Description
Module 09: Introduction
This module begins our emphasis on corporate strategy. So far, we have discussed business strategy, which focuses on what the company should do to reach competitive advantage. This module takes a broader look at the competitive environment to explore the boundaries of firms.
Learning Outcomes
Examine the linkage between innovation and competitive advantage and the determinants of the profitability of innovation.
Identify alternative strategies to exploit an innovation.
Argue the impact of technology on the rapid evolution of industry structure and changing key success factors.
Determine the impact of standards on markets.
Examine vertical integration decisions.
ReadingsRequired:
Chapter 9 Technology-based Industries and the Management of Innovation & Chapter 10 Vertical Integration and the Scope of the Firm in Contemporary Strategy Analysis
Chapters 9 & 10 PowerPoint slides in Contemporary Strategy Analysis
Munir, S., Rasid, S. Z. A., Aamir, M., & Ahmed, I. (2022). Big Data Analytics Capabilities, Innovation and Organizational Culture: Systematic Literature Review and Future Research Agenda. 3C Tecnologia, 209–235. https://doi.org/10.17993/3ctecno.2022.specialissue9.209-235
Recommended:
Chen, Y. (2021). A Systematic Literature Review of Disruptive Innovation and Strategic Alliance. Proceedings of ISPIM Conferences, 1–14. https://doi.org/10.1016/j.jengtecman.2020.101568
Module 09: Critical Thinking Assignment
Attached Files:
CT Rubric (58.071 KB)
Eni Case 16 (850.238 KB)
Eni is Italy’s largest and most profitable company. The case traces Eni’s 50-year history from its founding as a state-owned oil and gas company, through its privatization and restructuring during the 1990s, to its growth and success under its present CEO, Vittorio Mincato. The case surveys the state of Eni during the early part of 2003 and considers some of the challenges facing Mr. Mincato as he seeks to sustain and continue Eni’s outstanding financial and operating performance under a strategy of “disciplined growth” and “core business focus.” The case deals with the analysis of corporate strategy for a large corporation. (By 2003, Eni was among the top-50 global corporations whether measured by sales or market capitalization.) Eni is vertically integrated, international, and diversified across several industrial sectors. The case requires students to identify and analyze the rationale behind Eni’s current corporate strategy and make recommendations for how Eni should allocate its resources across its different vertical levels, business sectors, and geographical areas of operation in the future. A key challenge of the case is that Eni is currently performing exceptionally well. Hence, there is a tendency among many students to recommend “Keep up the good work, Mr. Mincato” without looking deeply at the company and its business. In fact, Eni faces a number of key challenges, which must be addressed if Eni’s recent success is to be sustained. This case is used to develop students’ skills in the following:
Identifying, articulating, and analyzing a company’s corporate strategy.
Analyzing the fit between a company’s corporate strategy and (a) its external environment and (b) its resources and capabilities
Combining quantitative, qualitative, and historical information to build a profile of a company’s resources and capabilities.
Examining the structure, systems, and culture that an organization needs to support its corporate strategy.
What is Eni’s corporate strategy?
Evaluate Eni’s corporate strategy. How well aligned is Eni’s strategy with (a) the characteristics and requirements of its industry environment and (b) Eni’s resources and capabilities?
Looking ahead over Eni’s next four-year planning period (2004–7), what are the main issues that face the company? How should Eni allocate its resources across its different businesses and between different geographical areas? In particular: a) Should Eni divest its chemicals business? What about its engineering, construction, and oilfield services subsidiaries? b) Should Eni seek to establish itself as a major supplier of electrical power? Should it invest in renewable energy sources (e.g. wind power)? c) What should Eni’s international strategy be – especially in relation to its downstream businesses (Refining and Marketing; Gas and Power)?
What organizational changes should Mincato pioneer, especially with regard to organizational structure, management systems, and corporate culture?
Note: Answer the Critical Thinking Assignment mainly based on the Module 9 Case . Chapter 5 ” Analyzing Resources and Capabilities” of the textbook is also relevant to this case. Optionally, feel free to support your reasoning with additional valid academic sources using SEU e-library.
Your well-written paper should meet the following requirements:
Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
Use Saudi Electronic University academic writing standards and APA style guidelines.
Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
Review the grading rubric to see how you will be graded for this assignment.
Unformatted Attachment Preview
Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant
Chapter 9
Technology-based Industries and the Management of
Innovation
Technology-based Industries and the Management of Innovation
Outline
• Competitive Advantage in Technology-intensive Industries.
• Strategies to Exploit Innovation.
• Standards, Platforms, and Network Externalities.
• Platform-based Markets.
• Implementing Technology Strategies.
9-2
Competitive Advantage in Technology-intensive Industries (1 of 10)
The Development of Technology: from Knowledge Generation to Diffusion
9-3
Competitive Advantage in Technology-intensive Industries (2 of 10)
Compressing the Technology Cycle: Less Lag between Invention and
Commercialization
BASIC KNOWLEDGE
FIRST
PATENTS
PRODUCT LAUNCH IMITATION
Jet Engines
17th century Newtonian physics
1930
1957
1959
Xerography
Late 19th, early 20th centuries
1940
1958
1974
Fuzzy logic controllers
1960’s
1981
1987
1988
Automobile satellite navigation
Late 1950s
Early 1960s
1998
2002
MP3 players
Early 1990s
1994
1997
1999
Instant messaging
Late 1980s
2002
2008
2009
9-4
Competitive Advantage in Technology-intensive Industries (3 of 10)
Appropriation of Value: How are the Benefits from Innovation Distributed?
9-5
Competitive Advantage in Technology-intensive Industries (4 of 10)
Appropriating Value: Who Gets the Benefits from Innovation?
9-6
Competitive Advantage in Technology-intensive Industries (5 of 10)
The Profitability of Innovation
9-7
Competitive Advantage in Technology-intensive Industries (6 of 10)
Legal Protection of Intellectual Property
Patents
— exclusive rights to a new product, process, substance or design.
Copyrights
— exclusive rights to artistic, dramatic, and musical works.
Trademarks
— exclusive rights to words, symbols or other marks to distinguish goods and services;
trademarks are registered with the Patent Office.
Trade Secrets
— protection of chemical formulae, recipes, and industrial processes.
Also: employment contracts may restrict employees’ freedom to transfer technology and
know how.
9-8
Competitive Advantage in Technology-intensive Industries (7 of 10)
Complementary Resources
Bargaining power of owners of complementary resources depends upon whether
complementary resources are generic or specialized.
9-9
Competitive Advantage in Technology-intensive Industries (8 of 10)
U.S. Managers’ Perception of the Effectiveness of Different Mechanisms for Protecting Innovation
Secrecy (%)
Patents (%)
Lead-time (%)
Sales/service (%)
Manufacturing (%)
Food
59
18
53
40
51
Drugs
54
50
50
33
49
Electronic components
34
21
46
50
51
Telecom equipment
47
26
66
42
41
Medical equipment
51
55
58
52
49
All industries
51
35
53
43
46
Food
56
16
42
30
47
Drugs
68
36
36
25
44
Electronic components
47
15
43
42
56
Telecom equipment
35
15
43
34
41
Medical equipment
49
34
45
32
50
All industries
51
23
38
31
43
Product innovations
Process innovations
9-10
Competitive Advantage in Technology-intensive Industries (9 of 10)
Why Do Firms Patent? (Responses by 674 US manufacturers)
9-11
Competitive Advantage in Technology-intensive Industries (10 of 10)
Alternative Strategies for Exploiting Innovation
9-12
Strategies to Exploit Innovation (1 of 4)
The Timing of Innovation: To Leader or to Follow?
Product
Innovator
Follower
The winner
Jet airliner
De Havilland (Comet)
Boeing (707)
Follower
Float glass
Pilkington
Corning
Leader
X-ray scanner
EMI
General Electric
Follower
Office PC
Xerox
IBM
Follower
VCRs
Ampex/Sony
Matsushita
Follower
Instant camera
Polaroid
Kodak
Leader
Microwave oven
Raytheon
Samsung
Follower
Video games player
Atari
Nintendo/Sony
Followers
Disposable diaper
Procter & Gamble
Kimberley-Clark
Leader
Compact disk (CD)
Sony/Philips
Matsushita, Pioneer
Leader
Web browser
Netscape
Microsoft
Follower
Web search engine
Lycos
Google
Follower
MP3 music players
Diamond Multimedia
Apple (iPod)
Follower
9-13
Strategies to Exploit Innovation (2 of 4)
The Timing of Innovation: To Leader or to Follow?
Product
Innovator
Follower
The winner
Microprocessors
Intel
AMD, ARM
Leader
Cryptocurrencies
Bitcoin
Etherium, Ripple
Leader
Flash memory
Toshiba
Samsung, Intel
Followers
E-book reader
Sony (Digital Reader)
Amazon (Kindle)
Follower
Social networking
SixDegrees.com
Facebook
Follower
9-14
Strategies to Exploit Innovation (3 of 4)
To Lead or to Follow? Some Key Considerations
9-15
Strategies to Exploit Innovation (4 of 4)
Uncertainty & Risk Management in Tech-based Industries
9-16
Standards, Platforms, and Network Externalities (1 of 5)
The Emergence of Standards
• Emergence of a dominant designs.
• Model T in autos.
• IBM 360 in mainframes.
• Douglas DC3 in passenger aircraft.
• Emergence of technical standards.
• Emerge in industries where there are network extremities.
• Entrenchment of dominant designs and technical standards.
• Learning effects: incremental improvement of the dominant design.
• Switching costs.
• Need for coordinated action by multiple players.
9-17
Standards, Platforms, and Network Externalities (2 of 5)
Sources of Network Externalities
• Users linked within a network e.g.:
o
o
Telephone systems—only value of telephone is connection to other users.
On-line auction—value of auction depends on number of buyers and sellers participating.
[Also, social identification—the desire to conform encourages imitative behavior].
• Availability of complementary products e.g.:
o
o
Most smartphone apps written for iPhone and Android—Blackberry and Windows dying for lack of
apps.
In autos, more available spares and repairs for a Ford Focus or Honda Accord than a Kia, Proton, or
Lamborghini.
• Economizing on switching costs e.g.:
o
Office software (Microsoft Office v s. Lotus SmartSuite).
ersu
9-18
Standards, Platforms, and Network Externalities (3 of 5)
Companies that Own
Technical Standards
Company
Product category
Standard
Microsoft
PC operating systems
Windows
Intel
PC microprocessors
x86 series
Sony/Philips
Compact disks
CD-ROM format
ARM (Holdings)
Microprocessors for mobile devices
ARM architecture
Oracle Corporation
Programming language for web apps
Java
Rockwell and 3Com
56K modems
V90
Qualcomm
Digital cellular wireless communication
CDMA
Adobe Systems
Common file format for creating and viewing documents
Acrobat Portable Document Format
Adobe Systems
Web page animation
Adobe Flash
Adobe Systems
Page description language for document printing
PostScript
Bosch
Antilock braking systems
ABS and TCS (Traction Control System)
IMAX Corporation
Motion picture filming/projection system
IMAX
Apple
Music downloading system
iTunes/iPod
Sony
High definition DVD
Blu-ray
Nissan, Toyota, PSA
Electric vehicle charging
CHAdeMO
9-19
Standards, Platforms, and Network Externalities (4 of 5)
Competing for Standards: Value Appropriation v s. Market Acceptance
ersu
9-20
Standards, Platforms, and Network Externalities (5 of 5)
Fighting Standards Wars
1. Determine the potential for standards emergence—analyze network externalities.
2. Assemble allies—enlist partners (customers, complementors, competitors) to build a bandwagon.
3. Pre-empt the market—build user base quickly: enter early, attract key customers, adopt penetration pricing.
4. Manage expectations—use launch and pre-launch publicity and promotion to convince the market that you will
be the winner.
How can the winner sustaining the standard?
o
o
o
o
Don’t fall behind on technology.
Ensure backward compatibility.
Meet threat of disruptive technology by offering customers a migration path.
Reinforce standard with other resources—e.g. brand.
What if you’re a loser? (a) ensure compatibility (b) go for niche
9-21
Implementing Technology Strategies (1 of 3)
The Conditions for Creativity: “Operating” and “Innovating” Organizations
Operating organization
Innovating organization
Structure
Bureaucratic: Specialization and division of
labor; hierarchical control. Defined
organizational boundaries.
Flat organization with weak hierarchical control.
Task-oriented project teams. Fuzzy
organizational boundaries.
Processes
Emphasis on eliminating variation (e.g. sixsigma). Top-down control. Tight financial
controls.
Emphasis on enhancing variation. Loose controls
to foster idea generation. Flexible strategic
planning and financial control.
Reward systems
Financial compensation, promotion up the
hierarchy, power, and status symbols.
Autonomy, recognition, equity participation in
new ventures
People
Recruitment and selection based on need for
specific skills: functional and staff specialists,
general managers, and operatives.
Seeking idea generators that combine required
technical knowledge with creative personality
traits. Managers as sponsors and orchestrators.
9-22
Implementing Technology Strategies (2 of 3)
Organizational Initiatives to Stimulate Innovation
• Cross-functional new product development teams—highly effective in integrating with
specialized functional knowledge.
• Product champions—provide the direction and motivation needed to link invention
with commercialization, drive integration, and counteract organizational inertia.
• Buying innovation—if start-ups are best at initiating innovation and established
companies are rich in complementary resources—innovation most effective where the
latter acquire the former.
• Open innovation—the sharing of ideas and technical know-how among firms.
• Corporate incubators—specialized business development units within established
firms.
9-23
Implementing Technology Strategies (3 of 3)
Innovation Modes
Requires
new
business
Model
DISRUPTIVE
e.g. Google’s Android is an opensource operating system, but
draws upon Google’s expertise in
software development
ARCHITECTURAL
e.g. Kodak’s entry into digital
imaging required new capabilities
and a different business model
Leverages
current
business
Model
ROUTINE
e.g. Intel’s new microprocessors
deploy its existing design and
fabrication capabilities and
require no change in Intel’s
business model
RADICAL
e.g. The major pharmaceutical
firms’ entry into biotechnology
required new genetic capabilities,
but no change in their existing
business models
Uses existing technical
capabilities
Requires new technical
capabilities
9-24
Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant
Chapter 10
Vertical Integration and the Scope of the Firm
Vertical Integration and the Scope of the Firm
Outline
• Transaction Costs and the Scope of the Firm
• The Benefits and Costs of Vertical Integration
• Designing Vertical Relationships
3-2
Transaction Costs and the Scope of the Firm (1 of 3)
From Business Strategy to Corporate Strategy: The Scope of the Firm
• Business Strategy is concerned with how a firm competes within a particular
market
• Corporate Strategy is concerned with where a firm competes, i.e. the scope of
its activities
• The dimensions of scope are:
o vertical scope
o geographical scope
o product scope
3-3
Transaction Costs and the Scope of the Firm (2 of 3)
Multiple specialist firms v s. integration within a single firm
ersu
3-4
Transaction Costs and the Scope of the Firm (3 of 3)
The changing scale and scope of large US companies
Top 100
companies’
share of total
employment
(%)
3-5
The Costs and Benefits of Vertical Integration (1 of 4)
The Benefits of Vertical Integration
• Technical economies from integrating processes e.g. iron and steel production
o but doesn’t necessarily require common ownership
• Avoids transactions costs of market contracts in situations where there are:
o small numbers of firms
o transaction-specific investments
o opportunism and strategic misrepresentation
o taxes and regulations on market transactions
• Superior coordination
3-6
The Costs and Benefits of Vertical Integration (2 of 4)
The Costs of Vertical Integration
• Differences in optimal scale of operation between different stages of production prevent
balanced vertical integration
• Inhibits development of distinctive capabilities
• Difficulties of managing strategically different businesses
• Incentive problems: lack of “high-powered” incentives
• Limits flexibility
o in responding to demand fluctuations
o in responding to changes in technology, customer preferences, etc.
(But, may be conducive to system-wide flexibility)
• Superior coordination
3-7
The Costs and Benefits of Vertical Integration (3 of 4)
Vertical Integration v. Outsourcing: Key Considerations
3-8
The Costs and Benefits of Vertical Integration (4 of 4)
The Value Chain for Steel Cans
What factors explain why some stages are vertically integrated, while others are linked
by market transactions?
3-9
Designing Vertical Relationships (1 of 3)
Long-Term Contracts and Quasi-Vertical Integration
• Choices not limited to vertical integration or arms-length market contracts:
o Several intermediate types of vertical relationship: these may combine benefits of
both market transactions and internalization
• Key issues in designing vertical relationships:
o No generic solution: depends upon the resources,
o capabilities and strategy of the individual firm
o How is risk to be allocated between the parties?
o Are the incentives appropriate?
3-10
Designing Vertical Relationships (2 of 3)
Different Types of Vertical Relationship
3-11
Designing Vertical Relationships (3 of 3)
Recent Trends in Vertical Relationships
• From competitive contracting to supplier partnerships, e.g. in autos
• From vertical integration to outsourcing (not just components, also IT,
distribution, and administrative services).
• Diffusion of franchising
• Technology partnerships (e.g. IBM- Apple; Canon- HP)
• Inter-firm networks
General conclusion:- boundaries between firms and markets are becoming
increasingly blurred.
3-12
Name
CT_Rubric_100
Description
100 Points
Rubric Detail
Levels of Achievement
Criteria
Exceeds Expectation
Meets Expectation
Some Expectations
Unsatisfactory
Content
33 to 35 points
29 to 32 points
26 to 28 points
0 to 25 points
Demonstrates
substantial and
extensive knowledge of
the materials, with no
errors or major
omissions.
Demonstrates adequate
knowledge of the
materials; may include
some minor errors or
omissions.
Demonstrates fair
knowledge of the materials
and/or includes some
major errors or omissions.
Fails to demonstrate
knowledge of the
materials and/or
includes many major
errors or omissions.
33 to 35 points
29 to 32 points
26 to 28 points
0 to 25 points
Provides strong thought,
insight, and analysis of
concepts and
applications.
Provides adequate
thought, insight, and
analysis of concepts and
applications.
Provides poor though,
insight, and analysis of
concepts and applications.
Provides little or no
thought, insight, and
analysis of concepts and
applications.
15 to 15 points
13 to 14 points
11 to 12 points
0 to 10 points
Sources go above and
beyond required criteria
and are well chosen to
provide effective
substance and
perspectives on the
issue under
examination.
Sources meet required
criteria and are
adequately chosen to
provide substance and
perspectives on the issue
under examination.
Sources meet required
criteria but are poorly
chosen to provide
substance and perspectives
on the issue under
examination.
Source selection and
integration of knowledge
from the course is clearly
deficient.
15 to 15 points
13 to 14 points
11 to 12 points
0 to 10 points
Project is clearly
organized, well written,
and in proper format as
outlined in the
assignment. Strong
sentence and paragraph
structure, contains no
errors in grammar,
spelling, APA style, or
APA citations and
references.
Project is fairly well
organized and written
and is in proper format as
outlined in the
assignment. Reasonably
good sentence and
paragraph structure, may
include a few minor
errors in grammar,
spelling, APA style, or APA
citations and references.
Project is poorly organized
and written and may not
follow proper format as
outlined in the assignment.
Inconsistent to inadequate
sentence and paragraph
development, and/or
includes numerous or
major errors in grammar,
spelling, APA style or APA
citations and references.
Project is not organized
or well written and is not
in proper format as
outlined in the
assignment. Poor quality
work; unacceptable in
terms of grammar,
spelling, APA style, and
APA citations and
references.
Analysis
Sources
Demonstrates
college-level
proficiency in
organization,
grammar and
style.
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ENI case
Performance Measurement E Corporate Strategy – Modulo Ii (Corporate Strategy) /
Performance Measurement And Corporate Strategy – Module Ii (Corporate Strategy)
(Università Commerciale Luigi Bocconi)
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Case 16 Eni SpA: The
Corporate Strategy
of an International
Energy Major
On May 13, 2015, Claudio Descalzi opened the annual meeting of shareholders’ of
Eni SpA. It had been little more than a year since the 59-year-old petroleum executive had been appointed as CEO of Italy’s largest company. Yet, during that time
a series of events had shaken Eni and raised troubling questions over its strategic
direction.
Over two and a half decades, Eni had been transformed from a widely diversified,
loss-making, state-owned company into an international oil and gas major with the
highest market capitalization of any Italian company. Under Descalzi’s three predecessors, Eni had developed a distinctive, well-integrated strategy that comprised a:
near exclusive focus on oil and gas, with a primary focus on exploration and
production, especially in Africa which accounted for more than half of Eni’s
oil and gas production;
● vertically integrated natural gas strategy where Eni’s major gas fields were
linked to its downstream markets in Europe by pipelines and LNG (liquefied
natural gas) facilities.
●
During 2014, the security and profitability of Eni’s upstream operations were
threatened by a series of political and economic developments. The Arab Spring
had unleashed chaos across much of North Africa and the Middle East. That year,
instability and violence were especially acute in Libya and Egypt—Eni’s two most
important sources of hydrocarbons. Further problems for Eni ensued from the tensions between Europe and Russia that followed Russia’s annexation of Crimea and
intervention in Ukraine. Eni’s relations with Russia extended back to the Soviet era:
Eni was a key customer of Gazprom, a partner of Gazprom in several major pipeline
projects, and was pursuing several upstream projects in Russia. In December 2014,
Vladimir Putin announced the cancellation of the South Stream gas pipeline from
Russia to Western Europe, which was to have been built by Eni’s subsidiary Saipem.
In terms of its impact on Eni’s bottom line, the most catastrophic event was the
collapse of crude oil prices during the latter half of 2014. The effect of low oil prices
became clear on April 28, 2015 when Descalzi presented Eni’s financial results for
This case was prepared by Robert M. Grant. ©2015 Robert M. Grant.
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CASE 16 ENI SPA: THE CORPORATE STRATEGY OF AN INTERNATIONAL ENERGY MAJOR
609
the first quarter of the year. Net profit was 46% lower than in the year-ago quarter
with upstream operating profit down by more than 70%.
The History of Eni
Mattei and Eni as a State-owned Enterprise, 1926–1992
In 1926, Italian Prime Minister Benito Mussolini established Agip (Azienda Generali
Italiana Petroli) as a state-owned oil company. At the end of the Second World War,
Enrico Mattei, a former partisan, was appointed head of Agip and instructed to
dismantle this relic of fascist economic intervention. Contrary to instructions, Mattei
renewed Agip’s exploration efforts and, in 1948, discovered a substantial gas field
in northern Italy’s Po Valley. Mattei also took over the management of Snam SpA,
the Italian gas distribution company and in 1953, the government merged Agip,
Snam, and other state-owned energy activities to form Ente Nazionale Idrocarburi
(Eni) with the task of “promoting and undertaking initiatives of national interest in
the fields of hydrocarbons and natural gases.” Mattei became its first chairman and
chief executive. Eni’s 36 subsidiaries extended well beyond oil and gas to include
engineering services, chemicals, soap, and real estate.
Mattei’s vision was for Eni to become an integrated, international oil and gas
company that would ensure the independence of Italy’s energy supplies and make
a substantial contribution to Italy’s postwar regeneration. In doing so he became a
national hero: “He embodied great visions for postwar Italy—antifascism, the resurrection and rebuilding of the nation, and the emergence of the ‘new man’ who had
made it himself, without the old boy network.”1
Eni’s international growth reflected Mattei’s daring and resourcefulness. The international oil majors, which Mattei referred to as the “Seven Sisters,” had tied up
most of the world’s known sources of oil in the Middle East and Latin America.
The production-sharing agreement that Mattei signed with the Shah of Iran in
1957 marked the beginning of a fundamental shift of power from the oil majors to
producer governments and established Eni as the enfant terrible of the oil business.
The Iranian agreement was revolutionary. It created a jointly owned exploration and
production company headed by an Iranian chairman and with the proceeds shared
between Eni and the Iranian National Oil Company. This “Mattei formula” was replicated in Libya, Egypt, Tunisia, and Algeria. Mattei also concluded a barter deal to
acquire crude oil from the Soviet Union.
At home, Mattei built political support within Italy. He rescued struggling companies to meet the political needs of government ministers and politicians. By 1962,
Eni was “engaged in motels, highways, chemicals, soap, fertilizers, synthetic rubber, machinery, instruments, textiles, electrical generation and distribution, contract
research, engineering and construction, publishing, nuclear power, steel pipes,
cement, investment banking, and even education, to mention only a few.”2
Mattei died in a plane crash on October 27, 1962 at the age of 56. He left a
sprawling corporate empire whose strategy had been Mattei’s own vision and whose
integrating force had been Mattei’s charisma and personal authority.3 Without his
leadership, power shifted to the politicians and Eni became an instrument of government economic, industrial, and employment policies: the boards and chief executives
of Eni’s subsidiaries were appointed by government.4 Nevertheless, Eni continued to
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610 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
FIGURE 1
The Development of Eni, 1985–2014
Sales ($billion)
180
160
140
120
100
80
60
40
20
0
Net income ($million)
20000
10000
0
–10000
1985
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1985
1989 1993 1997 2001 2005 2009 2013
Oil and gas produced (thousands boe/day)
1989
1993
1997
2001
2005
2009
2013
1985
1989
1993
1997
2001
2005
2009
2013
2009
2013
Employees (thousands)
160
140
120
100
80
60
40
20
0
1985
1989
1993
1997
2001
2005
Note: BOE = barrels of oil-equivalent.
Source: Eni annual reports for various years.
expand its oil and gas interests, though financial performance remained weak: Eni
earned significant profits only during 1988–1990 (Figure 1).
The Bernabè Era: Privatization and Transformation,
1992–1998
Pressured from the European Commission to cut the public-sector deficit and reduce
state intervention, reformist Prime Minister Giuliano Amato granted Eni greater autonomy in 1992 and appointed Franco Bernabè, a 44-year-old economist, as CEO. Though
lacking line management experience, Bernabè possessed a clear vision for Eni’s future
as a privatized, integrated energy company, shorn of its various diversified businesses.5
The corruption scandal that swept Italy in 1993 resulted in Eni’s chairman together
with several board members and executives being arrested on corruption charges.
Bernabè now seized the opportunity to launch a radical transformation of Eni.
Bernabè’s corporate strategy was “to reduce Eni from being a loose conglomerate to concentrate on its core activity of energy.”6 During 1993, 73 Eni businesses
were closed or sold and employment was cut by 15,000. Cost savings and asset sales
resulted in a profit of almost $2 billion in 1994.7
Eni’s initial public offering on the Milan, London, and New York stock exchanges
in November 1995 marked the beginning of a new era. After four decades of looking
to politicians in Rome for direction, Eni’s top management had a new set of masters:
the global investment community.
The new creed of shareholder value creation encouraged further refocusing: “Eni’s
strategy is to focus on businesses and geographical areas where, through size, technology, or cost structure, it has a leading market position. To this end, Eni intends to
implement dynamic management of its portfolio through acquisitions, joint ventures,
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and divestments. Eni also intends to outsource non-strategic activities.”8 Investment
was concentrated upon upstream activities with divestment of refining, marketing,
and petrochemical assets.
The results were striking (see Figure 1). Between 1992 and 1998, Eni halved its
debt, turned a loss into a substantial profit, and reduced employment by 46,000. In
1998, Bernabè was appointed to lead another newly privatized giant: Telecom Italia.
Eni’s Strategy Under Mincato and Scaroni, 1998–2014
Eni’s next two CEOs had very different backgrounds. Vittorio Mincato was a veteran
line manager with 42 years’ service at Eni. Paolo Scaroni, who succeeded Mincato in
2005, had pursued a diverse international career and had been CEO of British glassmaker Pilkington, and of Enel, Italy’s dominant electricity supplier. Nevertheless, the
two followed similar strategies for Eni.
Upstream Strategy: “Disciplined Growth” Eni’s primary strategic goal was to
grow its production of oil and gas. Expanding oil and gas reserves and production
was achieved primarily by organic growth—finding new oil and gas fields and more
effectively exploiting existing reserves. Both CEOs were skeptical of growth through
mergers and acquisitions and chose to limit themselves to small acquisitions that
could be integrated within Eni’s existing upstream activities. These included British
Borneo (2000, €1.3 billion), LASMO (2000, €4.1 billion), Fortum’s Norwegian oil and
gas assets (2002, $1.1 billion), and Dominion Exploration and Production’s Gulf of
Mexico oilfields (2007, $4.8 billion), Maurel & Prom’s Congo oilfields (2007, $1.4 billion), and Burren Energy (2008, €2.36 billion).
Between 1998 and 2014, Eni’s capital expenditure more than tripled (in US$
terms) with 82% of it going into exploration and production (E&P). Major upstream
projects included:
Kazakhstan: Eni’s giant Kashagan oilfield with upward of 15 billion barrels
of oil was the world’s biggest oil find of the past three decades and the most
expensive to develop. Eni held a 16.8% stake and was the field’s operator.
As well as being Eni’s biggest upstream project, it was also the most troublesome with huge cost overruns, an eight-year delay in start-up, and fierce
disputes with the Kazakh government.
● In Russia, Eni built upon its status as a major, long-term customer for Soviet
gas, to broaden its relationship with Gazprom (including joint ventures to
build the Greenstream and South Stream gas pipelines) and initiated several
exploration ventures with Rosneft.
● In Congo, Eni’s approach was widely viewed as a model for oil company
relations with host governments. In addition to onshore and offshore E&P
projects, Eni built power plants using associated gas from the M’Boundi oilfield to provide the majority of Congo’s electricity needs. Eni also initiated a
biofuels plant, while the Eni Foundation established health clinics and a vaccination program for children.
● In Libya, Eni built on its status as Libya’s oldest and biggest petroleum partner by extending its concessions to 2047 and maintaining production despite
the chaos that followed the overthrow of the Gaddafi regime.
●
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In deep waters off Mozambique, Eni discovered in 2011–2013 the world’s
fourth-largest gas field with about 2,650 billion cubic meters (or 93.6 trillion
cubic feet) of gas. Eni and its partner Anadarko were planning an LNG plant
which would begin operations in 2018.
● Eni extended its E&P activities into Asia—including Australia, East Timor,
Indonesia, and Pakistan.
●
A further feature of Eni’s upstream strategy was its preference to take the role
of operator in oil and gas fields in which it held a major stake. This allowed Eni
greater control over development and costs and helped it to build its production
capabilities.
As Eni extended the geographical extent of its gas fields beyond its core
Mediterranean region, it looked increasingly to LNG as a means of monetizing these
reserves. LNG allowed Eni to develop gas production far from its core European
market and to expand its sales of gas to Asia. By 2014, Eni held equity interests
in LNG trains in Egypt, Libya, Nigeria, Angola, Oman, Trinidad, Indonesia, and
Australia.
Table 1 shows the geographical distribution of Eni’s production and reserves. This
distribution contrasted sharply with that of most other petroleum majors. Their major
sources of hydrocarbons were North America and the Middle East. Eni’s focus on
Africa and the former Soviet Union reflected, first, its comparative youth and, second, its capacity to build cordial relations in countries that were viewed as difficult
places to do business. Energy commentator Steve LeVine observed: “Italy’s Eni continues to pioneer a successful path to survival in Big Oil’s treacherous new world—
get in bed, don’t compete with the world’s state-owned oil companies . . . Where its
brethren bicker with Hugo Chavez and Vladimir Putin, Eni has found a comfortable embrace.”9 Others viewed Eni’s willingness to engage with the autocratic and
TABLE 1 Eni’s petroleum production and reserves by region, 2014a
Italy
Rest of Europe
North Africa
Sub-Saharan Africa
Kazakhstan
Rest of Asia
Americas
Australia and Oceania
TOTAL
Hydrocarbon
productionb
Liquids
productionc
Gas
productiond
Reservese
179
149
528
307
96
135
114
299
1,537
73
93
253
230
52
37
84
6
828
541
498
1,536
418
181
297
205
106
3,782
503
544
1,756
1,320
1,069
290
960
160
6,602
Notes:
a
Production/reserves data include both consolidated subsidiaries and equity-accounted entities.
b
Thousands of barrels of oil equivalent per day.
c
Thousands of barrels per day.
d
Millions of cubic feet per day.
e
Millions of barrels of oil equivalent (includes both developed and undeveloped reserves).
Source: Eni 20-F report for 2014.
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unrepresentative governments of Algeria, Nigeria, Angola, Kazakhstan, and Russia as
opportunistic and unprincipled. Scaroni’s response was matter-of-fact: “We deal with
countries that have gas. If Switzerland had gas, we would deal with Switzerland.”
At the root of Eni’s flexible approach to host government relationships was its recognition that the balance of power had shifted in favor of the producer countries:
“The fact is, the oil is theirs . . . If you are looked at as a partner, you are allowed to
exploit their oil; if not, you are pushed aside.”10 A key component of Eni’s engagement with host countries was investing in electricity supplies. In Nigeria, the Okpai
power plant and electricity from other industrial plants supplied 10.5 million
customers.
Downstream: Building the European Gas Business In possessing a large
downstream gas business, Eni was unique among the majors—though vertically
integrated in oil, gas distribution had historically been in the hands of regulated
monopolies: state-owned co
