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The energy requirement of the world is skyrocketing. The Nuclear Energy Agency has estimated that the demand for electricity would jump 2.5 times by 2050. It has also been predicted that between 2030 and 2050, the energy requirement of the world would increase many times and this can be satisfied by adding additional 23 to 54 nuclear reactors(Lagorse, 2010).
As far as UK is concerned, it is expected to produce electricity equivalent to one billion oil barrels by 2050. A research by Boston Consultany Group reveals that Britain would not only be able to meet its domestic demand but would also be able to produce surplus electricity. In order to supply the electricity Britain needed to develop infrastructure which would allow it to export electricity all across the world (Macalister, 2010).
Prior to 1989 all electricity needs of Britain and Wales was taken care by the Central Electricity Generating Board. However there was a sharp decline in power stations during the period 1958 to 1986 because of increasing technical complexities associated with the industry.With privatization and deregulation of the electricity industry in 1991, CEGB went through a massive restructuring of the organization. PowerGen was formed to take care of the non nuclear power generation. The report has been framed in the context of PowerGen.
The report starts with an understanding of the terms corporate planning and strategy. It then tries to analyze the impact of changes in organizational structure on corporate planning of PoweGen. The next section deals with understanding of the core competencies and capabilities of PowerGen and how it has helped PowerGen to maintain its market share and profits. It also analyzes the core competencies and capabilities of EDF and E.ON. The report also explores the impact of privatization and deregulation on PowerGen. The report ends with understanding of the centralized nature of planning of CEGB with reference to Hofstede's article titled "Cultural constraints in management theories".
Corporate Planning and Strategy:
Corporate planning involves setting the corporate goals and objectives and identifying long term plans to ensure development of the company. Corporate planning is based on macroeconomic forecasts of various economic factors which were then analyzed with regards to the organization's performance. It is a description of various economic trends like market share, demand conditions, costs and margins, marketing trends and industry trends.
Characteristics of Corporate Planning:
Corporate planning has the following characteristics:
Planning period: The period of planning usually varies between five to ten years. The long term goals of the company are decided and ways to achieve the goals are identified.
Planning area: The area of planning involves the entire organization. It can be regarded as a Master Plan.
Planning levels: Corporate planning is usually done by the top management although at times divisional managers are also involved.
Use of various sources of information: while formulating the corporate plan, efforts must be made to use as many sources as possible.
Environmental factors: Environmental factors which affect the business must be fully understood while formulating the corporate plan.
In 1974 and 1979 the world was hit by oil crisis which led to macroeconomic instability and gave rise to competition. In the complex business environment long term planning became extremely difficult. This resulted in a paradigm shift from focus on planning to focus on strategy.
Strategy has been derived from the Greek word "strategia" which means generalship. Strategy can be regarded as a conscious search for an action plan which will help an organization build competitive advantage. Competitive strategy is an attempt to be different from the competitors which would help it in standing apart from the rest. It is the quest for a competitive advantage and value addition for customers which shifted the focus of organizations towards strategy. The basic essence of strategy is to help an organization to identify various ways of attaining the goals of the organization. An effective strategy helps in survival and prosperity of a business. Just like a business plan, strategies are usually long term (Grant, Pp.15-17).
Impact of Changes in Organizational structure on PowerGen's Corporate Planning Process:
The organizational structure of PowerGen was transformed several times during the period between 1990-98. Such changes were necessary because of privatization and deregulation in the electricity industry of Britain.
In 1988, McKinsey Company developed an organizational structure having divisions with well defined responsibilities and few management layers. The units within each division were named business units. The corporate planning was based on a five stage model as shown below.
Planning was highly centralized. The commercial division which had several planners was responsible for formulating the plans. The employees of the business planning and development unit were responsible for information related to market share, competitor analysis and pool prices.
In 1990 with the opening of the market for electricity, competition started increasing and the centralized system of planning started losing relevance. This prompted a change in organizational structure and the formation of three separate divisions ;New Venture (containing North Sea(gas), PowerGen International and Combined Heat & Power), Engineering and Business Services and UK Electricity.
Corporate planning was accordingly changed with the central planning team being changed by planning staff. A central strategic team for managing corporate planning and strategy and a finance department for managing finances was formed. Business Units were assigned greater responsibilities and was regarded as a profit or cost center. Each unit was supposed to frame their own business plans which was submitted to the divisional board and the top management for formulating the corporate plan. The corporate plan was prepared by the corporate level staff. Unlike earlier corporate plan which used to be based on expenditure limits, the new plan provided a guideline for the overall business, profit targets and economic scenario. The time frame for formulating the corporate plan was reduced to nine months compared to one year.
During the mid 1990's the businesses under New Venture became big and there was a need for managing them separately. There was a need for providing greater autonomy to the sales and marketing department by separating it from generation.
This resulted in reorganization of PowerGen in 1996 where the divisional form was replaced by business unit clusters. The cluster was headed by a managing director who was further assisted by the finance manager. The staff members were given the responsibility of formulating strategy for their respective business units. A group MD was also appointed. The CEO was responsible for developing corporate strategy, finance director was responsible for financial strategies and the group MD was responsible for strategies related to business units. All three acted like a team to manage the overall financial and strategic direction of the company. The corporate strategy team having three staffs and the corporate planning team having four staffs developed business plans and strategies.
Core competency may be defined as "a set of activities, goals, structures, processes and resources fundamental to the ways in which an organisation excels" (Chaudron, 2002). However, it is noteworthy that any process that is "core to an organisation's success" (Chaudron, 2002) does not necessarily mean that the organisation has the capability to execute it well. In the context of the modern business scenario, it has become increasingly evident that core competency is acutely crucial for organisational success and owing to the breakneck competition that abound the business environment, organisations strive to develop multiple core competencies. This is achieved through organisational strategic directives. Prahalad and Hamel (1990) have propounded that "the core competency concept specifically emphasises the meaning of the development and control of key technologies that can be applied to different products" (Picot, Reichwald & Wigand, 2008), and hence it is implied that the development of core competencies is a corporate level function that goes hand-in-hand with long term business strategies. The efficiency of any core competency maybe evaluated by testing it for (1) its relevance in multiple businesses, product lines and markets, (2) its contribution towards the improvement of customers' perception in terms of the value delivered through the products and/or services, and (3) its uniqueness/inimitability (Snyder, 2003). The dynamic capabilities of any business organisation lie in its capability to reconfigure, fabricate and integrate its core competencies for managing change - both internal as well as external - in order to improve continually. Hence, the dynamic qualities depend on the organisational ability to methodically transform as well as create the operating processes for the purpose of improving effectiveness (Witcher & Chau, 2009). It has been observed that the most significant core competency of PowerGen is its ability to generate power at low costs. Moreover, its supply chain also serves as a vital core competency. The company has upstream as well as down stream operations and has a global presence. The operations of PowerGen are spread over nations such as Germany, Hungary, Indonesia and Portugal. When it comes to global business, size does matter. PowerGen has merged regional electricity companies (RECs) such as Midlands Electricity into its folds and as a result its size has increased significantly and in turn has given it an access to broader skill bases. Moreover, such measures have also helped PowerGen hone its dexterity in the area of project management. It goes beyond saying that its massive size is a core competency for PowerGen. While the company's core business during 1995-96 was to sell power, its enhanced size and strong supply chain provided it with the prospect of fixing the electricity pool prices. Shifting the focus on the aspect of dynamic capability, it may be observed that PowerGen is a veteran player in its sector and the company had realised the significance of operational flexibility as well as commercial orientation at a rather early stage. PowerGen's dynamic capability is reflected through the flexibility that it exhibits in its operations. This in turn helps the company to respond spontaneously to unforeseen changes. The core competencies coupled with the dynamic capabilities provide PowerGen with the extra mileage to remain ahead of industrial competition, thereby enhancing its profit before taxes and market share.
Electricité de France (EDF)
EDF ranks among the largest of the British energy producers and it generates approximately twenty per cent of UK's electricity. The company has a commendable manpower comprising 20000 employees and a customer base of 8 million. EDF's core competency lies in its ability of generating nuclear energy that it generates from eight power plants. The company is also planning to come up with a range of other nuclear plants as well in order to generate electricity through processes that will be safe and reliable, and will also consume less carbon. The company has been observed to handle energy production at every step (EDF Energy, "About EDF"). The company's dynamic capability is that it has the talents to develop different technologies according to the changes in its environment. As the current global scenario calls for the development of green energy sources, it has been observed that EDF is channelising its expertise and resources towards this area.
E.ON is a forerunner in the power and gas sector of the UK and is involved in the production as well distribution of electrical power. The company is also a leading retailer of power and gas. It has been found that E.ON's core competency is the generation as well as distribution of gas and electricity across the UK for meeting domestic as well as industrial requirements. The company has also diversified its operations in order to provide a wide variety of ancillary services such as maintenance and repairs of household energy equipments such as central heating systems and boilers. Green generation is also a noteworthy core competence of the company and it has been striving to reduce carbon content from its operations. As a result the company is giving utmost importance to green generation techniques so that it can reduce the harmful impacts on the environment (E.ON-a, "About Us"). E.ON's dynamic capability lies in its ability to tailor its offerings on the basis of the specific requirements of its customers - that are corporate, SMEs, commercial developers, etc. (E.ON-b, "Technology").
3. a) UK electricity industry was made nationalized in 1947. The entire process of electricity generation and distribution were centralized since that period. However in 1990 heavy reforms in various policies took place and privatization and deregulation of the electricity industry is actually the result of such reforms. In fact the process was started in 1989 when the 'Energy Act' was introduced. The main purpose of this act was to remove monopoly power and create competition in the electricity supplying sector. The industry was likely to be divided into potentially competitive components and natural generation monopoly. The competitive components included generation and supply, whereas the monopoly remained at distribution and transmission. Such deregulation resulted to increased competition especially in the supply area (Anonymous. The Acts). Firstly the market of gas was deregulated which and as a result of which new gas supplying companies were allowed to supply gas to the customers of British Gas. Then the electricity market was deregulated which allowed new companies to get into the business of electricity supply. Initially there were 14 regional supplying companies, each of them was allocated one regions of total 14 regions. In the first stage of deregulation the new companies were permitted to offer services provided their pricing policy was approved by Ofgem which was the regulatory body. The main purpose of such approval was to make sure that cheaper products as compared to regional suppliers' products are offered by the new companies. However after few years such restrictions were lifted so that regional supplying companies could compete in an entirely deregulated market. Initially several new supplying companies got into new regions with low prices. Their main objective was to gain as much market share as possible with the low price strategy. However such strategy could not protect them as significant increase took place in wholesale costs and most of them were taken over by larger companies (Anonymous. The Uk Energy).
The takeover of Midland Electricity Plc by Powergen can be analyzed in the context of above described situation. Midland Electricity Plc was solely responsible for supplying electricity in the Midland region. It was meeting needs of small customer base whose total annual electricity bill was never above 300 Euros (domestic customers) and 12000 Euros (small businesses). In the competitive market where demand was more than 100 KW, the company had only 6% share. On the Powergen was a large company as compared to Midland. In order to take over Midland, Powergen had to bid twice in the time period of 1995-98. In 1995-96 the first bid was placed by Powergen. The Monopolies and Merger Commission, after analyzing the effect of the merger over the industry, decided to give the green signal. However UK government was agreed to it and blocked the merger. Then in 1998 Powergen was permitted by the government to takeover Midland Electricity. The company placed the second bid of 1.9 billion Euros and took over Midland Electricity Plc. This take over is actually the result of the competitive situation that was created due to privatization and deregulation of the electricity industry. Competition among the players became more intense as they were allowed to enter into others' operating region.
3. b) Prior to the period of privatization and deregulation of UK electricity industry, it was the Central Electricity Generating Board (CEGB) that was mainly responsible for generating and transmitting electricity. However in the post deregulation period the board was broken up into three new companies and 12 regional supplying companies. The planning process was decentralized after the formation of these companies. However previously it was entirely a centralized process when CEGB was solely responsible for electricity generation and transmission. There were several problems and criticalities when the planning process was centralized. First of all in the centralized approach the planning process was centered on the top management of the company. There were several important functional departments that were not involved in the process. For instance the role of finance department was not as significant as it should have been in a market where competition started to become price centered. Moreover there were other issues like communication gap within the organization. The situation can be better analysed in the context of Geert Hofstede's article titled "Cultural constraints in management theories". In this article, the author said that different country has different work culture and such cultural change is actually the combination of changes in different cultural dimensions like individualism, power distance etc. According to research of Hofstede individualism is more prominent in USA than that of in European countries like France and Germany (Hofstede, G. Cultural constraints in management theories). Since UK is a European country it can be expected that individualism would be less prominent in the country. In other words in UK individualism might lead to significant decline in overall organizational performance. However in the centralized planning process decisions were mainly taken by the individuals who were sitting at the top management. In other words the involvement of all the departments was less and individualism was more in the planning process. Such process ultimately resulted to lack of competitiveness and break up of the central board.
During the research it has been found that the domains of corporate planning as well as strategy are interrelated, and strategic effectiveness determines the accomplishment of corporate plan. Various facets of PowerGen has been analysed and it has been found that changing the organisational structure of the company from purely centralised to a decentralised form required proper support through relevant modifications in corporate plans. Moreover, the individual departments had to be delegated greater responsibilities. Coming to the core competencies, it has been found that PowerGen stands apart by virtue of producing low-cost power which it achieves through a strong supply chain. EDF and E.ON are also significant players that have been concentrating on the generation of electricity through green techniques. The merger of Midlands Electricity with PowerGen has helped augment the resources of the latter and has also given it a much needed access to a massive customer base and helped it in controlling the prices of electricity pool. Finally, Hofstede's model has shown that cultural considerations are of immense importance in the context of deciding the managerial functions. It is necessary for the managers to understand as to how they must deal with employees in transnational organisations.