The Evolution of the Strategy and Structure of a State-Owned Company: The Case of Agip Petroli S.p.A., 1960-1990

Luigi Orsenigo FondazioneASSI and Bocconi UniversiCyof

Giulio Sapelli Pier AngeloTonine!!i FondazioneASSI and State UniversiCyof Milan

The historyof Agip is interestingfor severalreasons •. First,as the historyof an oil company,it is a pertinentcase study in the processof adjustmentand reorganizationof a large,vertically integrated company. This study highlights the perennial tension between centralization and decentralizationwithin organizations, sheds light on the natureof the patterns of responseto externalshocks, and illustratesthe role of precedentand traditionin shapingbehavior, strategies and structures. Second, since Agip is a state-ownedcompany, the storysheds light on the difficultrelationship betweenpolitics and economicsas well as on the behaviorof state-owned companies.The historyof Agip illustratesthe influenceof the processof evolutionon managerialcompetency, and on the impactof the structureof incentivesand controlmechanisms on management.Third, as the historyof an Italian corporation,the caseof Agip providesmaterial for the analysisof a crucialissue in Italian businessand industrialhistory, namely the weakness of the large, manageriallyfragmented company, and the persistingrole of family capitalism.

The Birth of Agip Petroli: Antecedents

"AgipPetroli" (AP) wasfounded in December1977 as the resultof the separationof Agip (the oil divisionof ) into two operatingcompanies: Agip S.p•., responsiblefor explorationand supply activities,and AP,

•Thispaper is based partly on interviews with current and/or former managers ofAgip. In what follows,for reasonsof space,we shallnot quotethese sources as evidenceabout specific issues. We take the opportunity,however, to thankall of them for their kind cooperation.Empirical evidenceand data are drawn from [1, 2, 10].

BUSINESS AND ECONOMIC HISTORY, SecondSeries, Volume Twenty-one, 1992. Copyright(c) 1992by the BusinessHistory Conference. ISSN 0849-6825.

129 130

responsiblefor refiningand distribution activities. The birth of AP markedthe culminationof a long processof organizationaland strategicchange at Agip and ENI. These developmentshad been initiatedin the 1960s,and were motivatedby the interactionof economic,organizational and political variables.: Traditionally,the ENI grouphad been extremely centralized. As an oil company,ENI was intrinsicallycharacterized by a high degree of vertical integrationand centralization. As a state-ownedcompany, ENI hadthe precise "mission"of guaranteeingthe energyself-sufficiency of the countrythrough its controlof all stagesin the productionof oil. Finally,ENI hadbeen dominated by the personalityof its founder,; strategyand management were stronglycentralized in Mattei's hands. FollowingMattei's death in 1962,the organizationalstructure of the oil activitiesdid not undergodrastic change. With regardto Agip, the company maintainedan integratedmanagement approach toward exploration,supply and distribution.Refining, however, was controlledby ANIC, the chemical divisionof ENI. By comparisonwith otherprivate producers and the majors on the Italian market, the ANIC was quite small. In the late 1960sAgip retained12% of the oil-refiningcapacity of the country,whereas the majors held 37% and the independentnational private producers held 51%. During this period,moreover, the role of explorationwas graduallyreduced as a consequenceof a strategyaimed at obtainingsupplies of crudethrough long- term contractswith the "majors"and with producingcountries. Agip, in other words,was becoming less a producerthan a "merchant"[4, 14]. Duringthe 1960s,the operatingcompanies gained progressively higher degreesof autonomyvis-a-vis the holdingcompany. This was the outcomeof severalfactors. First, the deathof Mattel had weakenedthe strategicinitiative of ENI. In this respect,Agip's situation was comparable to that of a number of companiesthat experienceddecline upon entering the "secondgeneration" of leadership.Yet, the caseof ENI is considerablymore complex,primarily becauseENI is a state-ownedcompany. Furthermore, during the 1960s,the relationshipbetween ENI and the political world underwentprofound changes.In the"Mattei Age," the relationship was dominated by thecompany,

•TheAgenzia Generale Italiana Petroli (Agip) was created in1926 by Mussolini and given the task of exploringand supplyinghydrocarbons and distributingoil productsin . The expectationof the Fascistregime was that the new state-ownedcompany would reducethe foreignenergy dependence of the country.However, up to the postWorld War II periodresults werevirtually negligible, since the companywas nearly paralyzed by contrastingeconomic and politicalinterests of both privateand publicnature. The actualdevelopment of the company beganwith the 1946appointment of EnricoMattei as extraordinaryadministrator by the C.N.L. Mattei gavea newimpulse to explorationand supplyof oil and gasin Italy and abroad.Later (1953)he wasresponsible for the creationof a state-ownedintegrated oil group,ENI (Ente NazionaleIdrocarburi). Once again, the aimwas to providefor the energyindependence of the country,counterbalancing the power of foreigncompanies, as well as to developchemical activitiescontrolled by the state.As a consequence,Agip becamethe outstandingoperating companyof the ENI group.See, for instance,[4, 11, 14]. 131

whichwas able to imposeon the politicalsystem its own visionand strategy, andeven to createits ownconstituency in thepolitical parties [16]. This ability dependedheavily on the personalityof Mattei, but also on the contextual developmentof a strongand aggressive "corporate culture," which was capable of proposingand implementing ambitious strategies. Indeed, despite the high degree of centralizationof the company,especially evident in strategy formulation,a competent,proud and technicallyoriented management was being createdwithin the company.However, the autonomyof ENI also dependedon a generalconfluence of interestsand vision between the political systemand the public"managerial" system. In other words,in the 1950s,the relationshipbetween ENI andthe political system was cooperative rather than hierarchical.In short,ENI wasan activepart of the politicalsystem, capable of influencingand transformingit [14]. This relationshipwas reflected in the organizationaland control structureswithin ENI. At the top strataof the politicalsystem, the Minister of StateParticipation in Industryhad political responsibility for the strategies of the company.The reciprocalrelationship between ENI and the political system,as well as the validityof politicalinfluence, were reinforcedas these strategieswere implemented.In the middle,the holdingcompany (ENI) coordinatedsectoral policies and provided financial assistance to the operating companies.The operatingcompanies were then free to pursuetheir own strategiesand run day-to-daymanagement within the aboveconstraints [5, 15]. The inherentfragility of thissystem was revealed in the 1960swhen the preconditionsfor its viabilitygradually weakened. In general,the verygrowth of the systemof "StateParticipation" raised the issueof the relationship between the State and its companies.This generateda complexand sophisticateddebate regarding the extentand mechanismsof politicalcontrol over the managementof the companies[5, 12, 15]. Moreover,changes in the politicalenvironment, when a Center-Leftgovernment coalition was formed, had introducednew parties into the administrationof state-ownedcompanies [7, 11, 131. Other developmentswere specificto the caseof ENI. As mentioned, the autonomousinitiative of ENI declinedto someextent as a consequence of Mattei's death.Second, the generalpolitical dimate becameless favorable to ENI. The turningpoint and dearestmanifestation of this changewas the so-called"chemical war," which occurredwhen the expansionof ENI into chemicalsand the acquisitionof Montedison(the largestItalian private chemicalcorporation) led to a bittereconomic and political conflict. On this occasion,ENI lost a largepart of its politicalsupport. Third, the economic and financialcondition of ENI hadworsened as a resultof overleveragingand a declinein self-fmancing.Consequently, the companywas subjected to the constrainingpower of the politicalsystem. Political institutions gained the latitudeto makedecisions regarding the provisionof directfmancing (in its positionas soleshareholder), through the mechanismof "endowmentfunds". Fourth,and possibly more important, this constraining power did not coincide with the ability to formulatestrategies; but sincepublic shareholdingwas actuallyfragmented into different political factions, pursuing different interests and objectives,it manifesteditself only as a powerof veto. 132

ENI thussaw its abilityto formulatestrategies reduced. The resultant lossof controlwas not dueto excessivesize as such, but to the fragmentation of interestsamong its publicshareholder, and the absenceof a management capableof runningthe companyfree of the controlof the shareholder.Within this context,the autonomyof the operatingcompanies resulted in structural transformationto a "weak"feudal system. The absenceof a clear strategy increasedtheir scopeof action and allowedthe operatingcompanies to establishdirect links with the politicalsystem, independently of the holding company.At the sametime, theywere exposedto myriadpolitical pressures andbecame a battlegroundfor the definitionof spheresof influencespheres and political factions.In part, however,the increasingautonomy of the operatingcompanies reflected an attempton the part of managementto resist politicalpressures and to reasserttheir independence.This resurgencefound a formal manifestationin 1972,when the new presidentof ENI, Girotti, explicitlyexpanded the responsibilitiesof the operatingcompanies. Girotti redefinedand restrictedholding company involvement to the approvalof generalprograms. Direct interventionon the part of the holdingcompany becameacceptable only in caseof unsuccessfulmanagement of the operating companies.

Strategic and Organizational Change after the First Oil Shock

Despite these changes,the structure of Agip remained virtually unchanged.However, separation and sometimesconflict between upstream activitiesin Milan and downstreamactivities in becameapparent. As a resultof the emergingmerchant orientation in Agip,Rome had gained an increasinglyimportant role. It must be noted that downstreamactivities representeda smallershare of total activitiesin ENI as comparedto other major companies,but thiswasonly a consequenceof the strongdomestic orientationof thedownstream operations. 3Thus, the structure of Agip,while seeminglysimple on the surface,was actuallyquite complex.It integrated different culturesand hid a de facto autonomywhich generatedconflicts between the various directions,especially when the organizationaland strategicweakness of the holdingcompany is takeninto account. The changein the structureof the marketsand competitionwhich followedthe first oil shockintroduced further problems. In general,the first oil shockbrought the followingconsequences at the industrylevel. First,the lossof controlof the sourcesof crudeand of prices,reduced the abilityto

3Onthe domestic market, Agip was the largest distributor ofrefined products inthe early 1970s. The marketshare of Agip reached25% for gasolineand 18% of all otherrefined products. The expansionof the commercialactivities had taken place also through the developmentof supportingstructures to distributors(e.g. motels)and throughthe introductionof innovative lubricantsOutside the homecountry, instead, the growthof downstreamactivities was limited andconcentrated in few Europeanand African countfids: France, Germany, Switzerland, Austria andHungary in Europe.At anyrate, 3/4 of Agip'soutlets were concentrated in Italy andeven in the followingyears the growthof downstreamoperations took place mainly domestically. 133

managethe oil cycle in a fully integratedway. The degree of vertical integrationwithin the industrydecreased quite rapidly as different agents now controlled upstreamand downstreamactivities. Second, as a consequence, supply graduallybecame a separatefunction from productionand was increasinglybased on the knowledgeof marketoperations. The development of spotand forwardmarkets also meant lower transactioncosts. During the 1970s,this trend particularlyaffected companies like Agip which did not control large oil reservesand were comparativelymore downstream orientated.Third, decliningprofits made it necessaryto increasethe efficiency and accountabilityin the variousphases of the oil cyclethrough the creation of costand profit centers within the companies.It mustbe stressedthat in the 1970sdeclining profits again becamea characteristicof the "crude-poor" companies.Although higher oil pricesraised the possibilityof increased profits,companies with a limitedsupply of crudewere incapable of benefitting from the situation[6, 9]. For Agip, the oil shockimplied that its traditional"mission," i.e. the guaranteeingof energyself-sufficiency coupled with the needto curbimport of crude,returned as the central strategic concern of the company.As in most oil companies,the immediateconsequence of thisstrategic imperative was an effort to reconstitutevertical integration through renewed exploration. This explorationinitiative was to be implementedboth domestically and abroad and wouldinclude an emphasison off-shoreexploration. Both the refining capacity and market share in total domestic distributionincreased substantially after 1973.In part, this growthwas the resultof a consciousstrategy of expansionof downstreamactivities. To a large extent,however, this choicewas dictatedby the fact that someimportant producersand distributorswere restructuringtheir downstreamactivities worldwide,and consequentlyexited the Italian market.In this context,Italy was no longerperceived to be an attractivelocation, partly because of the 1967-75closure of the SuezCanal, and alsobecause Italian legislationon the pricingof oil productswas consideredexcessively tight. Agip consideredthe gapsthus opened in the Italian market as an opportunityfor growth.Even more importantly,as a state-ownedcompany, Agip saw a threat to the continuedsupply and distributionof oil productson the domesticmarket. Therefore,Agip choseto acquireShell Italia, whichbecame IP, Industria Italiana Petroli. As a resultof internaland externalgrowth, by 1975,the oil sectorin ENI had substantiallychanged. 4 Both upstreamand downstreamactivities, particularlyrefining, had expandedconsiderably. This growthhad instigated severalthorny problems.The downstreamexpansion had occurredin a piecemealmanner. Consequently, an extensiverestructuring was necessary in productivecapacity, logistics, and in the managementof the distribution network.

nThedomestic market share of Agipreached 40% for gasoline and 30% of alloil products. Agip'srefining capacity which in the late Sixtiesamounted to 12% of the total capacityof the country,surpassed 40% in 1978,while abroadit was reduced. 134

Furthermore, the expansionof reœmingactivities as well as the acquisitionof ShellItalia, had introduced new technical and corporate cultures and capabilities.All thesedevelopments implied changing power relationships withinAgip. Officesoverseeing exploration remained relatively subordinate within the structureof the company,even followingthe marked increasein exploration.The explorationbranches of Agip beganto requesthigher levels of autonomy.Finally, it had become necessaryto introduce greater accountabilityand transparency in internaltransactions, particularly concerning the relationshipbetween exploration and downstreamactivities. A lack of transparencyin supplyoperations also needed to be addressed. The processof reorganizationof Agip beganin 1975.It wasa source of considerableconflict, which involved several different (and overlapping) cultures.First werethe "makeversus buy" cultures. The conflictwas between one part of managementthat consideredit a mistaketo separatea "naturally integratedoil cycle"and anotherpart that emphasizedthe potentialbenefits derivingfrom a more decentralizedorganization. Second were the "public" versus"private cultures. The first stressedAgip's traditionalmission as guarantorof the oil supply;the latter wasgradually growing within ENI, both internallyand throughthe entryof the managementfrom privatecompanies that had been acquiredby ENI. Thesemanagers had a financialrather than a technicalorientation and advocateddevoting more attentionto efficiency and to the economicperformance of the company.Third were the upstream versusdownstream cultures, both of which asked for more power and/or autonomywithin Agip. Thesecultures interacted in complexways, generating a widespectrum of opinionsand prescriptives. Moreover, the conflictwas also influencedby politicalconsiderations and the politicalaffiliation of individual managers. The reorgani7ationproject was eventually approved at the endof 1977. Agip was dividedinto two operatingcompanies: Agip S.p.A, whichwas responsiblefor upstreamoperations and supply,and Agip Petroli,which controlledrefining and distribution in boththe homemarket and abroad. Agip Petroli was in a subordinateposition visa vis the upstreamcompany. The partitionof Agip wasthe outcomeof the growingautonomy of the operatingcompanies, coupled with a responseto the needfor higherdegrees of accountabilitywithin Agip. The particularsolution chosen reflected the ascendancyof upstreamoperations, both in economicand political influence.

Evolution in the 1980s

Radical transformation of the national and international markets in the aftermathof the secondoil shockquickly made the new organi7ational structureobsolete. Falling demandand pricesresulted in overcapacityand decliningprofits. These factors strengthenedthe trend toward vertical disintegration,transformed supply into a market-orientedactivity, and stimulatedattempts to attainhigher cost efficiency. Compared to the period followingthe first oil shock,the crucialstrategic problem was no longerthe sheeravailability of oil. In the 1978-81period supply became a pivotalaspect of Italy'senergy policy to thepoint that it required"political" management, or 135 at least "supervision"of ENI onAgip S.p•? Efficientacquisition, utilization and particularly,distribution of oil in the marketplacebecame the crucial issues[6, 9]. As chief determinantand sourceof profits, downstreamoperations acquiredstrategic importance. Correspondingly, supply activities became more doselylinked to refiningand distribution.The cumulativeresults included: rationalizationof the organizationaland productive structures to checkfalling prices; modernizationof industrialactivities through the adoption of technologiescapable of increasingconversion capacity and making more efficient and flexible use of the crude;and rationalizationof the distribution network. Emphasison downstreamoperations made for a newchange in strategy and structure of oil activities in ENI. Rationalization, efficiency and profitability gradually substitutedmarket share as the main strategic imperative.In 1981 Agip Petroli was promotedto the positionof parent company,to be placedin the positionof coordinatingthe refining and distributionactivities, as well as streamliningthe downstreamcycle. A special committeewas appointed in ENI to coordinateupstream and downstream activities,in particularthe supplyand definitionof transferprices. However, the workingof thiscommittee was never fully satisfactory and the coordination of supplybetween the two companiesremained a constantsource of disputes. A long-term efficiencyand rationalizationplan was immediately initiated. Refming required major restructuringas well as substantial downsizingof some plants.An additionalgoal was the adoptionof new technologiescapable of introducinggreater flexibility and overallefficiency intothe production process. 6Moreover, refining had long been managed by the chemicaldivision of ENI. Ref'mingtherefore required effective integration into, and coordinationwith, distribution.This task amountedto the creation andmerger of productivecapabilities within a structuretraditionally orientated towardmarketing and distribution. Difficulties were compoundedby the fact that existingref'ming capacity had resulted in the acquisitionof heterogeneous plants,technical competency and corresponding managerial strategies. Similar problemswere involved in the restructuringof the distributionnetwork, which was characterizedby an excessivenumber of small and inefficientoutlets. Rationali?ation,however, implied coordination with otheroil companiesand washampered by legislationwhich essentially protected small, independent outlets.

SEvidencesupporting thisview can be found in a numberofsources both internal and external to the ENI group.See, for instance,[3, 8].

6Inthe early 1980s inAgip were working on average at60% of their primary capacity while conversioncapacity was below 10%. As far as distributionis concerned,the network of gasolinestations averaged only about 400 tons per unit/peryear. This was quite a recordfor the Italian market but was muchlower than the averageof most other Europeancountries. 136

In 1981 AP acquiredthe plants of Mach, a private refining and distributioncompany. This acquisitionwas highlycontroversial and strongly opposedby a largefaction within Agip management.Opponents considered the moveeconomically unsound, and viewed it asa resultof politicalpressure aimedat rescuingthe politicallyinfluential Math group. The rationalizationprogram achieved some notable results. As a state- ownedcompany, Agip facedspecial constraints when considering layoffs and plantclosings. The government expected Agip to helpavoid social conflict, as well as to prevententry into the domesticmarket by the Middle-East companies.7 In 1985 a new rationalizationprogram was launched,which emphasizedtechnological change intended to increase conversioncapacity andachieve greater profitability. The programwas quite successful, although rationalizationof the distributionnetworks proceeded much more slowlythan initial projections.s A major result of this strategyhas been the decentralizationof all activitiesexcept distribution. This wasaccomplished throughthe creationof a numberof subordinatecompanies. Moreover, increasedefficiency was reached through the informatizationof logisticsand of the distributionnetwork. This downstreamgrowth revived the issueof the organizationalstructure of oil activities.In 1991,Agip Petroli wasassigned responsibilityfor managingsupply.

Conclusion

The studyof the historyof Agip suggestsseveral avenues for future research.First, it providesa rich casestudy of the nature of strategicand organi?ationalcorporate change. In Agip,such changes were rather (but not always)slow and were heavily influenced by precedent and prior evolutionary developments.Change and innovation also involved deep conflict. It mustbe also stressedthat to some extent the processof adaptationwas not fully conscious.The debate that led to variousreorganizations did not always concern the issues that turned out to be the most relevant. Even now it is not entirelyclear whetherthe optionschosen were the best available.In particular,economic variables did not suggestper se precisestrategic and organizationalsolutions; rather, they identified only a broadset of constraints whichwould have alloweda broad menu of choices.Thus, the processesof decentralizationand of (partial)vertical disintegration that took place in Agip resultednot onlyfrom a consciousevaluation of the potentialeconomic and organizationaladvantages, but were stimulatedto a large extentby the weakeningof the strategicand control capability of the coordinatingfunction

7Suchentry would not only have threatened Agip' s market share, but more important, it would have alsoadded instabilityin the market.

Sin1985 two of the less productive refineries and a fewdeposits had been already closed and eliminationof lessprofitable gas stations was underway. 137

withinthe holdingsubsidiaries. Nevertheless, the resultingsolutions were used and adaptedto meet the problemsthat were left unresolvedor emerged unexpectedly. The caseof Agip alsoillustrates some of the problemsassociated with stateownership. It demonstratesthat politicaland socialconstraints influence corporatestrategy, structure and performance.This is often accomplished throughmanagerial diffusion at the microlevel, of "politically-oriented"rules of behavior and selectionmechanisms. In particular, it illustrates the fragmentationof interestsand objectivesof the shareholderwhich had weakenedthe strategiccapabilities of the company,as well asthe abilityof the holdingcompanies to control and direct the activitiesof the operational branches.From this perspective,the caseof Agip testifiesto the difficulties involvedin the developmentof "managerialcompanies" in Italy, evenin the caseof a state-ownedcompany. Soon after the deathof the "founder,"and as the confluenceof interestswithin the political systembroke down, the companywas exposed to a processof lossof controland strategicparalysis. In privateItalian companiesthe solutionto the problemof "succession"has been the persistenceof "familycapitalism." In the state-ownedcompanies, successionof leadershiphas often been accompanied by a declinein efficiency. The caseof Agip is distinctivebecause an independentand professional managementhas expanded and adaptedto change,while frequentlyresisting politicalpressure and influence.In otherwords, a strongmanagerial culture has persistedover time and has heavily contributedto the shapingand evolutionof strategiesand structures.

References

1. AGIP Petroli,Relazioni di BilancioRome, various years. 2. AGIP S.p.A.,Relazioni di Bilancio(Rome, various years). 3. Cameradei Deputati,VIII Legislatura,V CommissionePermannente, lndagine conoscitiva sui modidi eserciziodell'attivita dell'ENI, etc., 2 w. (Roma, 1980). 4. M. Colitti,Energia e sviluppoin Italia. La vicendadi EnricoMattei (Bari, 1979). 5. , Le grandiimprese e 1ostato (Torino, 1972). 6. , Oil Companies:Strategies to Meet the New Challanges,paper presentedto the EnergyOutlook Conference,Rome, 13-14June 1991. 7. D. Cuzzi,Breve storia dell'Eni. Da Ceilsa Girotti(Bari, 1975). 8. ENI, Direzioneper Io sviluppoe la programmazione,Piano di sviluppodel gruppoENI (Roma, 1979). 9. R.M.Grant, TheOil Companiesin Transition(Milano, 1991). 10. IP (Italiana Petroli)Relazioni di Bilancio(Genua, various years). 11. M. Magini,L'italia e il petrotio.Fra storiae cronologia(Milano, 1975). 12. Ministeroalelie Partecipazioni Statali, Rapporto sullepartecipazioni starall, (Venezia, 1980). 13. A. Pressendaand M.Sarale,œ'Eni da Mattei a Ceils(Torino, 1978). 14. G. Sapelliand F. CarnevaleUno sviluppo tra pollficae strategia.ENI 1953-1985(Milano, 1992). 15. P. Saracen• • sis•emade•e impresea partec•pazi•nestata•e nel• esperienzaita•iana (Mi•an• 1975). 16. A. Shonfield,Modem Capitalism(Oxford, 1965).