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Strategy can be defined as a course of action. It requires the resources necessary to achieve the specific objectives in an organization. It is concerned with identifying products/ services and markets which will serve to ensure the continuity and growth of an organization. The word has a military origin and it was meant for 'general'. In an organization, a strategy in required to draft, implement and evaluate the cross functional decisions in order to achieve its long term objectives ( David, F,1989). In order for an organization to be successful, it requires, among other things, strategic capabilities to perform at a certain level in the industry. Such strategic capabilities are related to the resources available, balance of such resources in the light of activities and business units and the competence to perform such activities. Such strategy gives direction to the organization to achieve competitive advantage by assessing its internal and external environment forces and taking necessary offensive or defensive action to reach a defendable position in the market. Such strategies can be (a) Low cost strategy, (b) focus strategy, (c) differentiation strategy (Porter, Michael,1979) or (d) a combination of the above depending on the product/ service line and the resources available. Such strategies build up core competence in the organization to perform something exceptionally well and help it sustain the business in the long run. Therefore, the strategic management is 'an ongoing process which evaluate and take action by assessing the competitors and internal and external environmental changes and setting up goals ,changing or implanting new strategies' (Lamb, 1984).
Corporate planning: In order to achieve the goals and objectives of an organization, detailed action plans must be made. The process of drawing up such plans is called corporate planning. This takes into consideration the available resources in the organization and the environment in which the organization operates. Hence, corporate planning models provided tools for risk assessment and provide basis for cause and effect analysis. The aim of such model is to enhance the quality of decision making, quality of planning. This results in risk avoidance and help organization to reshape itself favourably for future environments in business.
In contrast, corporate planning can be seen as an approach which is formally structured in order to achieve goals and objectives and also to implement corporate strategy in a firm. Therefore, it can also be expressed as an explanation, description and interrelation of processes and functional divisions such as logistics, manufacturing, finance and human resources. Such interrelations can be expressed as a set of mathematical and logical equations in order to generate variety of reports. In doing so, corporate planning involves models for risk analysis, cause and effect (i.e. what if analysis) etc. This results in improve decision making and quality of planning, thus minimising the risk factors and adjusting the organization for future business environment.
Further, corporate planning provides a framework in which the organization can develop it's strategies on various levels. In fact, planning process emerges from the architecture of the organization. However, strategy evolves from a very systematic and deterministic process which includes the analysis of the firm ( eg: SWAT analysis), external and internal environment, performance leading to the formation of a long term ( perspective) rational plan or evolve through a process of learning, experimentation and adjustment ( i.e. emergent)
In comparison, strategy can be seen in the following five ways as well i.e.' (1) Strategy as a plan to direct and guide, (2) Strategy as a ploy to outwit the competition by competitors, (3) Strategy as a pattern of past behaviour, (4) Strategy as a position to position its products and services , and, (5) Strategy as a perspective for long term re shaping as determined by strategists' (Mintzberg, Henry and Quinn, J.B, 1988)
Also, strategy can be seen as a hierarchical determination in an organization where (a) Corporate strategy determines which business the firm should be engaged in, how to build up competitive advantage etc, (b) functional strategy determines how the specific activities are set up to support the main strategy . These include financial, planning, human resources and other strategies, and, (c) Operational strategies to handle day to day operational activities.
Corporate planning, in contrast emerges from the concept of long range planing of the firm, management of policies, planning of Strategic Business units (SBU) and functional planning. It also determines the number and different layers of management, functional responsibilities and the lines of command , communication and authority ( i.e. vertical and/or horizontal)
Therefore, in summary, corporate planning can be seen as a formal and structured approach to achieve the corporate strategy.
Critically evaluate the impact of changes in ' Organization structure' on PowerGen's ' Corporate Planning Process' during the period 1990-1998
The fundamental aspect of PowerGen's organization structure introduced by McKinsey in 1990 was that it was a hierarchical structure where Chief Executive headed the whole operation while few layers of managers were present with well defined functional responsibilities.
Fig :1(a): Organization structure, 1990
This enabled PowerGen to retain a high degree of centralization in planning process and can be described rather as a top down process. However, since the process was managed and led by commercial with the involvement of many planners, it had the opportunity to incorporate the financial priorities and align the process with demand and supply. Such a planning process would serve the purpose only if the business is focussed on a single area (i. e. Power generation) However, as market becomes more competitive and complex, this process would not be adequate as it required more commercial and operational flexibility.
In 1992, re organization can be seen as a more decentralization and liberalization as far as planning process is concerned. Introduction of business units and planning staff in the individual business units with a smaller central strategic planning helped it to achieve the flexibility needed for individual units while a separate planning team was allocated for strategic planning.
Figure-2: Organization structure 1992
However, since financial planning has also been made a separate department, the financial priorities were not properly incorporated in the individual unit planning as well as group's strategic planning. It also was exaggerated by the bureaucracy and communication between the divisions. Therefore, financial strategic priorities were not properly addressed in this structure. However, the units were able to produce their own plans flexibly to operate in this decentralised structure. Nevertheless, the influence of the financial department was minimal in this structure. Also, the communication of scenario information were met with barriers when it was necessary to develop business plans in the long term strategic context. These were the results leading to the arguments at the time within PowerGen.
Reorganization in 1996 as cluster units eliminated the above barrier and gave the opportunity for managers to be more focussed on the planning process. However, this cluster based organization structure requires coordination between different clusters
Fig-3: Organization structure , 1996
Also, this structure was important after PowerGen merged with other companies and the organization became wider and complex than before. Specially , when its strategy looked at the possibility of building up an integrated gas and electricity business. These developments, together with the evolution scenario of UK electricity market required the need for coordination of business units to support UK operation and developing overseas operations. The Human Resources initiatives to support such coordination is evident in the organization structure where HR and communication have been placed at a higher layer in the hierarchy.
Fig-4: Corporate planning cycle, 1998
As seen in Fig 4, the planning cycle was made as an on going examination of business units. This has addressed the main issue (i.e financial priorities) encountered in the previous structure and planning cycle. Also, this supports the decentralized nature of the process in that the business units engage in strategy debates in July/ August which are relevant for the individual units. Also, business units can devise their individual strategic plans in line with the corporate guideline which gives them direction in the long term overall company strategy. This provides the path for the business units to come up with business plans with the corporate staff with five year horizon. This provides the opportunity to set up business unit's objectives and their plans of action to achieve them.
The planning review which takes place in February in the following year gives the opportunity for corporate senior level to examine in the light of broader financial picture and amalgamate to draft the corporate plan and also tie up with bonus rewards at the performance review stage. Therefore, with this cluster structure, the planning process can be seen as a collective and systematic approach where the subsequent execution of the plan would yield the business objectives while in keeping with the corporate strategic direction and objectives as well. Most importantly since the plan pass though a stage where it goes under the scrutiny of the financial division, the financial priorities are also embedded in the cycle which help it become profitable while it achieves other objectives of individual business units.
Using information from relevant literature, and your own understanding of ' core competencies' and 'dynamic capabilities'; discuss 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 competence is something a company can do excellently well in industry compared to the competitors and achieve specialization and competitive advantage (i.e. to gain competitiveness to outwit the competitors) . Such core competencies can be in the form of superior skills of the individuals employed ( eg: Microsoft employing high calibre IT professionals), Superior systems and network to deliver the products and services ( eg: Worldwide web in servicing the global internet), More skills in achieving the low cost ( eg: most of Chinese garment manufacturers have achieved this through high efficiency and lower labour costs), unique formulae ( eg; Coca Cola) ,superior quality ( eg; Apple , Sony) and better merchanding and service quality. The need of building up such core competence is to make it difficult for the rivals to imitate the level of product and services and , even if they try, to make it a costly and lengthy process for them to copy or outperform the same.
'Dynamic Capability is the company's ability to integrate, develop and re adjust its external and internal competencies to handle rapidly changing business environment. In other words, its ability to be quickly responsive and innovative for fast changing market environment.' (Teece, D., G. Pisano and A. Shuen, 1997 )
In the case of PowerGen, their core competencies are in 'Power Generation and Electricity Industry, to become a low-cost producer' ( Ed Wallis,1996), However, with the opening of market for electricity in 1990, the core competency needed to be re-strengthened an re shaped to adjust to the competitive environment. PowerGen has been successful in increasing its profit before tax from £272 million in 1991 to £687 million in 1996 , followed by a decline upto £577 million in 1997 and £211 in 1998.
From 1990 onwards, PowerGen was re adjusting itself to retain market share of 16% through 1995 to 1998. In doing so, it has shown its dynamic capabilities by merging with Midlands PLC REC and establishing partnerships with Kinetica in down stream activities in gas supply and transportation. Also, it was capable of acquiring the expertise in project management, plant operation and deregulation. As such, 'by 1990s it was ble to it was able to establish power station and mining acquisition in Eastern Germany and Hungary with construction projects which were in operation in Indonesea and Portugal' (De Wit and Meyer,Jennings D, 2004) However, its generator's share of total output of electricity in England and Wales has declined from around 28.4 in 1991 upto 19.7% with the opening of industry to competition. These included managing industry and geographical diversification, growing competition, government and regulator interference.
Therefore, in summary, Powergen has been able to survive the changes in the market environment such as opening of competition of electricity of markets, government regulations etc with its core competency of Electricity power generation and dynamic capabilities such as ability to merge and integrate and re structure its own structures and proceses ( eg: planning and organization) to re shape itself.
Using relevant data/ information company websites compare and contrast the core competencies and capabilities the electricity suppliers, Electricite de France (EDF) and E-ON.
E ON is the second largest electricity generator and a leading electricity supplier in the UK. It is also the world's largest investor-owned gas and Electicity supplier. The capacity of E on Central Network supplies power to approximately five million consumers throughout UK with its 133,000 km of overhead and underground cables and though 94,000 sub-stations. Also, it has engaged in renewable energy and biomass and wind farms. The current financial performance can be seen in the below table:
Fig-5 : Financial Highlights E-ON
It's objective is to provide integrated, non discriminatory, transparent and climate friendly in energy market. In power generation, it has a capacity of 73 GW of which one third is having zero- emission capability, and in Gas production it is 1.4 bcm. And further, it has the most well balanced and broader fuel mix for its production. Also, it is broadly present in a geographically diversified platform with over 88,000 employee skill base. This brings E-ON the synergy and transfer of knowledge from a wide range. Since it is one of the largest investor-owned company, it has received over â‚¬27 billion from since 2007. Such superior resources have helped it build up a strong core competency and stronger competitiveness in the energy market.
It's dynamic capabilities can be identified specially in this period of financial crisis by engaging in efficiency enhancement to deliver â‚¬1.5 billion lasting earning improvement by 2011 though productivity and organizational improvements. Also, its capabilities are also in diversifying into renewable energies, biomass and which is a new market expansion for the existing markets with E-ON. Also, it was capable of achieving the social demands of carbon reduction with 1.6% year-on-year in 1990 with plans to expand renewable upto one third by 2030 including natural gas and LNG investments.
Also, it has capabilities to stay ahead in competition though research and developments. This was clear in its university grants of â‚¬17 million in 2009. Also, its ongoing dialogue with non-governmental and other stake holders gives it opportunity to re evaluate and refine its ideas and initiatives for future development. Also, its Research and Development (R&D) are engaged in continually optimizing the facilities and special note must be given to its projects with BMW in Munich for zero emission recharging hydro powered station and capabilities to enter into auto industry.
EDF is the largest network operator in UK serves over 5 million customers with gas and electricity. It was originated in 2003 with the merger of Eastern Network, London Electricity Group and Seeboard with the subsequent expansion with the acquisition of British Energy in 2009. With this it has become the largest electricity generator in UK. It is engaged in Nuclear power, coal and gas generation, power plants and wind farms. It also has a global customer base over 38 million and in France alone 28 million. In France alone , it has been successful in supplying 95% of power without CO2 emission. This is much higher than 1/3 ( i.e. 33%) achieved by E-ON.
Also, its expertise as the world's most experienced nuclear operator with 58 reactors in France and 15 running reactors in UK can be identified as a core competency which is more competitive against E ON. Also, its competencies are evident with its plans for built 4 new reactors in UK by 2017.Further, it is aiming to achieve 60% total CO2 reduction by 2020. Further, it has also shown capabilities of integrating with other companies by the joint venture ' EDF Nouvelle' in renewable energy , this leads to its long term strategy to be sustainable in the future.
In conclusion, as shown in Figure 5 and 6, E-ON has been able to achieve more sales (â‚¬81,817 million) compared to EDF (â‚¬66,336 million) in 2009. This shows how E-ON has managed to leverage its core competencies (specially in superior resources and skills) more than EDF.
Fig-6: EDF Financial Results 2009
Critically evaluate the effect of 'privatization' and 'deregulation' in the UK Electricity Industry on the merger between PowerGen's and Midlands Electricity PLC in the mid 1990s.
Where PowerGen merger with Midland Electricity is concerned, the privatization and deregulation had more positive advantages. It increased the prospects of acquired information and influence supporting higher prices. Also, 'privatization of utilities gave potential for Powergen to enter related markets and acquire expertise in management of projects , plant operation and deregulation . As a result, by mid 90's it made power station and mining acquisition in Hungary and Germany and also constructions projects in Indonesia and Portugal' (De Wit and Meyer, Jennings, 2004) Also, since PowerGen had 16% and Midland Electricity 6% the merger , merger made it possible for PowerGen to set pool prices for around 35%, which would otherwise have been between 27% to 30% without merger .As discussed in the case, with this Powergen's vision was to build up a World's leading integrated Electricity and gas business with the skills gained in UK for developing further opportunities in Global Liberalized markets. Also, increased size of the company with the merger and wider skill base enhanced the ability to compete in international markets and, later for bidding in overseas contracts. This was clear in Ed Wallis prediction to create 5 or 6 super utilities to dominate privatised electricity market. Further, Powergen has seen more flexibility in its planning process to determine the priorities for the individual business units. Even though, it faced set backs initially by not incorporating the financial priorities and other issues due to communication of scenario information, and bureaucracy , through the cluster structure and planning cycle implemented from 1996 onwards, it was able to avoid such barriers. In addition, privatization has advantages such as reduced power of Trade unions. Control of excess employment and increased efficiency 'profit maximization though proper monitoring' (Peren Arin, Calga Okten,2005) , ability to raise capital for further development and possible entry into other markets both local and overseas.
Therefore, in conclusion, it can be mentioned that through Privatization and de regulation, PowerGen was has seen more positive advantages. However, such deregulation works well only when the strategies, organization structure and planning process are balanced in such a way that the company goals and objectives are reflected in the individual business units' strategies and plan of action and financial priorities are considered.
With reference to the PowerGen case study, critique the centralised approach to planning associated with the Central Electricity Generating Board(CEGB)' in the context of Geert Hofstede's (1993) article entitled " Cultural Constraints in management theories", cited in De Wit and Meyer (2004: 34)
Consolidation to a corporate plan
Review at Divisional level
Aggregation of plans at divisional level
Business Units construct plans
corporate staff guidance
In PowerGen centralized planning structure before reorganization in 1992, the planning process was mainly managed by its commercial division with a large group of planers involved. They planned the development of PowerGen's corporate development strategy through business units. Therefore, process retained a high degree of centralization.
Fig-1: Corporate planning cycle (PowerGen, 1990)
Such planning cycle was a result of the involvement of McKinsey consulting company which is rich with American culture and management Theories. While this allocated well defined functional responsibilities with a low number of management layers with centrally determined strategy. Therefore, in a structure such as above the managers are much more involved in maintaining those links . Also, as observed by Greet Hoftstede, in America 'manager is a cultural hero', who can decide, guide and control the workforce. Therefore, this top down planning process is in total concert with this view. While culture can be defined as ' collective programming of the mind which distinguishes one group from another' ( Hoftstede G, 1993) The same can be extended to the corporate culture with cultural dimensions introduced by Hofstede. Those include; (1) Power distance ( degree of inequality), (2) Individualism vs collectivitism ( how what extent the group work as individuals as opposed to working as groups), (3) Masculinity vs Femininity ( tough values such as assertiveness, performance against tender values such as care for others), (4) Uncertainty Avoidance ( degree to which people prefer structured situations) and (5) Long Term Orientation ( values or long term thinking as against short term thinking) The below table shows the dimensional relative values for 10 countries including USA.
From the above table-1, it is clear that USA culture has higher ranking in Individualism and Masculinity while has lower ranking in Long term orientation, uncertainty avoidance and power distance. As detailed in the case, the Mckinsey structure has established well defined functional responsibilities which can be attributed to the individualistic nature as against collective de centralised structure which was implemented later on. Also, since that robust centralised planning cycle did not consider the long term needs in the open market competition and need for divisional strategic planning priorities to be fast responsive in the competitive market, the centralised planning cycle later had to be changed in to cluster planning. This can be described as a result of low Ranking in Long Term orientation and lower uncertainty avoidances of the culture introduced.
Also, the structure introduced by McKinsey has only a few layers of managers. As observed by Hofstede, American management theories are based more on the market process, stress on individuals and focus on managers (Hofstede,1993) Therefore, need for more managers at different levels were not present. Instead, the focus was on the process and it was expected that the individuals would support the process through ' transaction cost' viewpoint. This means that the individuals' social life comprise the economic transaction between individuals. Further Hofstede's article explains that Economist Oliver Williamson opposed ' hierarchies'.In conclusion, it was therefore understandable that Mckinsey involvement has reduced the number of layers of hierarchy and instead introduced a well defined process based structure which is centrally planned and controlled. This 'centralised' planning model also explains the role of ' manager' as a cultural hero in the organization who can centrally plan, execute and control the process without having to decentralized with the support of the individual units.