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The main focus of this write up is the strategic and organizational development of PowerGen Plc.Â The findings of the write up are based on information taken from a case study found in 'Strategy: Process, Content, Context' (2004), PowerGen: Strategy and Corporate Planning" and other online literatures and text books to examines its organizational developments from 1990 to 1998. The objectives of this report were, firstly, to identify three key areas of interest taken from the case study about some of the many strategic changes PowerGen has undergone since 1990, and secondly, to answer the three (3) questions given on Power Gen. Company and give necessary sound recommendations for the analysis computed.Â The three key points of analysis identified were:, PowerGen's Corporate planning techniques and the strategic decision making power.
(1.1) Background of the Study
According to Weekly Corporate Growth Report (2000) Powergen is a one of the leading incorporated gas and electric company created from the breakup of the nationalized electricity industry in England and Wales. As privatization emerge, Powergen is carved out as a separate division of the Central Electricity Generating Board in 1989 and is incorporated as a public limited company with the majority of its shares sold to the public two years later. Powergen and its larger rival at the time, National Power, constitute a virtual duopoly of electricity generation in England and Wales, though that scenario is expected to change as more and more competition enter the industry. Perhaps in response to this inevitable shift in the status quo, the company increasingly becomes involved in allied ventures including forays into international power markets, the provision of combined heat and power, and, most significantly, investment in natural gas. The following chronology deduced from Zahra, and Nielsen (2002) explains the company history better.
1988: Privatization of the United Kingdom's electricity industry occurs.
1989: The Power Generation Company PLC (Powergen PLC) is incorporated.
1991: Sixty percent of Powergen shares are sold to the public.
1993: Powergen opens its first gas-fired power station at Killingholme.
1995: The U.K. government sells its remaining 40 percent stake in Powergen.
1997: Powergen announces the joint venture Cottam Development Centre with Siemens.
1998: The company acquires East Midlands Electricity and sells Powergen North Sea Ltd.
1999: Powergen becomes the first U.K. Company to sell electricity and gas to domestic customers via the Internet.
2000: The Company enters the U.S. energy market with its US$3.2 billion acquisition of LG&E in Kentucky.
2002: The German-based global energy services company E.ON finalizes the acquisition of Powergen and its U.S. subsidiary, LG&E Energy, as a wholly owned subsidiary.
1.2 SWOT ANALYSIS OF POWER GEN.
To evaluate PowerGen operating environment, this assignment is going to make use of analytical tool called SWOT analysis. According to (Yip 2004) SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors. With the help of this analysis, we are going to examine Strengths, Weaknesses, Opportunities, and Threats of PowerGen.
According to the report given by the Trinity Expert Systems (company that provides dual support services for Powergen subsidiary) that Powergen plc was one of the UK.s best-known names in electricity and gas. The company produced electricity, provided gas and telephone services and acts as an Internet Service Provider. It sold its services to a range of residential, business, corporate and government customers directly and via the Internet. Powergen was also a market leader in providing combined heat and power plants to industrial clients.
In the year 1998, PowerGen power station portfolio includes over 8.1GW of coal, gas and oil-fired power plant in the UK, and over 9.7GW of predominantly coal-fired plant in the US. PowerGen have a commissioned capacity of over 480MWe of combined heat and power plant in the UK, with further projects under development. Through its joint venture Powergen Renewables, we have interests in 14 operational wind farms in the UK and Eire, with a total capacity of 78MW. In the UK, PowerGen owned and operate the electricity distribution network for the East Midlands, covering 16,000 square kilometres. In the US, it also operate electricity and gas transmission and distribution assets in Kentucky, covering 70,000 square kilometres.
According to 2003 annual report, Powergen depends upon the UK market, although international business was still growing, and was expected to contribute greater amounts to PowerGen profits for some years, the company highly dependent on the UK market (73.8% of 2003 revenues). While this wasn't a major weakness in the short term, but due to it difficulties in its planning, a new trading market was devised with the privatization scheme for bulk sales of electricity from generators to distributors--the pool. A rather complicated pricing procedure exists in the pool, according to which each generating station offers a quote for each half-hour of the day, based on an elaborate set of criteria including the operating costs of that particular plant, the time of day, the expected demand for electricity, and the available capacity of the station.
According to 2000 annual report, following becoming a PLC, Powergen increasingly looked abroad for opportunities and advancement. In 1993 to 1994 the company undertook, as a member of a consortium with two U.S. companies--NRG Energy, Inc. and Morrison Knudson Co., Inc.--to operate lignite mining and power generation in the Leipzig region of Germany. As a future investment in the area, and again in cooperation with NRG Energy, the company bought a 400MW share in the 900MW Schkopau power station. At Tapada do Outeiro in Portugal, Powergen became a member of a consortium charged to build and operate a 900MW CCGT power station.
Powergen began moving into the field of combined heat and power generation through its subsidiary Powergen CHP. Its first project in this area, initiated in 1993 to 1994, was a 14MW co-generation plant commissioned by SmithKline Beecham. The subsidiary has also undertaken to provide energy for three paper mills in Kent.
Powergen's sorties into ventures, related to but independent of its primary function as a U.K. power generator, were necessary for the company to grow. Its share of the home electricity market was undeniably dwindling, from a post-privatization inheritance of 30 percent to some 24.5 percent in 1994; and Nuclear Electric had edged out Powergen as the second largest power generator. Powergen's market share was expected to sink yet further as the government's plan to increase competition in power generation came to fruition. Nonetheless, it seemed likely that Powergen would continue to control a significant proportion of the industry.
Rebounding from the disappointment, Powergen entered into a new joint venture with Siemens in 1997, the development of the Cottam Development Centre, which went on to win a 1997 Strategic Partnership Industry All-Star Award. This collaboration wasn't the first between the two companies; they had worked together on other large-scale projects, including construction of the Killingholme station on South Humberside in 1993. The Cottam project would become a showcase for the latest design of high-efficient, environmentally mindful gas turbines, providing a solid platform for large-scale development ventures well into the future.
In July 1998, Powergen purchased East Midlands Electricity for £1.9 billion. This marked the company's entrance into the residential and smaller business electricity markets and allowed the distribution of electricity over a region of 16,000 square miles and 67,000 kilometers of overhead lines and underground cables. The following year, Powergen became the first U.K. company to sell electricity and gas to domestic customers via the Internet.
According to 2000 annual report, negligence of Powergen by not building competitive trading and retail businesses give its competitors advantage in the wholesale and retail markets. The threat from competitor like Nuclear electric was compounded when the company suddenly increased its electricity supplied. UK structural change sparked a price war. The price followers in the UK market suddenly become aggressive investors in price, due to new ownership and new management in electricity suppliers in UK. Some of the electricity suppliers used the idea of lower prices as one of the basic changes necessary to drive their recovery. With PowerGen who had been committed to price leadership, this resulted in a step down in industry profitability.
After becoming PLC, Powergen International growth and expansion was expensive. Entering new markets with a new brand requires heavy investment and marketing, as well as land prices (which are currently low) and extra distribution and operation expense. Powergen's debt was increased before it begins to decline.
This write up is basically analysis of secondary data gathered from case study entitled "PowerGen: Strategy and Corporate Planning" by David Jennings, cited in De Wit and Meyer (2004: 709-720); Tesco annual reports; Performances analysis table from 1991-98 cited in De Wit and Meyer, 2004 and other textbooks. The data and figures obtained from the available materials will be analyzed through the use of correlation co-efficient and regression analysis. The profit before tax and total turnover will be regarded as X and Y respectively. This will be the best method for this assignment in order to give necessary recommendation for the organization.
(3.) QUESTION ONE
(3.1) Compare and contrast the meaning of "Strategy" and "Corporate Planning"
Henry Mintzberg, in his 1994 book, The Rise and Fall of Strategic Planning , points out that people use "strategy" in several different ways, the most common being these four:
Strategy is a plan, a "how," a means of getting from here to there.
Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.
Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets.
Strategy is perspective, that is, vision and direction.
Mintzberg argues that strategy emerges over time as intentions collide with and accommodate a changing reality. Thus, one might start with a perspective and conclude that it calls for a certain position, which is to be achieved by way of a carefully crafted plan, with the eventual outcome and strategy reflected in a pattern evident in decisions and actions over time. This pattern in decisions and actions defines what Mintzberg called "realized" or emergent strategy.
Mintzberg's typology has support in the earlier writings of others concerned with strategy in the business world, most notably, Kenneth Andrews, a Harvard Business School professor and for many years editor of the Harvard Business Review.
Strategy According to Kenneth Andrews who presents this lengthy definition of strategy in his book, The Concept of Corporate Strategy:
"Corporate strategy is the pattern [italics added] of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities. (Pp.18-19)."
According to Corporate planning is the systematic process of determining goals to be achieved in the foreseeable future. It consists of: (1) Management's fundamental assumptions about the future economic, technological, and competitive environments. (2) Setting of goals to be achieved within a specified timeframe. (3) Performance of SWOT analysis. (4) Selecting main and alternative strategies to achieve the goals. (5) Formulating, implementing, and monitoring the operational or tactical plans to achieve interim objectives
Corporate planning is a bridge between the present and the future. It is also a bridge between the management and strategy.
(3.2) Critically evaluate the impact of changes in "organizational structure" on PowerGen's corporate Planning process during the period 1990-1998
According to David who cited in De Wit and Meyer (2004) that after privatisation in 1991 PowerGen had 21 power stations and was producing around 30% of the electricity supplied to England and Wales. Between 1989 and 1992 PowerGen had a 'functional' organisational structure with few layers of management.Â For instance, their core business functions such as electricity generation and commercial energy sales formed divisions i.e. 'Generation division' and 'Commercial division', which were then subdivided into business units: business planning, marketing, or the power stations themselves.
Therefore the implications of PowerGen's organisational structure for its strategy and planning were that its high-level strategy to "become a low-cost producer on a world class basis" was translated into key business objectives and action plans in a simple and more streamlined way.Â The company went on to develop gas-fired stations, which proved cheaper to build and maintain and were more productive generators of electricity than the coal and dual-fire (coal and oil) power stations it had originally. (De Wit and Meyer, 2004)
The national grid forecasted only a slow growth in electricity demand throughout the early to mid 1990s of only 0.6% annually.Â PowerGen then decided to close some power stations and invest in the growing international market.Â It could be argued that it was PowerGen's simple and efficient organisational structure (relative to a diversified and complex structure) that enabled it to adapt to this change in circumstance in time to avert too many negative effects from the stagnating domestic market
However, a couple of years later there was a problem with the planning process in that the financial department was not integrated properly with the result that corporate financial requirements were not realised.Â This problem was directly attributable to the new form of divisional organisation introduced in 1992.Â Devolved strategic decision making - whilst empowering individual divisions - made planning implementation more fragmented from a corporate point of view.Â An example of this is the failure by top-level management to cascade 'scenario information' effectively enough to its divisions so that when 'capping' occurred (presumably capping of profits) the divisional business plans were not equipped to deal with the new situation. (De Wit and Meyer, 2004)
In 1996, PowerGen underwent another reorganisation to accommodate the development and diversification of the New Venture.Â The reorganisation introduced new clusters of business units beneath the Chief Executive Officer and Managing Director (MD) such as 'UK Production', 'Gas', 'Sales & Marketing'.Â Each cluster had its own MD and finance manager and both were involved in the planning process.Â The main advantages of this new structure were that it obviated the past problem of lack of financial input into the strategic plan and that it brought improved focus to each business unit on the circumstances specific to its role, for example, the Sales & Marketing cluster could concentrate on achieving their sales targets and enhancing the company's edge in the increasingly competitive market. (De Wit and Meyer 2004)
4. QUESTION TWO
4.1. Using information from relevant literature, and your own understanding of "core competencies" and "dynamic capabilities": Discuss how power Gen' core competencies' and Capabilities accounts for its "market share" and "profit before tax" in England and Wales during the period 1991-1998.
According to Teece, Pisano, and Shuen (1997), Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage.
According to the Work of Hamel and Prahalad, the main ideas about Core Competencies where developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a best-selling book - Competing for the Future. Their central idea is that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth.
'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible
Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for?
Teece et al. (1997) define dynamic capabilities as 'the ability to integrate, build, and reconfigure internal and external competencies to address rapidly-changing environments'. The concept of dynamic capabilities arose from a key shortcoming of the resource-based view of the firm. The RBV has been criticized for ignoring factors surrounding resources, instead assuming that they simply "exist". Considerations such as how resources are developed, how they are integrated within the firm and how they are released have been under-explored in the literature. Dynamic capabilities attempt to bridge these gaps by adopting a process approach: by acting as a buffer between firm resources and the changing business environment, dynamic resources help a firm adjust its resource mix and thereby maintain the sustainability of the firm's competitive advantage, which otherwise might be quickly eroded. So, while the RBV emphasizes resource choice or the selecting of appropriate resources, dynamic capabilities emphasize resource development and renewal.
4.2 How PowerGen's core competencies and capabilities account for its market share and profit before tax in England and Wales during the period 1991-98 can easily be explained by computing ratios for applicable information on market share and profit before tax.
Table 1: This Represent Market Share In Percentage
Market share %
( Source: De Wit and Meyer (2004), Market Shares Table 1 of Electricity Suppliers session 6 cases, pg. 718)
Table 2: This Represent Operating Profit Margin in Percentage
Market share %
(Source: De Wit and Meyer (2004), Powergen Performance Table 2 case 5, pg. 719)
To calculate operating profit margin for 1996, 1997 & 1998 years ended that are not given in the Powergen performance Table 2 (Pg. 719, case 5 cited in De Wit and Meyer 2004) will be by the below formular:
Operating profit margin = Operating profit x 100%
For 1996 693 x 100% = 23.6%
1997 511 x 100% = 17.6%
1998 591 x 100% = 20.2%
Also calculating Profit Before Tax Margin = Profit before tax x 100%
Profit Before Tax Margin
Profit before tax margin %
272 x 100% =
359x 100% =
425 x 100%
476 x 100% =
545 x 100% =
687x 100% =
577x 100% =
211x 100% =
Source: De Wit and Meyer (2004), Table 2 Powergen Performance case 5, pg. 719
Summary of findings of Power Gen performances analysis on whether core Competencies and capabilities account for its market share and profit before tax during the period of 1991-98.
Market share of Power Gen was stable between 1994 -95 but later reduced drastically due to fluctuation in price. From the analysis computed, it is very clear that from 1991 till 1996 the margin continue to increase which means that even though the market share is falling, the company was able to manage its expenditures with the help of a good strategic core competencies and dynamic capabilities.
The company also experience reduction in its profit before tax margin in 1997 and 1998 due to
Changes in Organizational structure of 1996
Lapses in core competencies and capabilities
4.3 Using relevant data/ information from company websites compare and contrast of the core competencies and capabilities of the electricity suppliers, Electricite de France (EDF) and E-ON UK PLC.
E.ON UK sells electricity, gas and other energy-related products to residential, business and industrial customers throughout Great Britain. As of 31 December 2009 according to annual report, E.ON UK supplied approximately 7.9 million customer accounts, of which 7.4 million were residential customer accounts and 0.5 million were small and medium-sized business and industrial customer accounts. Approximately 63% of E.ON UKâ€Ÿs residential customer accounts are electricity customers and 37% are gas customers. Individual retail customers who buy more than one product (i.e. electricity, gas or other energy-related products) are counted as having a separate account for each product, although they may choose to receive a single bill for all E.ON UK provided services. E.ON UK Central Networks business served 5 million customer connections. Energy Services provided boiler care for 95,000 customers. Group revenue from continuing operations grew by £188 million during the year to sales totalled £9,227 million, an increase of 2%. The external increase in turnover has arisen primarily in the Retail, Generation and EC&R UK businesses.
Electricite De France opined in their website that the combination of EDF Energy and British Energy forms one of the UK's largest energy companies. Â The combined business is the UK's largest producer of electricity. With a current installed capacity of around 16.5GW, we produce almost one-quarter of the nation's electricity from our nuclear, coal and gas power stations, as well as combined heat and power plants and wind farms. with a current installed capacity of around 16.5GW, we produce almost one-quarter of the nation's electricity from our nuclear, coal and gas power stations, as well as combined heat and power plants and wind farms. Second, we are building a new highly-efficient combined cycle gas turbine (CCGT) power station at West Burton which is capable of producing 1.3 GW, enough electricity to supply approximately 1.5 million homes. It will help to provide new generation capacity in the short term and will significantly reduce the carbon intensity of our fleet. Our sales totalled £6,616 million, representing growth of 13.3% compared with 2007. EDF Energy's profitability reflected in EBITDA was £758 million for the year, representing a decline of 11.9% but includes accounting adjustments for the adverse impact of the mark-to-market valuation of commodities hedging contracts.
Therefore, comparing the two companies above, it is very clear that Electricite De France could not contain to enjoying their monopoly power without merging with other big companies, hence they lack core competencies. However they have proved to be dynamic in capabilities by responding to environmental threats and opportunities around them. They have also proved to be competent in supplying consistently to their customers despite the numbers of customers they had to satisfy their needs. But they cannot still with stand the success of E-ON UK PLC when will compare their achievement together by looking at their five years financial summary, the number of customers differences, the total Sales and profit are also incomparable. For example the total sales of E.ON UK. PLC was £9,227 million compare to total sales of Electricite De France which was £6,616 million. The formal was able to be ahead of their strong core competencies and capabilities through continues focusing on reducing the costs of its retail business, through efficiency improvements, more economical procurement of services and the utilisation of lower cost sales channels.
(5.) QUESTION THREE
5.1 Critically evaluate the effect of "privatisation" and "Deregulation" in the UK Electricity industry on the merger between powers Gen's and Midlands Electricity Plc. In the mid -1990s.
According to Financial Times (1994), Privatization of the utility was designed to promote a beneficial result through the free play of market forces. The introduction of competition in power generation, it was argued, would lead both to greater efficiency within the industry and to lower prices for the consumer. Within a few short years, however, concerns had already arisen, as critics of the scheme had predicted from the start. A duopoly, which at the time of its creation held such a significant majority of the electricity generating market, was never likely to embody the purest form of free market operations.
In 1994 the industry watchdog, the Office of Electricity Regulation (Offer), expressed concern about Powergen and Midlands Electricity continuing dominance of the market as a result of their merger--and the fact that from June 1990 to January 1994 the wholesale price of electricity had risen by 50 percent. The market share of the big two had in fact declined since privatization, with Midlands Electricity enjoying some 33 percent and Powergen controlling less than 25 percent, but nonetheless rumors were rife that Offer would refer the duopoly to the Monopolies and Mergers Commission. Offer eventually stopped short of that proceeding, but the regulator did lay strictures on the two generating companies, requiring that they should sell a specified amount of generating plant capacity--in the case of Powergen 2,000MW--and submit to price-capping for a period of two years.
The demand to sell plant capacity was expected to cause little hardship to Powergen; which plant to sell and when to sell was left to the company's discretion, provided it complied with Offer's deadline of December 31, 1995. Much of the plant capacity disposed of was expected to be less-attractive coal-fired plants, some of which Powergen would have closed anyway as the plants were unnecessary to its needs. In preference to an outright sale, it seemed possible that Powergen might be able to arrange an asset exchange with a foreign power company.
The required price caps, ironically, appeared likely to prove a less onerous burden to Powergen and National Power than to the state-owned Nuclear Electric and to small independents, both existing and potential. Nor would the new pricing rules result in lower electricity bills for the average household consumer--only for large corporate customers.
The government, apart from its concerns about fair competition and price, was particularly interested in resolving any controversy or questions regarding Powergen and Midlands Electricity, as it intended to sell its remaining 40 percent share (which it had retained at privatization) in each of the two companies. The sell-off to the public, scheduled to take place in February 1995, was expected to raise a welcome £4 billion for the government; £1.5 billion of which would be attributable to Powergen.
Powergen followed the usual route of privatized companies in the United Kingdom by undertaking a rigorous program of cost-cutting, achieved primarily through improved efficiency, staff reductions, and plant closures. Employee redundancies had been dramatic: Powergen's staff as of 1994 was less than half its 1990 level. Several power stations were closed outright, while others were put into indefinite reserve. The strategy proved a successful one, with the company's profits healthy despite a reduction in sales.
5.2 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 Geen Hofstede's (1993) article entitled "Cultural constraints in the management theories", cited in De Wit and Meyer (2004: 34)
Central Electricity generating Board was unable to with stand the challenges in electricity industry due to the Centralized approach to planning adopted. The approach continues to face a lot of problems as the company grows which later lead to the reduction of power station. But after the reorganization of 1996 which gave room for competition by allowing other electricity suppliers like PowerGen in the open market. The whole story changed for better.
RECOMMENDATION COMPUTATION FOR POWER GEN CORRELATION COEFFICIENT.
r = Cov xy = âˆ‘(x- x) (y- y)
Stdx x stdy Stdx x std y
Y = Profit before tax
X = Total Turnover
âˆ‘ (X- X)(Y-Y)
X = âˆ‘x = 23516 = 2,939.5
Y = âˆ‘Y = 3552 = 444
Cov xy = âˆ‘(X-X) (Y-Y) = 22417 = 2802.125
6x = âˆ‘ (X - Y)2 = 174638 = 21829.75 = 147.75
6y = âˆ‘ (y-y)2 = 179422 = 22427.25 = 149.75
r = 2,802.128 = 2,802.125 = 0.127
147.75 x 149.75 = 22127.04
INTERPRETATION AND CONCLUSION
A positive result indicates that there is a positive relationship while a negative result shows a negative relationship.
With correction of 0.127, there is a positive relationship between total turnover and profit before tax of Powergen. This implies that privatization, deregulation, merger and acquisition had positive impact on the growth of powergen. This will also go a long way to achieve the global electricity generation forecast that is expected to grow at an average annual rate of 2.6% till 2030.
The conclusion from here is that E-ON UK PLC formerly known as Powergen has a bright future if it can use its core competencies and dynamic capabilities fully to increase its output and gain larger share of the market. Other electricity suppliers can still perform better by formulating new innovations, strong core competencies and capabilities.