The interests of the PowerGen Company

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PowerGen was vested as a British electricity generation company in 1990 as the result of the privatization of the UK energy systems. The previous state owned "Central Electricity Generating Board" was split into three companies, of which PowerGen was the smallest. All three companies were asked to compete in the market, and the market was opened for further new entrants as well. Along with the privatization and liberalization, the government introduced completely new mechanisms of matching supply and demand, such as an electricity pool or the creation of a separate transmission company, and the installation of new regulatory institutions. All market players needed to learn how to operate an energy market, where before there was only a central planning agency.

As the name of CEGB implied, the institution from which PowerGen emerged, had strong planning instincts for fulfilling its task to supply electricity to British households and industry. Therefore, it was not surprising when PowerGen started preparations for being an independent company in 1988, that a very detailed strategic planning system was installed with the help of McKinsey consultants. However, already in 1992, only two years after the operational start of the company, a substantial reorganization was conducted, which triggered a complete change of the strategic planning system as well. When this new planning system failed to function satisfactorily in 1993, it was substantially revised for the 1994 planning cycle.

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In 1996 the company underwent again a major reorganization, adjusting the company to a number of internal and external strategic developments. That also caused the strategic planning system to be substantially revised. In particular it was now broadened to include a highly sophisticated scenario development module to be conducted on the business unit level. The corporate composition did not stabilize thereafter either. In 1998

PowerGen completed a major purchase of a regional energy distribution company, merger discussions with US partners continued on and off, government interference changed the pricing arrangements of the industry and dictated strategic directions, etc. It seemed that the planning system was always several steps behind the actual conditions of the company.

Privatization of the utility was the only tool to promote a favorable result in the market forces. By the introduction of competition commission would lead to both greater efficiency and lower prices for the consumer.

Compare and contrast the meaning of 'strategy' and 'corporate planning.

Organizational Strategy is drafting, implementing and evaluating cross functional decisions that will enable an organization to achieve its long-term objectives.

The process begins with an analysis of a company's current strategies. Among the tools to assess the (Strengths, weaknesses, opportunities, threats) the most popular tool is SWOT analysis. The external environment is examined in terms of opportunities and threats posed at the current position. The analysis also assesses the company's internal environment strengths and weakness. PowerGen's strategy planning system developed in four different stages during the first six years of its privatization.

Stage 1:

In 1990 PowerGen was having functional structure with strong centralized hierarchy and planning. At that time PowerGen constitutes commercial division that mainly focus on pool operation.

In a this functional structure of the organization which was managed by centralized planning team at the commercial division, PowerGen experienced the problem of monopolization of the strategy planning and decision making within the corporation.

There was a Separate Finance division for reviews and projection plans.

PowerGen formulate a 5-stage planning process:

Business unit

Aggregation

Divisional plans

Aggregation

Corporate plan

The focus of PowerGen strategy was to diversify and internalize the operation of the pool. Planning was more inclined towards resource base strategic decisions.

Stage II

Starts from 1992 in this period structure was more of decentralized for planning, there were self-governing division supported by directors, and divisionalised financial staff therefore corporate planning team was downsized corporate planning hence PowerGen switched from a functional organization design to divisionalised structure with profit and cost centers.

At that point of time Managing Directors were the people who were heading the decision making process of this Decentralized autonomous SBU's thereby replacing large, central planning team by business level planning staff within the divisions. By the Introduction of small strategic planning units SBUs were responsible for both corporate strategy development and corporate planning.

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Small Business units stated developing their own business plans and were being reviewed by divisional boards, and incorporated in corporate plans. The devolution of responsibility hasn't changed process itself but it is more responsibility transferred to SBUs this process shortened planning cycle.

The business units were provided their own expenditure limits towards achieving the set operating targets which was eventually set centrally. Less detailed level of planning. Devolution thus created an internal market within PowerGen. Diversification attempts to internalize and verticalisation of the PowerGen which in turn increased responsiveness at business unit level.

Stage III

Happened in 1994, this phase emphasized to create a fit between strategy developments along with financial priorities. Responsibilities were passed to finance directors to manage the corporate planning process. This effectively increased the stimulus of financial considerations in the planning process.

Scenario planning and development was partially delegated to strategic business units, this makes SBUs responsible for developing a number of scenarios that market might develop, so the plans were more robust to those possibilities.

Regulatory intervention (introduction of capped wholesale prices) decreased the profit margins than forecasted and reoccurrence of massive calculation has extended planning cycle.

This induced an unforeseen gap between strategic decisions and financial priorities further to that there were only few independent checks in strategy and planning process from a financial point of view because of having autonomous bodies. Unfortunately in the case of PowerGen center failed to communicate strategic information fully to its SBUs hence PowerGen started again with an effort to remove divisional bureaucracy to manage the planning process, because of the conflicts of interest involved between different layers of the corporation.

Stage IV

In 1996 PowerGen further delegation of decision making and planning process to strategic business units, this increased the coordination between SBU's for strategic management activities.

With the shift of Powergen from divisional structure to strategic business unit's structure this separates the strategy responsibilities among SBUs and new management teams were assigned for the planning of business units.

This made a trilogy between CEO who was responsible for corporate strategy who will get further assistance from Finance Director to manage corporate finance and the corporate strategist and corporate planner to plan for the PowerGen; the Group of Managing director was only responsible for strategic business unit strategy who is then assisted by finance manager to manage the planning process.

Strategic actions were the anticipation of external environmental and industry dynamics and in the reaction of regulatory changes. It formulates a continuous absorption of the external environment dynamics and its impact on strategic options.

Decentralization to develop strategies from corporate scenarios was the guideline, towards strategical development at strategic business unit level. Horizontal coordination between multiple units induced strategic management and development in PowerGen small business units.

The creation of business unit has given has given PowerGen an extensive preset details towards a gradual process, with many checks at Business Unit. The strategies were having a better scope for absorption of emerging issues in the external and internal environment for planning and development cycle. This business unit reduces the formal of process including forming coalitions for strategic options.

The high impact of regulatory forces on PowerGen increasingly put PowerGen under pressure to do political bargaining in the external environment.

So rather than planning for future, a situation has created a pattern of action and reaction with external environmental forces this bears a high influence in PowerGen's strategic behavior.

Powergen Organizational structure Encourage the planning initiatives to be taken by Business Units within a corporate context e.g. the multi-unit scenario development.

The diversification has increased the level of complexity and uncertainty by the Introduction of new bonus plan for business units, strategy process, competition and new regulation. New business unit structure has generated need for coordination of strategies between the Business Units and need for independent management of many new business units.

Businesses were also required separation and autonomy of marketing and sales, in anticipation of liberalization of core markets. Need for even further autonomy of business units, in order to create more focus for business units' individual circumstances.

SWOT Analysis

SWOTAnalysis

Strengths

Weaknesses

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(b) Critically evaluate the impact of changes in 'organizational structure' on PowerGen's 'Corporate Planning Process' during the period 1990-1998.

Functional Organizational Structure

In the period of 1990-1992 the structure of the PowerGen was functional structure with few layer of management horizontally. PowerGen fundamental business function was to generate electricity and sale to commercial units. Later the restructuring of PowerGen created SBU's strategic business units. Those companies that have functional structure tend to have insignificant desire of a formal process of strategy formation because of the less number of managers involved to implement strategies.

Thus the implications of PowerGen's organizational structure for its strategy and planning were to emphasize to produce at low cost. Therefore the mission to be low cost translated PowerGen fundamental business objectives to start developing gas fired stations, which proved to be much cheaper and more productive generators to produce electricity compared to the coal power stations that PowerGen had originally. To understand more about PowerGen structure we have to consider external environment.  The forecasted national grid electricity demand was a slow growth in the early to mid-1990s. PowerGen planned to close some of its power stations and started investing to grow in international market by horizontal and vertical integration of PowerGen.

The PowerGen simple and efficient organizational structure it could be argued that it was PowerGen's simple and efficient organizational 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.

After privatization of PowerGen in 1991; 21 power stations were producing 30% of the electricity supplied to England and Wales.

Devolved Management and Decision Making

Top management normally plays major part in the strategic planning and decision making process. Same happen to PowerGen when it went through a major reorganization in 1992 from a functional structure into three main divisions:

New Ventures

UK Electricity

Engineering & Business Services. 

As these were the autonomous divisions so more decision making and strategic role of top management was pass to to staff within the divisions together this lead the decision of each unit to follow the planning development process in its own way.

However, financial department later in the years experienced a problem in the planning process because of the financial integration hasn't being done properly in financial department as a result corporate financial requirements were not comprehended. 

This problem was directly effect on the new form of divisional structure which was introduced in 1992.  Decentralized strategic decision making while permitting individual units and divisions to make their own decisions was very fragmented from a corporate view point.

Strategic and Planning Tools

PowerGen underwent reorganization in 1996 again to accommodate the development and diversification of the new projects.  The reorganization process a new concept of SBU's under the hierarchy of Chief Executive Officer and Managing Director e.g. UK Production, Sales & Marketing.  Each SBU containing its own Managing Director and finance manager hence both were involved in the planning process of that unit. 

The advantages of those SBUs were that it PowerGen has removed the past problem of absence of financial input into the strategic plan it also has given an improved focus to individual business unit for example, the Sales & Marketing unit could only have to concentrate on achieving their sales targets by achieving extra share in the competitive market.

Environmental factors and external drivers are the main drive for business level strategies. Increased competition in UK, diversification was main thrust for PowerGen's and these external factors were also involved government influence. Consequently the new organizational structure essentially had to be flexible and responsive to the strategic planning to deal with the environmental uncertainty challenges. 

PowerGen greatly reacted by constantly evaluating strategic options by creating a number of 'synergies'

The corporate planning greatly reflected new integrated gas and electricity business PowerGen has greatly collaborated its strategies and objectives both internationally and domestic level to coordinate between its units.  In 1998 PowerGen has incorporated its corporate planning cycle in more formalized way.

In 1989 PowerGen has transformed itself from a UK based company to a diversified international corporation.  It has undertaken many strategic and organizational changes. Powergen was having relatively simple structure that enabled PowerGen to integrate its plans globally by reducing its operation in domestic market.

In 1992 when PowerGen restructured itself into a divisional structure has brought some problems for its performance due to a lack of integration for its corporate and divisional planning.

The year 1999 brought a fierce competition in the industry which reduces significantly PowerGen's market share to 21% which was in1990 at 30%.

PowerGen have reacted to changing environmental circumstances by restructuring again by pursuing an integrated SBUs structure.

Strategy formulation is a continuous process and as a company external factors Change Company has to review its strategy as well.  The Long Range Planning journal article discusses the ability of PowerGen's planning to balance between autonomy and adaptation by the strategic business units with great coordination to fulfill corporate financial objectives.

Now PowerGen is a part of E.ON, the world's major energy company. E.O.N is a leading provider of electricity and gas globally by diversifying significantly its renewable resources of energy, specifically wind energy and hydropower.

With reference to the PowerGen case study, critique the 'centralized 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 DeWit and Meyer (2004:34).

Many definitions of culture exist; one appropriate for this focus is by (Hofstede's; 1993): "the collective programming of the mind which distinguishes one group of people from another".

(Hofstede; 2003) tossed the concept of 'culture' to an onion, which consists of many layers. The outer layers consist of practices, symbols, heroes and rituals which can be observed through language, food, gestures, pictures and fashions, heroes, (alive or dead, real or imaginary) which possess qualities that are valued within a culture.

Under the CEGB considerable effort had been put into the Development of its own forecasts concerning the demand for electricity and the factors. Following privatization scenario construction was increasingly used as a way of exploring the possibilities presented by an environment where forecasts were often unreliable in predicting the price of gas, oil and coal, and inappropriate for anticipating changes in regulatory conditions.

Scenario production:

PowerGen has adopted the practice of developing a number of scenarios prior to the commencement of the planning cycle. The principal scenario exercises concern the inputs and outputs of PowerGen's businesses, the markets and prices for gas, coal and electricity. Scenario production takes the form of a devolved process, carried out by the business units with assistance from the corporate strategy staff. Information from the scenario exercises is incorporated into the planning guidelines. While scenarios can be seen as facilitating the adaptive role of planning, their joint construction and acceptance by business units also acts to facilitate co-ordination between those units. Figure 2 shows the main stages in Power- Gen's current planning process.

Formation of unit representative:

For each scenario exercise a team is drawn from a number of functions and businesses representing the various groups with a significant interest in the output from the scenario. The team is led by a representative of the unit that either has the most expertise or involvement in the area on which the scenario is focused.

Corporate planning:

By the end of the 1960s a number of nationalized industries had begun to undertake a planning process that was described as "corporate planning". The culture of the nationalized industries within which planning operated has been portrayed as concerned with the technological operating core, with norms, values and standards focused on the maintenance and upgrading of that core (Woodward, 1988). Planning practice within the nationalized UK utilities followed a largely bureaucratic and centralized approach. Nationalization provided the opportunity to develop economies of scale in achieving coordinated

Supply in a highly fragmented industry. Following nationalization the CEGB acted as a monopoly responsible for all generation and the bulk transmission of electricity at high voltage with the statutory responsibility of maintaining supply. CEGB has reorganized to reflect the changes by adopting a structure based functional specialization, replacing regional management style by providing resources on a national scale to address the generic problems of the generating stations.

A centralized planning process determined the funds available to each power station to deliver its particular generating requirements. Each station was required to produce a five year plan for its own operations. The central planning team provided the overall coordination of planning activity and developed an extensive set of forecasts with which to estimate growth in the demand for electricity.

The situation in which PowerGen was to operate differed considerably from that of the nationalized CEGB. The generators were to sell electricity into a wholesale Electricity Pool operating on the basis of competitive bidding and a progressively liberalized and competitive electricity market, with the availability of gas powered plant lowering the barriers for entry into generation.

At an early stage it was accepted by PowerGen's senior management that the company would have to become a world-class low cost producer of electricity and that, through competition and regulation, the company would suffer an inevitable loss of market share. As a consequence medium and longer term growth would require the establishment of new income streams in other energy related areas. Overseas the increasing international demand for power and the opening up of electricity markets to foreign investment presented opportunities for PowerGen's diversification (Wallis, 1995).

The planning process retained a high degree of centrality. Staff in the Business Planning and Development Department constructed a number of scenarios concerning market share, pool prices and competitor analysis for the core business (the Generation Division). The decisions that could be made by each unit (power station) were essentially those that had been available to them within the CEGB, with the focus of planning remaining, as with the CEGB, upon developing the resource implications of a centrally determined strategy.

The role of the other divisions was essentially to forecast costs within the scenarios that had been developed by the Business Planning staff. The plans from the business units were aggregated to provide divisional plans. The centralized approach to planning associated with the CEGB began to lose relevance with the opening of the market for electricity, the wholesale Electricity Pool (April 1990). The operation of the Pool became the focus of PowerGen's strategy, requiring the development of both a strong commercial orientation and increased operational flexibility.

In 1992 PowerGen introduced a number of organizational changes that were to profoundly affect the corporate planning process. The company was reorganized from a functional form to three divisions.

Each division was given its own MD. The existing, large, central planning team was replaced by planning staff within the divisions. A smaller central Strategic Planning function was introduced, responsible for both corporate strategy and corporate planning. All business units became either profit or cost centers. The business units were given a wider role in decision making, with their managers provided, often for the first time, with a profit and loss format and support from finance staff newly located in their division.

Using information from relevant literature, and your own understanding of 'core competencies' and 'dynamic capabilities'; Discuss how PowerGen's core competencies and capabilities accounts for its 'market share' and 'profit before tax' in England and Wales during the period 1991-1998.

Using Relevant Data/Information From Company Websites Compare And Contrast The Core Competencies And Capabilities Of The Electricity Suppliers, Electricité De France (Edf)

PowerGen started developing its generation capacity to fit its commercial and environmental Needs by simultaneously improving the flexibility of coal and gas fired units. Before the privatization, the previous planning mechanism were based yearly basis could only foresee total demand, and allocation of parts to various generation units.

But in the new market, the demand for energy could easily be altered because of the improved mechanism and having a pool of wholesale. To be responsive to the new market, production required to be flexible.

However by introduction of flexible production the whole idea of the formalized hierarchy of planning process was opposed which was adopted by PowerGen in 1990. Because of the pool of electricity, it was much harder to forecast precise production demand.

PowerGen started Leveraging its core competencies in other energy related areas, both vertically and horizontally by doing internationalization Examples would be include acquisition of assets in the North Sea also the formation of a joint venture with Conoco, Kinetica.

As mentioned in the case study, PowerGen strategy expected that it would lose most of its market share because of the pressures for price reduction.

Therefore, the company realized that its worth investing in medium and longer term to establish new income channels in other energy related areas where PowerGen core competencies could create value.

The case reveals a slow growth for PowerGen's in the core industry in UK whereas high growth in domestic energy related areas and high international demand for power. The planning cycle revealed many external environmental synergies and provided an insight, which resulted in the formulation of strategic choices to growth in a still UK market. Also, the case explains that integration of power generation and distribution provided an opportunity for future international acquisitions.

Clearly, the objective of the strategy was to plan a process that essentially focuses on leveraging core competencies for expansion of its business.

In the late 1990s PowerGen's challenge was to get individual business units to be more responsive in leveraging core competencies of PowerGen to operations in both domestic and international markets.

One could argue that the planning process of PowerGen from 1996 successfully managed this challenge, by engaging delegated business units in the strategic management process. Identification of strategic issues by this division might be completely different when the strategic management function was allocated to the finance department (as in 1992)

Creation of a new holding company in the US, in order to grow for PowerGen's core business it's required a huge amount of capital.

The case reveals explicitly the causes of failure of intended mergers between PowerGen and Cinergy and Houston, two major US utility companies. Both failures are clear cases of intended, but unrealized synergies.

Quest for Sustainable Competitive Advantage:

Resource-based View

Different explanations of corporate strategies were offered by the various researchers: be it minimization of transaction cost or achievement of economies of scale and scope. All these corporate strategies were directed towards the external environment and, according to this stream of thought, the firms which were able to match their strengths with the opportunities in the external environment were able to secure a competitive advantage (Porter, 1985; Barney, 1991). Subsequently, researchers started viewing firms as a collection of resources and capabilities and started considering the internal resources as the source of competitive advantage.

The resource-based view of the firm suggested that the differences in the resources of the firm are accumulated and learnt over time and the heterogeneity of these resources is the source of competitive advantage. This unique set of resources, capabilities, and skills, which accumulate over time, plays a significant role in providing a direction for the firm's future strategies. A firm's competitive advantage is thus derived from this unique knowledge (Spender, 1993).

The firm resources can be further classified into three categories: physical capital, human capital, and organizational capital (Bogaert, Martens and Cauwenbergh, 1994). Most of the researchers on the subject have reiterated that invisible or intangible (doing) resources are critical to business success.

Core Competencies as the Most Important Resource

The concept of core competencies evolved from the resource- based view of the firm which emphasized the fact that competitive advantage rests on the firm's possession of unique difficult to imitate skills, knowledge, resources and competencies (Wernerfelt, 1984; Rumelt, 1984).

These causally ambiguous inimitable core capabilities serve to provide sustainable competitive advantage to the firm. This view emerged as a counterpoint to market structure analysis of competitive strategy. A firm's core competencies are thus defined as a set of problem defining and problem-solving insights that foster the development of idiosyncratic strategic growth alternatives (Lei, Hitt and Bettis, 1996). According to Hamel and Prahalad (1990), core competencies have three basic characteristics: they provide access to a wide variety of markets, contribute significantly to the end product benefits, and are difficult for the competitors to imitate.

These collective learning or coordination skills behind the firm's product lines are the source of its competitive advantage and enable the firm to introduce a new array of products and services. By focusing on their core competencies, firms stand to gain since they do those things at which they are the best. Core competencies when viewed as unique knowledge for problem definition and problem solving can form the basis of a firm's compete

The concept of core competencies is distinct from the traditional strategic thinking of competing for market share and also from Porter's (1985) low cost-differentiation strategy. The competition in the product/market arena is essentially for market share (Buzzell, Gale, Sultan, 1975). Strategists and researchers use the term 'market share' to refer exclusively to 'brand share' or 'end product share.' The concept of core competencies transcends the boundaries of the traditional market share. It is reflected in the firm's 'core products' which need not be end products of the firm and are usually the result of application of one or more core competencies of the firm (Hamel and Prahalad, 1990). Since the core product are usually not the end products and do not directly contribute to the competitive advantage of the firm, they may not be reflected by the traditional brand share (Hamel, 1994).

Competencies Pool

Every organization has its own set of 'doing' resources. These intangible assets are skills which help the firm in performing its activities. Hamel (1994) uses the terms competencies and capabilities interchangeably. These competencies may or may not be strategic. Dierickx and Cool (1988) mention that these competencies are learnt and accumulated over time.

The pool may be replenished with competencies which continue to provide competitive advantage; some new competencies may be added to the existing pool or some of the old, redundant competencies may be spilled out of the pool. Also, the pool may have some dormant competencies which may be utilized

As and when the need arises, the critical competence framework seeks to empower managers and practitioners with the requisite knowledge so that the competencies pool of the organization is managed in a way that enhances the firm's performance.

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 mid1990s.

Post-privatization planning

The planning process retained a high degree of centrality. Staff in the Business Planning and Development Department constructed a number of scenarios for the core business, the Generation Division. These scenarios focused upon market share, pool prices and competitor analysis.

The decisions that could be made by each business unit (each power station) were essentially those that had been available to them within the CEGB. The focus of planning remained, as with the CEGB, upon developing the resource implications of a centrally determined strategy.

The role of units in the other divisions was primarily to forecast costs within the scenarios that had been developed by the Business Planning staff. The plans from the business units were aggregated to provide divisional plans. Financial projections from these exercises were consolidated by the Finance Division.

Devolution

The centralized approach to planning associated with the CEGB became increasingly less relevant with the opening of the market for electricity, the wholesale Electricity Pool, at the start of April 1990. The operation of the Pool became the focus of PowerGen's strategy, requiring the development of both a strong commercial orientation and increased operational flexibility.

In 1992 PowerGen introduced a number of organizational changes that were to result in the devolution of the planning process. The company was reorganized (see Figure 3) from a functional form into three divisions: New Ventures (containing PowerGen International, North Sea, and Combined Heat and Power); UK Electricity (UK Generation, including sales and marketing); and an Engineering and Business Services Division. Each division was given its own managing director.

Reorganization was accompanied by changes in the planning process. The existing large, central planning team was replaced by planning staff within the divisions. A much smaller central Strategic Planning function was introduced with responsibility for both corporate strategy and corporate planning. All business units became either profit or cost centers with the scope of options available to the business units considerably widened

The changes to the planning process were consistent with the developing planning needs of PowerGen; the growth in the significance of the new businesses and their need for greater autonomy to achieve adaptation to their own particular competitive environments and, in the core generation business, the need for increased flexibility and wider exploitation of the opportunities for cost reduction to meet market and competitive conditions.

Planning problems:

The planning difficulties also reflected a failure by the center to fully communicate scenario information. The center had considered that such an event as `price capping' could occur, but had not communicated that early enough for it to become a part of the assumptions for business planning.

PowerGen adopted the practice that scenarios should be developed by the business managers and planners; the plans that followed were to be robust to the possibilities identified by the scenarios.

The difficulties experienced in the 1993-1994 planning cycle were added to by the divisional form of organization which PowerGen had adopted in 1992. From the perspective of managing the planning process, the divisions added a level of bureaucracy and affected communication with the business units. Priorities and issues that were identified at corporate level were

Encouraging adaptation and integration

By 1996 several of the diversification initiatives within the New Venture Division had developed to a stage where they justified their own management, on a level with that of the company's core business, UK Electricity. Within the core business, the signaled liberalization of the electricity market (1998) argued for sales and marketing to be given greater autonomy and separated from generation. In September 1996 PowerGen underwent a further reorganization that reflected these developments and replaced the divisional form of organization with new clusters of business units, each cluster headed by a managing director, with a Group Managing Director addressing the overall development and co-ordination of the businesses.

The planning system encouraged initiatives by the business units within a corporate context; it also addressed the need for coordination between a numbers of the business units.

In the UK PowerGen was seeking to build an integrated gas and electricity business. The businesses that made up the UK electricity and gas value chain required the coordination of their strategies and objectives. There was also a need for coordination between UK activities and the developing overseas operations which were supported by PowerGen's core skills in electricity and fuel trading, power station construction and operation. PowerGen adopted the practice that scenarios should be developed by the business managers and planners.