Features of Shells Strategic Planning System - Assignment Example

Running header: Shell Student’s name: Instructor’s name: Subject code: Date of submission Question 1 The following are the main features of shell’s strategic planning system. Shell’s strategic planning emphasizes on long term strategic thinking with its planning period (horizon) extending 20 years into the future as opposed to the four or five years planning periods employed by most companies. Furthermore the basis of the strategic plans is scenarios (alternative views of the future that allow managers to consider strategic responses in different ways in which the future might unfold) as opposed to most other companies which use forecasts as a basis of planning. The system is based on a broad vision and emphasizes on generation and application of ideas as opposed to focusing on financial performance alone. The system is open to ideas from disciplines such as economics, psychology, biochemistry, biology, mathematics, anthropology, as well as ecology which have made the company pioneer many managerial techniques such as multiple scenario analysis, business portfolio planning, cognitive mapping as well as application of organizational learning concepts to planning processes. Shell applies a planning strategy that encourages thinking of the future, develops capacity for organizational learning, promotes organizational dialogue and facilitates organizational adoption to a changing world. Application of a bottom-up approach to strategic planning where the committee of managing directors (CMD) identifies key issues, sets strategic direction and approves major projects while the planning department formulates scenarios although most strategic decisions and initiatives originate from among the operating companies(Robert, 56). The planning staff, the regional coordinators as well as sector coordinators coordinate the operating companies’ strategic plans. Question 2 The main changes between the early 1970’s and early 1990’s that transformed the world of petroleum industry Between the year 1970 and 1990, the global petroleum industry underwent some fundamental changes that transformed it. These changes included the following; the growing power of the oil producing countries Their growing power and influence was not only seen in the sharp increase in crude oil prices during the 1974’s first oil shock but more fundamentally in the nationalization of the oil reserves owned by the major oil companies. This can be evidenced by the fact that by the 1990s the world’s top twenty oil and gas producers list was dominated by state owned and controlled companies. These included companies such as Saudi Aramco, petroleos de Venezuela, Kuwait oil among others. Furthermore, the traditional oil majors such as Shell faced competition from newly established majors which included such companies as Elf Aquitaine, Total, and Nippon oil among others (Beck, 65). This led to the reduction of oil production by the traditional oil majors (known as the “seven sisters”) from 31 percent to 7 percent of the total world’s oil production. Loss of control over the crude oil sources by the oil majors This had an overwhelming effect on the petroleum majors owing to the fact that their tactic of vertical incorporation was based upon the theory of risk management through acquiring the downstream facilities required for providing secure outlets for the crude oil. This led to the prices becoming more volatile as market transactions for crude oil and refinery outputs became increasingly important. For instance the prices fell from 42 dollars per barrel to 9 dollars between 1981 and 1986 before recovering briefly to 38 dollars in the wake of Iraq invasion of Kuwait and then resumed downwards. Question 3 How loss of control over sources of crude oil affected the strategic direction of oil and gas producers As earlier stated, the loss of power over crude oil sources had an overwhelming effect on oil and gas producers owing to the fact that tactic of vertical incorporation was based upon the theory of risk management through acquiring the downstream facilities required for providing secure outlets for the crude oil. As a result, the companies had to undergo far reaching restructuring so as to be able to cope with these changes and hence avoid losses that would result as the prices had become volatile. The restructuring involved changes in the decision making process employed by the companies, changes in the strategic goals of the companies to goals that are more centered towards satisfaction of shareholders as well as divestment of unprofitable businesses, business closures and withdrawal from unprofitable countries (George 22). There were also cuts in the number of employees as well as elimination of administrative layers within the hierarchical structure aimed at making decision making easier. All these changes were aimed at reducing costs and making strategic decision making easier and more responsive to future changes in the business environment. Question 4 Owing to the changes mentioned above all the world’s major oil producers underwent restructuring that involved radical simultaneous changes in strategy and organizational structure within a short time. The changes were seen in; a) Strategic goals and objectives Major organizations reoriented their goals towards shareholder value maximization as shareholders demanded better returns. Part of the strategy involved divestment of unprofitable businesses as well as refocusing around their core petroleum and gas business, withdrawal from unprofitable countries where returns were not sufficient to justify the investment and outsourcing the activities that could be performed more efficiently by outside suppliers. Other changes included reduction in the number of employees employed by the companies (Simons, 70). All these changes were aimed at reducing cost and hence maximizing profits as well as returns o shareholders. b) Decision making The restructuring also resulted in decentralized decision making from corporate to divisional levels as well as from divisional levels to business unit levels. The divisions and business unit levels were also given full responsibility on profit and loss and hence the decisions that affected their profitability. The decentralization of decision making was achieved through organization structure changes as well as elimination of administrative layers within hierarchical structures. c) Organizational structures The restructuring also affected organizational structures of the oil majors. The companies shifted the basis of their organizational structures from geographical organization around countries and regions to worldwide product divisions (which included divisions for upstream activities, downstream activities and chemicals in most cases). There was also delayering achieved through the elimination of administrative layers within hierarchical structures. The effect of this was the reduction of bureaucracy as well as the timeframe required for decision making and resulted in completely new organization structures in the oil majors. Question 5 Analysis and explanation of Shell’s financial performance during the 1990’s with particular reference to ROCE and ROE. The following table has been use to analyze Shell’s performance in 1990s with respect to ROE and ROCE 1999 1998 1997 1996 1995 1994 1993 1992 ROE 12.1 2.8 12.0 12.0 10.7 10.4 7.9 9.0 ROCE 15.4 0.7 12.8 15.1 11.8 11.5 8.7 9.7 As can be seen from the table, Shell Company’s ROE and ROCE is lowest in the early 1990S (1992&1993) before taking an upward trend in 1994.this can be attributed to the fact that the early 1990s global recession negatively affected the global petroleum and gas industry and shell was not spared either. The recession caused a decline in demand for petroleum and gas products and hence pushed prices down. As a result, shell just like other oil and gas companies reported poor performance throughout the early 1990s.This explains the low state of both ROE and ROCE for the shell company during the early 1990s. Shell Company was also being affected by the increasing competition from the newly established oil companies which adversely affected sales. The poor performance of the Shell Company is also attributed to the company’s former structure (Jeremy, 102). Although the structure had been in operation since 1950s, the structure was no longer responsive to the constant environmental changes in the now globalised economic world. Decisions were taking long to be made while the structure was also cost intensive. Furthermore, the company had maintained this structure when other companies embarked on restructuring in 1980s. The company’s performance with respect to ROE and ROCE shows an improvement from the year 1993 onwards. The improved performance can be attributed to the restructuring spearheaded by Cor Herkstroter when he took over as the chairman of CMD in 1993.the changes enabled the company to cut down on costs hence ensuring improved profitability. The decision making process was also made less costly and less time consuming hence improving managerial performance. Some of the cost cutting strategies included reduction of the number of staff, savings in procurement costs as well as divesting and closure of unprofitable ventures. The company’s performance with respect to ROE and ROCE was at is lowest in 1998. This could be attributed to declining oil and gas prices as well as weakening margins in refining and chemicals. However, further restructuring by Mark Moody-Stuart ensured that the company returned to its original path of improved performance in 1999. Question 6 How the managing director, Cor Herkstroter changed Shell’s organizational structure in response to its financial performance in the early 1990s. Owing to the deterioration in performance in the 1990s, the chairman to the CMD Cor Herkstroter saw the need to institute changes in Shell’s company structure so as to improve performance and make decision making easier. This is because the original structure was seen as being obsolete and unable to respond adequately to changes in the business environment at the time. The new organization structure by Herkstroter contained four new organizational elements namely the business organizations, the corporate centre, professional services and operating units. Two other organizational units were borrowed from the old structure. This included the operating companies and committee of managing directors. The components of the new structure are discussed below. a) The business organizations The new structure contained four business organizations namely E&P (upstream), oil products (downstream), chemicals and gas and coal. These organizations were headed by business committees appointed by the CMD and were responsible for: -The strategy of their business area; -endorsing of the capital expenditure as well as financial plans of the operating companies and business segments within their business area; -appraising performance of the operating companies as well as business segments; and - availing of technical, efficient business services to the operating companies occurring within their business sector. b) The corporate center The role of the corporate center included setting the direction and strategy of the entire group; growing and shaping the group’s investment and resources portfolio; enhancing performance of group’s assets; acting as a custodian of the group’s reputation, policies and processes; and providing internal and external communication (Glenn,235). The center comprised of six directorates including planning, environment and external affairs, corporate advice, group treasurer, human resources, group controller and legal director. b) Professional services The units provided functional support to operating and service companies within the group. The services provided included finance, human resource, intellectual property, health, and group security services among others. c) The operating companies The operating companies retained their role as the primary business units within Shell. They were headed by a chief executive with the following responsibilities; Coming up with the organization’s strategic aims using the guidelines issued by the business committee Providing leadership necessary for putting strategic aims into effect and instilling entrepreneurial company culture Coming up with in-house financial and operating estimates and ensuring their achievement Business management supervision and setting of priorities Effective reporting of the company’s activities and results to the group (Claire, 45). d) Operating units Due to the fact that operating companies were based on countries rather as opposed to business sector of operation and incorporated activities that crossed business sectors, operating units were created to manage the activities of each business activity within an operating company. The units were managed by executive managers who were answerable to the appropriate business director. Work cited: Robert, M. Kent E Cases in contemporary strategy analysis. Oxford: Oxford university press, 2003. Beck, J. Worldwide petroleum industry outlook. London: Prentice hall, 2002. George, A. A strategic planning: The case of Shell Company. American journal on strategic management 1.2 (2005):54-56. Simons, R. Performance Measurement and Control Systems for Implementing Strategy: Text and Cases, USA, Prentice Hall, 2000. Jeremy, D. International Business. Cambridge: Lighthouse press, 2008. Glenn A. A strategic governance review for multi organizational systems. Chicago: Chicago printing press, 2004. Claire, C .Understanding strategic management. New York: Fairmont printing house, 1999. Read More