PowerGen Management Essay
An Analysis of PowerGen Plc’s Strategic Development
Executive Summary
The main focus of this report is the strategic and organisational development of PowerGen Plc. The findings of the report are based on information taken from a case study found in ‘Strategy: Process, Content, Context’ (2004)[1] that examines its organisational developments from 1989 to 1998.
The objectives of this report were, firstly, to identify three key areas of interest taken from the case study about some of the many strategic changes PowerGen has undergone since 1989, and secondly, to analyse these issues with reference to current management thinking and research. The three key points of analysis identified were: the functional organisational structure, the devolvement of decision making power and PowerGen’s strategic and planning techniques.
Functional Organisational Structure
After privatisation in 1991 PowerGen had 21 power stations and was producing around 30% of the electricity supplied to England and Wales.
Between 1989 and 1992 PowerGen had a ‘functional’ organisational structure with few layers of management. For instance, their core business functions such as electricity generation and commercial energy sales formed divisions i.e. ‘Generation division’ and ‘Commercial division’, which were then subdivided into business units: business planning, marketing, or the power stations themselves.
According to some sources companies that are functionally organised have less need of a formal process of strategy formation.[2] This is due to the fewer number of managers involved than in larger more diverse corporations for example. More emphasis is placed on the formation and reformation of action programs to implement the strategy.
Therefore the implications of PowerGen’s organisational structure for its strategy and planning were that its high-level strategy to “become a low-cost producer on a world class basis” was translated into key business objectives and action plans in a simple and more streamlined way. The company went on to develop gas-fired stations, which proved cheaper to build and maintain and were more productive generators of electricity than the coal and dual-fire (coal and oil) power stations it had originally.
To better understand and appreciate a corporation’s strategic development, the external environment or context within which the developments take place should be considered. The national grid forecasted only a slow growth in electricity demand throughout the early to mid 1990s of only 0.6% annually. PowerGen then decided to close some power stations and invest in the growing international market. It could be argued that it was PowerGen’s simple and efficient organisational 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.
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 summarised as
“…reviewing both policy and information related to internal factors and the external environment and then, through rational decision making, to translate the mission into more specific objectives and establish major plans of action to reach those objectives. [3]“
In 1992 PowerGen underwent a major reorganisation 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 realised. This problem was directly attributable to the new form of divisional organisation introduced in 1992. Devolved strategic decision making - whilst empowering individual divisions - made planning implementation more fragmented from a corporate point of view. An example of this is the failure by top-level management to cascade ‘scenario information’ effectively enough to its divisions so that when ‘capping’ occurred (presumably capping of profits) the divisional business plans were not equipped to deal with the new situation.
Strategic and Planning Tools
In 1996, PowerGen underwent another reorganisation to accommodate the development and diversification of the New Venture. The reorganisation introduced new clusters of business units beneath the Chief Executive Officer and Managing Director (MD) such as ‘UK Production’, ‘Gas’, ‘Sales & Marketing’. Each cluster had its own MD and finance manager and both were involved in the planning process. The main advantages of this new structure were that it obviated 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 the scope of their business level strategic content prescribed for them by external drivers[4] 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 organisational 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 centralised 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 formalised this combined effort with inbuilt scope for flexibility.
Conclusion
Since 1989 PowerGen has transformed from a UK based electricity provider to a diversified international corporation. It has undergone many organisational 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 reorganisation 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%[5].
PowerGen responded to these changing circumstances by reorganising 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 ‘revolutionise’ the strategy or corporate objectives but only to adjust or reformulate certain objectives or elements. The Long Range Planning journal article[6] discusses the ability of PowerGen’s planning processes to balance “autonomy and adaptation by the business units” with greater intra-company coordination and fulfilment 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[7].
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Reference List
1. De Wit B and Meyer R (2004), Strategy: Process, Content, Context: an International Perspective, 3rd edition, Thompson Learning
2. Lorange P (1993), Strategic Planning & Control: Issues in the Strategy Process
3. Higgins JM (1985), Strategy Formulation, Implementation and Control, CBS College Publishing
4. Ghobadian A, Viney H, ‘Strategic reorientation in former public utilities: the example of UK electricity‘, Management Decision 2002; Vol 4(7): pp634-636
5. Sanderson J, ‘Passing value to customers: on the power of regulation in the industrial electricity supply chain‘, Supply Chain Management: An International Journal; 1999; Vol 4(4): pp199-208
6. Jennings D, ‘PowerGen: The Development of Corporate Planning in a Privatised Utility‘, Long Range Planning - International Journal of Strategic Management; 33(2); April 2000
7. PowerGen website: http://www.powergen.co.uk
Footnotes:
[1] De Wit B and Meyer R (2004), Strategy: Process, Content, Context: an International Perspective, 3rd edition, Thompson Learning
[2] Lorange P (1993), Strategic Planning & Control: Issues in the Strategy Process
[3] Higgins JM (1985), Strategy Formulation, Implementation and Control, CBS College Publishing
[4] Ghobadian A, Viney H, ‘Strategic reorientation in former public utilities: the example of UK electricity‘, Management Decision 2002; Vol 4(7): pp634-636
[5] Sanderson J, ‘Passing value to customers: on the power of regulation in the industrial electricity supply chain‘, Supply Chain Management: An International Journal; 1999; Vol 4(4): pp199-208
[6] Jennings D, ‘PowerGen: The Development of Corporate Planning in a Privatised Utility‘, Long Range Planning - International Journal of Strategic Management; 33(2); April 2000
[7] PowerGen website: http://www.powergen.co.uk
