Strategy and Corporate Planning at PowerGen

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PowerGen is a company that produces and supplies the electricity needs of Great Britain. Established in March 1990, PowerGen as a business entity came into being as a result of the reorganization of the British power industry from a highly centralized and nationalized (government owned corporation) to an industry mainly ran by the private sector. Prior to PowerGen's creation, electricity was supplied by the Central Electricity Generating Board (CEGB), but by the late 80's, problems stemming from the decline of the number of power stations who were supplying electricity, and the effects of the growing complexity regarding the technical aspects of power generation the British Government decided to reorganize CEGB with the aim of developing a more dynamic and efficient power industry.

From the onset, PowerGen's focus was based on the new setup of the CEGB was power generation. And to face this task the corporate planners of PowerGen had to come up both with a strategy and corporate plan that would address the challenges facing the power industry and which PowerGen needs to address in order to be a successful player in the industry.

In order to fully understand the strategy of PowerGen and how it differs from corporate planning let us first define what the meaning of these two terms. Strategy or corporate strategy is defined as the way a company will approach the future of its operations by analyzing existing factors concerning its competitors and the customers on the one hand, and the business entity on the other.

Simply put, strategy is commonly understood and refers to the overall framework or marching orders that define the corporate vision, mission and goals of the corporation or business entity. Strategy is based on an overall analysis of the internal and external factors that would affect the operation and profitability of the corporation. In the case of PowerGen, this deals with developing its capacity to generate electricity at a lower cost. On the other hand, corporate planning pertains to the concrete steps that all the aspects of the corporate entity shall undertake in order to achieve its vision, mission and goals and which in turn are shaped by its strategy.

Corporate strategy and corporate planning are the same in that both are ways that are instituted by a corporate entity to address a certain situation and concern that affects the company. The main difference is that, as was stated, corporate strategy addresses these situations by providing a general framework or vision by which the company shall conduct itself and operate, while corporate planning deals with concrete and very detailed action plans that are more focused on how organizational structures should function. Another difference of strategy is that being a framework it is more fluid and can easily adapt to changes to the situation while being true to its general vision. Corporate strategy is also more focused on analyzing internal and external contexts for the purpose of forecasting where an organizations direction for development will be, while corporate planning deals with indentifying internal and external factors to determine organizational steps and changes.

Corporate planning being an organizational decision is the sole responsibility of senior management while corporate strategy while primarily designed by management the direction it sets should be a shared value of all the organization and should be understood by everyone who are part of the organization in order to ensure a unity as to the direction an organization will take and how every aspect of work contributes to achieving this vision.

The changes made to the organizational structure of PowerGen made an impact in the planning process in several ways. First of all, it reorganized itself into three divisions which are New Ventures, UK Electricity, and Engineering and Business Services Division. All three divisions acted as business units that have its own Marketing Division and were given a bigger decision making role. The effect of this is that the planning process became more efficient because it can now focus more on the needs and concerns of each specific division and as such can developed more concrete business objectives and action plans. Giving the managers of each division a wider decision making role helped to eliminate bureaucracy and make the company more flexible in addressing developments in its area of concern and it also made operations more efficient and focused on raising profitability. The new structure also dispersed responsibility while ensuring control by establishing a central Strategic Planning staff that will develop corporate strategy while giving each unit the authority to develop its own business plan based on the general vision or strategy of the organization.

This helped in turning the company from a monolithic to a more dynamic organization that is more productive and adaptable to developments in the industry. By cutting through the bureaucracy, the reorganization of the company also ensured that the plans that are developed are very specific and focused on the expected outcomes for the specific division. With a dispersed decision making structure, the company now can act on needed measures more quickly and decisively than before when it was more top heavy in its corporate structures. However on the downside, during the first part of its reorganization there strategic objectives of the company and the financial requirements of the company seemed disconnected. This was due to the way planning responsibilities were distributed in the company and a lack of a communication system within the company that would reflect the new organization. For example, the strategic vision of the company is not clearly reflected in the business plans of the company, and scenarios that might concern business planners at the division level are not communicated effectively by those in charge with the strategic direction of the company. Another problem that was faced by PowerGen is how planning responsibilities were designated in the company. Under the reorganized setup, the development of a corporate strategy and production of a corporate plan is the responsibility of the strategic planner whose findings is then reported to and approved by the Chief Executive. The weakness was that the setup did not include the views and opinions of the Finance Department therefore creating a rift between the financial needs of the company with the strategic decisions that were made.

In effect some of the strategic decisions were not practical and are overarching in relation to the issue of financial cost and profitability. This situation was remedied when the Director of Finance was given the responsibility for managing the corporate planning process therefore giving stress to the financial considerations in the planning process.

Question 2:

PowerGen's core competencies and dynamic capabilities can be seen in three specific areas: on its ability to provide consumer benefits; technical developments; and its wide distribution of its products and markets. In terms of consumer benefit, PowerGen has offered a cut in energy surcharge rates for its pre-payment consumers. This move benefited about 230,000 costumers making the cost of electricity consumption more affordable. PowerGen also offered price friendly packages to consumers who are in the age of over 60 which considers there economic status through a plan that is cheap and easily affordable. PowerGen also helped pre-payment costumers by cutting their pre-payment surcharge and by offering a range of energy efficient services giving them a wider choice of services that is applicable to their needs and income capacity. PowerGen has also adapted to the hectic and fast paced lifestyle by delving into e-commerce, incorporating the internet into its day-to-day business activities which makes transactions between costumers, shareholders and the company faster, easier, and efficient. Through the internet PowerGen has been able to sell products and offer services to customers using the World Wide Web. Compared E-procurement is also been maximized by the company to reduce PowerGen's buying costs.

PowerGen has also shown advancements in its operational efficiency and technological advancements compared to their competitors. In the 1990's, PowerGen was able to develop its generating capacity that is adapted to the needs of the market and which is sensitive to the needs of the environment. This was done by developing the flexibility of its coal units and by developing its gas fired stations. Venturing into gas fired stations benefited PowerGen because it has a low capital cost compared to coal fired stations. Gas fired stations can also be constructed at a shorter time and it operates more efficiently and productively, and it produces lower polluting emissions compared to the generation of coal. This allowed PowerGen to fulfill its objective of being a company that focuses on power generation. PowerGen is also noted for its acquisitions, mergers and partnerships with different companies who are also players in the power industry. Through this PowerGen has expanded its range of services offered from energy generation, energy trading, and energy retailing to electricity production and electricity distribution. In the 1990's, PowerGen was already involved in production, transport, marketing and trading of gas and meeting the long term needs of the company by establishing long term contracts with gas producers. PowerGen was also successful in supplying gas for household use and supplying electricity to two Regional Electricity Companies. PowerGen was also able to supply about 10% of the gas market both industrial and commercial. The success of its heat and power business also allowed for the establishment of two new CHP plants bringing the total of PowerGen's capacity to 180 Mega Watts.

This need is driven by the opening up of the market for electricity which was exemplified by the new system for supplying electricity requirements or what is called the Electricity Pool. The Electricity Pool is where all power generators will have to sell their power generation. From this Pool suppliers or what is called as Regional Electricity Companies (REC) will then buy generated power. The Pool is the total generated power produced by different power generators and as such it operates under a system of competitive bidding. Generators who can produce more for less will have a bigger edge in the bidding process and can profit more since power contracts and profit from it is determined by the relationship between generators and suppliers. Agreements between generators and suppliers specify the price and quantity of generated power for a certain period of time.

b) The two electricity suppliers, Electricité de France (EDF) and E-ON have varying degrees of similarities with regards to their core competencies and capabilities. These similarities include:

Both companies addresses concerns and challenges facing the organization in relation to production and distribution of electricity. E-ON has been generating and distributing electricity as well as retailing gas and power. The company has been utilizing renewable sources to generate energy and has built a dedicated biomass power station said to be the largest in the UK. Such strategies facilitate the creation of the local employment, income generation as well as tourism opportunities to the communities. E-ON also prioritizes investments in solar power and promotes its home use. The corporation provides the solar energy to its clients through the Solar Saver scheme which offers 41p2 for every unity of electricity used with the home solar panels. An additional 3p will be provided for every unit unused in the client's home which can be sold back to the electricity network. E-ON also offers electricity tariffs to its clients such as Go Green Electricity which is provided through a renewable electricity source, the standard E-ON electricity, and the business electricity products suited for small and medium businesses.

EDF's energy meanwhile generates electricity mainly through traditional sources i.e. coal-fired power plants. The company is also developing and exploring sources such as nuclear power as part of solutions to climate change, wind, solar, tidal, wave and biomass energy. EDF's efforts in providing energy for its UK clients generated from nuclear sources will expand to accommodate four plants by the year 2017. Under EDF's Eco20:20, the electricity provided to the consumers are 20% cheaper during nights and weekends. The largest purchases of EDF for energy generation were allocated for coals within and outside UK. EDF Trading, the corporation's trading group has been prioritizing the integration of the UN Global Compact framework dealing with environmental and labour standards into the procurement process of coals. Assessments to gauge the sustainability of counterparties in energy trading were also used as a standard in their risk management.

EDF is also utilizing the 2000MV Cottam power station, a coal-fired power station which is expected to produce 4% of the market. Another coal-fired power station is the West Burton which operates 24 hours to provide the power requirements of approximately two million citizens.

EDF and E-ON has customized energy saving plans for consumers. Both corporations offer services catering to the specific needs of its clients. EDF offers energy saving packages for small and medium business enterprises as well as large business with specific billing period options and specified annual rate. For household energy use, EDF's Save Today Save Tomorrow allows the client to choose services and competitive tariffs that is most suited to his/her energy needs. Another service popularly known as Eco20:20 provide 20% discount to EDF services for off peak hours as well as share advices on measures that will reduce carbon footprint up to 20%.

E-ON's services consist of a variety of electricity tariffs such as those of EDF's services. The company offers E.ON FixOnline 8 Electricity which permits the consumer to choose and fix their energy prices by July 1, 2011. Another service from E.ON is the Go Green Electricity in which the consumer's energy consumption is generated from a renewable electricity source. EDF also ventured into product development and carries a number of business electricity products which can help small and medium business enterprises to save funds.

Question 3 

The privatization as well as the deregulation of the electric industry in 1990 occurred to help establish a more competitive electric industry. Ideologically, the structuring was caused by the belief that the private ownership and the motivation to make profits provides a more better incentives than state control and competition among private industries facilitate better solutions than monopolies.

The Department of Energy in 1988 released a White paper which discussed the vision of the electric industry under a vigorous competition, the paper also reflected the transfer of ownership of the transmission grid formerly owned by Central Electricity Generating Board (CEGB) to distribution companies. The power stations of CEGB can be divided between its two competing companies. This structure allows the distributors to purchase electricity from UK, France and Scotland. The resolution that there will only be two generators was also motivated by the goal to privatise the nuclear power station of CEGB. Distributors shall gain access and be able to purchase the electricity.

The people behind the deregulation and privatization needed a competition in generation, but the same people seek to maintain the merit order system. Under the system the cheapest generators were first dispatched. This is a rather complex obligation for the system as it expects that cheap stations with contract will be called instead of stations that are expensive and binded by contracts. This system was impossible during the time thus the Pool was born. Every station shall be dispatched based on merit order and shall bid in a single market.

In PowerGen's merging with Midlands Electricity, PowerGen believed that the vertical integration signify the most logical advancement in the electric market a natural aspect of the industry's continuing development. The corporation considers that the efficient model of competition development of the industry requires five of six vertically integrated companies and some smaller companies as well.

PowerGen's vision of the advancement of the electric industry and the merger with Midlands facilitated the development of the industry as indicated by the formation of a vertically integrated player with Eastern Group's purchase of 6,000 MW of generating plant from PowerGen, the creation of generation capacity by RECs, the strengthening of RECs' competitive positions through the formation of regional multi-utilities as indicated in the merger of RECs with water companies, and the purchasing of another REC by vertically integrated corporation - ScottishPower to create a vertically integrated multi-utility.

However while these developments increased the productivity of the industry, these benefits did not actually translate to into lower prices for consumers particularly since privatization led to an increase in electricity prices. Although costs have been reduced, these were considered as additional profits and not as a means to reduce rates for consumers.

b) The centralised approach applied by the Central Electricity Generating Board (CEGB) proved to be disadvantageous during a period wherein advancements are expected from the electric industry. All the operations were centralized in the National Grid wherein engineers lead the anticipation of demand, monitoring and directing power station managers to generate or stop generating electricity and other similar functions known as the merit order. However the reformists pushing for privatization of the electric industry eventually succeeded as the CEGB was dissolved and branched out to three generating companies - Powergen, Nuclear Electric and National Power.

Seemingly, as Geert Hofstede's article stated, CEGB was experiencing the fourth dimension of management and culture - Uncertainty Avoidance. This dimension is defined as applying and resorting to a more structured situation rather than unstructured ones. Structured situations consist of clear rules of behaviour in which the people can refer to. A country or organization with high levels of uncertainty avoidance approaches new experiences and challenges as "what is different is dangerous" as opposed to organizations with low uncertainty avoidance. Such countries or organizations approaches new experiences as "what is different is curious" or interesting. Another dimension of management and culture that can be applied to the case of CEGB is the fifth dimension - long term orientation which is characterized by values geared towards preparation for the future, against short term orientation which is characterized by focusing and concentration on the past and present.

According to Hofstede's article, the ideal nature and approach of control in organizations is competition between individuals. This market philosophy is applicable to countries with low power distance, low uncertainty avoidance and individualism which made it suitable for European countries. Such philosophy directly contradicts the centralized approach of CEGB.