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The specific pattern of decisions and actions that manager's take by using core competence to achieve a competitive advantage and out-perform competitors.
The process starts with an analysis of a company's current mission and strategies. The most popular tool used in this process is the SWOT (Strengths, weaknesses, opportunities, threats) model. The external environment in terms of opportunities and threats is analyzed by examining threats to the company's current position and new opportunities. The analysis proceeds by examining the company's internal environment in terms of its strengths and weakness. A mission and competitive strategy is formulated that matches opportunities with strengths and plans are made to strengthen areas of weakness.
The next step is to develop functional strategies that support the overall business level competitive strategy. Marketing, Human Resource, Financial, Operations, Information Systems, and R & D strategies are developed that support the business unit strategy.
Finally, a control system (organizational structure) is designed to insure that operational decisions are made consistent with the business and functional strategies. When every day decisions do not conform to the business and functional strategies, the Intended Strategy becomes an Unrealized Strategy. Many strategic plans have taken this route as they sit on shelves of corporate offices in nicely bound volumes.
Emergent Strategies are the result of incremental decision-making that achieve some degree of consistency over time and launch the organization into a direction. When decisions are made or problems are solved, they have potential strategic impact.
Three Levels of Strategy
Corporate Level Strategy-
The Strategic planning phase starts with corporate planning process. This is planning phase where all management approaches to an agreement as to the strategic objectives of the company. Mostly strategic plans are created to deal with market targets, product development issues and competitive issues.
Competitive or Business Level Strategy-
Competitive strategies involve determining the basis of costumer or client decision-making. Generally, they are based on some combination of quality, service, cost, time, and quality of the experience. There are many typologies of competitive strategies. Porter's generic strategy typology has received the most attention.
Cost Leadership Strategies
With this strategy you are competing on price. Your various functional strategies all emphasize cost reduction. This is an effective strategy when the market is comprised of many price sensitive buyers.
Some risks involved in this strategy are that competitors may imitate the strategy, hence driving overall industry profits down. The low cost leader in any market gains competitive advantage of lowest cost production.
However, low cost does not always lead to low price there by exploiting the benefits of a better margin than competitors. E.g. Toyota, are good not only at producing high quality cars and at a low price but they also have the brand and marketing skills to use a premium pricing policy.
Differentiation strategies rely on some basis of product differentiation such as flexibility, specific features, service, time and availability, low maintenance, etc. as the basis for competition. Product development and market research are generally necessary components of a differentiation strategy.
Generally, a successful differentiation strategy allows a firm to charge a higher price for its product. Organizations generally need strong R & D departments with strong coordination between R & D and marketing departments.
Focus or Niche Strategies
A successful focus strategy depends upon an industry segment that is of sufficient size, has good growth potential, and it not crucial to the success of other major competitors. Focus strategies are pursued in limited markets in conjunction with cost leadership and/or differentiation strategies.
Focus strategies are the most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segment. Risks of pursuing a focus strategy include the possibility that numerous competitors recognize the successful focus strategy and copy the strategy, or that consumer preferences drift towards those of the market as a whole. Customer groups, geographic areas, and specific product lines are some bases of focus strategies. Firms using the focus strategy are Red Lobster, Federal Express, MCI, Coors, and URI (EMBA).
Where an organization can afford neither a wide scope cost neither leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. Smaller firms often use a niche strategy.
A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.
Generic Business Strategies Model
A plan of action to strengthen an organization's functional and organizational resources to coordinate its abilities in order to create core competence.
These strategies answer as to how do organizational functional units contribute to the business level strategies and how can functional strategies be integrated to achieve competitive advantage.
In brief, a strategic planning requires simultaneous consideration of both external (business strategy) and internal (consistency) requirement leads to superior performance of the firm. This performance advantage is achieved by:
Marshaling resources that support the business strategy and implementing the chosen strategy, efficiently and effectively.
Utilizing the full potential of the human resources to the firm's advantage.
Leveraging other resources such as physical assets and capital to complement and augment the human resources based advantage.
(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 national grid forecasted only a slow growth in electricity demand throughout the early to mid-1990s of only 0.6% annually. PowerGen started to shut some of its power stations and start invests in the growing international market.
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
It goes without saying that top management plays a key role in the strategic plan development process. Their role in the process can be summarized as
In 1992 PowerGen underwent a major re-organization from a functional structure into three main divisions: New Ventures, UK Electricity and Engineering & Business Services. The strategic role of top management was devolved to staff within the divisions together with more decision making power with the effect that each division became a more autonomous system that could follow the planning development process in its own way.
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 realized. This problem was directly attributable to the new form of divisional organization introduced in 1992. Devolved strategic decision making whilst empowering individual divisions made planning implementation more fragmented from a corporate point of view.
Strategic and Planning Tools
In 1996, PowerGen underwent another reorganization to accommodate the development and diversification of the New Venture. The reorganization introduced new SBU's below the level of CEO and Managing Director (MD) such as 'UK Production', 'Gas', and 'Sales & Marketing'. Each SBU will have its own Managing Director and finance manager and both were involved in the planning process.
The main advantages of this new structure were that it obviously 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.
It has been said that companies have advantage of their business level strategies prescribed for them by external drivers and that the main thrust of strategic development is largely determined by these environmental factors rather than a corporate set strategic mission. In the case of PowerGen these external factors were the increasing UK competition, geographical diversification expanding PowerGen's interests overseas - and the changing influence of the government.
Therefore the new organizational structure had to be flexible and responsive enough and the strategic planning had to be robust enough to deal with the challenges posed by increasing environmental uncertainty. PowerGen responded by continually assessing strategic options by developing a number of 'scenarios' (for instance, changing energy prices and the effect this would have on the industry) and where previously this had been a more centralized procedure - this was now a devolved process involving one or more business units and the corporate strategist.
The corporate planning process now integrated the gas and electricity business to reflect the need for consistent strategies and objectives and there was greater collaboration internationally to coordinate human resource management and the transfer of skills. The corporate planning cycle developed in 1998 formalized this combined effort with inbuilt scope for flexibility.
Since 1989 PowerGen has transformed from a UK based electricity provider to a diversified international corporation. It has undergone many organizational and strategic changes in this time. Its relatively simple structure from 1989 enabled it to incorporate plans for a possible downturn in domestic market share and to compete internationally in growing overseas markets in, for example, Australia, India and Thailand.
Its reorganization in 1992 into a divisional structure had certain negative implications for its performance due to a lack of integration of corporate and divisional strategic planning.
Industry diversification and fierce competition meant that by 1999 there were 20 major power producers (MPPs), the two largest were National Power (23.6%) and PowerGen (21.3%), which represents a significant reduction in PowerGen's market share since 1990 when it was nearer 30%.
PowerGen responded to these changing circumstances by reorganizing again but combining the benefits of devolved decision making and autonomy with an integrated structure. Strategy formulation is a reiterative process and as a company changes and its environment changes so must its strategy although it may not be necessary to 'revolutionize' the strategy or corporate objectives but only to adjust or reformulate certain objectives or elements. The Long Range Planning journal article discusses the ability of PowerGen's planning processes to balance "autonomy and adaptation by the business units" with greater intra-company coordination and fulfillment of corporate financial objectives.
Currently PowerGen is a part of E.ON, the world's largest energy company; it is a leading supplier of electricity and gas worldwide and is still diversifying with significant developments in renewable sources of energy, namely wind energy and hydropower.
(b) 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.
(Clifford Geertz, 1973) cited that culture provides a meaningful context through which humans "interpret their experience and guide their actions". Considering cultures and values as dimensions gives greater meaning than attempting categorization. Two main research contributions to the field of culture, referred to later, use the following dimensions of culture.
(Hofstede, 2001) suggested that culture can be considered within 5 independent dimensions
Power distance, which is related to the different solutions to the basic problem of human inequality
Uncertainty avoidance, which is related to the level of stress in a society in the face of an unknown future
Individualism versus collectivism which is related to the integration of individuals into primary groups
Masculinity versus femininity, which is related to the division of emotional roles between men and women
Long-term versus short-term orientation, which is related to the choice of focus for people's efforts: the future or the present
(Hoftstede, 1980 cited in Ali, 1993) Shaw and Welton (1994, p9) state that decision-making is linked with many cultural dimensions, including "degrees of power distance, individualism, and particularism" which influence participants involved.
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.
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.
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)
Quest for Sustainable Competitive Advantage:
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).
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.
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.
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.
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
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