In 1997, under the auspices of the State Privatization Program, the State of Rio de Janeiro privatized the Rio de Janeiro State Gas Company (Companhia Estadual de Gás do Rio de Janeiro) – currently the Rio de Janeiro Gas Distribution Company (CEG) – and Riogas S.A, currently CEG RIO S.A. CEG was the result of a century-old operation. Riogas S.A. , on the other hand, was created in 1997 to distribute gas to 65 municipalities in the interior of the State of Rio de Janeiro, and thus, at the time of its privatization had practically no operations, having incorporated a few distribution assets and eight Petrobras customers.
CEG and CEG RIO’s concession contracts were signed on July 21, 1997. CEG was required to replace all manufactured gas with natural gas, and was originally given ninety months to complete this conversion in the city of Rio de Janeiro. In the case of CEG RIO, the gas distributed had always been natural gas. CEG began the conversion project straight after privatization, but according to the company, incidents that occurred at the beginning caused interruptions and delays, postponing its conclusion until the middle of 2007.
In Brazil’s natural gas industry, production, import, transportation and commercialization activities are regulated by a federal agency, the ANP – National Oil, Natural Gas and Biofuels Agency. Distribution is regulated by local state agencies. An analysis of the chronological development of the Brazilian piped gas distribution sector’s legal framework shows that the sector’s regulatory mark had not been established before privatization and the signing of CEG and CEG RIO’s concession contracts. The Energy and Basic Sanitation Regulatory Agency – AGENERSA, is responsible for overseeing the companies’ concession contracts, amongst its other regulatory attributions. These concession contracts have always generated a great deal of controversy. Two critical themes, which directly affect the companies’ management, have appeared time and time again: i) the level of investment needed to expand and improve the quality of services; ii) tariffs, with respect to their structure and review methodology.
During the period under analysis in the case study - 1998 to 2005 - CEG and CEG RIO’s markets underwent profound changes and experienced rapid growth. The significant increase in the distribution network (CEG’s grew 51.9% between 1998 and 2005, while CEG RIO’s grew by 119.7% during the same period), was consistent with the companies’ growth strategies in terms of the municipalities to be served, while the growth in the number of customers reflected their efforts to increase their penetration rates in geographical areas that had already been gasified and capture new customers in recently gasified areas.
The mission, vision and values that guided CEG and CEG RIO’s activities were the same as their controller’s, Gas Natural SNG, which were expressed publicly on its website (portal.gasnatural.com). References can be found to themes like the excellence of services and products, customer focus, respect for the environment, a commitment to growing and sustainable profitability, a position of leadership as an energy group, a multinational
presence, increasing opportunities for employees’ professional and personal development and a positive contribution to society through an interest in people, social responsibility and integrity. In addition, principles were established to guide the activities of four groups of stakeholders: customers, shareholders, employees and society.
The documental investigation confirmed that Gas Natural SNG’s aim was to firmly establish itself as a multinational company, consolidating its position in Latin America and increasing its presence in the Brazilian market due to the latter’s enormous gasification potential, the development of vehicular natural gas and the expansion of gas-fired thermal plants. CEG and CEG RIO’s main objectives were to: i) increase the number of customers, which would demand new investments to expand their gas pipeline networks, moving towards the universalization of piped gas distribution services in the concession area; ii) improve efficiency and reduce costs;
iii) use cash generated from tariff revenues for investment; iv) conclude the conversion from manufactured to natural gas; and v) the pursuit of excellence in customer service, grounded in the safe and reliable supply of gas.
The characterization of their strategic scope, in accordance with Fahey’s and Randall’s (1998) categories and constructs, is given below:
• Products: manufactured and natural gas and PLG distributed in a piped form.
• Consumers/customers: i) households; ii) commerce; iii) industry; iv) generation and co-generation plants; v) vehicles; and vi) thermal plants (unconventional market).
• Concession areas of CEG and CEG RIO defined according to groups of municipalities of the State of Rio de Janeiro.
• Stakeholders: society, customers, shareholders and employees. No explicit mention is made of the conceding authority (State of Rio de Janeiro) and the regulatory bodies - AGENERSA and ANP.
• Strategic planning process: centralized and restricted to a small group of executives who formulate directives, objectives, and targets, strongly influenced and constrained by the reference terms established by Gas Natural SNG’s strategic planning.
The companies’ strategic posture was grounded in: growth, profitability and quality. The survey of perceptions showed that the companies adopted a strategy of customer-oriented differentiation by quality (73.1% of replies), though some mentioned differentiation by support (11.5%) and by tariff/price (15.4%).
More than two thirds (70.8%) thought that there would be a tendency for economic regulatory obligations to increase during the following five years, and all (100%) believed in the same trend regarding social and environmental regulatory obligations. As for the strategy adopted to deal with the uncertainties of the political and institutional macro-environment, almost a third (31.8%) of those surveyed thought that the companies did not prepare specific strategies, preferring to act on a piecemeal basis. Only 9% thought that they sought to mitigate collective or relative disadvantages. More than half (59.2%) were of the opinion that the companies sought to exploit advantages they possessed in relation to other industry agents and opportunities provided by the macro-environment (41% and 18.2% respectively).
The participation of the companies in alliances and networks was perceived to be important and indeed a fundamental element of customer-oriented strategies in the gas distribution sector, and also as a way of dealing with the uncertainties of the political and institutional macro-environment. However, when the theme was explored more deeply in the interviews, it became evident that the potential afforded by alliances and networks was poorly understood. Several links - often compulsory ones like the concession contracts - were not perceived as being strategic.
The five main factors motivating the establishment of strategic alliances at CEG and CEG RIO, identified by respondents, are given below in order of importance: 1) positioning in relation to political and institutional changes; 2) management of uncertainties; 3) cost sharing; 4) access to information capital afforded by new relationships; and 5) tightening of commercial relations. This confirms the preliminary understanding that macro-environmental changes/uncertainties are very important in this kind of industry and that they are the greatest motivators of possible strategic alliances. Although some respondents affirmed that the companies typically take part in both bilateral and multilateral alliances, it was not possible to confirm the latter’s existence. CEG and CEG
RIO’s centrality in Brazil’s gas distribution sector cannot be gauged with any clarity from an observation of these companies’ exposure in the media and the documents analyzed.
Table 1 presents the components of CEG and CEG RIO’s ego net, based on the generic roles of component actors of the value network of a piped gas distribution company, showing the main strategic actors / partners and the types of relationships that the company established with them. Tables 2 and 3 contain a summary of the results of the relation analyses of CEG and CEG RIO, in terms of the constructs and indicators researched, respectively, at corporate and industry levels. Many strategic implications were identified at both corporate (real and potential strengths and weaknesses) and industry (real and potential threats and opportunities) levels. The relational analysis highlighted the complexity of the companies’ relationship with Petrobras, with its multiple roles and dominant position in Brazil’s gas chain. Equally relevant were the relationships with supplier partners of technical services.
The conceding authority and the regulatory body also stand out as strategic actors in the CEG and CEG RIO ego net, and the research evidenced the large number of opportunities and threats that surrounded their relationship.
Table 1 – Strategic actors / partners and their types of alliances in CEG and CEG RIO’s ego network Generic Role Strategic Actors / Partners Types of Alliances
Customers Households, commerce, industry, electricity generation and co-generation plants, thermal plants and vehicles.
Gas supply contract and
agreement/contract to provide services Suppliers Petrobras (natural gas, naphtha), manufacturers
of network equipment, network construction and maintenance services and administrative services in general.
Agreement / contract to supply products and agreement/contract to provide services
Substitutes Energy substitutes: electric energy, gasoline, ethanol, diesel, fuel oil, PLG (petroleum liquefied gas), CNG (compressed natural gas) and LNG (liquefied natural gas).
Not identified.
Competitors Distributors / companies that sell energy substitutes.
Not identified.
Complementors Additional design and technical support services related, for example, to fuel distributors, manufacturers of gas-driven equipment and builders of real estate using piped natural gas.
Joint commercialization agreements and agreement/contract for the provision of services.
Government Conceding authority, regulatory agencies, various government bodies and trade associations.
Concession contract and cooperation agreements/contracts.
Companies with
a Shareholding Gas Natural SNG, companies in which Gas Natural SNG has a shareholding (GN Services and GN São Paulo Sul) and Petrobras.
Joint commercialization agreements, technology transfer agreements, contracts for services provision and shareholdings.
Table 2 –Industry-level relational analysis indicators
Constructs Indicators
1.1 - Density High density
1.2 - Scope Restricted: concession area
Central in relation to the concession area
Intermediate in relation to Brazilian piped gas sector 1.3 – Position and centrality
Peripheral in relation to the overall gas chain in Brazil
1.4 – Structural Holes Non-existent
Strong conceding authority (State Government) Strong and big customers
Weak suppliers 2.1 – Identity of partners in the focal industry
Weak regulatory body
2.2 - Status of partners in the focal industry Successful 2.3 – Access to focal industry resources Difficult 3.1 – Strength of connections Strong
Collaborative with group firms, customers, suppliers and the conceding authority
3.2 – Nature of ties
Opportunistic with the state regulatory body
Table 3 – Corporate-level relational analysis indicators
Constructs Indicators
1.1 - Density High
Restricted: concession area 1.2 - Scope
Wide-ranging: global ties
Central in relation to the concession area
Intermediate in relation to the piped gas distribution sector in Brazil.
Peripheral in relation to the overall gas sector in Brazil 1.3 – Position and centrality in the network
Central in the world gas
1.4 –Structural holes Non-existent
1.5 – Types of ties Visible
1.6 – Structural equivalence Non-equivalence
1.7 – Pattern of ties Direct and indirect
2.1 – Identity of the focal firm Strong and favorable 2.2 - Status of the focal firm Strong and favorable 3.1 – Strength of connections Strong
Collaborative with group firms, customers, suppliers and the conceding authority
3.2 – Nature of ties
Opportunistic with the state regulatory body Inappropriate in the case of the governance of the alliances entered into by the firms
4.1 – Use of governance mechanisms
Appropriate in the case of service providers 4.2 – Development of inter-firm information
sharing routines
Low stage of development 4.3 – Experience with multiple alliances Considerable
Inadequate between the companies and the state regulatory authority
4.4 – Alignment of interests between the partners
Adequate with the conceding authority 4.5 –Network performance measurement systems Insufficient
The research was unable to identify structural holes or equivalences in the companies’ networks. However there was a clear perception that establishing alliances or networks with equivalent industries and companies would add value to products and services offered to customers and have a positive impact on their competitive advantage, image, perception of value, customer loyalty and overall performance. It was also perceived that alliances increased the companies’ capacity to deal with political, demographic, cultural and economic factors. But the same was not evidenced regarding an increase or decrease in suppliers’ and customers’ bargaining power, the ability to protect themselves from substitutes and the degree of rivalry between competitors.
Most alliances were entered into with service suppliers. The companies revealed a concern to manage these relationships through the use of quality indicators and training out-sourced labor. The research was unable to identify any other forms of alliance management using control systems based on performance indicators.
Various examples were found of the companies’ strategic fit, as in the case of the quality-differentiated client focus achieved by exploiting the forces resulting from the competencies acquired by the transfer of Gas
Natural SNG’s piped natural gas distribution technology. These forces were levered to take advantage of the opportunities provided by an enormous potential market that had remained unexploited until privatization, mainly the auto industry and other industrial customers, besides expanding its captive market composed of residential and commercial customers. On the other hand, however, the research revealed strategic implications of the macro-environment that were not properly mitigated as in the case of the threat to the gas supplies (volume and price) that, after all, sustained investment plans, and the uncertainties regarding the regulatory mark, a risk factor that led, on the contrary, to the postponement of investment decisions.
Following Gas Natural SNG’s global policy of making the maximum use of outside firms to provide internal services for customers and perform manufactured to natural gas conversions/ services, created significant problems at the beginning of the concessionary companies’ period under private management. However there is evidence that these problems were overcome by establishing alliances with these suppliers. Although outsourcing’s main aim, at first, was to reduce costs, the firms gradually began to develop partnerships with suppliers to improve the quality of their services by providing them with the necessary training. A natural reduction in the group of suppliers occurred during this process that proved beneficial to all parties involved.
Relationships with suppliers of technical services constituted the most authentically strategic alliances entered into by these firms. Both in design and execution, these relationships displayed characteristics of high density, a pattern of direct ties, strong and favorable identities and statuses, a collaborative nature and strong ties that constituted CEG and CEG Rio’s strengths as regards their outsourcing strategy. The constant development of mechanisms to manage these alliances, through the control over the skills of the outsourced labor force, and monitoring the efficiency and quality of the services provided, unequivocally attest that these strategic alliances are a clear example of strategic alliance management at work. The research also revealed the existence of alliances with equipment suppliers to execute joint marketing and commercialization actions.
As regards the relationships with the government of the State of Rio de Janeiro and other government bodies who are very important actors in the companies’ value networks, the research verified that they were characteristic of strategic alliances. The clauses added to concession contracts that stipulate targets related to increasing the state’s gasification, are examples of formal collaborative ties. But informal alliances were also present in the shape of the increasing collaboration between the companies and the state government that received considerable media coverage.
The same did not occur in the case of other important actors in the companies’ value networks: Petrobras and the state regulatory body. No evidence was found of a strategic orchestration of the relations that existed with Petrobras. Relationships were developed on a piecemeal basis, without an integrated and relational perspective, despite the multiple and important roles played by Petrobras in CEG and CEG RIO’s ego networks as, for example, the sole supplier of gas, rival (through the competition provided by its energy substitutes that substitute natural gas) and shareholder (of CEG RIO). Although the various relationships with Petrobras were generally friendly and productive, there were signs that opportunities were not sufficiently capitalized upon, and evidence that threats, such as the subordination of CEG and CEG RIO’s expansion strategies to Petrobras’ investment capacity, were not adequately mitigated.
The relationship with the state regulatory body was always very problematic and there were no indications that that the firms were managing to neutralize the threats and lever the opportunities that existed in the political macro environment, despite the above-mentioned, friendly and productive relationship with the conceding authority.
The research found no evidence of a consistent strategic posture in the sense of exploiting the “policy windows”
provided by the incipient nature of the regulatory mark’s development. The research detected the adoption of a piecemeal approach in this sphere that, despite not having had a negative impact on the companies’ performance to date, could do so in the future. The results of the first 5-year tariff review, that were not in fact unfavorable to the companies, provided a good example of this potential risk. In the companies’ opinion, the methodology used was not provided for under current concession contracts, thus increasing the uncertainty surrounding future reviews.
The research revealed the perception that the state regulator, both technically and politically, left a great deal to be desired. But did not detect any intention on the part of the companies to establish a strategic relationship
aimed at taking advantage of their strength (the quality of services, for example) to exploit the opportunities provided by a partially undefined regulatory mark, and mitigate the threats posed by the regulatory body’s inconsistent modus operandi.
The research also evidenced the importance of the strategic implications of macro-environmental factors for CEG and CEG RIO’s performance. Of the 28 macro-environmental factors selected for an assessment of their degree of importance, no less than 27 were perceived as being important or very important by more than two thirds of those surveyed (70%). Moreover they identified 31 real or potential threats posed by the macro environment as opposed to 21 real or potential opportunities. The two most relevant macro-environmental factors contributing to the climate of uncertainty surrounding the firms, and whose strategic treatment could not be clearly perceived, were the supply of gas and the configuration of the natural gas sector’s regulatory mark. As regards the latter, there was the perception that there was an average or high influence of ideologies in political, legislative and judicial decisions (84.6% of respondents), and that the technical capacity of the institutions that had a positive or negative impact on the companies, such as the regulatory bodies, was average or low (77.0% of respondents). The importance of these factors became even clearer in light of the growing risks facing the supply (volume and price) of natural gas in Brazil, and bills of law currently under examination by Congress that affected natural gas’ regulatory mark.
The study revealed that CEG and CEG RIO’s performances were aligned with their declared strategies – demonstrating strategic fit – and that these strategies had been able to produce the performance expected. However this research showed that the leverage of strengths constituted by organizational factors (e.g.: international know-how, alliances with service providers, technical and financial investment capacity, educational systems, specific processes and systems to the business, political influence and articulation capacity etc.) and the minimization of weaknesses (e.g.: centralized decision process, less than ideal use of information technology, management of relationships on a piecemeal basis etc. ) had a hitherto unexploited potential to mitigate the considerable threats posed by political (e.g.: regulatory mark) and economic (e.g.: supply of natural gas) macro-environmental factors.