Mental Models at Royal Dutch Shell

INCUBATING A NEW BUSINESS WORLDVIEW

Perhaps the first large corporation to discover the power of mental models in learning was Royal Dutch/Shell. Shell’s experience shows how difficult it can be to build consensus in a global, multicultural business. The story begins before the upheavals in the world oil business associated with OPEC’s growing influence.

From its beginnings, Shell was multi-cultural: the firm was formed originally in 1907 from a “gentleman’s agreement” between Royal Dutch Petroleum and the London-based Shell Transport and Trading Company. Consequently, Shell managers had developed a self-described “consensus-style” of management respectful of differing cultural perspectives. But as the company grew to more than a hundred operating companies around the world, led by managers from almost as many different cultures, people found themselves trying to build consensus across vast gulfs of style and understanding.

In 1972, a year before the oil embargo, Shell’s scenario planning group had already concluded that the stable, predictable world familiar to Shell’s managers was about to change—with consequences for corporate strategy and global politics. After analyzing long-term trends of oil production and consumption, senior planner Pierre Wack and his team could see that Europe, Japan, and the U.S. were becoming increasingly dependent on oil imports, and that these came from a small number of oil-exporting countries. Although diverse culturally and politically, they had some important things in common. Iran, Iraq, Libya, and Venezuela were becoming increasingly concerned with falling reserves. Saudi Arabia, on the other hand, was reaching the limits of its ability to productively invest oil revenues. In other words, all were gaining economic power as large producers and all had a motivation to limit production. To the Shell planners, these trends meant that the historical, smooth growth in oil demand and supply would eventually give way to chronic supply shortfalls, excess demand, and a “seller’s market” controlled by the oil-exporting nations. Shell’s planners did not predict the precise form of the coming crisis, but they anticipated a shift in power toward oil-exporting nations. Yet, attempts to impress upon Shell’s managers the radical shifts ahead largely failed.

In principle, Shell’s “Group Planning” staff were in an ideal position to disseminate insights about the changes ahead. Group Planning was the central planning department, responsible for coordinating planning activities in operating companies worldwide. At the time, Group Planning was developing scenario planning as a practical method for summarizing alternative future trends. The planners at Shell began to build the coming discontinuities into their scenarios. But their audience of Shell managers found these new scenarios so contradictory to their years of experience with predictable growth that they paid little attention to them.

At this point, Wack and his colleagues realized that they had fundamentally misperceived their task. In a Harvard Business Review article he wrote over a decade later, Wack said that, from that moment, “We no longer saw our task as producing a documented view of the future … Our real target was the ‘microcosms’ our decision makers … Unless we influenced the mental image, the picture of reality held by critical decision-makers, our scenarios would be like water on a stone.”6 If the planners had once thought their job was delivering information to the decision makers, it was now clear that their task was to help managers rethink their world-view. In particular, the Group Planners developed a new set of scenarios in January and February, 1973 which forced the managers to identify all of the assumptions that had to be true in order for the managers’ “trouble-free” future to occur. This revealed a set of assumptions only slightly more likely to come true than a fairy tale.

Group Planning now built a new set of scenarios, carefully designed to take off from the current mental models of Shell managers. Then they helped managers begin the process of constructing a new mental model—by helping them think through how they would have to manage in this new world. For example, exploration for oil would have to expand to new countries, while refinery building would have to slow down because of higher prices and consequently slower demand growth. Also, with greater instability, nations would respond differently. Some, with free-market traditions, would let the price rise freely; others with controlled-market policies, would try to keep it low. Thus, Shell’s locally based operating companies would need more authority to enable them to adapt to local conditions.

Although many Shell managers remained skeptical, they took the new scenarios seriously because they began to see that their present understandings were untenable. The exercise had begun to unfreeze managers’ mental models and incubate a new worldview.

When the OPEC oil embargo suddenly became a reality in the winter of 1973–74, Shell responded differently from the other major oil companies. They slowed down their investments in refineries, and designed refineries that could adapt to whatever type of crude oil was available. They forecast energy demand at a consistently lower level than their competitors did, and consistently more accurately. They quickly accelerated development of oil fields outside OPEC.

While competitors reined in their divisions and increased centralized control—a common response to crisis—Shell did the opposite. This gave their operating companies more room to maneuver.

Shell’s managers responded differently because they interpreted their reality differently. They saw themselves entering a new era of supply shortages, lower growth, and price instability. Because they had come to expect the 1970s to be a decade of turbulence (Wack’s scenarios called it the decade of “the rapids”), they responded as if the turbulence would continue. Shell had discovered the power of managing mental models.

The net result of Shell’s efforts was a significant shift in business fortunes. In 1970, Shell had been considered the weakest of the seven largest oil companies. Forbes called it the “Ugly Sister” of the “Seven Sisters.” By 1979 it was perhaps the strongest; certainly it and Exxon were in a class by themselves.7 By the early 1980s, bringing managers’ mental models to the surface was an important part of the planning process at Shell. About a half-year prior to the collapse of oil prices in 1986, Group Planning, under the direction of coordinator Arie de Geus, produced a fictitious Harvard Business School-style case study of an oil company coping with a sudden world oil glut. Managers had to critique the oil company’s decisions and in doing so prepare themselves mentally for another dramatic shift in their reality. Two years later, a similar exercise was conducted around the fall of the Soviet Union, two years before this too became a reality.

Senge also credits work on mental models with contributing to BP’s rise over the fifteen years covered by his account, when it reached the number two position in global oil sales and volume (after Exxon). BP took a different approach from Shell. At BP the vehicle was not a centralized planning staff, as had been the case at Shell, but a fervent commitment to distribute decision-making power and authority.

By the late 1990s, BP had one hundred and fifty local profit centers, and business unit managers had much greater authority. “We were all familiar with Shell’s use of scenarios to foster challenging mental models,” says CIO and Group VP John Leggate. “But the way they did it through the central planning function did not seem to be the way we wanted to go. John Browne (BP’s CEO since 1995) was passionate about building a performance culture and this meant that more people had to have bottom-line business accountability and think issues through for themselves. Pushing down profit-and-loss responsibility can be hard to do in a large highly integrated business like ours, but we gradually succeeded. The danger of distributing power well is that you become fragmented, which makes ensuring that learning occurs across the business difficult.

“What has helped prevent that from happening here are the variety of networks we’ve developed to keep connecting people, and a climate of openly talking about our problems and challenging each other’s thinking. Continually questioning ourselves has become the basis for our discipline of mental models—though we have never used that terminology extensively.”