Achieving growth in a competitive marketplace
A Powergen case study

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Page 2: Market structure

Powergen 3 Diagram 1Among the principal commercial features of the reorganised industry was the introduction of competition in two of these areas - generation and supply. This competition in electricity generation changed the nature and structure of PowerGen’s activities by putting pressure upon market share and the prices it could obtain in the market for its product.

Upon privatisation, there were 10 generating companies bidding to sell the output from their power stations into the electricity Pool – the mechanism through which electricity is traded on a daily basis. Today, this has risen to around 20 companies. As a result PowerGen’s market share fell from 28% in 1990/1 to less than 22% in 1996/7. This will reduce further as new entrant capacity continues to grow and as a result of PowerGen’s divestment of two of its power stations (which it was required to do this by the industry’s regulator in order to speed up the competitive process).

In the area of electricity supply, the sale of electricity and services (including billing and metering) to end consumers is in the final stages of transition to full competition. There are around 30 licensed suppliers (including a number of new independent energy companies) competing for customers in the liberalised part of the market, which currently covers electricity users with a demand of over 100 kW (small industrial and commercial customers and above). In 1998, this choice will be extended to the entire electricity market, including 22 million domestic customers. Since privatisation, PowerGen has successfully competed to maintain its position as the largest supplier to customers in this ‘direct sales’ market.

Competitive developments have resulted, as intended, in significant reductions in electricity prices. These reductions are over 20% for the Regional Electricity Companies for onwards supply to their own customers, and over a quarter for the industrial and commercial customers PowerGen supplies directly.

Strategic options

Powergen 3 Diagram 2There are many features of a modern marketplace. If you read business magazines they identify markets and organisations appearing and disappearing overnight. They refer to the changing nature of competitors who are quicker and smarter. To keep up, they emphasise the importance of flexibility, nimbleness and customer focus. ‘Year by year demand increases for organisations to centralise, decentralise, reorganise and reengineer. If they don’t recognise the need for change it might simply be too late.’ (M. Porter)

In the world of increasing competition, PowerGen was faced with having to decide whether to choose a future of its own making or whether to allow the future to shape its activities! It had to broach the issue of where it was going to go and how it was going to get there. According to Michael Porter, an authority in the area of competition ‘The key to growth - even survival – is to stake out a position that is less vulnerable to attack from head to head opponents, whether established or new and less vulnerable to erosion from the direction of buyers, suppliers and substitute goods.’ When facing this tough market situation for its core business, PowerGen had two main strategic options:

  • to sustain market share and protect margins in the core business by becoming a low cost and flexible producer
  • to broaden the business into new areas of activity.

Powergen | Achieving growth in a competitive marketplace
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