Petro-Canada International Assistance Corporation and World Bank 1988 Conference on Petroleum Industry Management (Vol. 6 of 9) : Organizational Growth and Change in National Oil Companies

/7q60O ORGANIZATIONAL GROWTH AND CHANGE IN NATIONAL OIL COMPANIES - A CASE STUDY - A.K. Malhotra January 1988 Energy Division Technical Department The World Bank. ''''^'''z1f 'Ie  ~~*. 449ITRODCTIO (1~~ ? ORGANIZATIONAL GROWTH AND CHANGE IN NATIONAL OIL COMPANIES - A CASE STUDY - . 1. INTRODUCTION 2.. ORGANIZATIONAL CHANGE 3. ORGANIZATIONAL PHASES OF GROWTH IN INDIA'S OIL INDUSTRY 4. SOME KEY ISSUES IN ORGANIZATIONAL CHANGE 5. THE PROCESS OF CHANGE 1  ORGANIZATIONAL GROWTH AND CHANGE IN NOCS A CASE STUDY A.K. MALHOTRA 1. INTRODUCTION During the last six decades, society in every country has become increasingly dominated by large institutions. Every major task, whether it be education, public health, setting up steel mills, pursuit of new knowledge or defense, is today being entrusted to big organizations--either in the public or the private sector. Since these organizations usually function in key areas of the national economy, on their performance oftens depends the future of the country. The National Oil Companies (NOCs) tend to be the largest commercial entities in virtually every developing country, and the largest among them rank among the biggest industrial enterprises in the world. Thus their organization and performance over time has been, and continues to be, an area of crucial strategic national interest. Historical forces have shaped the emergence and growth of the NOCs in the developing countries. And as they have grown, their internal structure and management systems have moved through various stages of development in respone to their environment. An organization structure and form considered optimum for one set of circumstances has proven to be completely inadequate as the organization grows, or the technology alters or the external environment shifts significantly. The critical dimension of time is an element in manage- ment decision making on organization structure that has often been missing. Any organization architect has basically five design principles, i.e., five distinct organization structures for the placement of activities and the ordering of relationships; two of them are traditional--Henri Fayol's functional structure and Alfred Sloan's federal decentralization. Three others are relatively newer--team organization, simulated decentralization and the system or matrix structure. But each of these designs express different design logics and are built with different structure. For large and complex organizations, the important thing to grasp is that organizational structure is only one manifestation of the organization's strength and ability to perform, and even this changes with the age and size of the organization, the growth rate of the industry or the external environment and its own internal dynamics. The various phases of growth that all growing organizations tend to go through will, of course, vary from country to country and company to company. In the succeeding pages, the case of a national oil company (NOC) in a developing country is traced over three decades to identify its various stages of growth, as well as its responses to the external and internal environment. A number of issues such as--(i) the role and composition of the Board of Directors, (ii) the role of regional managers in different stages of growth, (iii) the problem of integration mechanisms in large institutions, (iv) internal research and development (R&D) and the problem of innovation and (v) the mechanism of organizational change--are studied to derive lessons  -2- which may be of some relevance to decision-makers in other countries contem- plating change. 2. ORGANIZATIONAL CHANGE The nationally owned corporations in the developing countries func- tion in a unique environment and successful organizational change in them requires a somewhat different approach than the conventional A major issue in understanding organizational change in the develop- ing countries is to recognize that government owned corporations function in a system which is, in many ways, fundamentally different from that of the private--or even the publicly-owned corporations in the West. The Indian public sector organization, for example, functions in an environment which is different from say a publicly owned corporation in USA or Europe for it is not possible here to apply the simple framework characteristic of the corporate sector the world over, of the interrelationship between the shareholders and the corporate management. The shareholders to board of directors - corporate management framework is invalidated in India because of two factors: (a) The government is the sole shareholder and is accountable to the Parliament; and (b) The corporate management itself is an entity that is composed of three diverse constituents, i.e., the Minister, the administrative ministry embodied in the Secretary of the department and the Chief Executive of the enterprise. This diverse corporate management in turn has different values and frames of reference and hence their objectives and actions are normally not in consonance. The Minister's reference groups are the Parliament, the legis- lative assemblies of the states where the facilities may be located and the various parliamentary committees that oversee the ministry's work in a demo- cracy. And, of course, the press. The administrative secretary and ministry looks for legitimacy and approval to a reference group constituted of the planning commission, the public investment board, the relevant state adminis- trations, the finance ministry and the various ministries which purchase or provide raw materials inputs/outputs to the enterprise. The Chief Executive on the other hand has to deal with a diverse reference or pressure group which includes not only his minister, but also the administrative ministries, the trade unions and the managers of the enterprise itself who are sometimes his colleagues on the board. Thus in managing the organization, there are diverse pressure groups, which need to be catered to. And any change in the existing order of things creates opposition of a magnitude and intensity that is, perhaps, foreign to most publicly-owned corporations in the West. A major restructuring of a national owned corporation requires the approval--or at least benign neglect from--the three constituents as well as their reference groups. A second major factor to note is the fact that though there is no such thing as a 'perfect, organization, even the 'optimum" organization struc- ture changes over time. Every organization, and its component parts, are at different phases of development, and each phase is characterized by a dominant  -3- management style and a structure which is most effective in achieving growth. There is a school of management thought that argues that all growing organiza- tions move through five distinguishable phases of development, each of which contains a relatively calm period of growth (evolution) that ends with a management crisis (revolution), and that each phase is both an effect of the previous phase and a cause for the next phase, and that for each phase there is a distinct form or organizational structure and system. There are a number of key dimensions which seem to define organizational development (Annex 1). Management problems and principles are rooted in time. The passage of time also contributes to the institutionalization of attitudes in an organization making any change progressively more difficult. The change in size creates problems of coordination and communication, levels of hierarchy increase and integration of functions requires changes in systems and structure. The increasing complexity in technology as well as the rate of growth in the external environment make demands on an organization which require differing responses. Thus an organization as it grows may go through a number of phases--from the earliest, entrepreneurial days of creativity to progressively more and more formalized structures in response to the various crises that confront it. During each of these phases, the management focus alters and the organization structure, and practices have to be changed to increase effectiveness (Annex 2). It is now also evident that organizational structure by itself is not enough. Nor is a new strategy an automatic answer to corporate failure. Chronic use of military metaphors leads people to think of all organizations as being hierarchical, rule-driven, impersonal and bureaucratic. But for NOCs, which are organizations that are seeking improvization rather than fore- casting, that value argument more highly than serenity and compliance, that dwell on opportunities rather than on constraints, that encourage doubt and contradiction rather than belief and that need to look to the future rather than defend past actions, neither an organizational chart nor a well-defined strategy is enough. Recent research reveals that a new approach to organizing requires attention not only to structure and strategy, but also to five other variables--systems and procedures, shared values (i.e. working culture), management style, skills and, of course, people. A framework for understand- ing the way organizations function--and the way they can be made to function more effectively--therefore requires focus not only on the hardware--the strategy and structure--but also the software--style, systems, staff, skills and shared values--of the organization. Thus for an organization to grow and function effectively, it must not only master the above seven levels of complexity at a point in time, it must also develop the capability to change as the environment changes. And this response to the environment--be it the forces of international trade, shifts in government regulations, the skills of the competitor, etc., has to go beyond mere changes in structure and strategy. In analyzing organizational growth and change of a national oil company (NOC), it is, therefore, essential to keep the above factors in view. The case study of a NOC in India thus examines not only the organization structure and strategies over the last three decades, but also the dominant patterns of style, systems, skills and staff in the organization.  4- 3. ORGANIZATIONAL PHASES OF GROWTH IN INDIA'S OIL INDUSTRY The oil industry in India is primarily in the public sector. The activities of the public sector are administered by the ministry of petroleum in the areas of exploration and development of oil and natural gas, petroleum refining, trading in crude oil and petroleum products including their market- ing and distribution, production of petrochemicals and other allied products, research, development and training in the field of oil industry including the regulation of the oil industry, rendering of consultancy in engineering services, and pollution control. The ministry is headed by a minister while a full fledged secretary to the Government of India (GOI) is in overall in charge of the Secretariat of the Ministry to assist and advise the Minister. The Secretary normally has a number of joint secretaries, Directors, Deputy Secretaries, Section Officers, etc., and also has had in the past advisers in the area of economic policy, exploration, refineries and petrochemicals to provide technical assistance. In 1985-86, the Ministry dealt with as many as 18 public sector companies or organizations with a combined total equity of about Rs 5,000 1/ crores (including loans), and an annual plan outlay of Rs 3,200 crores. The organi- zations which are administered by the Ministry of Petroleum and which are owned by the government are: Exploration and Production 1. Oil and Natural Gas Commission 2. Oil India Limited B. Refining and Marketing 1. Indian Oil Corporation, Ltd. 2. Bharat Petroleum Corporation, Ltd. 3. Hindustan Petroleum Corporation, Ltd. 4. Cochin Refineries, Ltd. 5. Madras Refineries, Ltd. 6. I.B.P. Company, Ltd. 7. Lubrizol India, Ltd. 8. Indian Oil Blending, Ltd. C. Petrochemicals and other downstream units 1. Indian Petrochemicals, Ltd. 2. Petrofils Cooperative, Ltd. 3. Bongaigon Refineries and Petrochemicals, Ltd. D. Engineering and other services 1. Gas Authority of India, Ltd. 2. Engineers India, Ltd. 3. Balmer Lawrie, Ltd. 4. Bieco Lawrie, Ltd. 5. Bridge and Roof, Co., Ltd. 1/ US$1 = Rs 12.7; 1 crore = 10 million.  -5- The capital investment in the above companies are given in Table 1. This table shows that the companies involved in oil exploration and production had, as of April 1985, a major share of the capital investment of Rs 4,865 crores: A. Exploration and Production 55% B. Refining and Marketing 33% C. Petrochemicals and other units llZ D. Engineering and other services 1% Table 1: CAPITAL INVESTMENT IN THE PUBLIC/SECTOR UNDERTAKINGS As on 1-4-1985 Name of the undertaking Equity Loans Total Exploration & Production 395.85 2,309.50 2,705.35 Oil & Natural Gas Commission 342.85 2,270.93 2,613.78 Hydro Carbons India, Ltd. 25.00 - 25.00 Oil India, Ltd. 28.00 38.57 66.57 Refining & Marketing 293.39 1,311.27 1,604.66 Indian Oil Corporation, Ltd. 123.27 485.34 608.61 Bharat Petroleum Corp. Ltd. 16.57 139.24 155.81 Hindustan Petroleum Corp. Ltd. 40.20 244.01 284.21 Cochin Refineries, Ltd. 7.00 182.20 189.20 Madras Refineries, Ltd. 98.25 255.13 353.38 IBP Co. Ltd. 2.90 0.28 3.18 Lubrizol India Ltd. 4.80 5.07 9.87 Indian Oil Blending Ltd. 0.40 - 0.40 Petrochemicals & Other Down Stream units 333.4 185.46 518.87 Indian Petrochemical Corp., Ltd. 186.00 17.60 203.60 Petroflils Cooperative Ltd. 14.99 2.84 17.83 Bongaigaon Refinery & Petrochemicals Ltd. 132.42 165.02 297.44 Engineering and Other Services 9.40 27.43 36.83 Engineers India Ltd. 0.50 - 0.50 Balmer Lawries Ltd. 1.89 4.28 6.17 Bieco Lawrie Ltd. 1.77 13.80 15.57 Bridge & Roof Co. (India) Ltd. 5.24 9.35 14.59 Total 1.032.05 3,833.66 4.865.71  Table 2: FINANCIAL STRUCTURE/PROFITABILITY OF THE UNDERTAKINGS DURING 1984-85 Gross Net a *ge of Saleo/ profit profit Not pro- Not Gross Oper- before after Corpo- fit to profit profit Name of the Paid-up Net- Capital ating interest tax and Dilvi- rate paid-up to not- capital undertaking capital Loans worth employed income & tax interest dend tax capital worth employed Explorations A production 396 333 3 443 4,188 4 415 1 978 910 38 916 230.1 26.6 47.3 ONGC 3 2,270 >F5 i 8,98 1791 34 IT 2839.8 TV i9 HIL 25 4t8- 4 2 2 38.1 4.3 9.5 OIL 28 83 290 239 428 182 8e 4 90 309.9 29.8 76.4 Refining & Mar- keting 293 1,478 1 290 2 171 17 402 327 118 370 49 39.6 9.0 1651 IOC 123 485 8 i0i 10 989 193 83 T72t 774 1 _M BPCL 18 110 123 334 2,142 34 16 23 120.1 13.7 10.4 HPCL 40 424 1,879 434 2,825 46 9 40 22.6 6.4 10.7 CRL 7 198 28 71 162 6 1 17.1 4.6 8,7 MRL 98 265 128 280 888 33 9 12 N 20.0 16.3 12.1 IBP Co. Ltd. 2 17 12 640 6 2 2 100.7 16.9 46.9 LIL 4 5 18 24 90 6 3 9 1 62.7 18.7 23.7 IOB 2 3 4 102.6 14.8 32.8 Petrolchemical A other down stream units 333 204 836 637 889 97 64 9 23 19.5 10.2 18.4 IPCL 188 -37 4M30 379 679 i SO 9 27.2 11.7 1704 POL 14 2 85 67 154 32 17 9 14 117.2 27.0 47.8 BRPL 132 164 139 91 1S5 - -3 -2.6 -2.4 -0.9 Engineering A other servicing units 9 29 40 78 192 22 7 9 75,5 17.6 2901 EIL 1 33