Strategies For Ceylon Electricity Board Commerce Essay

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This report on Ceylon electricity board here on referred to as CEB will analyses the current down falls that it is facing and the reasons for it will be discussed in the introduction. Briefly explaining the statues of CEB and the history of it the report will move to the strategic aspect of CEB.

For the purpose of this report rational planning model is being used to have a more structured approach to selecting and evaluating the strategic options that will arise to CEB.

The mission and vision of CEB is identified and the stakeholders that will have interest in the operations of the management of CEB will be assessed to create a rounded strategy that will take into account the take holder groups. Mendelow's matrix will be used as a tool for assessing stakeholder power and interest in CEB. Corporate hierarchy theory will be explained in the context of the company and what kind of forms of strategies will each level of hierarchy need.

Corporate appraisal will be carried out to assess the internal and external factors that will be an influence in the creation of strategies of the Company. SWOT analysis will be used to identify the core internal values of CEB and PEST analysis will be used to identify the External factors that will have effect on CEB.

When selecting appropriate strategies porter's generic strategies will be assessed and Ansoff matrix will be further looked into. Divestment strategies will also be looked at improving the inefficient structure of the state owned corperation.the issues of divestment will also be analyzed.

Treasury will also be looked at and ways that CEB could reduce their burden on them will be reported in this assignment. Finally the recommendations and conclusion for CEB will be provided in this report to the board of directors of CEB.

Contents

Acknowledgement

This report could not have been successfully completed without Mr. Trevor Mendis `s help, who Pushed and helped me through the academic program. He never accepted less than my best efforts. Thank you.

What are collected in this report are materials that I found in our handouts, the knowledge given by our lecturer, books and the personal research done through internet. I make no claim to be comprehensive.

A special thanks to our lecturer again. This report would have taken years off my life, without you. I would like to acknowledge and extend our heartfelt gratitude to Mr. Trevor Mendis our Director in IIHE for motivating me in this subject to carry on further. At last not least I would also like to thank my CIMA lecturers who bought me to this level and made this assignment easier and helped me to complete it faster.

Thank you!

1. Introduction

Ceylon Electricity Board (CEB) has a long standing history in this nation, for operating since 1968. CEB is currently enjoying monopoly statues in the energy market in Sri Lanka owning nearly 100% market share. The only competitor that CEB faces in Sri Lanka is from lanka electricity company, which CEB has a major shareholding of 55.2% (2010, annual report). It has a high degree of vertical integration having power generation, distribution, transmission, retailing giving it the monopoly statues in Sri Lanka.CEB uses different forms of generating energy from fossil fuel to renewable energy source such as hydroelectricity. Establishing its presence around the island in the most scenic environments.CEB currently has a registered accounts of approximately 4.4 million residents in Sri Lanka (2010, CEB annual report).

1.1 Case brief

CEB is in a crisis situation due to many internal and external factors that cannot be avoided by the board of CEB.The losses have staked up to Rs.40 Bn which has a strain on the government as well as the economy. This is mainly due to the exchange rate volatility of Sri Lankan rupee and that thermal energy, which requires diesel to generate energy which is imported, thus exchange volatility.

This report is to the board of CEB on the Strategic analysis, strategic Choice and strategic implementation to turn CEB from a loss making company to a desired situation for all stakeholders. While exploring alternative sources that would help increase the productivity and efficiency to further help CEB's unfavorable situation.decieding on a planning technique to ensure that operations would be uninterrupted and would reduce the pressure on the government as this organization is a state owned operation.

2. Rational planning tool for strategic formulation

"Strategic planning is a systematic, formalized approach to strategy formulation"[Grant2003]

Rational planning method will be used to guild the strategic formulation for CEB in order to meet the following objectives-

Overcome the adverse financial situation of losses.

Explore other renewable sources of energy to sustain a better future.

Avoid future technical break downs to a mere minimum percentage.

Increase productivity and reduce burden on the Sri Lankan treasury.

Position Audit

Mission and objective

Corporate appraisal

Implication and review

Strategic evaluation

Strategic options

Environmental audit

2.1 Mission and Objective

What is a strategy?

'This is the process of formulating a course of actions & direction that a firm should be in a long term perspective'

"Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations" http://tutor2u.net/business/strategy/what_is_strategy.htm 

For CEB to succeed in the pursuit of getting the company in a better position by changing its strategies they must first clearly defined Vision and mission statements to ensure that the management has a general direction that it could aim for in a span of 5-10 year or more.

Vision

'Enrich Life through Power' (CEB annual report, 2010)

Mission

'To develop and maintain an efficient, coordinated and economical system of electricity supply to the whole of Sri Lanka, while adhering to our core values' (CEB annual report, 2010)

Strategies are formulated based on first looking at the Mission and Vision of the company, this would Give a Specific Direction that CEB indented to be in the long term perspective (5-10 years).CEB intended to Maintain efficient economical systems while providing a quality service to its customers, which its falling short of due to many technical deficiencies and external adversity. The new strategy should directly reflect what the mission statement intended to offer to its stakeholders.

2.1.1 Assessing Stakeholder powers of CEB

"Stakeholders are parties that have vested interest on the business activities. They span from employees to customers"

CEB must assess what are their main groups of stakeholders in order to keep them satisfied so that the company can perform their operations without disruptions.

Stakeholder groups in CEB -

Stakeholders

Power

Interest

Description

Customers

5

7

These individuals are the ones who buy the services of CEB. Buy consuming the electricity that CEB generates and pay them for the units consumed. As CEB is the monopoly power supplier in Sri lanka this group of Stake holders will not have much power

Suppliers

8

4

This stakeholder refers to the suppliers of material required for CEB to produce the electricity that is intents to supply. Suppliers have a higher bargaining power compared to the power of CEB As petroleum is a scares resource

Government

8

8

CEB is currently Owned by the government so they are likely to have high power and interest in the operations of CEB

Local community

4

4

These stakeholders are like to have not much power or interest in the activities of CEB because they may not be directly involved as customer or shareholders

Trade union & Pressure groups

6

8

This group of stakeholders are with high interest of CEB's activates cause it may have a direct impact on the jobs or environment.

This is on the Scale of 1-10 one being weak and 10 being strong

Mendelow's matrix

C:\Users\User\Dropbox\B324_1_004i.jpg

(mendelow's matrix)

A category - The local community falls under this category, according to the the theory CEB should not direct its strategic resources to this quadrant as it not going to Affect CEB and its operations.

B category - the customers fall in to this category as CEB is the monopoly energy supplier to Sri Lanka. However they are interested in the pricing of the Electricity as they will have to pay for their consumptions. So CEB should keep its customers informed if there is any major changes that would affect them like pricing or Power failures.

C category - this stakeholder group has high power but doesn't have much interest in the activities of CEB as it may be insignificant. Suppliers to CEB fall into this catogoy.where they have a better bargaining power as coal is not extracted from within Sri Lanka and has to be imported from Middle East or Latin America.

D category - Government falls into this category because CEB is a government run organization, Government makes the decision and has the power to control strategies. According to mendelow they should be kept the main stakeholders that the Company should be looking to satisfy.

CEBs should implement strategies that will increase the government's wealth

2.1.2 The corporate hierarchy theory

This model provides an overview to CEB of each Slab that will require appropriate strategies in order to function as an efficient and dynamic firm.

Cooperate strategies - the overview of the whole organization and acting as an Indicator to the stakeholders where the firm should be. Corporate strategies must be deiced by the board of directors of CEB as to 'which Business should CEB be in?' CEB having many SBU under its parent company umbrella they should evaluate if the company as a whole is synchronized to one direction in the strategic perspective. Strategies must be formulated in this level for the future of CEB, if they find future prospects in other business so that they could diversify.

Business strategies - All the CEB's SBUs strategies aggregated into one long term plan to ensure the success of the business from joining all the hydro power plant strategies to thermal plant strategies, IPP Thermal plants and small power producers etc...

Functional strategies - include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department's functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies that CEB would have in place.

After a thorough understanding of all the levels of strategies that CEB should be consider, a strategic plan should be put in place to achieve a successful strategy.

CEB currently operates in a market with monopoly statues. This provides the management with the opportunity of using a long term strategic planning tool rather than emergent planning.

2.2 Critical analysis of Cooperate appraisal

Cooperate appraisal connects the vision and the objectives environmental audit and position audit to understand the process connections better in the organization. There are couple of tools that can be used to carry out this appraisal such as SWOT Analysis, Value chain, GAP analysis, Benchmarking.

When formulating strategies the Internal environment and the external environment of CEB should be critically evaluated in order to make the strategies more value adding and to make it suited to the context and situation the company is currently going through. Position audit will be used to see the current position of the governmental organization and the Environmental analysis will critically evaluate the factor of the environment that might affect the organization.

2.2.1 Position Audit

SWOT Analysis of CEB

'A critical assessment of the strengths and weaknesses, opportunities and treats (SWOT analysis) in relation to the internal and environmental factors affecting an entity in order to establish its condition prior to the preparation of the long term plan' (Neil Botten, 2009)

SWOT is a very powerful tool to analyses the current core competencies of CEB and make sure they can adopt strategies to improve on its strength and grasp the opportunities while minimizing its treats and reducing its weakness. Currently the SWOT for CEB is as follows:

Currently CEB is a governmental organization with monopoly power and being a regulatory body has unlimited power in the current market.CEB also possess unparalleled integration island wide from distributing to producing and retailing, this is a immense strength that CEB possess.

As CEB is a governmental organization it is indebted to create jobs and this has become a major reason for concern in stakeholder satisfaction, as the powerful trade union have made strategic decisions hard to implement and carry out without a major strike or retaliation by the employees.

Sri Lankan is a developing nation and there is a great increase in demand for power during the years. Giving it an unsaturated market that can generate major income in the future.

As the CEB is drowning in organizational and internal issues the treat such as power theft from people who delay payments to people who use unethical means to avoid paying for the service they used is growing. Also as CEB generates a lot of power using fuel that has to be imported they face a risk of exchange rate fluctuations and transaction risk. This also is due to the high volatility in the Srilankan Rupee compared to the US dollar which the Oil barrels are purchased in.

2.2.2 Environmental analysis

PEST Analysis for CEB

Element

Description

Political

PUCSL has been already set up under the provisions of the Public Utilities Commission of Sri Lanka Act No. 35 of 2002 to regulate the physical infrastructure sectors, it will be empowered to execute regulation only when the individual industry legislations are enacted and made effective. The state polies have made it clear that energy should be provided at the lowest possible level to the customer of the industry. (national energy polies and strategies for sri Lankan, 2006)

Economical

GDP real growth rate is 8%

GDP per capital - $5300

8.307 million (2011 est.) - labor force by occupation

industry: 24.2% (affect CEB)

Unemployment rate

4.9% (2010 EST.)

Budget surplus (+) or deficit (-)

-7.3% of GDP (2011 EST.)

Exchange rates: Sri Lankan rupees (LKR) per US dollar -

112 (2011 est.)

113.06 (2010 est.)

114.95 (2009)

108.33 (2008)

110.78 (2007)

(Sri Lanka Economy Profile 2012. 2013)

Social

Currently due to the Growth in the country and the high education levels of the citizens, they are demanding a more renewable energy source without depleting the natural resource of the world

Technological

Technological development has advanced and increased the demand for electricity and other energy sources. Such as hydro and turbine green power etc.

The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business. A PEST analysis is a business measurement tool. PEST is an acronym for Political, Economic, Social and Technological factors, which are used to assess the market for a business or organizational unit.

All this data is on or before 2010***

Once the corporate appraisal is fully evaluated the strategic options must be considered in order to meet the objectives of the Company in the best form possible.

2.3 Strategic option generation and critical evaluation

There are many models that can be used to generate strategies to overcome several of CEB problems like heavy losses and high trade union powers. For this report purpose we will be generating strategies from -

Porters generic competitive strategic model

Product - market strategies

Divestment strategies

2.3.1 Poters Generic strategies

According to Michel porter (1980), 'there are three potential successful generic strategic approaches to outperforming other firms in an industry'.

Elements

Description

Overall cost leadership

Lowest cost producers compared to the completion. Where due to the firms core competencies they enjoy a reduction in cost or due to the scale and size of operation they enjoy economies of scale

Differentiation

Creating a Differentiated product that the industry wide customers are willing to pay a premium price to enjoy the product or service

Focus

Serves a narrow strategic target more effectively than rivals who are competing more broadly

Evaluation of the strategies

Currently CEB is having many technical issues due to its unreliable power plants around sir Lankan. Overall cost leadership strategy, where it gives an uninterrupted flow of service with the lowest possible price. As CEB is a monopoly, there is little to no competition, to be in line with the mission statement of 'Enrich Life through Power' (CEB annual report, 2010) CEB must provide the service to all the people in the country and make it affordable to all consumers. However for CEB to become a cost leader in the Power industry they must have a sound and stable organizational structure, and should not be in an unfavorable situation making losses.

Differentiation strategies for CEB would be creating new source of power than what it already uses. Currently they use -

Fossil fuel: 51.7%

hydro: 48.3%

nuclear: 0%

other: 0%

(www.indexmundi.com)

By CEB creating alternative sources and differentiating its product by moving into renewable energy such as wind and solar power, Biomass or even nuclear might be able to charge a premium from the consumers who concerned about conserving the environment.Sri Lankan being a country which needs tourism to have an inflow of foreign reserve needs to conserve its scenic beauty which many other countries lack. Thermal, diesel and petroleum energy pollutes the environment causing server environmental problems, therefore Investing in Nuclear power which is clean source of energy will help preserve the beauty and the economy thus helping CEB in the Future.

CEB has many options to choose and differentiate its product and service being in an island with abundant of resources.

Focus strategies are not the most suited for CEB as it is a monopoly and has to produce, transport and retail all the energy need of the country. This strategy will suit a smaller private electricity producer.

2.3.2 Product - market strategies

Ansoff matrix - Ansoff demonstrates the strategic direction open to the firm in the form of a Matrix. (Adopted from Ansoff, 1965)

C:\Users\Amjad\Desktop\AnsoffMatrix.jpg

Elements

Description

Market penetration

Firm increase its sales in the present line of business

Product development

Extending the product range available to the firms existing market

Market development

Here the firm develops through another group of buyers for its product

Diversification

Here the firm gets involved in a totally new industry

CEB currently has a register customer base of around 4.1 million users has potential to gain more in comparison to Sri Lankan pollution of 21 million (Approximately). (www.indexmundi.com)

So by making the power more affordable CEB would be able to increase its Customer base. By gaining Economies of scale through the number of new customers CEB will be able to improve the pricing of power. Sri Lankan is a fast developing country with potential and the energy market is not saturated. CEB must make distribution channel to further cities and town in the rural areas. Building towers to carry the electricity will be a well worth investment as the customers and market has high demand.

The other directional strategy that would be looked at is the Product development. CEB would invest in new source of energy or make the current source of energy more efficient. The other energy source as stated above under Poters generic strategies could be adopted to overcome the current situation of loss making and inefficiencies in the fossil fuel production of energy.

2.3.3 Divestment strategies

CEB being a State owned institution has to comply with the governmental regulation and orders, Thus CEB is making enormous losses and is inefficient. Divestment strategies will help CEB taken over by a private management with shareholders thus having a better control and interest over the business. Divestment could be selling of the management to a private owner or selling assets that being in negative NPV to CEB such as the loss making power plants Norochcholai and Lakvijaya which would improve its loss making processes and improve the efficiency by having a more concentrated unit to manage.

2.4 Issues in divestment that CEB faced

CEB being a firm that has a large pool of labors has very powerful labor unions which is preventing Divestment or any other action that will help improve the CEB lose making situation.

CEB could improve the Losses that it's facing by divesting the loss making power plants such as Norochcholai which give CEB massive losses of 6.5 billion rupees. (The Sunday leader, 2012) however it's not possible due to the labor union and the power they hold as stakeholders.

CEB could resolve many of its problems by divestment, however the trade unions must firstly be dealt with. Some strategies to deal with the labor unions are-

Pass legislations - As CEB being a state owned organization they could pass a legislation to ban illegal strikes and disruption of work and have the the trade and labor unions pay for the losses. This would deter the thought of going against the management decisions. However this could impact the government's relationship with the vote base.

Educated and communicate - share the vision of the decision of the management. Make the employees understand the need for the change. This strategy is time consuming and there's no guarantee it would work

Compensate and council - because CEB will be reducing its labor force they will retaliate against the decision, by providing them a compensation package they will be able to understand the decision and help CEB go through with the strategic decisions.

3. Reduce burden on treasury

Currently CEB imports the FUEL needs therefore the Countries deficit is also increasing in size.

Fossil fuel: 51.7%

hydro: 48.3%

nuclear: 0%

other: 0%

(www.indexmundi.com)

Where the hydroelectricity is generated in Sri Lankan but 51.7% is foreign exchange reducing in the reserve of the country. Also Sri Lankan not exporting enough products means the depletion of reserve are greater than the repletion. The exchange rate fluctuation also is a reason for the burden to increase on the treasury and the loss of profit to increase in CEB.

CEB should follow a Growth strategy mentioned above and make its sustainable by reducing the need for fuel which is imported in $. This would help reduce the burden on the government and the taxation policies.

CEB should improve an further invest in R & D to identify sustainable green energy that will a cheaper source of raw material that also could be found within the island of sri Lankan.

4. Conclusion and Recommendation

In conclusion CEB is running at a major loss every year due to its management inefficiencies and the external factors such as Fuel and Exchange rate fluctuations. The most appropriate strategies to overcome the losses and the inefficiencies must be to divest the major loss making plants that CEB currently operates. This would help CEB concentrate more on the plants that are running efficiently and improve them. CEB would also be able to invest in a more suitable source of power like Wind, and Hydro as Sri Lankan is an island and has this resource in abundance. This type of power source will help CEB become a more sustainable producer with a CSR aspect.

Trade unions power needs to be diluted in order to take CEB from a loss making firm to a more favorable sitatuion.this can be achieved if they educated and compensate the workforce thus reducing the chance of the labor force getting demotivated and becoming unproductive.

Having only a base of about 4.1 million register users CEB must improve its distribution and affordability to customers around the island by reduction the cost and improving the service. Cost can be reduced through Economies of scale by increased number of users, CEB being the monopoly firm in the electricity market they could indeed gain Economies of scale.

Also according to Ansoff theory CEB must develop a wider range of products that will give the consumers a better choice.CEB must develop a more efficient and cost effective form of energy that will be more attractive to its consumers.

Finally this report would be concluded by saying the heavy losses and high power trade unions would be stopped once the inefficiencies and loss making division are divested by CEB. By using Rational planning process to guild the company in selecting and evaluating the most appropriate strategies.

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