The Royal Dutch/Shell group of companies is a widely known leader in the gas and oil industry. It has been in the business for 93 years with roots from a seashell trade industry, inherited by Marcus Samuel from his father and such endeavor has enlighten him about the possible prospects of kerosene supply among the emergent Russian oilfields. The opening of the Suez Canal to the Far East led Samuel to foresee more opportunities, until he invested in a tanker, Murex, that delivers tons of Russian kerosene to Singapore and Bangkok. Samuel then formed the Shell Transport and Trading Company in 1897.
On the other hand, August Kessler, began developing a Dutch oilfield in Sumatra, until Henri Deterding joined him and they embarked on the construction, storage, transportation and distribution in bringing their oil to the market.
Faced with a heavy competition between Rockefeller's Standard Oil, Samuel and Deterding, who supersede Kessler's chairmanship of the Royal Dutch, began working together towards a common goal. Until in 1907, they have merged their companies into what is now called as the Royal Dutch/ Shell Group.
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Through the years, both companies have agreed a ratio of 60 percent in favor of the Royal Dutch and 40 percent for the Shell Group. The company also started in lengthening its manufacture in Romania, Russia, Egypt, United States of America, Venezuela and Trinidad. It has even penetrated into a chemical business until they combined into the Shell Union Oil Corporation in 1933.
These beginnings have apparently prospered into multinational progress that has served countries across the globe. One then can initialize to look into how the company manages to look into its basic operations and strategic planning system, which have thus further contributed to its prominence. All companies need a basic but complex and effective planning to keep it standing amidst the occurrence of inevitable change. Metaphorically speaking, a driver should be knowledgeable enough to know until when and how long will his gas run until he reach his specific destination. Perhaps, he should plan ahead on the things that he might encounter along the road or if how many times he should refuel to keep him full tank. But such is just a mere example that Shell might have gradually thought of as to refer to its strategic planning system.
Robert Grant (2002) has noted Shell's strategic planning system as the heart of its management system. The main features presented are as follows: a.) a strong emphasis upon long-term strategic thinking; b.) a breadth of vision, and emphasis on the generation and application of ideas rather than a narrow focus on financial performance; and c.) an advance grip over the different transitions in the future by the development of an organizational learning, dialogue and adaptation. As mentioned, Shell has been running for 93 years and such time element has become an initial proof of how the company has promoted a strong emphasis on long-term strategic planning. This indicated that they do not merely formulate plans of predictions but rather situational analysis and substitutes on the possible transitions that they would encounter. Another contribution involves the company's width in handling different visions and accepting general ideas rather than focusing more on its financial stability. This indicates its sensitiveness to enter into other concepts and ideas like economics, ecology and mathematics; that would then become data's for future management techniques, multiple scenario analysis, business portfolio planning, cognitive mapping and the organizational learning planning processes (Grant 2002, p5)-all of which Shell pioneered. Thus, these actions are indicators that company was able to use such strategies to further become an organizational vanguard in adapting future changes.
2. What were the main changes between the early 1970's and early 1990's that transformed the world petroleum industry? (4 marks)
One cannot avoid change for it is said to be the only constant thing on earth. As for the oil industry, there are many breakthroughs that are unavoidable to risks and failures.
One of the main changes that occurred in the early 1970's is the rise of petroleum prices that has led to a nationalization of the major industry players even across the country. By the 1990s, the list of the world's top 20 oil and gas producers was dominated by state-owned companies such as Saudi Aramco, Petroleos de Venezuela, Kuwait Oil, Iran National Oil Company, Pemex (Mexico), and Russia's Gasprom and Lukoil (Grant 2002, p6). Such appearance has created an apparent mode of competition that some players attempt to lower crude prices, not realizing that they are going downstream.
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On the earlier days of 1990, the world saw an unsatisfactory financial performance; and the most difficult years for the oil industry. As Grant observed:
The fall in oil prices to the mid-teens meant that returns from the traditional fount of profit - upstream - were meager. At the same time, refining and chemicals suffered from widespread excess capacity and price wars. Meanwhile, investors and the financial community were putting increased pressure on companies for improved return to shareholders. (Grant 2002, p7)
Another is that, oil companies of the world began diversifying business out of petroleum like metal mining, nuclear reactors, coal business and other chemicals like polybutylene and even ventured into forestry. These may be important scenarios of innovating and creating other means or products out of oil industry alone. It could then be justified that one can increase its sources and then its income and profit-that have rooted from a single product.
3. How did a loss of control over sources of crude oil affect the strategic direction of oil and gas producers? (5 marks)
The loss of control over their sources of crude oil was a devastating blow for the majors - their whole strategy of vertical integration had been based around the concept of controlling risk through owning the downstream facilities needed to provide secure outlets for their crude oil (Grant 2002, p6). This could mean that since there are other countries operating in oil as well, chances are that many consumers or suppliers have developed the making of decisions on where to purchase and which is preferably better. If the other company is offering a lower cost, the other might as well do so in order to gain sales. With this, an aura of competition has taken place that the more companies introduce lower prices over the other, the more they, as an industry as a whole is going to a major downstream.
Many companies then promulgated a restructuring of strategies and organizational methods with key features listed as:
Reorienting their goals around shareholder value maximization.
Sorting and selection investments that were not justified by returns being earned
Reducing excess capacity through refinery closures and sales and scrapping of oceangoing tankers.
Decentralization of decision making
Shifting the basis of organizational structure from geographical organization around countries and regions to worldwide product divisions
"Delayering" through eliminating administrative layers within hierarchical structures
All of these features are possible prospects that could threatened not only the oil and petroleum industry but as to the whole nation as well.
The Royal Dutch/Shell group of companies did not radically take these major restructuring procedures.
4. How did the restructuring of the world's major oil companies affect: (a) strategic goals and objectives; (b) decision making; and (c) organizational structures? (5 marks)
Due to the mentioned problems and losses of the world's major companies, the Shell Group intentionally restructured its organization schemes and structure. Through this course of action, there were related effects to its goals and objectives, decision making as well as its organizational framework.
By the late nineties, these companies reduced its cost especially in the Services company staff. The companies' goals and objectives mainly aims to the fifteen percent (15%) increase of ROACE by 2001 in order to redeem the loss of the companies' employees due to its reduction of cost. The leadership of Stuart and Moody was strategically aiming to give out the leadership skill that each of the employees possess, trusting them with accountability and responsibility at the same time. Goals and objectives were mainly centered in the employment structure of the company.
Decision making was mainly towards the application of generating individual leadership and accountability. The company would like to project that profile that their focus is more on the tough-mindedness and decisiveness. Its decisions are made to be straight forwards and rapid since it has sacrificed a lot in order to get to the goal.
As part of the achieving of these goals, there was also an introduction to its new organizational structure not only from one company but also its global companies. Stuart and Moody would like to implement the integration of the US subsidiary and making the different offices into one global division. The major effect that this restructuring of the group has done is the re-organization of staff and employees in the global offices wherein according to the CMD former Vice Chairman, reporting lines are direct, uncomplicated. Incentive pay and stock options are the norm. Every project has to compete globally for capital (Grant 2002, p15). The organization of the LEAP, Leadership and Performance Operations moved higher to its gear, resulting to the in substantial increase in Shell's management development and organizational development activities (Grant 2002, p13).
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Towards the new century, Shell was able to gather different changes not only from its sales and performance of its cost capital but also the change was also experienced by its employees, either those who were retained and those who were reduced.
5. Analyze and explain Shell's financial performance during the 1990's with particular reference to ROCE and ROE (6 marks)
A ratio that indicates the efficiency and profitability of a company's capital investments is called the Return of the Capital Employed or ROCE ( Investopedia).
The formula in deriving for the ROCE of a certain company is
Wherein, EBIT - Earnings Before Interest & Tax
EBIT is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income", and re-arranging the formula, it is presented as follows:
EBIT = Revenue - Operating Expenses
On the other hand, ROE is the company's Return On Equity. This is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia).
Shell's financing performance can, therefore, be analyzed using the given set of tables below:
Table 1 Employment among the oil majors ('000)
aExxon merged with Mobil in 1998.
bAmoco merged with BP in 1997. BP acquired Arco in 1999.
cTotal merged with Fina in 1998 and with Elf Aquitaine in 1999.
Source: Fortune Global 500, 2000, 1997, 1994, 1991, and 1996.
On the Table 1, there is an indication that the Shell company is actually has greater number of employees as compared to other major oil companies. In the early 1990's, even before the major re-organization and restructuring, Shell was able to hire greater number of employees and it continually increased its number by the late 90's since it is considered as the largest oil company, much more during its restructuring.
Table 2 Royal Dutch/Shell Group: performance data, 1992-9
Gross sales ($ bill.)
Operating profit ($ bill.)
Net income ($ bill.)
Cash flow from operations ($ bill.)
Capital expenditure ($ bill.)
(The data are for continuing operations only. Hence, Shell's numbers of employees shown in Table 1 differ from those here because of acquisitions and disposals.)
Table 2 would indicate the over-all performance of the finances of the company by the 1990's. In 1992 up to the 1995, the Company's net profit income would only range from four (4) to six (6) billion dollars; however, in the dawn of 1996, Shell was able to achieve its 8.9 billion dollar net profit income, which is considered at its peak in this era of the 90's. This was also the year when the number of employees reached to 104,000.
When related to its ROCE, however, the 1996 percentage was 0.1 lower than that in 1999, wherein restructuring was made possible and Cor Herkstroter was succeeded by Moody-Stuart. There was an evident increase of the company' return of the capital employed by the time that restructuring was established.
In 1999, there was a dramatic increase of 2.6 percent of the company's return of equity (ROE) as compared to that of 1997's. Although 1998 was an extreme downturn of the company, 1999 and towards the new millennium, a positive increase of the company's net profit was made evident as the cost of capital expenditure was to its lowest of 7.4 billion dollars. There was actually a positive reaction from its investment and shareholders. The decrease number of employees, the new organization of its management and relative low expenditure has created the positive outcome of finances of Shell.
6. How did the Managing Director, Cor Herkstroter, change Shell's organizational structure in response to its financial performance in the early 1990's?
Cor Herkstroter is considered as a legend in the lifetime of Shell. This Dutch accountant was said to be the "unlikely pioneer of change" in Shell. He is described to be a private, Old World personality without much charisma, and with a preference for written communication (Grant, p.8).
In the process of changing the structure of Shell, the Shell's "Gorbachev" (as consultant Philipp Morvis described Herkstroter) met up with Shell's 50 top managers at Hartwell House, an English country manor, in May 1994. In event of the meeting, these top managers were asked to state in a self-centered and selfish way their frank and open reports regarding Shell's issues and organizational structure. Later it then resulted to the creation assignments of a high level team to study the company's organization in the internal setting and arrive with designs for change.
As the team was formulated, research was conducted, and drafts of proposals were presented and approved, Chairman Herkstroter gave a speech, directed to all company employees, to prepare them for change by indicating the need for change and the likelihood of job losses, but without any specifics as to the organizational changes that were likely to occur (Grant, p. 9).
Many critics would consider Herkstroter as mean, impersonal and arrogant, but this firm and strong manager courageously created a reform for Shell that led the company to be the continually the largest earning oil corporation of the world. His belief on the global structure of the organization allowed many greater benefits not only to the company alone but even to its employees.