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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:

  1. 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.

  2. 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.

  3. 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.

  4. Utilities must realistically appraise their cultural and risk profiles as well as their appetites for risk.

  5. 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.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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