Changing Values: The Energy Group - Case Study Example

Changing Values- The Energy Group January 8, 2006 I. Introduction II. Eastern Energy III. Management Issues IV. Value Chain Analysis V. Summary VI. Reference I. Introduction This analysis is based on the video “Changing Values Video-Made in 1998”. The video is based on the privatisation issue of the energy sector. It is about the Eastern Energy, which is a part of ‘The Energy Group’ now. 1980-1990’s was a period of privatisation for many utility sector companies. This video specifically focuses on the Eastern Energy. The privatisation of the utility services had always been an issue of discussion among various business, economics and social experts. This is due to several issues involved in privatisation. These issues are related to the cost and quality of the service. Experts are always concerned about the impact of privatisation on the industry and economy. The case also throws light on the various financial and management issues. The question raised in the case is about the shareholders interest. There are various strategy and management issues involved in the case. The case starts with background of Eastern Energy. It is followed by the details of various managerial issues involved in the case. The case is analysed on the basis of “Porter’s Value Chain Model”. II. Eastern Energy As mentioned in the case the Eastern Energy was privatised for £650 million in 1990. It was a state owned company from 1947 to 1990. Eastern Energy was one among several other utility service firms to get privatised during that period. It was independent stock market company during 1990 to 1995. It was taken over by Hanson Plc in 1995-97. Takeover was successful in terms of growth and change management. At present, it is a major part of The Energy Group with stock value of over £ 4 Billion. III. Management Issues Each private sector firm focuses on values and benefits of the shareholders. A company can keep track of its performance by taking care of the benefits of shareholders. Shareholders take risk while investing in any company. Performance of the company indicates the profit or loss on the investment shareholder has done. These investments are important for companies. Eastern Company had shown good value on asset, dividend, profitability and cash flow. The factors we notice in the case are as follows: a. Eastern Energy: A state owned company. There were several reasons of opening utility sector for privatisation. These were factors like gulf war, recession and the concerns of service delivery in many utility segments. The government was concerned about the efficiency and competitiveness of the energy sector. This was the primary reason for them to privatise many of the utility services. Government formed regulatory policies so that all the issues concerned with various stakeholders are addressed. The important factors of Eastern Energy during this period were: Company Valued on assets Government set targets for profits Emphasis on service delivery Customer Service was given due importance. b. Eastern Energy: After Privatisation 1990 after the privatisation the practice of asset based valuation was replaced with the valuation on dividend basis. Changes were in the following directions: Valuation on the basis of dividends. Shareholders concerns on the growth in the future values of the dividends. Energy sector showed steady return and increase in earnings. Company focused its strategy on dividend growths. Eastern Energy performance during this period of 6.4% was more than the industry average of 5.5%. Market value increased. Chief Executive adopted strategy of shifting the focus from dividend to profits and P/E (profit/earnings) ratio. Focus was on shareholder value. It was communicated management and staff. Adopted proper change management strategy by informing people about the reasons and benefits of change. Management adopted various managerial practices like cost cutting, reduction in workforce and diversification. Adopting Buy-back and Money back strategy for those who want to leave the management. This strategy has helped in creating positive image of the company among shareholders. This resulted independence in the highly regulated distribution business. c. Takeover The takeover of Eastern by Hanson was successful. It also had shown growth in profits and market value. Even after that Hanson’s overall performance was not satisfactory. This was one influencing factors for shareholders. It was the reason to de-merge Eastern from Hanson. Market trends focused on the internal drivers. More focus on the cash flow and tangible benefits. Focus on EBITDA and free cash flow. Eastern energy’s best management practices and strategy helped to develop a leading position in the industry. After analysing the current and future profitability, Hanson paid 40% premium for the takeover bid. Hanson had its focus on profit and cash flow. Hanson de-merged Eastern Energy to offer Eastern Energy shareholders value from its growth. 1998 it emphasise on customer service to ensure value creation on financial and non financial manner. The company is transitioning from one form to other. This transition was from the public sector company to the private sector company. As summarised in the case itself the changes are as follows: 1. Cash flow was indicator of internal business performance. It was influenced by external operating environment. It offered strategic value to predators. 2. The importance of dividends and profits were declining. 3. Assets were less popular but still used by utility regulators. 4. Options were the latest trend. 5. Value depends on the view of stakeholder. These stakeholders were those whose views were taken by the company. 6. Share price was affected by supply and demand for the shares. It was not merely depended on cash flow. (Source: Changing Values Video) Analysing each factor individually, we will find various issues of concerns of the management. Cash flow was one of the measures for the shareholders to analyse Company’s performance. As mentioned, it provided strategic value to the company. It was mentioned in the case that cash flow was not the only criteria to create value among the shareholders. There were other intangible factors like market value of the company, expected performance of the industry, performance of the company, demand of shares etc, which influenced the shareholders. Dividend and profits were key strategic factors to attract the shareholders. After privatisation these were losing their strategic importance. Assets were utilised in the financial calculations but it was no longer the only factor of performance indicator. The trends had change. The business and financial environment became more complex. There were more components to analyse the overall performance of any company. The shareholders become more aware and informed. The intangible factors were getting due importance in creating values among the shareholders. IV. Value Chain Analysis The management of Eastern Energy had focussed on the overall processes to create value for the stakeholders. These efforts were not limited to the immediate financial returns. They took care of the intangible factors and operational issues. The value creation by the company to the stakeholders can be understood by the ‘Value Chain model of Michael Porter’. According to Michael Porter there are two kinds of activities to analyse the value creation process of any company. These are as follows: c. Primary Activities It includes inbound logistics, operations, outbound logistics, marketing and sales and service. Management at Eastern focused on the delivering service timely and properly. They kept records like: Customer related performance Times to answer phones Times to answers letters Times to do things for customers Number of new customers This helped Eastern Energy to analyse the factors that could create value in the customer service and attract new customers. These were intangible factors. This helped them developing the right approach to focus on the things which creates value for the customers and other stakeholders. These had influenced the financials of the company. It attracted new customers and helped in sustaining the existing customers. d. Support Activities Any organisation’s front desk can function properly when it is properly supported by the backend services. Proper technology, right workforce and infrastructure help in delivering the right product or service on right time. Figure 4.1 Porter’s Value Chain (Pg 44, Kotler) In the case we could see changes in the way stakeholder perceived any sector or organisation performing. Initially it was thought that energy sector would not be profitable for the investments. It was due to the slow growth rate of this sector. The perceptions and assumptions changed very soon. It was due to the slow and steadily growth of the sector. The calculation of the financial values also changed over a period of time from assets to dividend and to cash flow. There are several other factors which supported the value of the organisation among all the stakeholders. Eastern Energy was also capable to grab shareholders attention towards it. The reason for it was the management’s strategic decisions. The process of change from public to private sector entity was managed well. The management tried to identify the factors which can enhance the value among the stakeholders. It included tangible and intangible factors. They focused on customer value creation by handling the calls effectively, improving service standards and keeping track of service standard. Chief Executive-John Devaney had focused on communication factor and the way benefits were shown to the shareholders. He focused on the shareholders’ earnings. He communicated the benefits of concentrating on shareholders’ earnings to management and staff. He also managed change by communicating the importance of change among them. To maintain the customer service standard at any organisation, it has to focus on the channel through which the service is delivered. In the case of energy sector ensuring better service means having proper technology placed for production and distribution. Overall there was an emphasis on delivering quality service to the customers. This was possible by effective supply of energy and handling the service related calls effectively. There should be some balance between the price customer was paying and the quality of service he was getting. Efforts were towards creating value for money to the customer. The factors discussed above are the primary activities of the value chain. Primary activities can function properly only when the support activities are effective. The support activities are procurement, human resource management, technology development and infrastructure. All of these are very important in the case of energy sector. Procurement of raw materials is required to produce inline with demand. Production of the energy is possible when proper technology and infrastructure is placed. Human resource is important at each level since it controls the overall activity. There was emphasis shown in the case on the human resource part. They had been doing resizing and communicating with the staff about the important factors. Various factors which influence the performance of the human are socioeconomic factors like cost of living, growth prospects, social setup, organisation factors like management attitude, resources available, human resource policies, influence of government and trade unions. In Figure 4.1 the margin is indicated at the end of the value chain. All the primary factors have impact on them. Without the effective support activities the primary activities will not be able to produce attractive margins. This is an overall process of value creation which impacts the shareholders too. V. Summary In one hand shareholders should be the key factor in decision making for the company on the other hand there are several other factors which have direct or indirect impact on the shareholder. These factors are important for overall performance of the company. Focusing on just shareholders interest is not sufficient for the management. The others factors are also important to influence the thinking process of the shareholders. If management focuses on the stakeholders, that will improve the market value and goodwill of the company. The performance indicators in the view of shareholders have changed from just asset to the cash flow of today. This is a very complex sector. The value creation should be mainly focused on the proper production facilities, distribution and customer service. Apart from these the company need to take care of the proper regulatory framework and the competition. Values which are intangible in nature are also very important for the shareholders. VI. Reference Changing Values Video – Made in 1998 Kotler, Philip, Marketing Management, Prentice-Hall Inc. New Jersey, 10th Edition, 2000 Read More