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 Milan 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 ENI) 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,Enrico Mattei; 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 the company, •TheAgenzia Generale Italiana Petroli (Agip) was created in1926 by Mussolini and given the task of exploringand supplyinghydrocarbons and distributingoil productsin Italy. 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