A Case Study of Powergen in the UK Electricity Industry

Introduction

Increasing demand and consumption of electricity in many different regions of the world continues to change the global electricity landscape. For instance, in 2007 electricity consumption increased by 2.6%. Studies show that the world’s electricity consumption will grow by 12% by 2012. Previously, the electricity industry was only dominated by a few national companies which generated power and sold it directly to the consumers. However, deregulation and privatization have forced electricity generators and suppliers to operate in a competitive market to sell their electricity to customers; comprising of industrial, commercial, household, transportation, and agricultural users. In the process, some companies have expanded to acquire markets beyond their national boundaries. This report analyses the various aspects strategies used by electricity companies to provide electricity to consumers and generate power from their own sources. It is based on the case study of PowerGen; one of the leading electricity generating and distributing companies in the UK. The report explores different views of corporate planning and organizational structure as well as the functioning of different roles of staff in an effective electricity company. It focuses on the core competencies of companies successful companies such as electricity of France and PowerGen that puts them ahead of other small companies.

Meaning of ‘strategy’ and ‘corporate planning’

Strategy is the technique and approach used by individuals and companies to meet certain specific targets. In business, the targets are specified as goals or objectives and can be achieved within a short time or over a long duration of time. The objectives attainable within a short span of time are classified as short-term while those achievable over long periods, normally more than one year are considered under long-term objectives. On the other hand, corporate planning is the process of engraving the strategies in a design chosen by the company for purposes of guiding its activities within a given time frame, either long term or long term. Therefore, corporate planning comprises budgeting, inventory as well as allocating responsibilities to identified implementing authorities. As the strategy as to how the company financial objectives, corporate planning is a concern with the assembling of the companies resources for purposes of raising the necessary capital, investing the capital in most viable energy options in the case of power generating companies such as PowerGen and proper operations that lead to desired profits. In essence, corporate planning identifies the business opportunities while strategies define the means with which the opportunities turn into a business.

Ultimately, strategy and corporate planning synergize the processes of a company towards its sustainable operations. For example, in PowerGen, the strategies involved using a team of few managerial authorities with few layers in carrying out its tasks. On the other hand, its corporate planning used these strategies to put up an initiative that would see each person in the management produce a plan that is implementable in their area of specialization. An organization will change its strategies over time reflecting on the changes in its environment. Therefore, PowerGen has adopted various strategies aimed at reorganizing its structure in order to obtain an economically suitable design that can effectively carry out its functions (Porter, 1980).

Corporate planning identified important ways of decision-making roles of managers that would result in critical strategies for positioning a company in its most advantageous position in the industry. The strategy involved ways that would lead a company to improve its market share, expanding into new areas, and diversifying its products and sources of raw materials. In the period 1982 to 1994, PowerGen kept on shifting its strategies to reflect the growing demand for energy in UK and Wales. Strategies indicate a variety of ways in which the company objectives set by its available opportunities are achieved. Consequently, the role of corporate planning in the business is to put up implementable measures that will make the company get the benefits of diversified market operations (Hitt, Ireland & Hoskisso, 2008, pp. 375).

In terms of management, corporate planning focuses on the identified strategies that explore the competencies of a company in a highly competitive environment. This way defines the core business of the company thereby reaffirming its relevance in the market. PowerGen’s strategies designed to give it an edge above its competitors outlined a cost-effective mechanism for generating electricity by using cheap sources such as gas and improved coal units in its generators. The strategies employed also considered the impacts of the energy sources on the environment and on people’s lives around the generator locations. Therefore, PowerGen’s planning process which included improving its production capacity made some consideration to earlier strategies which included commercial and environmental requirements (Mintzberg, Ahlstrand & Lampel, 1998, pp. 128).

Impact of changes in ‘organizational structure’ on PowerGen’s ‘Corporate Planning Process’ during the period 1990-1998

During the period 1990-1998, PowerGen experienced major changes in its organizational structure that impacted its corporate planning process. In this section, we critically evaluate the impacts of these changes in the planning process of PowerGen.

In the first instance, during the period, 1989-1992, Mckinsey consulting company developed a strategy that affected its PowerGen’s organizational structure by revising the pre-existing one. In this new structure, the functional responsibilities of staff were clearly defined according to the objectives of the company. The most important change was the proposition of few management layers in the management of the company. Since it was founded, this major decision eliminated all unnecessary offices that created long bureaucracies in its operations.

McKinsey’s review recommended only a five-stage planning process that was implemented by the company in 1990. In this case, the planning process conferred high authority on the financial department. Since this department undertakes most roles of budgeting and preparing the various accounts of the company, this strategic change allowed the company more accountability by creating transparent means of monitoring its financial records. By designating the financial department as the final endorsing authority in the planning process, the company was able to operate with relatively low costs due to a number of cost-minimizing strategies that the department employs before concluding the plan. To a very large extent, financial constraints are the main factors impeding the planning process in an organization. Therefore, the commercial division is free to make adjustments in all the proposals received from the other layers and make financial arrangements for even a major plan considering the nature of the market and expected returns (Porter, 1980).

The organization structure retained a centralized system by putting commercial, technology, and engineering, generating, finance, and corporate divisions accountable to the CEO of PowerGen. In doing this, the company allowed its management to exercise direct control over all of its branches in the UK and Wales. This change improved the possibilities for the company to all information it requires to consolidate its efforts towards specific target projects. For instance, the decision to partner with other energy producers in the industry and improve its market share through taking over other strategic companies.

In 1992, the structure of PowerGen was changed to three division forms that produced new ventures. Thus, PowerGen International, North Sea gas and CHP, and UK electricity were formed under the new structure of PowerGen with each division given an autonomous managing director. For the first time in the history of PowerGen, directors shouldered the responsibility of making decisions on issues affecting their units. Consequently, effective management leading to increased capacity in power supply would be motivated internal competition as opposed to previous structures that placed a ceiling on the roles of heads of departments (Hampton & Reno, 2003, 155).

Previously, the company had a central planning team, but this was replaced by planning officers in each new division. This way, central strategic planning was introduced. In this strategy, corporate planning and strategy were assigned to the planning staff of each division. These two important changes became critical in the decision-making process, monitoring, and follow-up of company projects. On corporate planning, the strategic planning staff in finance departments, sales executives, and company marketers could sit together while drawing plans and prospects of the company. Therefore, it took a shorter time and resulted in comprehensive plans that serve the company sustainably both in the long and in the short term. Similarly, the central planning strategy was cost-effective because all the concerned staff drawing from corporate strategy and corporate planning expertise meets at the same time in a commonplace. Its little space to manage this lot and because it happens less frequently it saves money (Bierman, 1999, pp. 55).

All business units were now designed to respond to profits or costs. Each business unit found more roles in decision-making because they functioned independently. Earlier the company had run into great losses because of managerial and operational problems. These new changes would reflect on the lessons learned earlier so that, a particular division that consistently incurs losses risks being merged with a well-performing branch at the cost of its staff (Hampton & Reno, 2003, 154-158).

How PowerGen’s core competencies and capabilities account for its ‘market share’ and ‘profit before tax’ in England and Wales during the period 1991-1998

Core competencies are the various kinds of strategies employed by the company to meet its targets based on its existing strengths in the industry. These are the strategies that allow the company to function in its core business. Core competencies of a company change depending on the changing capacity of the company to grow. The dynamic capabilities refer to the changing positions of strengths of the company depending on variations in scales of operation. For example, when PowerGen learned that shifting from coal energy to gas in its generators would lead to savings in the costs of production and draw other partners to its plan, it proceeded to put up gas plants in its new branches. Consequently, it partnered with Powerflens and National power.

The effect of this on its market share and pre-taxed profit

During this period, the national grid estimated the growth of electricity demand at about 0.6% per year. In preparation for the anticipated demand that rose beyond 61 GW at the beginning of 1991, PowerGen closed most of its old power stations following a privatization plan.

This strategy meant that PowerGen was set for reduced market share accompanied by price reduction. Since growth was only feasibly in the long run, such a dynamic capability required the establishment of new sources of income in areas where the core competencies allowed for value addition. Due to the closure of its branches, the company had already prepared to lose immensely in its pre-taxed profits. Therefore, creating new businesses in the UK was the first option. Given its competencies, this option would allow it to tap into the growing market at home unlike in the case of international development that would only yield profits after a very long time (Lynch, 2006, pp. 301).

PowerGen acquired assets in the North Sea and Liverpool bay. It also assessed its competencies and realized that given its current abilities mergers and partnerships were the most viable options. This scenario saw PowerGen partner with Kinetica followed by the establishment of Combined Heat and Power. This move provided PowerGen with heat and power in agreement with specific companies in the electricity industry. Other core competencies were produced by the privatization of national power plants and companies. PowerGen could expand its market share from its project management expertise acquired in the previous years. PowerGen continued its expansion programs through acquisitions in Hungary and Germany (Kerzner, 2009, pp. 98).

Using relevant data/information from company websites compare and contrast the core competencies and capabilities of the electricity suppliers, Electricité de France (EDF)

The specific factors that a company finds as critical to its mode of operations are known as a core competency. They include services customized to consumers and that can be standardized to many products and markets within the industry.

Core competencies are strongly linked to the capability or strength of a company that provides a fundamental basis for the added value of a specific company’s product in the industry. It involves the mechanisms through which the company integrates different skills of production and a wide array of technology at its disposal. In essence, it is the learned style to take serious commitments in business that transcends organizational boundaries. Therefore, core competencies are unique to the organizations which practice them (Hunt, 2002, pp. 215).

E-ON energy installs for its clients’ solar saver besides gas and electricity supplies at reduced charges. The company established that customers experience high rates of hydro and wind-generated power thereby causing their inclination to gas and solar. Their position in the electricity industry allowed for their competencies to explore this area. They deployed staff to various parts of north Germany for example to assess the provision of improved solar power at affordable rates. E-ON has energy provisions (hydro, wind and solar) sources customized to businesses and homeowners separately (Whittington, 2001, pp. 66).

Similarly, Electricite de France (EDF) is highly responsive to market changes because it has hired a team of highly trained technical staff that carries out feasibility studies in households and business premises with views of collecting relevant information used in packaging products that meet customers’ specific needs. Out of commitment and dedication to providing energy with high-value addition, EDF has partnered with some companies in and customized energy supplies for homeowners, small to medium enterprises, and large businesses. In addition, the company has formed chains and networks with other partners including power generating companies, and electrical supplies, and installation giant outlets for purposes of adequate response to the customers’ specific needs (Kerzner, 2009, pp. 98).

The electricity of France (EDF), through involvement in a highly dynamic venture in research and development, has laid down electricity infrastructure that covers a wide range of domestic and commercial needs. While operating in new buildings, the company’s provisions include value-added installations that connect new and existing infrastructure. Given the company’s resource ability, it provides services with highly preferential value as indicated by how it procures and conducts its inspection and installation exercises. For example, household supplies involve the completion of ongoing projects and in the commercial sector; it covers street lighting and commercial buildings (Griffin & Puller, 2005, pp. 101-114).

Having learned about the consumer demand for clean energy, E-ON has advanced its pursuit of clean power sources. Such sources as wind and solar are not associated with pollution from their initial installation. This aspect of core competency is indicated in E-ON business plans for SMEs and large-scale businesses. E-ON statistics indicate that more than 500,000 businesses have a business plan with the company. Its organizational ability is based on private electricity generating plants, a fixed proportion of power that goes to the national grid is allocated to the company for retailing.

EDF seeks to link everyone to sustainable energy solutions. In its provisions, EDF generates energy from both renewable and non-renewable sources. Again, its organizational capacity allows it to explore both traditional and modern sources to the ever-growing demand for electricity in the United Kingdom. For example, the power plants owned by EDF generate more than 25 terawatts of electricity annually. The UK’s demand for energy encouraged EDF to generate power from burning coal, nuclear generators, gas and thermal power plants. Furthermore, EDF’s capacity is backed by a Combined Cycle Gas Turbine (CCGT) which generates 803 megawatts of electricity. This plant is located in Sutton Bridge in Cambridge.

E-ON organizational capacity also comprises the private initiative of power generators that produce electricity for domestic distribution/ supplies through a retailing system. Based on these strengths, the company offers value-added energy through various business plans. The plans include a prepayment plan that spans one to three years. This plan operates on fixed rates and therefore the customer is not affected by changes in production. Through a diversified customer portfolio, EDF buys gas and sells to its customers in order to supplement the existing demand. Since the company values the net worth of its business power subscribers, it takes on the extra cost of putting buffers on their generation plants in the UK (Johnson, Scholes, & Whittington, 2005, 325).

The effect of ‘privatisation’ and ‘deregulation’ in the UK Electricity Industry on the merger between PowerGen’s and Midlands Electricity Plc in the mid-1990s

In the 1990s, the government privatized national utilities and made further deregulations in the UK industry. In this period, PowerGen faced many challenges that forced it to merge with Midlands Electricity in a partnership deal. This section identifies and evaluates the effects of privatization and deregulation on the merger.

In England the electricity industry underwent privatization in 1991, prior to these developments; the Central Electricity Generating Board was charged with generating and distributing electricity in the entire UK. Due to persistent problems of declining power stations amidst increasing technical complications of power generators, CEGB found that nationalization significantly contributed to poor management of the power stations. PowerGen closed most of its companies in the fall of privatization because it was preparing for new establishments adaptable to the environment and suitable to its customers (Robinson & Hunt, 2003, pp. 35-42).

Following the expiry of government share in Regional Electricity Companies (RECs), the UK-based Electricity Company; PowerGen partnered with Midlands Electricity Plc. These had a number of effects on both the companies. For example, PowerGen had access to Midland’s previous market served by 100 kilowatts. These were mainly household customers and small business operators with bills ranging between 300 to 12,000 pounds. Since PowerGen was the largest supplier of electricity, it used the merger with Midlands to advance retail services with motivations to take over the small REC. in the process Midlands enjoyed profits accruing to the companies in the short run. PowerGen improved its distribution of power and charged relatively low prices because of privatization before leading most RECs at the consumer frontier in 1996. As many customers subscribe to Midlands Electricity supply PowerGen stepped up its production to exceed 88MW and rationalized its distribution to other RECs in Wales (Hofstede, 2004, pp. 34).

Critique of Hofstede’s Central planning Method used by CEGB

A centralized approach to planning associated with the Central Electricity Generating Board (CEGB) lacks universal appeal as it focuses on a few areas where the company has influence and neglects other frontiers where the company makes profits using its current competencies. Since it concentrates much authority on the chief executive of the companies, it limits the role of leaders in the other units as mere representatives held more accountable to the central authority than to the customers. Consequently, the personnel in the other departments remain with little responsibility particularly in the decision-making process of the organization. Though it helps in identifying the opportunities in the market where the company has competencies and makes profits with minimal costs, this approach to planning fails to provide the corporate with a clear functional horizontal integration structure that can be used as a framework for the basis of planning. Central Electricity Generating Board insisted continued to maintain the organizational culture was the main influencing factor in the planning process that led to better management of power plants and distribution of electricity. At the beginning of the 1990s, it sought to maintain a monopoly of companies. Therefore, it ignored the multiplicity of cross-cultural variations inherent in the electricity industry. If CEGB would have achieved to establish a monopoly of plant operators and electricity retailing companies, then the central planning corporate strategy would fail most of the management because the strategies designed by the planning staff must reflect the wide range of needs presented by both the customers and the workers (De Wit &Meyer R 2004, pp. 257).

By merging all units and departments acting in the electricity industry, CEGB ignored the fact that there are interdepartmental and intra-organizational cultural variations in different companies in the industry. CEGB generalized a national culture from the organization of leading companies in the industry and they seemed to fix the particular pattern of management to all the companies. In the 1990s when was low and growing the Hofstede’s central planning approach would work. However, with changes in technology and methods of power production to different classes of customers, it became necessary to use other integrated approaches that employ the competencies of all members of a company. Therefore, persistence on Hofstede’s approach would definitely fail the management as it would lose its bases when companies shift the production and distribution strategies and when they are finally privatized. The merger improved the organizational capacity of PowerGen to compete on an international scale where other electricity companies were developing.

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