9 -9 PETRO-CANADA INTERNATIONAL ASSISTANCE CORPORATION - ~AND THE WORLD BANK 1988 CHINA CONFERENCE 'DECENTRALISED COHESION' THE STRUCTURE OF THE ROYAL DUTCH/SHELL GROUP By T. P. BRENNAND SHELL CHINA LIMITED '.A}'.'"';a ' 49 'Decentralised cohesion' the structure of the Royal Dutch/Shell Group (VUGRAPH 1) (VUGRAPH 2) Part I Group Structure Part II history of organisational changes Part III the 'logic' of multi-functional/multi-national enterprise Part IV upstream organisation Part I Group structure The unique structure of the Royal Dutch/Shell Group of Companies stems from the alliance made in 1907 between Royal Dutch Petroleum Company and The 'Shell' Transport and Trading Company, Limited whereby the companies merged their interests but retained their separate iden- tities. (VUGRAPH 3) Royal Dutch Petroleum Company has a 602 interest in the Group and The 'Shell' Transport and Trading Company p.l.c a 402 interest. These two, publicly quoted, companies are known as parent companies. Each has a separate board of directors and is responsible to its own shareholders. (VUGRAPH 4) The Group consists of three holding companies - Shell Petroleum N.V., The Shell Petroleum Company Limited and Shell Petroleum Inc - together with those companies in which they directly or indirectly hold inter- ests. (VUGRAPH 5) In over 100 hundred countries, operating com_panies are engaged in various branches of oil and natural gas, coal, chemicalg, metals and- other businesses. Every one of these companies is a distinct and separate entity. Many are joint ventures with shares held by other companies, governments or private citizens. Those with a 51% or more Shell interest are known as 'Group companiest and those with less as 'associated companies'. Certain standards are upheld throughout the Group - these include business ethics, accounting practices and safety and environmental protection standards. The business principles on which the-conduct of. - - the Group is predicated is contained in a 'Statement of General Business Principles?. Individual operating companies may elaborate their own statements to meet their national situations, but the general statement serves as a a basis on which Shell companies pursue the highest standards of business behaviour. (VUGRAPH 6) Other Group companies in London and The Hague are known as service companies. Their main business is to provide advice and services to the holding companies and to operating companies. Some of them also conduct trading activities. (VUGRAPH 7) Responsibilities within the service companies are organised in a matrix system into regions, sectors and functions: (VUGRAPH 8) regions are responsible for coordinating business plans in different areas of the world (business in the People's Republic of China is the responsibility of the East and Australasia regional organisation); (VUGRAPH 9) - sectors provide technical advice and services within key business sectors (advice and services to companies involved in the 'upstream' is provided by the Exploration & Production coordination); (VUGRAPH 10) functional organisations are responsible for specialist advice and services - such as on purchasing, legal, personnel or safety matters. (VUGRAPH 1l) The members of the Board of Management of Royal Dutch and the'managing Directors of Shell Transport are full-time executives who have spent most of their working lives within Shell companies. They hold office as the managing directors of the holding companies. As such they are known as Group managing directors. The four main service companies have established a joint committee known as the Committee of Managing Directors (CMD) which considers, develops and decides upon overall objectives and long-term plans to be recommended to operating companies. Each Group managing director is on the board of one or more service companies and is also a member of the CMD, which is composed entirely of Group managing directors. The current chairman of the CMD is Mr L C van Wachem, the President of Royal Dutch. The vice-chairman is Mr P F Holmes, the Chairman of Shell Transport. Each managing director is responsible for a 'portfolio' of spheres of interest normally covering a geographical region, a business sector and one or more functions. The managing director responsible for the Exploration and Production sector is Mr J S Jennings whose portfolio also includes the Materials function. Mr J H H van Engelshoven is responsible for the East and Australasia region and also oversees the Natural Gas, Coal and Metal sectors. 4- Part II history of organisational changes The Group is a complex and dynamic organisation which, because of changes in the business environment and in the Group's strategic direction, has changed greatly over the last 30 years. This section will highlight only the most important changes, particularly those which took place in the late 1950's and in the middle to late 1970's - two significant milestones in the Group's history. Up to the late 1950's, the Group was organised on activity lines into 'marketing' operations and 'production' operations. However, with the rapid expansion of the Group's activities in the late 1940s and the 1950s, this structure became difficult to manage effectively. Three particular problems were noted: the need to integrate refining, marketing and production activities; the need for a 'functional' role as distinct from 'line' management and 'staff' activities; the advisability of further decentralisation of responsibility and authority from the central organisation to operating units. As a result a study carried out in 1958 a fundamental change in management philosophy occurred - towards management of the Group as a real 'group of companies' rather than a 'single company with many branches'. The study recommended that the operating unit in each country should .in future to be treated as a separate, self-governing unit with a general manager accountable for results. Group coordination should be exercised by establishing overall objectives, plans and programmes; by developing a single pool of professional personnel; and by establishing an integrated Group-wide system of financial control. Among specific recommendations of the study were: the creation of a single integrated central organisation -5- ('one office in two places') by the establishment of service companies in The Hague and London. (For historical reasons the Group's central offices have been divided between London and The Hague. This adds an element of complexity in practice but does not affect the theory of running a large multi-national, multi-functional group of companies.) the central coordination of business on a geographical basis through regional coordinators. The new organisation was implemented in April 1959, when the new service companies were created. The Committee of Managing Directors was also established at this time. This organisation structure remained essentially unchanged until the middle 1960s, when a Natural Gas coordination was added to oil and chemicals, reflecting the Group's developing interests in natural gas. During the 1960's the oil industry was dominated by the vertically integrated companies which produced their own oil, moved it to their own refineries in their own tankers, and distributed and sold the products in their own marketing network or processed them in their own chemical plants. The oil price shock of 1973 and the emerging power of the producing countries shattered the old system. At the same time, the Group was diversifying from being an oil, gas and chemical enterprise into metals, coal and nuclear power. These two events placed new demands on Group organisation, so that by the middle of the 1970's the structure had again become in need of review. Discussions took place at that time and a number of require- ments were identified. Among these were: the need to ensure local harmony of the various sectors of the business and to present a unified Shell approach to governments and other bodies; - the need for principal activities of Group companies to be allowed to develop as separate businesses; -.6- - the need for single points of reference at the centre for operating company chief executives. At the same time, financial institutions had begun to require com- panies to report their earnings by sector. There was also a growing realisation of the need for each business to think and plan strate- gically while retaining day-to-day decision-making power in the operating companies. To meet these requirements, it was decided to develop the concept of the business sector. The role of the regional organisations was widened further in 1978, when their responsibilities were extended to embrace all Group activ- ities in their geographical area. The concept of the 'Shell Represen- tative' for a particular country was also introduced, witK-a= direct - - relationship with the regional coordinator, to harmonise and represent the various business streams in that country. Part III the 'logic' of multi-functional/multi-national enterprise The structure of the Royal DutchtShell Group, like that of any enter- prise, is obviously determined by history and particular circum- stances. However, as a way of analysing the organisational needs of any company engaged in multi-functional (or multi-national) activities a theoretical framework of 'logics' - or forces acting on the organ- isation - can be developed. a. Corporate Logic The corporate logic is that which is needed to keep the parts together as a coherent group. Key features are: the need for cohesion so that the whole is greater than the sum of the parts; the need for a central point for decisions over the alloca- tion of resources and the spreading of risks; -* - 7- - - cthe need for some commonality of procedures, for example, in budgeting and accounting; - the need for a common code of business ethics and standards of health and safety practices, the need to clearly define areas of responsibility, accountability and authority.. These areas cover the traditional responsibilities of corporate functions. b. National/Regional Logic In each country there are laws, politics, fiscal regime and culture which, together with the underlying business environment,-will affect the way business is carried out. Similarly, at a supra-national level particular regions have their own logic which may affect business within and between countries. c. Functional Logic The performance of any enterprise is critically dependent on its business and technical knowledge. How it accumulates this, deploys it, keeps it up-to-date and develops it is a fundamental determinant of continuing health. d. Business Logic In the oil industry, in particular, there are global market in- fluences, which may clash with national, but which cannot be disre- garded. These influences will play a part in determining priorities, the allocation of physical, financial and human resources and, for a multi-national enterprise, the choice of geographical area. -8- Part IV upstream organisation Shell companies have interests in hydrocarbon production in some 30 countries around the world and in exploration for oil and gas in 50. They are operators for these ventures in over 30 countries and as such are responsible for nearly 6% of world oil production and 7% of gas sales. The following slides give an indication of the dimensions of this upstream business. (VUGRAPHS 12-16) It is an essential part of the Group structure that operating com- panies are distinct and separate entities. Operating company manage- ment are motivated by being responsible for the performance and long-term viability of their operations. Being sensitive to local conditions they are able to respond quickly to changing circumstances. However, through the service companies they are able to draw on the fund of technical and operational experience of Shell companies worldwide. The next slide shows the relationship with the service companies. (VUGRAPH 17) (VUGRAPH 18) The Exploration & Production coordination in The Hague is the focus of technical advice and services to upstream operating companies. It is organised into three main divisions: exploration which provides geological and geophysical advice and services; liaison and operations which is responsible for liaison with established operating companies, and production development which provides advice and services con- nected with petroleum engineeering, field development and E&P comput- ing. As well as providing services to operating companies, the E&P coor- dination is responsible for recommending new upstream business oppor- tunities to the holding companies and for the technical evaluation of plans submitted by operating companies to shareholders.. -9- (VUGRAPH 19 & 20) In providing technical advice, these divisions work closely with Group research laboratories, in particular the specialised E&P research laboratory at Rijswijk near The Hague. (VUGRAPH 21) From the point of view of the operating company chief executive, the major role of the service companies is to provide technical advice, technical and other services and experienced professional staff. One of the key ways in which the Group's technology is transferred to operating companies is through the pool of expatriate professional staff. The E&P coordination together with the personnel function are responsible for recruiting, training and developing a cadre--of- professional and managerial staff for operating companies. As well as 'international staff' who spend their careers moving between different operating companies, an important element in the professional staff pool is 'regional staff' from operating companies who gain experience through 'cross-postings' to other countries. Specialised training for operating company staff is provided by the personnel function's training organisation. 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