Utilities: A Market Transformed by Privatisation & Liberalisation
This report examines the rapid changes that have taken place in the utilities sector in recent years. Based on a series of interviews with senior management, this analysis looks in depth at the way in which three companies - Centrica, ScottishPower and Powergen - have developed and evolved the concept of the multi-utility.
Over the last few years, Centrica and ScottishPower have been remarkably successful in adding to shareholder value through the creation of entirely new consumer propositions. More recently, investors and financial analysts have begun to question some of the business strategies adopted by utilities in their drive to diversify in domestic and international markets. Centrica and ScottishPower have responded to these concerns by employing markedly different strategies. Centrica continues to develop the multi-utility concept, whilst ScottishPower has retreated from certain sectors, preferring to specialise on energy.
Powergen, which built up a reputation as a star performer following the privatisation of the electricity generation industry, began to encounter problems in the late 1990s. In the UK, it was severely handicapped by regulatory intervention in its core market ? electricity. Wholesale electricity prices tumbled and, as a result, profits in its domestic market took a serious hit. Overseas, the company has been burdened by a significant level of debt following its £2.8 bn takeover of LG&E Energy Corp., a Kentucky-based power supplier. In order to reduce its net gearing, Powergen was obliged to dispose of a range of assets, primarily those held in Europe and Asia.
Tougher regulatory controls contributed to a sharp downturn in investor confidence, which, in turn, led to substantial decline in Powergen?s market capitalisation. The share price dipped to below 230 pence in Spring 2000, but then began to recover strongly as investors bought the stock on the grounds that it was undervalued. Following the acquisition of Thames Water by the German utility, RWE, takeover rumours began to circulate about Powergen. These rumours were confirmed in January 2001 when it was announced that the company was in merger negotiations with E.On, Germany?s second largest utility. After three months intense negotiations, E.On made an agreed takeover bid for Powergen. It may nevertheless take at least a year for the bid to clear all the regulatory hurdles placed in its path.
The following analysis explores the importance of marketing in equipping previously state-owned enterprises to respond to the unshackled dynamics of the competitive marketplace. The critical factor that emerges from this analysis is the extent to which these companies have adopted a fully-fledged customer orientation throughout their organisation. Pursuing a strategy based on an on-going entrepreneurial search process, these companies have sought to identify what consumers most want to buy from them. Accordingly, each utility has moved towards offering a distinctive combination of product, service and emotional benefit in an effort to win consumer loyalty. How this process is managed determines competitive success or failure, and the degree to which shareholder value is fully realised.
The report begins with some background on the emergence of the current utility market. The three utilities are then considered in turn. Each company?s overall strategy is examined with regard to its marketing programme. The use of branding is highlighted, as well as the adoption of other marketing techniques employed to enter new markets. The analysis discusses how each company has tested the concept of the multi-utility. It also evaluates the major difficulties each company has encountered in the development of its business. The concluding section reviews the comparative performance of the three companies studied and draws out the major themes of the analysis.
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