: Efficiency in this context measures how well Shell can minimize environmental impact at a sustainable level of expense. Shell is now considered to be one of the most environmentally responsible oil companies alongside BP (Nastu, 2010). Shell seems to be interested in taking part in global emissions reductions, but it is unclear what that will look like in the future (Ball, 2018). Because of the nature of the industry and the high cost associated with the development of alternative energy, I gave environmental impact weight of 20%.
Results
Shell is attempting to position itself as an environmentally and socially conscious company. It is actively channeling resources to the development of alternative energy and has future plans to position the company as a producer of electricity (Ball, 2018). Considering the industry and the expectation, Shell scored a 3 out of 5 on the environmental impact scale.
Going concern: This perspective evaluates the solvency of the company, and in this case, consideration is given to future value and market headwinds. Because the demand and price of oil have such a profound impact on operations, this was weighted at 40%.
Results
Shell is looking ahead and attempting to position itself for oil to reach peak demand in the next 20 years. They are investing in solar and alternative energy while collecting oil profits in an environment where demand is still increasing. Additionally, Shell is shedding high-cost production assets such as its 7.25bn stake in the Canadian oil sands that it feels will weigh it down in the future (Ball, 2018). This suggests that the company will be positioned well for continued volatility and change. Shell scored a 4 out of 5 on the going concern scale.
Based on your research, how does the organization score on effectiveness?
Effectiveness Rank
Shell is a high performer in its industry, and based on the following method received a weighted scoring of 4.0 out of 5 on the effectiveness scale.
Method
To develop an accurate effectiveness ranking, criteria were established to measure Shell against competitors in the industry. Each criterion received a weight. The weight is based on the measurement’s value in the context of effectiveness.
Criteria
Company valuation
Company valuation is a measure of a company’s worth and considers, but is not solely determined by, revenue and profits. Other factors affecting the assessment are retained earnings and market capitalization. A company valuation indicates how effective they have been over a more extended period as well as expectations about future performance. As such, this receives 40% weight in the scoring.
Results
While not the most profitable company in its industry, Shell’s market valuation is $42.3bn, which is currently the highest of any oil-producing competitor (Mussprat, 2019). As a result, Shell scored a 5 out of 5 on the valuation scale.
Growth
Growth assesses how well the company is growing compared to peers. Also factored in this assessment is the growth potential of the total market environment. In this case, global oil demand, supply, and advances in alternative energy are external factors that are somewhat beyond Shell’s control but will impact their operational effectiveness. Because this measurement is so heavily influenced by external factors, it is given a weight of 20%.
Results
Shell’s market value grew by 7% over that last year. However, competitors PetroChina, Sinopec, and BP, Petronas, and ADNOC all had growth above 13%. Shell did beat Chevron, which lost value. Shell received a 2 out of 5 on the growth scale.
Corporate Social Responsibility
This measurement is designed to reflect how effectively Shell manages its brand and considers internal and external stakeholders. Environmentally friendly practices and green energy initiatives are also taken into account. Because the company is a prominent operator in the industry, this ranking is weighted at 40%.
Results
For consistency, the scale in this measurement is one to five. However, considering the industry, and how much CSR is determined by the impact on society at large, it was challenging to place any oil companies in the comparison at a ranking of 5. This is not because of any negative sentiment. Rather, it is still unclear what role oil companies will play in the future as we approach peak demand and day to day operations pose constant potential environmental threats such as spills. As previously mentioned, Shell and BP are companies that have positioned their brands for change. Shell is planning to adapt to the industry demand for reduced carbon emissions and increased reliance on electric power. Environmental watchdogs do credit Shell for leading CSR initiatives for the industry (Nastu, 2010). Specifically, Shell is credited with incorporating innovation into their processes and planning (Nastu, 2010). Shell receives the highest score allowed in this category which is a 4 out of 5.
Where would the organization like to be in the graph? Why? How do you know?
The cumulative research we have discussed as well as Shell’s explicit change management strategy position Shell well for the future. Ideally, Shell would like to rank 5 out of 5 on all metrics and operate at optimal efficiency and effectiveness. However, this is an unrealistic expectation, as optimization doesn’t measure possibility so much as it measures improvement. In other words, perfect optimization exists in only fictitious business scenario’s, which is why there are constant improvement and innovation. Also, some of the criteria may conflict with each other as they reach optimal levels.
That said, I think Shell would realistically like to score a (4.4, 4.0). This is accomplished by improving the growth measure of effectiveness to a 4 (highlighted below) through a strategic transition into electricity production as oil demand peaks. This transition also seeks to reduce the environmental impact, which is a measure of efficiency (highlighted below). Research indicates that these are areas where Shell may feasibly improve.
Does the current positioning of the organization correspond to its vision and mission statements?
Mission
“Shell’s purpose is to power progress together with more and cleaner energy solutions. We 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. At the same time, technology changes, and the need to tackle climate change means there is a transition underway to a lower-carbon, multisource energy system (Royal Dutch Shell, 2019).”
Vision
“To make a difference through our people, a team of dedicated professionals who value our customers, deliver on our promises, and contribute to sustainable development (Royal Dutch Shell, 2019).”
Research indicates that Shell is one of the most responsible and future-oriented oil companies operating today. The company acknowledges the changing environment of energy production and consumption and is actively restructuring to facilitate this change. Additionally, Shell is actively supporting green initiatives in line with the vision of sustainable development. By all indications, Shell’s positioning and strategy are aligned with its vision and mission.
References
Muspratt, A. (2019, May 01) The World’s Biggest Oil Companies in 2019. Retrieved from https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-and-gas-companies
Royal Dutch Shell (2019) https://www.shell.com/investors/shell-and-our-strategy/our-strategy.html
Royal Dutch Shell (2019) Business overview. Retrieved from https://reports.shell.com/annual-report/2017/strategic-report/strategy-business-and-market-overview/business-overview.php
Menachery M. (2019, April 10) Brand Finance: Shell leads the charge as world’s top oil and gas brand, ADNOC makes an entrance as fastest growing. Retrieved from https://www.refiningandpetrochemicalsme.com/refining/25185-brand-finance-shell-leads-the-charge-as-worlds-top-oil-and-gas-brand-adnoc-makes-an-entrance-as-fastest-growing
Nastu, P. (2010) BP, Shell Lead Oil/Gas Sustainability Ranking. Retrieved https://www.environmentalleader.com/2010/03/bp-shell-lead-oilgas-sustainability-ranking/
Frynas, J. (2010, February 1) Oil industry’s increasing focus on CSR. Retrieved from https://www.petroleum-economist.com/articles/corporate/company-profiles/2010/oil-industrys-increasing-focus-on-csr
Ball, J. ( 2018 January 24,) Inside oil giant shell’s race to remake itself for a low-price world. Retrieved from https://fortune.com/2018/01/24/royal-dutch-shell-lower-oil-prices/
ERBO International Expansion
If you are back for more, you must be a glutton for punishment. In the last episode, I shared a business idea with you. In case you forgot, it is a small startup called ERBO, which is an online peer-to-peer equipment rental platform. Today we are going to talk about growing the business, but first, I will provide some context.
While I would never call myself an expert, years of work experience have exposed me to many adages and biases that I think are potential weaknesses. Some of my favorite useless phrases are “let’s take this offline”(sure) and “it’s a no brainer” (uh-oh). Another pitfall of business planning is assuming that the most significant danger is failure. So many businesses are obsessed with avoiding failure. That is all well and good, but it neglects another problem: growth. Business success increases demand, and I am surprised at how many people have no plan to scale their business. My rule of thumb is this: if you can’t scale it, don’t do it. Many people are tied to moderately successful projects that require their full time and attention to infinity. Where is the fun in that?
Without digressing into one of those Tim Ferris “four-hour workweek” speeches that get people frothy about a model that is ridiculously hard to replicate (yes, most of us have to work really damn hard); let’s get back to ERBO. Can we scale it? Let’s find out by attempting to redesign ERBO according to the following criteria.
Criteria:
To meet these criteria, I have crafted an interconnected plan, where each tactic complements a broader strategy. First, we will mix up the order of things.
ERBO Merger
As the company has grown, ERBO has discovered one of the most significant challenges to entering a new market is exposure and variety of selection for the customer. The idea of independent P2P rentals may not be familiar in new markets, and selection may be limited if few items are listed on the platform. To address this problem and generate new revenue, ERBO has merged with Workforce, a Chinese manufacturer of small equipment such as pressure washers, paint sprayers, sanders, and small tractors. The merger will provide Workforce with exposure to the US market. In turn, ERBO will gain exposure to China and supply for new product lines. While manufacturing is a complete divergence from the original business model (transaction facilitator), ERBO expects that this will generate margins much higher than its current fee-based strategy. This merger is a direct merger where ERBO (acquirer) purchases Workforce (target) and assumes its assets and liabilities.
ERBO New Product Line
A primary benefit of the merger is ERBO will now be an equipment seller. This will serve two purposes. First, the platform will give buyers access to high-quality industrial equipment that is reasonably priced because the wholesaler/broker layer is removed. Additionally, private label selling yields higher profit margins than conventional retail. The second component will be the sale of used rental equipment that still has good value for the customer (this is not dissimilar from the car rental market). ERBO will now have supply to sell and rent their own equipment, thereby also helping self-develop their new markets.
ERBO International Expansion
Both the merger and the introduction of a retail sales division positions ERBO well for international expansion. ERBO will take a two-pronged approach. First they will sell and rent equipment at outlets previously owned by Workforce. Additionally the ERBO platform will expand into China to attempt to take part in the rapid growth of e-commerce in rural and urban areas (Harsano, 2018). ERBO management understands that the Chinese market is large, diverse, and hard to target without an intimate understanding of consumer preferences. As such, ERBO will rely on its international division to initially populate the site with equipment for sale or rent as well as guide marketing initiatives.
The Trump Trade Wars
This blog is in no way designed to be political, but in case you didn’t see it coming, this strategy is also about skirting the import tariffs. As ERBO will be its own manufacturer in China, it can avoid trade tariffs which are a source of turmoil and volatility in the market (Martin, 2018). This will serve two purposes. It will allow ERBO to offer excellent quality-to-price value to its customers, and it will preserve profit margins which are essential for the long term success of ERBO. It will also serve to insulate VRBO from trade volatility related to political events.
What about the people?
So by now, you might be wondering how an organic-flat four-person startup is going to manage all of this. Shown below are a series of management only organizational charts. They document structural changes that have and will allow ERBO to achieve and maintain continued growth.
Startup Structure (this is where it all began)
National Expansion
As ERBO expanded nationally, greater responsibility was placed on departments to develop initiatives and take actions that helped us manage increasing demand.
International Merger
Here is the business structure of ERBO-Workforce following the direct merger. We used horizontal absorption (which is something I made up) and added one layer of hierarchy. Horizontal absorption is a term I use to represent an acquisition that is in a different vertical market, subject to corporate goals but with autonomy to operate in line with its business. The idea is to allow Workforce to maintain its structural integrity and current leadership in the manufacturing sector alongside ERBO’s existing software initiatives. However, the added layer repositions executives to help drive overall strategy based on ERBO’s mission and vision.
Key Takeaways
I know this is a long post, but hopefully it conveyed some idea of how ERBO might undergo radical structural changes to adapt to growth and new markets. Writing this prompted some fun questions that I don’t yet have the answer for. Is this type of expansion too extreme? What cultural issues become impasses in an international merger? Would current executive leadership be able to guide an international division in a new vertical market? Let me know your thoughts in the comments below.
References
Harsano, H. (2019, November 13). Why The Future of Chinese E-commerce is in its Rural Areas. Retrieved from https://techcrunch.com/2018/11/13/why-the-future-of-chinese-e-commerce-is-in-its-rural-areas/
Martin W. (2018, November 22) Us Companies Are Using An Ingenious Method To Game The System And Avoid The Worst Of Trump’s Trade War. Retrieved from https://www.businessinsider.com/us-china-trade-war-american-companies-skirting-round-tariffs-2018-11
This is the sort of question that gets me bracing for sarcastic remarks. Here goes mine: I have a few dream jobs, but most of them fall into the category of nightmares.
I am, of course, joking. The data is overwhelming that we humans love to be productive and useful (Lickerman, 2010). Behavioral psychologists concur that a sense of purpose and meaning is essential to maintain sanity and a sense of well being (Taylor, 2013). These human tendencies and motivations may provide the template by which a dream job which may be defined: doing something that aligns well with our abilities and values. That said, I find my desires gravitate towards ownership and a business model that can be scaled without the limitation of my time or ability. My ideal business is one that allows freedom and is not fixed geographically. In that vein, I will share an idea that I have been contemplating for over a year. I trust that I won’t have to sue you later for stealing it. In this case, the model, rather than the method is what I find appealing.
ERBO (Equipment Rentals By Owner)
This business leverages the success of platforms such as Priceline and VRBO into the equipment rental market. Currently, the equipment rental model is antiquated. Customers are limited to what local rental companies provide and are subject to relatively high prices considering a rental to purchase ratio. I have run some rough payoff calculations on equipment by dividing the retail price by the daily rental cost. On average, this is about 90 rental days. For example, a $40,000 man lift that rents for $450 per day will be paid off after 89 days. Of course, this isn’t the actual payoff time as there are other costs such as maintenance and overhead and the equipment is likely financed. However, the existing model is limiting and offers consumers few choices.
ERBO is a platform for peer-to-peer rentals which connects individuals who own equipment with people who want to rent it. For example, imagine that John has an old bobcat he bought at an auction and uses for small projects around his house. Most of the time, it sits doing nothing. This website will connect people like John with people like Jim, who has a weekend landscaping project and needs a bobcat. What is more, it will provide renters with immediate competitive market pricing. The website will generate profit by taking a percentage of the rental fee in addition to offering CPM (impressions) or CPC (click-through) ad space.
Operating Goals
Goal #1: Create a transparent market that is favorable for both buyers and sellers
Measurement: A simple, easy to use platform that offers variety and price competition which creates transparency for the consumer.
Goal #2: Create a platform with built-in financial and liability protection for transactions.
Measurement: Facilitate payments and security deposits on a platform that is a neutral party to the transaction. This includes liability insurance considerations and waivers that legally bind and protect both parties.
Goal #3: Build local success (profitability and growth) before scaling. This is a time-bound risk prevention measure.
Measurement: Revenue must exceed the cost of the operation in a local market before the service expands to new markets. This does not preclude the organization from obtaining outside funding, only requires that cash flow be positive before further expansion. Once the business proves to be sustainable beyond the 3-5 year time frame, more risk is acceptable.
Goal #4: Reinvent the rental market through technology which increases the selection and speed of the transaction
Measurement: The platform will facilitate transactions in a target time of 10 minutes from start to finish. Currently, I estimate that between traveling to existing rental facilities and signing documents, it takes up to 1.5 hours to complete a rental transaction.
Goal #5: Create a trustworthy platform with privacy protection for users
Measurement: Maintain site SSL certificates and maintain current privacy policies.
Organizational Structure: Organic – Flat – Entrepreneurial
Strategy: Fast Prototyping
Time Frame: 1-3 years
Description
To keep overhead low, the company may start with a founder and one to three software developers. The software will be fast prototyped by creating a simple marketable model and introducing new features subsequently in a live beta test setting. This allows the product to get to market more quickly. The group will work as a team rather than a corporation. Sometime during the development phase, a marketing and customer relations manager will be needed to help define the brand and create media content and advertising.
Review
Whether or not I could actually develop this idea into a profitable business is somewhat ancillary. The core idea I want to relay is that a dream job will only be fulfilling if it matches our abilities and values. In my case, I prefer freedom and scalability. I get satisfaction from knowing something can grow without me staring at it twenty-four hours a day. What is your dream job and does it align with your skills and values? Let me know in the comments below.
References
Lickerman A. (2010, November 15) Why We Need to Know Why. Retrieved https://www.psychologytoday.com/us/blog/happiness-in-world/201011/why-we-need-know-why Taylor S. (2013, July 21) The Power of Purpose. Retrieved https://www.psychologytoday.com/us/blog/out-the-darkness/201307/the-power-purpose
It has occurred to me on more than one occasion that I may be too old for all this school stuff. The problem is, I love learning.
I am in the final semester of the MBA program at UAF. Currently I am employed in Fairbanks, Alaska as a Finance and IT Coordinator which is one of those confusing titles a financial analyst receives when they are promoted in a small town.
In addition to work and school, I own an LLC with my wife which I launched to augment her home business. We have focused our efforts as a 3rd party seller on the Amazon platform and were delighted to pass six figures in sales in the first full year of operation. We have experienced 30+ percent growth in the two subsequent years since. Additionally we have a few rentals and hope to acquire more as time permits and the market behaves.
It might seem like this takes all my time but in truth my favorite thing to do is spend time with my son. I am an assistant coach in the Eclipse Soccer Academy and spend a few nights a week enjoying watching him play and learn.
Attending UAF has been a truly enriching experience and part of me (not my wallet) is sad to see it come to an end.
Organizational Theory 