Financial Times: Planning strengths weakened by mistakes

By Michael Skapinker

Published: June 17 2004 21:36 | Last Updated: June 17 2004 21:36

Posted 18 June 2004 

Observers of management theory and practice have long held Shell in high regard. Few other companies have produced as many influential management writers and thinkers. Most were based in Shell's planning department, where they developed techniques that enabled the company to foresee the 1974 oil shock and the collapse of the Soviet Union.

The central figures in the department - people such as Pierre Wack, Peter Schwartz and Arie de Geus - made their mark on the world outside Shell with widely read articles and books.

In the Harvard Business Review in 1985, Mr Wack explained how Shell's scenario planning methods did more than attempt to forecast the future: they tried to change the way managers thought and prevent them from making the mistakes that came from following long-held routines.

"The point is not so much to have one scenario that 'gets it right' as to have a set of scenarios that illuminates the major forces driving the system, their interrelationships, and the critical uncertainties," Mr Wack wrote.

In the early 1970s the Shell planners, studying the increasing demand for energy and the desire of Middle East countries such as Saudi Arabia to preserve their resources, forecast that oil producers would acquire the upper hand over buyers. "The power that was to become Opec emerged clearly," Mr Wack wrote. The Shell planners did not know that the precipitating event would be the Yom Kippur war. But they knew prices would rise rapidly. "Shell was like a canoeist who hears white water around the bend and must prepare to negotiate the rapids," Mr Wack said.

Mr Schwartz, another member of the planning department, recalled in his book, The Art of the Long View, that he told his superiors in 1983 he wanted to study the Soviet Union because liberalisation would allow it to exploit its massive oil and gas reserves. They were sceptical but told him to go ahead.

Shell's studies of the Soviet Union revealed an economy in crisis: its population was ageing, its labour force dwindling. "To continue to keep any semblance of a standard of living, the Soviet Union had only two alternatives: either muddle through or open up," Mr Schwartz wrote. The planners presented both these scenarios to Shell's managers. They also presented their "opening up" hypothesis to the Central Intelligence Agency. "The CIA said 'You really don't know what you're talking about'."

Against this impressive record must be set Shell's mistakes: its failure to foresee the uproar over its disposal of the Brent Spar oil platform in the 1990s and the downgrading of reserves that led to its current crisis.

Mr Schwartz - who chairs Global Business Network, a California-based consultancy that helps companies think about the future - says both the Brent Spar affair and the reserves crisis illustrate particular Shell weaknesses to set against its scenario planning strengths.

Brent Spar showed Shell's tendency to think of itself as a government, he says. The company had talked to the governments concerned about sinking the Brent Spar platform at sea, which scientists regarded as the most environmentally acceptable option, but had not considered how campaigners would succeed in whipping up public concern.

Mr Schwartz, who left Shell in 1987, says he has no personal knowledge of the reserves crisis but points to several features of the company's culture that might have contributed to it. Its multicultural nature and, in particular, its Dutch and British sides, mean managers are reluctant to upset people of a different nationality by challenging them directly. Senior executives are left to run their departments on the assumption that they are doing the right thing. "Yes, you will raise questions, but not too hard. It's a very gentlemanly culture," Mr Schwartz says.

In spite of the attention it pays to international affairs, Shell is very insular, Mr Schwartz adds. It rarely hires senior managers from outside. He and Judy Boynton, the chief financial officer who lost her job in April, were exceptions.

The company paid little attention to external communications. It saw scant reason to talk to journalists or financial analysts. The failure of Sir Philip Watts, the chairman, to appear in January to explain the initial 20 per cent reduction in declared reserves was an example of this, he says. "That was typical. There was no one there with the public relations authority [to advise him]. That was a critical weakness."