|
New Ventures: Moving ahead of the pack
New York: March 12, 1999
By John R. Stephenson and Alan Caron
Since Enron brought Wall Street
to Houston, not much is new in the realm of utility and related
services strategy. Generating companies, energy service providers,
and marketing and trading firms are simply employing a more-for-less
approach and locked in a game of Follow-the-Leader.
Because this is generally not a good way to build long-term
shareholder value, you only need your fingers to count the
profitable ESCOs (energy service companies) among the 250
plus organizations formed within the last few years. Many
recent examples of abandoned energy marketing and trading
initiatives exist.
To be successful with a more-for-less strategy demands massive
economies of scale. Because of this, utilities accustomed
to operating in a regulated market cannot pursue so many unregulated
endeavors all at once and hope to succeed. The competitive
market presents an enormous cultural shift for these companies
and unfortunately, bold, differentiating strategies are uncommon.
What utilities want to be when they grow up in the deregulated
world remains unclear even among top management. With certain
exceptions, most gas and electric utilities are likely to
come full circle and focus on their core competencies –
managing and building wires and pipes.
Utilicorp, one of the industry’s most innovative companies,
shifted its focus from the unregulated side of the retail
energy business and back to wire, pipes and its upstream assets.
Although it closed its EnergyOne retail-marketing arm, Utilicorp
grew and allowed Aquila, its top-notch energy marketing and
trading arm, to survive and thrive. The same strategy proved
successful with its Utilco Group, an unregulated owner of
independent power projects.
Entergy also pulled back from unregulated retail endeavors
to focus more on its core business. After incurring a sizeable
loss from this summer’s price spikes, LG&E closed
its trading floor, PacificCorp too recently halted trading
in the East. And even Enron abandoned its retail efforts in
California and Pennsylvania.
To effectively draw consumers toward products or services,
utilities must offer something the competition does not, which
proves extremely difficult in more mature markets populated
with savvy, competitive marketers.
Without clear, differentiating product advantages, it is
difficult to create market “pull”. Creating consumer
awareness and brand identity, is a relatively easy task within
a utility’s service territory but becomes a seemingly
insurmountable and expensive task outside that established
market. Coupled with the fact that consumers view electricity
as a basic, undifferentiable necessity, the scope of the problem
becomes clear.
To date, many electric utilities seem poised to pursue the
glamour of a regional, national or global expansion into retail
services, rather than a more straightforward approach focused
on their regulated wires and pipes businesses.
Corporate strategy seems to lack an in-depth analysis of
the organization’s core capabilities, its appetite for
competition and a detailed analysis of risk-adjusted returns
for the proposed venture.
When confronted with deregulation, management often envisions
diversification strategies and enters the unregulated market
without adequate consideration of the inherent risks within
that new market.
The key to success lies in seeking out truly differentiating,
winning strategies, not necessarily in following the approach
taken by other companies. And even when employed, true differentiating
strategies often fail during implementation because of inadequate
business planning and resource allocation.
When establishing a new venture, management must seek unbiased
advice, be wary of consultants telling them what they want
to hear, and at least, conduct a careful analysis of the lessons
learned from the experiences of other industry players.
The winners will be those who develop sound strategies based
on the following:
- Utilities must clearly understand what
their business performance metrics (the critical success
factors that effect long-term profitability) are and which
of those metrics drive stakeholder value.
To determine the performance metrics for an organization,
several distinct steps should be followed. The first step
involves a strategic planning workshop where senior leaders
decide the goals and direction of the firm. This is followed
by another session where they select key metrics or ratios
(e.g. volume per employee or gross margin, etc.). The
metrics (measurements) chosen must correspond to the strategic
direction in which the firm intends to head.
The next phase consists of data gathering, analysis of
results and a roll out and accompanying communications
program to the rest of the organization. The program to
monitor these metrics on an on-going basis is then implemented.
To achieve the best results, tie performance along these
metrics to compensation.
- Utilities need a thorough and in-depth
understanding of possible future scenarios. Brainstorming
of future scenarios with the help of outside analysts is
a good start. The approach must yield a shared vision of
where the business will be in the next; say five years,
with appropriate consideration given to all factors, including
those outside the traditional business.
- Utilities must know their real strengths
and weaknesses based on an analysis of their performance
metrics compared to the competition and on achieving top
quartile performance along the metrics that drive shareholder
value.
The “Best in Class” companies consistently
achieve superior results. They understand which factors
matter and concentrate on only those. They often are not
the very best at everything (the full range of performance
metrics) but are the best at those critical to their businesses.
- Utilities must realistically appraise
their cultural and risk profiles as well as their appetites
for risk.
- Objective, unbiased advice and guidance
from outside the company helps. Consultants who roll out
a one-size-fits-all template often do not meet the needs
of individual companies.
As new ventures open and consumers can choose among an array
of products and services, the profits will come to those utilities
that break away from the herd and incorporate all of these
elements into a sound business plan. |
