Strategy and Corporate Planning PowerGen - Essay Example

PowerGen Abstract The report deals with the electricity industry in Britain with reference to Central Electricity Generation Board (CEGB). CEGB was responsible for producing and supplying electricity to Britain and Wales till 1989. In 1990 CEGB was divided into three companies; PoweGen and National Power for taking care of non nuclear power plants and Nuclear Electric for taking care of the nuclear based power plants. The case tries to specifically study PowerGen’s operations in regard to privatization and deregulation of the electricity industry in 1991. Massive organizational changes had to be undertaken in due course of time for sustenance of PowerGen. The report starts with analyzing the effect of organizational change on corporate planning. It is found that PowerGen reorganized itself three times between 1990 and 1998. The changes in the organizational structure had to be supported with effective corporate plans which specified the roles and responsibilities of each function. Initially PowerGen had a centralized structure which underwent a complete transformation to a decentralized operation with unit managers at each business level being given wider responsibilities. The next section tries to analyze the core competencies and capabilities which have helped PowerGen to maintain its market share. It has been found that PowerGen’s focus was to supply electricity at a low cost. It formed an effective supply chain across various geographical locations and by partering with various companies which helped it to produce electricity at low cost. This section also analyzes the core competencies and capabilities of two other major players in the industry which are EDF and E.ON. The last section deals with understanding the effect of privatization and deregulation and PowerGen’s merger with Midland electricity which was a major strategic move and helped PowerGen immensely to stay ahead of competition. The report ends with an analysis of the centralized system of planning adopted by CEGB in the context of Hofstede’s article titled “Cultural constraints in management theories”. It shows the importance of cultural aspects while dealing with employees. Introduction: The end product of electricity industry is one of the fastest growing industries of the world. The spiraling demand for energy is expected to rise considerably till 2030. The total value of the electricity market comprise of the total electricity sold to commercial, industrial, residential and other users. In 2007, the total value of the market increased by 14.5%. The maximum demand for electricity came from the industrial sector and accounted for 38.1%. In terms of geographical location maximum growth came from Asia Pacific region with a growth rate of 36.3%. The rise in demand is attributed to the rapid economic growth worldwide which resulted in increase in residential and commercial consumption. In 2012, the amount of electricity consumption is expected to reach 36.7%. On the other hand electricity generation is expected to rise at the rate of 2.6% till 2030. The supply chain of electricity industry consists of the three important elements which are: Generators: This consists of companies which are involved in electricity generation. After generation, transmission of electricity takes place through various transmission lines. Distributors: The distributors are responsible for operating tower networks through which electricity is transmitted to commercial and residential sites. Suppliers: This consists of companies who make the electricity available to the end consumers. The report is based on the various changes that PowerGen had to undergo because of privatization and deregulation of the electricity industry in Britain. It begins with studying the effect of organizational restructuring on corporate planning. It then tries to understand the core competencies and capabilities of PowerGen along with two other companies Electricité de France (EDF) and E.ON. The report tries to understand the impact of privatization and deregulation on PowerGen and its merger with Midland Electricity. Finally the impact of cultural constraints involved with centralized planning is studied. Section 1 Strategy v/s Corporate Planning: Corporate planning is regarded as the way in which the top management wants to run the business. It is a set of strict guidelines which every employee of the company needs to follow in order achieve a particular goal. The starting point of corporate planning is a decision (Narayan, n.d, p.1). Corporate plan is a statement regarding the vision and mission of the business, whether they can be attained and the way through which they can be attained. A business plan helps in: Taking crucial decisions and accordingly altering activities and resources Understanding the financial standing of the company Gathering crucial information regarding the industry in which the business is operating and market data. Avoiding unforeseen obstacles that might adversely affect the business and preparing a contingency plan. Setting measurable and attainable goals which would be the guiding force for the entire organization. Explore new areas for maximizing profits. (Abrams & Kleiner, 2003, p.xxxiv) Strategy is defined as “the direction and scope of an organization over the long term: ideally which matches its resources to its changing environment” (John & Gillies, 1993, p.176). The type of strategy that an organization would implement depends on the business plan of the organization. The vision, mission and goals of the business can only be achieved by formulating a relevant strategy. For example the vision of an organization may be to become a market leader in two wheeler segment. In order to achieve the vision, it needs to formulate strategies. This shows the interdependence between strategy and corporate plan. A strategy can be regarded as a part of corporate planning. Corporate planning is a holistic approach regarding the way various departments of the organization should function and the goals they need to achieve. It is through effective strategies that the goals are achieved by each department which leads to achievement of corporate goal. Strategies help in maximizing opportunities and strengths, minimizing threats and weaknesses. Organizational structure and corporate planning of PowerGen: During the period 1989-92, McKinsey Company was chosen to design an organizational structure and strategy for PowerGen. It proposed a structure based on functional responsibilities with few management layers. Such an organization structure was required because of increasing technical complexities related to power stations. A change in the organization structure called for a change in the corporate planning. The organization was headed by the chief executive. A centralized system of operation was followed by PowerGen. The planners associated with the commercial division of PowerGen were responsible for formulating business level strategies like corporate strategy, diversification strategy and business development strategy. The business development division under commercial division had to take decisions on various aspects like pool price, analysis of competitors and market share. The business unit formulated various plans on the how the divisional units should operate. The corporate planning was based on framing the guidelines for each of these departments and the strategies that each department needed for attaining corporate goals. Absence of competitors, allowed PowerGen to apply the concept of make and sell. Moreover the nature of the product did not offer much scope for differentiation. This was the scenario till 1990. In 1990 the market was opened for electricity and competitors started entering the industry. PowerGen realized the importance of increasing operational efficiency and the necessity for adopting a customer centric orientation. Michael Porter had suggested three generic strategies for firms which are: [Source: tutor2u] Cost Leadership Cost Focus Differentiation Differentiation Focus The strategy that was adopted by PowerGen after the market was opened was Cost Focus. PowerGen concentrated all their focus on their core business which was electricity and became a low-cost world class producer of electricity. In 1992, the company implemented various organizational changes to facilitate the process of corporate planning. The organization was reorganized into three divisions from the earlier functional structure which prompted a change in the corporate planning process. The various divisions that were formed were: New Ventures (which included Combined Heat and Power, North Sea(gas) and PowerGen International) UK Electricity (responsible for generation of electricity and sales and marketing in UK) Engineering and Business Service The centralized team was changed to planning staff within each division. Separate departments like finance department, strategic planning department were formed. The individual business units were reorganized as cost or profit centers with added responsibilities assigned to the managers. The corporate planning could be divided into three levels. The three levels of planning a strategy are: Corporate Level Business Level Functional Level Corporate level: At this level the corporate strategy was developed by the central strategic panning staff. The corporate level was responsible for the overall business level planning, financial planning and setting targets. Business Unit Level: The business unit was responsible for achieving the targets set by the corporate level. The limits of decision making were extended for the business level. A separate business plan was produced by each strategic business unit which was consolidated by the corporate and the divisional level to formulate the corporate plan. Each division was headed by a managing director. Functional Level: The functional level acted as a source of input for the business level. In case of PowerGen, the employees of the power plant are the ones involved at the functional level. The managers working with the power station were assigned bigger roles which allowed them to take independent decisions like cost reduction. In 1993-94, problems started crippling with the availability of finance, because of the existing organization structure where the strategic planner played the role of strategy development as well as corporate plan production limiting the function of the finance department. This prompted a change in organization structure and the responsibility for corporate planning was passed to the finance director. The final change in organizational structure came in 1996 when the need for a separate sales and marketing department was felt. The divisional structure was replaced by formation of business unit clusters with each cluster being headed by a managing director. The MD was helped by the finance manager in taking decisions regarding the planning process. The corporate planning was accordingly changed and it tried to focus on the role of unit managers. A group MD was also appointed who was to take care of all business units. Section - 2 Core Competency & Dynamic Capability of PowerGen: The concept of core competency has become extremely crucial for an organization’s success. Core competencies are something that is derived from the strategic mandate of an organization. Core competencies must be created at the corporate level and must run through the life and blood of the firm thereby becoming a way of life across the organization. A core competency must pass through three basic tests which are: The core competency should be prevalent in more than one business, product lines or market The core competency should make a major contribution towards improving customer’s perception regarding value of the product/service. The core competency should be difficult for competitors to imitate. (Snyder, 2003, p.7) Dynamic capability of an organization is its ability to reconfigure, build and integrate core competencies of the organization in order to manage change. Dynamic capability of an organization is a driver for continuous improvement. The dynamic quality of an organization depends on the ability of the organization to systematically modify and generate the operating procedures for improving effectiveness (Witcher & Chau, 2009, p.132) The core competency of PowerGen is generation of power at a low cost. The supply chain is an important core competency of PowerGen. It has both upstream and downstream operations and is present all across the globe in countries like Germany, Hungary, Portugal and Indonesia. The size of the company can be regarded as an important competency area of PowerGen. Mergers with Regional Electricity Companies (REC) like Midlands Electricity increased the size of the company which gave access to a wider skill base and helped it sharpen its skills in project management. The core business of the company till 1995-96 remained selling power to the electricity pool. The size and supply chain gave it the opportunity to fix the pool prices. The dynamic capability of PowewrGen can be understood from the fact that it is one of the oldest players in the power generation industry and realized the importance of commercial orientation and operational flexibility at an early stage. The dynamic capability of PowerGen is reflected in the flexibility of operations which helps it to satisfy unforeseen change easily. The core competencies and dynamic capability helps PowerGen to stay ahead of competition and increase its market share and profit before tax. Core Competency & Dynamic Capability of E.ON and EDF Energy: E.ON E.ON is among the leading power and gas producer in UK involved in production and distribution of electricity and power and gas retailing. The parent company of E.ON is the E.ON group which is among the largest investor-owned gas and power companies. The core competency of the company is generation and distribution of electricity and gas for domestic and industrial purposes all across UK. In line with its core competency, it has also ventured into a wide range of household energy services like repairs and maintenance of boilers and centralized heating systems. The company has built a core competency in green generation and has been focusing on reducing carbon content. It has been focusing on green generation of power which reduces environmental impacts. Keeping the core competency intact which is electricity and power generation, it has also developed wind farms in various parts of UK. In order to reduce consumption of non renewable sources like coal which is a raw material for power generation, the company mixes biomass materials along with coal which has given birth to a new biomass power station (e.on-a, n.d.). All its efforts are directed towards green energy which is the core competence of the company. Micro generation technologies and products like biomass boilers, solar thermal energy, air source and ground source heat pumps, solar photo voltaic and small wind turbines are all based on the core competency The capabilities of the company lie in its ability to produce low carbon energy for various sectors. The dynamic capability is easily reflected in the way it customizes its offerings depending on the type of requirement of the buyer who may be corporate, small business, house builders, commercial developers (e.on-b). EDF Energy: EDF Energy is among the largest producers of energy in UK and generates almost one fifth of the electricity of UK having an employee base of 20000 people and 8 million customers. The core competency of the company lies in generation of energy from nuclear power plants. It currently operates eight nuclear power plants and is planning various others nuclear plants to produce safe reliable and low carbon electricity. EDF handles production of energy at each step (EDF Energy, n.d.). EDF Energy uses various sources for generation of electricity. However the main source of electricity generation is coal and it has been developing various renewable sources of energy. Nuclear energy has been developed extensively and is the main area of competence for EDF. Nuclear power helps in reducing the harmful impacts on the environment and helps in fighting climate change. It is planning to come up with 4 new nuclear power plants which would come into operations by 2017. The dynamic capability of the organization lies in the fact that it has developed various technologies based on the need of the hour. The need of the hour being developing clean energy sources, both the companies have been focusing their operations towards this. Section - 3 Privatization and Deregulation of UK Electricity: Privatization has been narrowly defined as transformation of ownership of state firms. Privatization of a nation can be classified under the following: Grass roots privatization: This involves expansion of the current private sector or allowing new private companies to enter the market. Asset Privatization: This involves transfer of assets belonging to the state to private parties. Transformational Privatization: This involves changes in ownership in state-owned enterprise (SOEs). Deregulation refers to removal of governmental laws, restrictions and legislations in a market. It involves removal of entry barriers for new companies, hence deregulation encourages competition. An increase in competition leads to benefits for the customers in terms of reduced prices and better service. In April 1990, the market for electricity was opened for the first time by the government which had a major impact in reshaping the organizational strategies. Till 1995/96, the main function of PowerGen was selling electricity to the electricity pool and almost 70% of the revenues came from it. In 1995, government lost its control over the Regional Electricity Companies (REC) which led to takeovers and mergers of these companies by companies operating in the same industry and also by those outside it. On account of privatization the price of domestic electricity dropped by 4%. PowerGen could not afford to stay quiet. It adopted a policy of forward integration and entered into a merger with a local electric supply company, Midlands Electricity for an amount of £1.9 billion. At the same point of time even National Power which was another division of Central Electricity generating Board (CEGB) merged with Manweb. The merger with Midlands Electricity was a strategic move by PowerGen. The customers of Midland can be divided into two groups; customers having electricity consumption less than 100kW whose annual electric bill was in the range of £12000 (for small business) and £300 for (for domestic customers) and customers having electricity consumption above 100kW. Midlands Electricity was a Regional Electricity Company having a monopoly in the less than 100kW segment. In the above 100kW segment the market share of Midland Electricity was 6%. Midlands Electricity had the license to generate power up to 88MW, 15% in vesting and access to 5 power stations having a capacity of 2688MW. Due to the merger, the size of the merged company became huge which opened access to a wider skill and knowledge base which helped it to compete in global markets. The merger also allowed PowerGen to control the price of the electricity pool for almost 35% in 1995/96. It was forecasted that the percentage would have reduced to 27% to 30% in the absence of the merger. It helped PowerGen to charge a higher price. Hofstede’s Model: Hofstede has defined culture as the software that controls the mind. Every human being has a way of thinking which differs from others. The way of thinking is developed from his/her experiences that he/she encounters as he grows up. Unlearning whatever the person has learnt is much more difficult than learning something new. In case of a centralized organization control and major decisions are done at the top management levels. It is applicable for companies which have identical products/services, common distribution channels and one or very few core competencies. The Central Electricity Generating Board in 1991 had a highly centralized organizational structure. However there was a decrease in the count of power stations to 79 in 1986 from 262 in 1958. The CEGB changed its organizational structure in order to react to the change and adopted a function based organizational structure. CEGB was divided into three parts; non nuclear power generation which included National Power and PowerGen and nuclear based power generation named Nuclear Electric. The Mckinsey Company suggested an organizational structure for Powergen which was based on functional responsibilities and had few management layers. A division comprised of the functional responsibilities and the units were named business units. The organizational structure must be designed based on the country of operation. For example, in Germany employees expect their boss to be technically competent and they do not want mangers to decide their functions and motivate them which is a characteristic of the Americans. In Japan employees prefer to be motivated and guided by the peer group rather than managers. In case of a centralized operation the manager is expected to formulate the course of action which may not be acceptable for a German or a Japanese employee. In this case the organizational structure has to be decentralized. The initial centralized structure of CEGB underwent a transformation to decentralized structure due to increase in competition after the government opened its boundaries. Conclusion: The case has thoroughly analyzed various aspects of PowerGen particularly the strategic aspects. The first part of the case deals with an understanding of the strategy and the corporate planning process. Corporate planning and strategy are very closely related to each other. It is the effectiveness of the strategy which determines the success of the corporate plan. The next part studies the impact of change in organizational structure on the corporate planning of PowerGen. The changes in organizational structure from a highly centralized to decentralized had to be supported by a change in corporate planning with greater responsibilities assigned to each department. The next section studies the core competencies of PowerGen. It has been found that PowerGen’s core competency was in producing power at low cost which was possible because of its superior supply chain. Similarly it has been found that for other companies like EDF Energy and E.ON the main area of focus is generating electricity with a low carbon content. The next section studies the effect of privatization and deregulation on PowerGen and its subsequent merger with Midlands Electricity. The merger with Midlands Electricity helped it strengthen its resources by providing access to the huge customer pool of Midland. It helped PowerGen to control the electricity pool prices almost 35% of times which would have gone down to 27%-30% in absence of the merger. The merger with Midland was a highly needed strategic move for success of the company. It proved to be a classic example of forward integration where PowerGen tried to merge with Midland Electricity which was a buyer of electricity from Powergen. 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