'Strategy' is one of the most important and complex terminology in the world of business management. Business strategy is a crucial determinant in the success of a particular organisation. However, the term is also heavily used in military and sports. In fact, the term owes its origin to military. Strategy can be used in different ways as per the demands of the situation. According to Mentzberg, a strategy may be in the form of a ploy or a plan or a pattern of behaviour or a perspective or even a position with respect to others. None of these should be seen in isolation from others (Campbell, Stonehouse, Houston, 2002). The term, 'strategy' is explicitly defined by the famous American personality, Alfred D. Chandler. According to him "strategy is the determination of the basic long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals." (Chandler, A. D. 1970). This definition brings into notice three different but important components of a strategy. These are 'determinant of basic long term goal', 'adoption of courses of action' and 'allocation of resources'. The first is referred as the conceptualisation of attainable and coherent strategic objectives. The second component deals with the actions that are taken with the purpose of achieving these objectives. Finally the third component takes into account the cost of taking these actions.
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Corporate planning, on the other hand can be described as the comprehensive and systematic long term planning that takes into account all the capability and resources of an organization as well as the environment in which it is operating. Moreover in corporate planning the entire organization is viewed as a corporate unit (Balchin, 1998). Cole defines 'corporate planning' as "a continuing process by which the long term objectives of an organization may be formulated and subsequently attained by means of long-term strategic actions designed to make their impact on the organization as a whole." (Oldroyd, 2006). The process of corporate planning also includes the activities pertaining to the decision on code of conduct or policy.
It is quite clear from the above discussion that strategy and corporate planning, two of the most commonly used terms in the modern business environment are very much related as far as their nature and activities are concerned. In case of strategy, if Chandler's definition is considered as a standard one and in case of corporate planning if Cole's definition is accepted, it will be found that both strategy and corporate planning starts with the determination of the objectives and proceeds to take necessary actions in order to achieve them. Corporate planning advocates the adoption of strategic objectives. However, strategy does not involve any corporate planning as such. So overall it can be said that corporate planning is dependent on strategy.
2. b) Critically evaluate the impact of changes in 'organisational structure' on PowerGen's 'Corporate Planning Process' during the period 1990-1998.
In PowerGen, the process of reorganization started in the year 1989, when McKinsey was hired for developing its strategy and new organizational structure. Till 1998, the company went through several processes of reorganization which resulted in some significant changes in the organizational structure of the company. Every time the structure of the company changed, it had some significant effect on the overall corporate planning process of PowerGen. A new structure was proposed by McKinsey and it came in practice in 1990. As per the new structure, the commercial division of the company was supposed to manage and lead the planning process. This division includes several sub-divisions like sales and marketing, business planning and development and fuel procurement. In the commercial division, a team of planners were assigned who facilitated the corporate strategy development process. The 'business planning and development' staffs developed specific strategy regarding pool price, market share and competitors' position. Plans were also prepared by different business units. Finance division made some financial projections based on various plans. The main drawback of this planning process was that it was a centralized approach and it mainly involved business planning and development department and the finance division. Other departments like technology and engineering division, corporate services division hardly played any part in this process. As a result it is very likely that the process did not take into account all the possible circumstances that might arise out of it. Moreover, when market for electricity opened up and the company started to focus on both commercial as well as operational activities, the previous planning process started losing their relevance because it needed active participation of all the divisions in the planning process.
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In 1992, the structure of PowerGen was again changed when the company was divided into three separate new divisions. These three were new ventures, UK electricity and engineering and business services. In this new structure, planning teams from each of the divisions replaced the previously created central planning team. However, a small sized central strategic planning team was still existent. Financial planning was seen as a separate task and it was entirely the responsibility of the finance division. The planning process under this new structure actually took place at a number of levels. The corporate strategy was developed by the central strategic planning team. Furthermore, a business plan was produced by each of the business units. These plans were later reviewed by the divisional board. Corporate planning staff provided the necessary guidelines for conducting the planning exercise. This system was going well when 1993-94 some problems surfaced out. The problems were due to the mismatch in the financial requirements of the group and the strategic decisions taken during the planning cycle of 1993. Such problem was actually a result of improper allocation of planning responsibilities which resulted in the lack of participation from finance department. In 1996, another reorganization of the company's structure took place. As a consequence of this restructuring six new clusters were formed. Each of them was led by a managing director. In this new structure, each business units was encouraged by the planning system to take specific initiatives in the corporate context. The new planning system encouraged co-ordination among different business units. Most importantly this planning system started its journey by bridging the gap between the strategic objective and financial objective of the company. Based on both the strategic and financial objectives, entire planning process was conducted.
The planning processes of PowerGen can be analyzed in relation with the concept of strategic fit which states that the strategies adopted by the company must be in alignment with its structure as well as planning process. Judging the validity of this idea in the context of PowerGen, it can be said that the company was unable to achieve strategic fit during the period ranging from1990 to 1996. This is simply because the strategies were not aligned with the structure and planning process of PowerGen.
2. (a) 'core competencies' and 'dynamic capabilities'
According to Anders Drejer, the concept of core competency was first proposed by the Hamel and Prahalad. These two experts opined that core competency is "the collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies."(Drejer, 2002). They also said that the core competency of an organisation must be tested on the basis of three parameters to find out the authenticity of core competency. If results reveal that it is an important source of competitive advantage, it is hard to imitate by the competitors and it transcends a single business, then it can be considered as a core competency of the firm.
According to Dr Glenn Parry of Warwick University, core competence is referred as a skill, technology or asset that strengthens the business growth as well as differentiates the business organisation from its future and current competitors. Core competence can be analyzed from the strategic point of view, as there is a relation between core competence and strategy. In order to drive business growth it is important to consider both strategy and competence at the same time. Strategies are required to identify the development requirements in a core competence, whereas core competencies are required while planning the strategy (Parry, 2005).
Dynamic capability on the other hand is referred as the capability of sensing and then seizing new opportunities for reconfiguration and protection of knowledge assets, complementary assets and competencies so that sustainable competitive advantage can be achieved. Each of the components of this definition is important for a firm in the present business environment. In this fast- paced, ever-changing environment a large numbers of opportunities are likely to be available. Organisations first need to identify them and then exploit those opportunities to the best of their capabilities. Once the opportunities are properly capitalized, it has to be protected from the competitors in order to gain sustainable competitive advantage (Teece, 2009).
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If the above mentioned two concepts are analyzed in the context of PowerGen, it would be found that its core business is sales to electricity pools as it gives sustainable competitive advantage to the company. The company also has dynamic capabilities. It has already identified that huge opportunities are available in the natural gas market. In order to capitalize on this opportunity the company has entered an agreement with some of the electricity suppliers. Moreover, the company has acquired EME in order to sell both gas and electricity. PowerGen has also made significant investments in the developing markets like India, Thailand, and Indonesia where the demand of power is increasing continuously. A strong presence in the emerging markets will help the company to drive its overall business growth.
2. (b) Core competencies and capabilities of Electricité de France (EDF) and E-ON
EDF Energy is found to be the largest electricity producer in UK. Almost one fifth of UK's total electricity is produced by EDF Energy. There are almost 8 million customers including both businesses and domestic. The company mainly deals with nuclear energy. It has eight nuclear plants that are capable of producing 9,000 megawatts electricity (EDF Energy-a, n.d.). In addition to producing, the company is also involved in supplying electricity. Moreover, the company buys gas for supplying its own customers. However, financial results of the company have revealed that the main revenue of the company comes from the sales of electricity. The company's core competency lies in its handling of nuclear power. The parent company of EDF Energy- EDF group is the biggest nuclear power generator in the world. In 2008, the total sales of the company reached almost £6,621 million (EDF Energy, n.d.).
E.ON, on the other hand is also one of the largest energy companies. The company has millions of customers in UK. E.ON generates and distributes gas and retail electricity to both businesses and homes in UK. It has a significance presence in the wind farm segment of the country. There are almost 17,000 people working in the company in UK. Coal and natural gas are the two major sources of the energy that are produced by the company. Almost 45.2% energy is produced by using natural gas and 43.4% is produced from coal (EON, n.d.). The core competency of EON lies in natural gas. Unlike EDF, EON does not have buy gas for supplying its own customers. In contrast to EDF Energy, which mainly deals with nuclear plants, EON has hardly any presence in the nuclear energy segment, as only 11.9% of the total electricity is produced from nuclear sources. In case of EDF almost 16% of total energy is generated from nuclear energy sources.
[Source: EDF Energy]
Climate is an important issue for any power generating company and use of renewable energy is another crucial factor that the companies are accountable for. It is found that almost 6% of total energy generated by EDF comes from renewable sources. In case of EON, the figure is almost same as 5.9% of total energy is generated from renewable sources.
3. a) In United Kingdom, businesses as well as domestic consumers are allowed to choose their electricity and gas suppliers. Such scenario is a result of liberalization and privatization of the market. In 1990, UK government and energy market regulators decided to end the monopoly of regional electric companies in the country. The market was deregulated and this actually resulted in many companies to supply electricity and gas to those regions which were not accessible earlier. Initially the gas market was deregulated which allowed the companies to supply to the customers of British Gas. Then the electricity was also made open for all the companies. There were almost 14 supply areas; each of them had their own supplying company which delivered it to their respective customers. The deregulation took place in two different stages. In the first stage, the companies could supply electricity to other regions but the regional company had to have the pricing agreed by the regulatory body Ofgem before the prices are changed. Few years later this restrictions were taken away as a result of which regional supply companies were able to compete in a completely deregulated market. Few new companies entered the market after the initial deregulation. They kept the prices as low as possible in order to gain market share but with the increase in wholesale costs of energy over the next few years, many of them were acquired by the larger energy companies (Saveonyourbills, n.d.).
PowerGen's takeover of Midland Electricity Plc is actually an example of the above mentioned situation. Midland Electricity plc was a regional electricity supply company whose output was restricted to the regional customer base whose total demand was less than 100 KW. PowerGen offered 1.9 billion euro to Midland Electricity plc. Monopolies and Merger Commission reviewed the future of the merger and found that the merger was mandatory in order to compete in the international market. However Government did not feel so and decided to block it. In the next year i.e. in 1998, PowerGen placed its second bid to take over the East Midland Electricity and this time it got the permission from the government.
During1990 to 1998, the UK electricity industry was heavily influenced by several political, economic and technological factors. The influence of all these factors can be analyzed by using PEST model. Both government and regulatory bodies like MMC used to exercise a significant amount of influence over the electricity supplying companies and the overall industry. Any merger and acquisition related decision required the approval from MMC. Moreover, UK government had a 'Golden Share' in order to protect them from takeover bids. During that period the economy of the country was growing which resulted in higher demand of electricity. As far as technological commitment was concerned, with time these companies were using advanced technologies in generating and distributing electricity. Climate is less likely to be affected by these technologically advanced plants. For instance, PowerGen started two Combine Heat and Power plants where the heat that was generated was used in the process of electricity generation.
The overall electricity industry can be analyzed by using Porter's five force model. It is found that buyers' had significant power to bargain after the deregulation as they were allowed to choose their electricity and gas suppliers. Gas and coal suppliers also had significant bargaining power as they were supplying the raw materials for electricity generation. Competition among the rivals was also increasing with the rise in demand. Furthermore, threat of new entrants was lowered when deregulation of the market took place.
3. b) Prior to the period of 1989-90, the generation and transmission of electricity in England and Wales was the responsibility of Central Electricity Generating Board (CEGB). There was no other organization involved in the generation and distribution of electricity. However, it was found that the capacity of the board had been declining over the years. In 1958 there were almost 262 power stations under CEGB, but in 1986 only 79 such stations were found to be operating. Moreover several technical complexities began to crop up. In order to deal with such challenging situations, the board was made to undergo reorganization which resulted in the division of the board into different functional areas. In 1990, the generating activities of the board were divided among three newly formed companies and the transmission activities were shared with 12 electricity supply companies. However, since CEGB was solely responsible for generating and transmitting electricity prior to the formation of new companies, the planning process was entirely centralised. However, such centralised approach was only relevant prior to deregulation and privatization. After the opening of market, such approach was found to be inefficient as the market was getting more complex and competitive in nature. The performance required in order to stay competitive in the market was not achieved with this centralised approach. When closely analysed, it was revealed that the centralised approach only involved some top management of the organisation. However, it is very important to involve all the functional departments in the corporate planning process in order to achieve the desired success. The situation can be analyzed in the context of the article named "Cultural constraints in management theories" written by Geert Hofstede. According to Hofstede, different cultures result in different performances as the role of different cultural dimensions is different in different countries. According to Hofstede's research, role of power dimension is less significant in USA as compared to France. However, in Germany and Netherlands the role of power distance is prominent. This means that inequality among people is not considered normal in Netherlands and Germany (Hofstede, 1993). Since CEGB is a UK based organisation it can be expected that people will not consider power distance a normal factor. However, the centralised approach takes power distance into consideration. As a result, the performance of individuals is likely to be taken care of by the centralised approach and this in turn will result in the fall of organisational performance.
Strategy and corporate planning are the two most important elements that help a business organisation to achieve its long term objectives. Like any other company, PowerGen also has adopted several effective strategies in order to gain more competitive advantage. The company has undergone several restructuring processes which have influenced its corporate planning. The core competency of the company lies in selling electricity to the electricity pool. Much of its revenue comes from this activity. However, after deregulation of the industry, the company got the chance to take over some regional electricity company. PowerGen utilized this opportunity and took over Midland electricity in the second attempt as the first attempt was blocked by the UK government.
In the present business environment it is very important for every organisation to identify its core competencies and dynamic capabilities in order to gain sustainable competitive advantage.
EDF energy and EON energy are two of the largest power generation companies in UK. EDF mainly deals with nuclear plants and it has to buy gas for supplying its own customers. On the other hand for E.ON energy, natural gas forms the main source of energy generation. In other words it can be said that EDF's core competency lies in its efficient handling of nuclear energy and that of EON's in its capacity of using natural gas.
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