Executive summary
The paper begins by defining what a strategy is in corporate organizations and explaining the meaning of corporate planning. The impacts that are observed in changes of organisational structure on the PowerGen’s corporate planning process are discussed. This is during the period beginning 1990 to1998. The core competencies and the dynamic capabilities of PowerGen are addressed. Similarly, the core competencies and capabilities of electricity suppliers EDF and EON are compared and contrasted. The paper also assesses the effects of privatization and deregulation in the UK Electricity industry on the merger between PowerGen’s and Midlands Electricity plc in the mid-1990s. Finally, it ends by looking at the critiques of the centralised approach to planning associated with the Central Electricity Generating Board (CEGB).
‘Strategy’ vs. ‘corporate planning
Strategy entails the formulating, implementing and evaluating decisions that are crucial to an organization in realizing its long-term goals. It involves formulating the organization’s mission, developing policies and plans that are crucial to realizing the goals as well as allocating the resources required to achieve them. Corporate planning on the other hand refers to a systematic approach which is aimed at illustrating corporate objectives, defining decision making strategy and tracking progress towards achieving the objectives. While strategy focuses on ways and means to achieve sustained success, corporate planning involves the process of setting out instructions to be undertaken by the managers of the corporations stipulating the role each department is supposed to achieve towards the achievement of the corporate’ objectives. Strategy focuses strongly on competition as well as continuously improving the products they offer to gain a substantial share of the market. Corporate planning addresses the way the strategy is executed in order to meet the laid down corporate objectives and maintain sustainable success. Strategy focuses on exploration of the current and probable factors that relate to customers and the external environment in general with the organization or with its internal environment. It involves predicting an effective role in the organization in an imaginative position and organizing the course of action and resources to accomplish the role (Lynch 12).
As the company grows in size, its structure becomes complex. Managers are faced with various problems such as poor decisions, lack of proper business coordination and maintaining overall control of the organisation. A company with good corporate planning is able to overcome such problems without a problem. Good corporate planning is a framework for matching capital investment decisions with long term developmental goals of the firm. With good corporate planning, the firm’s objectives are well laid and its key economic trends can be forecasted. Priorities can be identified and capital expenditure allocated. Corporate planning allows for diversification in new business ventures. Strategy allows the execution of the plans developed through corporate planning. Strategy helps to define the position of a company, the way forward, and how to achieve the intended objectives. Strategy assists the management to relate to future markets that are more productive (Cummings & Wilson 28).
Impact of changes in ‘organisational structure’ on PowerGen’s ‘Corporate Planning Process’ during the period 1990-1998
After privatization of the electricity industry in 1991, PowerGen had a total of 21 power stations which were producing about 30% of the total electricity produced and distributed in England and Wales. In the early 1990s, PowerGen’s organizational structure was made up of chief executive and unit representatives only as the main offers in its corporate planning organ. These divisions were further subdivided into business planning units, marketing units and power station units. PowerGen was functionally reorganised to a system that allowed for minimal strategy formulation. This was possible due to the few numbers of managers required unlike in large complex organisations. The major concern was on formation of planning programs that were necessary to implement the strategy. In this case, it was meant to facilitate low cost power production that would meet international demands. As part of its action plan, it sought to adopt a dual power production technology that would use both coal and oil in a single station. The company’s strategy was made possible through gas-fire stations (Haberberg & Rieple 67).
In the same period PowerGen implemented a major restructuring in its organizational planning. PowerGen re-embarked on an expansion plan by establishing three divisions from its initial operation structure. This was amongst the first steps that placed the company on its path to international power generation and distribution. The role of strategic planning that was executed by the top management was passed on to the staff in these divisions. The staff were conferred with more decision making authority and each division became more independent and was allowed to execute the planning development process on its own. The benefits of devolvement however were short lived. After some few years later a problem in the planning process occurred. The financial department was not incorporated appropriately such that the corporate financial needs were not recognised. The act of empowering divisional units introduced in 1992 was the main source of these problems (Bennett 113).
Decision making at devolved levels while empowering individual units made the process of implementation of planned decisions more difficult and fragmented from a corporate sense. The top level management was unable to pass the situation information successfully enough to these divisions such that when profit limiting occurred, the business plan for these divisions were poorly equipped to handle the new condition. In 1996, PowerGen management was again reorganised to give room to development and diversification of the new enterprise. The company was reorganised in a manner that gave way to introduction to a new group of business units under the chief executive officer and management director. The business group units include, UK production, Sales and Marketing and Gas. Each group was headed by its own managing director assisted by a finance manager. The two officers represented the group in the planning process. This new structure was credited with the advantage of eliminating the problem of lack of financial contribution into the strategic plan. It also chipped in a new focus to the business units based on conditions specific to their function. To illustrate this, the sales and marketing group could concentrate itself on realizing their sales targets and increasing the company’s competitive ability in the ever rising competitive market. The business level strategy for PowerGen was prescribed by external drivers. To accommodate these changes, the managerial structure had to be elastic and responsive enough, coupled with vigorous strategic planning process so as to deal with the challenges caused by the increasing uncertainty to environmental change. Through constant reassessment of its strategies, PowerGen adjusted energy prices through a series of centralised procedures. It passed on the implementation of adjusted cost effects to the consumers through its business units.
The corporate planning cycle developed in late 1990s allowed for the corporate planning process to integrate both electricity and gas ventures on reliable objectives. This was further facilitated by greater internal collaboration managing its human resource and monitoring the applicability of technology transferred (Lynch 43).
PowerGen’s core competencies and capabilities accounts for its ‘market share’ and ‘profit before tax’ in England and Wales during the period 1991-1998
After privatization of the electricity industry in 1989, PowerGen was the second biggest electricity generation company in England and Wales. As more and more competitors entered the electricity generation market, the share of the market held by PowerGen started to decline. Following privatization, the company began the development of its generating capacity in line with its commercial needs and environmental requirements. The management had therefore had to look for ways and means that could enable PowerGen to retain its market share and increase its profit. This led the company to increasingly search for allied ventures with other electricity companies in the international markets. The company’s core competence relied on the early adoption use of combined heat and power, and more importantly, it’s increased investment in natural gas. To cut down on cost and increase its profit, PowerGen undertook a series of cost reduction measures through downsizing of staff through redundancies, improved efficiency, and some plant were closed and were held in indefinite reserves (Financial Times 48).
Though these measures reduced the company’s sales volume, the strategy was successful and resulted to a high level of profit. To better meet its commercial needs, the company improved the flexibility of its coal units and embarked in investing in gas fired stations. The company alleged that the future of electricity generation lied on the use of natural gas. By 1990, plans were underway to develop three combined cycle gas turbine (CCGT) power stations. These stations were estimated to cost $ 500 million. The company sought to develop a plant capacity that could produce 3,000MW of combined cycle gas turbine. To achieve this production target, three power stations were to be developed. These were Killingholme, located in South Humberside, Rye House, located in Hertfordshire and Connah’s Quay located in North Wales. The Killingholme was to complete its first year of operation between 1993 and 1994. The Rye House was to start its operation in 1993. Before the privatization process was complete in 1989, PowerGen had entered into partnership with Conoco UK Ltd to start a gas trading company know as Kinetica. The new company was set to sell gas and construct gas distribution lines (Lynch 56).
The company’s merger with international electricity companies early in the 1990s such as Monument Oil and Gas international was another important step towards the company’ s expansion. In this particular case, the company would be in a position to serve many customers because its capacity to generate its own power would be boosted at Quay power station. In another sense, such a move contributed toward its diversification in power plants resulting to more consumers’ confidence in its operation. Consequently, it would be better positioned for local competition as it bids for shares in other companies beyond the UK. In 1994, PowerGen bought an additional 5% of Liverpool Bay from a subsidiary of Lasmo. PowerGen’s corporate plan to establish its own plants was promoted by its acquisition of stakes in most other regional electricity generating companies and bids major electricity retailers. The company used its capital capacity to generate more electricity through partnerships and selling through the licensed retailers. Its revenue increased progressively in the period 1992-98 leading to its internationally acclaimed power provider status. It is evident that the company’s intensive and extensive power production and distribution strategy was critical to its continued operation.
The role of this strategy in its planning also meant that staff in the office and in the field coordinated information accurately and promptly. a joint venture with NRG Energy PowerGen company acquired a 400MWshare in Schkopau power station. PowerGen became a partner of a consortium that was mandated to build and operate a power station that could produce 900MW combined cycle gas turbine. Its first project in combined heat and power generation was a 14MW cogeneration plant. PowerGen dynamic capabilities are enormous; it maneuvered into other business enterprises which are related but different from power generation. PowerGen’s entrance into other venture was as a result of stiff competition from government sponsored Nuclear Electric Company which had overtaken it as the second largest producer of electricity in the domestic market. Redirecting to its core competencies, PowerGen entered into a joint venture with Siemens to in the development of Cottam Development Centre. The venture won the 1997 ‘Strategic Partnership Industry All-Star Award’. The Cottam project was constructed using high-efficient gas turbines which were modified in an environmentally friendly way. In 1998, PowerGen acquired East Midland Electricity at a cost of 1.9 billion dollars. This acquisition gave PowerGen a leeway to enter into the small business and residential electricity markets. It was then able to distribute electricity over 16,000 sq miles. Due to profitability of the venture, PowerGen grew in bound to become the first power generating company in United Kingdom to supply electricity and gas to through the internet to its customers (Mintzberg et al. 214).
The core competencies and capabilities of the electricity suppliers, Electricité de France (EDF), and E-ON
Electricite De France (EDF) is a power generating company with the largest generating fleet of companies and customer collection in Europe. Its strategy is to become the largest electricity generating company in the world. Its core competencies lie on its scale of productions as well as the scope of operations. Through diversification of the market, it is moving out to target other markets in the world. E.ON. is a large energy company in United Kingdom. It is the largest electricity and gas company that is investor owned in the world. It has the largest market in United Kingdom going into millions of customers. Due to economies of scale, it is able to offer their products at relatively lower prices than its competitors. Its prices are great compared to competitors. It s business strategy is to provide low and affordable price of power to its customers. Due to its large size, it is also able to enjoy economies of scale and hence offer its products at a lesser price. It is able to guarantee its customers a fixed price of its products without price rise for a particular duration. For example it had announced a freeze in price rise for its products until 1st 2009. It had also announced a guarantee that its gas would remain at a lower cost than British gas until may 2009 (Bennett 219).
To retain its customers it offers a variety of incentives as well as customer care services as well as a wide variety of home energy services such as central heating installations, boilers and maintenance. As their competitive edge, the company has gone green. It has developed a wide variety of green energy products. As a result it has developed wind driven energy projects. It is the leader in production of wind energy. It has ventured in wind energy projects and has been in operation since 1992. It owns 21 farms which are spread from Northern Ireland to Cornwall. The company has diversified its operation to production in areas such as hydroelectric power projects. (Erlandson et al. 69)
The E.D.F group of companies has faced increased challenges stemming from its aging plants, rising fossil fuels, stricter environmental restrictions and rising prices of fossils, the group has embarked with new and modern means of electricity production. The group is boosted by past experiences and successes. Being composed of some of the oldest power generating companies enjoys ownership of large amounts of industrial assets which it keeps on renewing. However it has invested heavily in modern methods of power generation to overcome its many bottlenecks. The group enjoys vast quantities of experience. It was very active in China in 1980’s as a consultant for hydroelectric and nuclear power and in 1990’s it invested in a coal-fired plant. The growth and development of China is very crucial to the group’s strategy in the Asian Continent (Cummings & Wilson 42).
The group has invested heavily through partnership in nuclear power, renewable energies and conventional coal-fired energy. It has increased its investments by setting up power projects in Vietnam and Laos. It has assisted China with provision of technical know-how to the nuclear power plants in Ling Ao and Daya Bay. The E.D.F. group has invested in projects that provide engineering skills and working experience outside Europe. With its vast skills it has been offering production services to large national power providers. E.ON through its acquisition and merger strategy has taken over for PowerGen at a cost of $13.86 billion. This is their largest acquisition and in line with their strategic policy. This provides it with a good access to the United Kingdom electricity market as well as growth opportunities especially due to PowerGen earlier takeover of LG&E in Kentucky. The takeover of PowerGen is a part of its strategy to consolidate both Europe and Britain (Ferguson & Ferguson 115).
The consequence of ‘privatisation’ and ‘deregulation’ in the UK Electricity Industry on the merger between PowerGen’s and Midlands Electricity Plc in the mid-1990s
Electricity industry was privatised and deregulated in 1991. The government maintained 40% share in the major electricity producing companies until 1995 when the shares held by the government were sold to the public. This sparked a spell of takeovers and mergers within the industry. Domestic electricity prices had fallen by 4% following Privatisation. PowerGen offered 1.9billion dollars to acquire Midland electricity plc which was a Regional Electricity Company. However the bid to merge it was blocked by the government. PowerGen’s bid to buy Midland Electricity Company was prohibited in 1996 by the state. The state argued that vertical integration between generators and suppliers could not be allowed at such an early period of liberalization of the energy market. (Stone et al. 109)
It was assumed that the process could slow down competition between generators. The go ahead for the acquisition of Midland Company by PowerGen Company was finally given in September 1998. Midlands commanded local monopoly of supply in its regions for customers with consumption range of less than 100KW. Most of its customers had an annual electricity bill of between 12,000 dollars for small businesses to 300dollars for domestic consumption. In total Regional Electricity Companies supplied power to about 23 million small consumers accounting for two-thirds of the value of the electricity supplied and half of all the electricity that was demanded in terms of volume. Having merged with Midland Electricity Company, PowerGen became the largest supplier of electricity in that market. Midland Electricity board was regulated to generate 88 MW, which was equivalent to 15% of what was required at vesting and had shown interest in other five power stations that could generate a total of 2688MW capacity (Grant 117).
Analysis offered to Monopolies and mergers commission (MMC) concluded that PowerGen had the capacity to use all its generating resources and capacities to set pool prices for a large amount of the time. This made it generate 35% of total electricity between 1995 and 1996. Without the merger, PowerGen could only produce within the range of 27 to 30% by year 2000.This is a clear indication that Privatisation of the electricity industry coupled with successful merger with Midland Electricity Company increased the productivity and subsequently supply and distribution of power. The merger assisted PowerGen Company to increase the price of electricity higher than it could otherwise be. The electricity regulators were not able to address the higher prices and enforce limitations on cross subsidy and the needs for economic buying (Timmons et al. 188).
The merging increased the size of the company, providing a wider skill base that increased its competitive ability in the international market where large international electricity companies were emerging. The managing director of PowerGen observed that merger could lead to formation of five or six super companies that would dominate the liberalised energy market, PowerGen leading them. There was a notion that Acquisition of Midland Electricity Company equity interest by Power Gen due to merger would gave it information necessary about the future developments and operation of the Independent power Producer. This knowledge would result to fall in competition and caused the prices of electricity to the consumer to rise. Merging of the two companies saw the reduction in the size of contracts for different market. this move also blocked further entrance into the market of independent generators and suppliers. The merger was intended to cut down the number of suppliers of over 100kW from 16 to 15. As a result of the competition in the market, the loss of one supplier would not affect the pattern of supply. The merger will increase the market for CDFDs than the size of the merger today after 1998. It was observed that the loss of Midland Electricity Company as a competitor due to merger would not considerably affect the market. The incorporation of PowerGen generation with Midland Electricity Company’s distribution was not likely to have negative effects on consumers and the merger would make it more complex for DGES to license and control mergers. (Haberberg & Rieple 98).
Critique the ‘centralised approach to planning associated with the Central Electricity Generating Board (CEGB)’
The Central Electricity Board was responsible for generation and transmission of electricity before the reorganization of the electricity industry in 1989. The electricity industry was centrally managed until 1991 when it was privatized. The centralized approach to planning by the central government has developed gradually since the start of the 19th century. The electricity lighting act of 1882 gave powers to central government to supply electricity. The Electricity Generating Board was established by the government in 1926. It was given the duty of constructing the national transmission grid. The grid was supposed to organize the transmission of power throughout the country as well as setting common standards in terms of technology (Abrahams 23).
In 1947, the electricity industry was nationalized to form a national electricity company which comprised the national grid and the twelve regional distribution boards which were allowed to act semi-independently, two vertically integrated companies in Scotland and one in Northern Ireland. The electricity act of 1957 extended further the role of the central government. Through this act, the Central Electricity Generating Board (CEGB) was created. This board was accountable for controlling the electricity generation operations and subsequent transmission and any other associated investment decisions. The twelve regional electricity boards were not affected. An electricity council was appointed which regulated the entire electricity industry. The council was made up of the chairmen of the twelve regional area boards, three representatives from the Central Electricity Generating Board, and six independent appointees by the in- charge governing minister (De Wit & Meyer 80)
The board employed a regulatory method that was an inaccurate and contentious measure so that they can construct a large supply tariff and the price to be levied to the supply companies by the Central Electricity Generating Board. The government made several attempts in 1960’s and 70’s to reform electricity industry, however due to political upheavals, the efforts were unsuccessful and the electricity industry nearly collapsed. Though PowerGen sought for various means and methods of independent operation in activities that cuts across the board from power generation to distribution, it is the electricity act that empowered it to set up its own first power plants in the UK and more others in Germany and France through partnerships and mergers. It did not completely remove the biased admission to the national grid and hence the current power producers had certain advantages over the new entrants (Thierauf 6)
The development of a Unite Kingdom free power production industry and the subsequent transformation of the entire electricity industry required a complete full legislation. The process of electricity industry restructuring began with the signing of the 1989 Act into law. The act enabled the restructuring of the industry before it was privatized. The privatization and deregulation process started with major changes in Central Electricity Generating Board; it was reorganized into four major units. Changes that affected electricity companies lead merging of initial regions, so that all major RECs would expand with minimal legal restrictions.. Action plans that followed consisted of major changes in the subsequent electricity companies thereby promoting mergers and international partnerships. Although devolved, all the four organizations were to remain under government control and ownership (Hofstede 60).
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