Sustainable
strategic
transformation
Leveraging
capabilities to
develop and sustain
your right to win
Contact
Dallas
Earl Simpkins
Partner
+1-214-746-6571
earl.simpkins
@strategyand.pwc.com
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Strategy&
About the authors
Earl Simpkins is a partner with Strategy& in the energy, chemicals,
and utilities practice in Dallas. He focuses on corporate and business
strategy, business transformation programs, customer operations,
corporate services, regulatory programs, mergers and acquisitions,
and financial performance.
Pramod Thota was formerly a senior associate with Strategy&.
This report was originally published by Booz & Company in 2012.
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Executive summary
America’s electric power and gas utilities are entering a time of
dramatic change. They will need strategies to compete in a distinctive
fashion and to gain performance leadership. The most successful
strategies are built around distinctive capabilities: the things your
company does so well that, taken together, they establish its “right to
win” in the market. Business transformation programs that are based
on core strategy enable companies to assess, enhance, and acquire
these capabilities. But many transformation programs fail to be
sustained; the organization simply waits for the initiative to pass over
like a storm cloud. The road map for a successful program consists of
several different elements working together: a way to play (or strategy);
a capabilities system applied to every part of the portfolio; and a
transformation program with nine critical enabling factors. These factors
are associated with the company’s people and culture, operational
excellence, and execution. When a transformation program leverages
these enabling factors, the company stands a better chance that its new
strategy will be implemented — and it will gain a long-term competitive
advantage based on its evolving high-performance identity.
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On the threshold of change
America’s electric and gas utilities are facing challenging times. With
the uncertainty around environmental regulation (and its implications
for strategic choices affecting power generation investment), coupled
with the potential for changing consumer behavior through smart grid
deployments (if fully utilized), a lot could be changing in the industry.
Financial pressures are greater than they were a few years ago, and
the expectations for investment returns are higher. Capital investment
decisions are changing accordingly; utilities are making additional
investments in all aspects of the business — from generation and
transmission to customer service and information technology — and
are seeking recovery from those investments more quickly. Finally,
regulatory pressure is mounting on both the environmental and
financial recovery fronts.
For several years, many pundits have said the industry would have to
change, although some have noticed that change in this industry can
be very slow. Now, the turning point seems closer. No matter what the
drivers, preparing for the pending transition requires many utilities
to take a hard look at their strategy and operations.
Preparing for
the pending
transition
requires many
utilities to take
a hard look at
their strategy
and operations.
One question will make all the difference: Do you have the strategy
and capabilities in place that you will need to be successful in this
time of change?
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Your strategy and capabilities
Over the years, a number of theories have addressed the meaning
of strategy. Schools of thought such as Michael Porter’s “competitive
advantage” and Gary Hamel and C.K. Prahalad’s “competing for the
future” argued that companies win by focusing on how to position
themselves in the marketplace. Other schools of thought including
Michael Hammer’s “business process reengineering” and Larry Bossidy
and Ram Charan’s “execution” argued that companies win by focusing
on improving how they deliver to the market. Essentially, all of these
theories laid a foundation for business decision makers to think about
whether they had a “right to win” in the market and how to gain one
if they didn’t.
A right to win is the ability to engage in any competitive market with
a better-than-even chance of success — not just in the short term, but
consistently. For utility companies, having the right to win means that,
in all regulatory and market scenarios, the company has the necessary
capabilities and deploys them well enough to be reasonably confident
of success.
Of course, no single strategy or group of capabilities provides a right
to win for all companies at all times, even in the same industry. There
is no silver bullet in corporate strategy. There are three reasons why
a winning strategy cannot simply be generic.
First, a winning strategy means different things to different
industries. For example, the winning strategy for a manufacturer
might predominantly involve market positioning and marketing
prowess (a demand-side play). But for an energy company, it may
involve resource optimization and carbon preparedness (a supplyside play). In many industries, the most successful companies adopt
different strategies, competing for customers in differentiated ways.
Second, a winning strategy evolves as the company and industry
change. Emerging industries require a different set of competitive
strategies than mature industries. Unpredictable cost structures,
low barriers to entry, and underdeveloped supplier and distribution
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channels are representative of emerging markets; a mature industry
has more fully recognized demand characteristics, mature value chain
relationships, and established cost structures. Other gradual changes,
such as aging populations and technological developments, also
strongly affect the types of strategies that prevail.
Finally, a winning strategy is flexible, to allow for unanticipated,
sudden industry shifts. For example, in the aftermath of the recent
economic crisis, financial firms have had to deal with heightened
regulation and public mistrust. The strategy that a Wall Street
firm follows today must be different from the winning strategies
of the pre-crisis era. The economic crisis also led to fundamental
shifts in the market structures for other industries, including
utilities. These market structure changes affect different industries
in different ways, and should help determine the strategic direction
of companies within them.
Successful companies adopt a strategic approach that gives them
the right to win in their industry. The success of any company’s
approach depends on the differentiating capabilities that define its
organization, and the coherence within the enterprise. Distinctive
capabilities are not just functional skills; a capability is the ability
to reliably and consistently deliver a specified strategic outcome,
relevant to your business, through the right combination of people,
tools, processes, and systems. Your company’s coherence, in turn,
is the ability to consistently and effectively deploy your most important
capabilities in line with your products and services, and with your
“way to play” — your strategy for reaching the market.
In the electric and gas utilities industry, experience suggests
that a capabilities-driven strategy (CDS) can provide companies
with the right to win. This involves growing by developing your
own differentiating capabilities, in a system where they reinforce
one another; it means executing them flawlessly; and it is
predicated on a kind of portfolio management that takes account
of your capabilities and evaluates businesses based on how they
fit with your company’s most effective elements of strategy and
execution (see Exhibit 1, next page). Additionally, a CDS often
includes cost rationalization programs to ensure that discretionary
costs effectively serve your differentiating capabilities (see Exhibit 2,
page 9).
To develop the desired results, including a more coherent portfolio
and cost reductions, successful programs must make the most of
existing capabilities and identify strategic gaps where capabilities
need to be developed or acquired. Transformations based on this
type of capabilities analysis provide the “stickiness” to enable
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Exhibit 1
Guiding matrix for portfolio decisions
Define the boundaries of your portfolio
Above par
– Divest products and
services that do not
fit with your core
capabilities system
Divest
Align
and grow
selectively
Grow
and
expand
– Grow or acquire
products and services
that leverage your core
capabilities and assets
Financial potential
Manage to divest/discontinue
Below par
Leverage
coherence
or divest
Low
High
Coherence with your capabilities system
Source: Strategy&
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Exhibit 2
Cost reduction process: Ensuring that discretionary costs
serve essential capabilities
Ensure that discretionary costs serve essential capabilities
Starting cost
base breakdown
Not required
– Nonessential capabilities
– Challenge the need to have
these investments at all
– Increase efficiency or lower
service levels for what
you keep
Essential capabilities
*
– 3 to 6 differentiating
capabilities that build
sustainable advantage
– Streamline for effectiveness
and efficiency
– Invest in critical activities
“Lights-on”
Table stakes
– Activities required to “keep
the lights on”/operate (legal
requirements, etc.)
– Look for opportunities to
increase efficiency
– Activities required by
industry dynamics to
compete in a given sector
– Look for opportunities to
increase efficiency
Strategy&
Source: Strategy&
9
successful, sustainable changes to business operations. The
project starts by looking at the way to play for your company:
your considered approach to capturing value in your market,
in a way that differentiates your company and gives it the
right to win.
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Developing your way to play
In the electric and gas utilities industry, any performance strategy
involves addressing three major uncertainties: regulation, capital
allocation, and demand shifts. In any given market, these three
shaping forces influence whether a utility company can win; each
of them is respectively determined by government, financial markets,
and customers’ needs (see Exhibit 3, next page).
Over the last several years, utilities have begun to position themselves
in the market according to any one of a number of ways to play (market
positions). Some utilities are generation providers, focused on production;
others build their business through execution and quality of service;
others provide low-cost power; still others position themselves as
customer service leaders. Any one of these market positions can lead to
success as long as the company maintains coherence by reinforcing that
way to play with the requisite capabilities and other related decisions.
To drive corporate focus around their particular way to play, several
utilities have executed a business transformation program. This enables
them to develop the capabilities and the portfolio — and ultimately the
right to win — that complement their chosen market position. As this
level of coherence cannot generally be realized in the short term, many
of these utilities seek to maintain a level of cost performance leadership
over sustained periods of time.
Successful
utilities have
sought to
transform their
operations in
line with their
strategy.
Performance leadership is critical in the utilities industry, especially
given the asset-intensive nature of the business and the degree of
regulation. Though several companies have been through performance
improvement programs, many of them have had to relaunch or renew
their efforts in subsequent years because the benefits were not fully
realized the first time. In many companies, the organization simply
waits for the initiative to pass over like a storm cloud and then reverts
to its old ways.
Instead of conducting separate cost-cutting exercises that recur
every few years, successful utilities have sought to transform their
operations in line with their strategy, building the kind of cost-cutting
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Exhibit 3
Shaping forces for the electric and gas utilities industry
Government
Financial markets
Regulation
Capital
allocation
Utilities
Demand shifts
Source: Strategy&
Customers’ needs
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capability that fosters continuous performance leadership. This type
of strategy-based business transformation program can help utilities
operate at cost levels that reflect their requirements, maintain
appropriate cash flows to be able to raise capital at favorable rates
in the financial markets, and provide a foundation for sustainable
performance excellence.
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Strategy-based transformation
A strategy-based business transformation program is a set of actions
that build and sustain operational excellence in a company, driven by a
desire to achieve strategic goals and a close connection to the company’s
way to play and distinctive capabilities system. This type of program
provides a strategic and tactical basis from which a company can assess
and enhance its right to win.
Transformation programs can take many forms. These range from pure
cost-cutting exercises to full-scale performance excellence and process
improvement initiatives (which typically yield cost savings, but in which
cost is not the sole purpose for launching the effort).
No matter the type of transformation program, the approach typically
consists of a number of phases and supporting activities to assess
(identify and quantify), design, and implement improvements (see
Exhibit 4, next page).
The assessment phase typically includes developing the aspirations
for performance (a vision of the desired end state), understanding the
current state of the company (the baseline), identifying the capabilities
needed to ensure a right to win, and beginning to clarify the nature
of the opportunity. This includes a preliminary quantification of
potential benefits. The design phase typically maps out the expected
implementation road map — including detailed specifications for the
process, organizational, and technology changes that will allow you
to successfully realize your goals. Implementation begins with a firm
understanding of the resource commitments and change requirements.
As you move along the execution road map, you are supported by a
strong mechanism for tracking results, to maintain accountability
and to ensure that benefits are achieved.
A data-driven, fact-based approach — grounded in analysis and
inspired by performance aspirations — is important to the success
of any transformation program. Coordinating processes and tracking
results across an enterprise can be a challenging task, but following
a common blueprint can help ensure that the transformation teams
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Exhibit 4
Phases of a strategy-based transformation
Transformation phases
Assess
Design
Implement
– Establish baseline
– Design processes
– Define requirements
– Define desired end state
– Identify enablers
– Ensure commitments
– Identify, quantify, and
prioritize opportunities
– Develop implementation
road map
– Track progress/
sustain results
Operating model
Process
Capabilities
Technology
Organization/governance
Change leadership
Source: Strategy&
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are aligned, headed down the right path, and focused on the right
performance enablers (see Exhibit 5, next page). The blueprint consists
of a number of dimensions and is intended to enable the team’s
creativity and focus on solutions that will achieve the transformation
program’s objectives.
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Exhibit 5
A typical transformation blueprint
Transformation blueprint
Aspirations
Operating model/
organizational model
Process framework
Performance metrics
Infrastructure enablers
Implementation road map
Source: Strategy&
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Nine keys to successful
transformations
Successful transformation programs commonly consist of
many separate elements, all working together to help move the
organization forward. Nine factors are particularly important in
setting the tone and realizing results. Each company will incorporate
these factors into its transformation initiative in a manner appropriate
to its own organizational culture. But they must all be considered,
because each is integral to sustainable performance improvement.
They are best approached in sequence: building a team, setting
the stage for transformation, and then measuring progress (see
Exhibit 6, next page).
1. The right team: An organization’s ability to field a high-quality
and well-connected group of leaders to oversee this initiative
will solidify its ability to transform the organization. The right
team possesses hard skills (intellectual capacity, analytic ability,
and the expertise needed to identify, design, and implement
improvements), along with soft interpersonal skills. Team
members can simultaneously challenge and collaborate with
the rest of the organization, while navigating the political land
mines and other sensitivities that come to the surface in any
transformation program.
Putting the right team in place requires attention and effort.
Identifying the right governance structure, process, and
implementation plan is easy by comparison; however, it is
worth taking the time to think through the team because
without the right team in place, the organization will not
move to the next level.
Putting the right
team in place
requires effort
but is necessary
to move the
organization to
the next level.
2. An aligned and well-mobilized organization: A strategybased transformation must motivate people throughout
the company in a meaningful way. To accomplish this, it
must disseminate information about the change deep into
the front lines of the organization. This will push the case
for change closer to where the work is being done (where
resistance might otherwise build) and embed the proposals
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Exhibit 6
Nine keys to successful transformations
Nine key success factors
1
2
The
right
team
Build the team
4
Operational
Excellence
A concrete
rallying
cry and case
for change
7
Measure progress
An
unwavering
commitment
to execution
An aligned
and
wellmobilized
organization
5
3
A disciplined
willingness
to
challenge
the status quo
People &
culture
6
Clarity
about
change
management
and culture
8
A “try
something”
mentality
Set the stage
9
A
relentless
focus on
communication
A
commitment
to
accountability
Execution
Source: Strategy&
Strategy&
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for change deep enough in the organization to withstand
the temptation to revert to the status quo. Aligning the full
organization around your strategic goals and objectives
also engages potential supporters and can help to influence
those who have not yet crossed the acceptance chasm.
3. A disciplined willingness to challenge the status quo: As leaders,
managers, and employees come to understand the nature of the
program, questions about the program’s purpose and objectives
will naturally arise. For example, people may resist the design
changes in a business or functional area, or seek to preserve the
status quo. When this happens, senior management and the
program leadership team need to ground themselves in the case
for change and the facts. They should consistently (and effectively)
challenge the current thinking and norms of the organization,
when required, to move the transformation forward.
4. A concrete rallying cry and case for change: This is one of the
prerequisites for a successful transformation program. Providing
the organization with the logic, emotional appeal, and practical
rationale (“What’s in it for me?”) is important, so that everyone
sees the purpose, objectives, and anticipated outcomes of the
business transformation program. When this level of clarity is
missing, organizations tend to aim their efforts at rapid cost
reductions — an easy and seemingly useful target — and not
change anything else. This often results in the organization not
realizing the full benefits of the transformation. A compelling
theme and projected outcome move the organization to a place
where people are significantly engaged and motivated to help
solve the issues and identify the solutions needed to effectively
transform the business.
5. Clarity about change management and culture: The practice
of change management is often associated with communication
and training programs — which, in many companies, have a
negative connotation. It is also typically seen as a “planning
activity” led by the human resources function and kept on the
back burner, ready to fire up and down as needed.
But true change management is much more than that; it consists
of an organized approach and method to engage the organization
from the initial stages of the transformation program all the
way through its successful implementation. It is planned early
and executed by multiple people. It deploys both formal and
informal aspects of the organization — its formal structure,
policies, and processes and its informal culture and social
networks — to implement the new strategy. A clear focus on
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culture and change management can embed transformation
deep in the organization, where the work is done.
6. A “try something” mentality: The organizations that push
forward are not fixated on “all or nothing” solutions. When
the best possible option (an ideal plan or practice) can’t be
implemented because of costs, internal politics, or other roadblocks,
these companies identify alternative approaches that work well
enough, without compromising too much of the original strategy,
intentions, or desired benefits. The flexibility to recognize and
implement a “second best” solution when necessary is an important
characteristic of successful organizations. It keeps the activity
moving and counters the inevitable tendency of organizations
to delay or defer a change.
7. An unwavering commitment to execution: Distractions and
competing priorities often undermine transformation programs,
especially when resources are stretched thin. Corporations
regularly have a number of competing priorities that consume
the time of the same high-performing leaders who are assigned
to transformation programs. In the midst of these continuing
challenges and competing priorities, a commitment to see the
transformation through will keep the teams and organization
focused on the ultimate goals and objectives of the program.
It is also important to manage the demands placed on the
transformation team by the program, so that those leaders
can fulfill their other commitments.
To prevent
the goals
from eroding
too much, a
disciplined
commitment to
performance
accountability
is required.
8. A relentless focus on communication: The transformation program
leaders need to establish a cadence and body of content through
which the new goals and practices become clear to managers and
employees. These communications should cover the overall strategy,
objectives, media, and anticipated outcome for the company. They
should be frequent and comprehensive enough to reach all segments
of the organization, and compelling enough to be heeded. Effective
communication plans use multiple formats and media, and they
do not solely focus on one-time events. Instead, they pick a few
key messages and repeat them with conviction. Key messages
are “bite-sized” packages of information, designed to help people
understand the elements of the program in accessible ways.
9. A commitment to accountability: As the transformation unwinds,
the original appetite for potential benefits might be pared down.
Some level of leakage should be expected, but to prevent the goals
from eroding too much, a disciplined commitment to performance
accountability is required. This will help maintain the success of a
transformation program after the initial analyses and designs are
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completed. Effective accountability mechanisms include linking
transformation goals to management compensation and gainsharing
pools. They can help you avoid the all-too-typical cycle of on-again,
off-again transformation programs that fatigue the organization.
Holding people accountable is important to ensure that all of the
benefits are sustainable.
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The culture of successful
transformation
At the heart of all of these factors are people and organizational culture.
Most companies that pursue successful business transformations do so
by engaging their people. In a study done by Strategy& that analyzed
responses from 319 executives, 73 percent of the executives who have
led major transformation initiatives attributed the success of the effort
first and foremost to the “people” initiatives, rather than to other
elements of the program. Four in five change leaders felt that peopleoriented activities made the programs more successful, in a way that
boosted business performance. When asked what they would do
differently if they had to do it over again, most change leaders said
they would conduct more people-oriented change activities, and
would start those activities sooner.
Many electric and gas utilities are seeking a step change in performance
levels right now. They have good reason for doing so. They will be well
served by a capabilities-driven approach to executing transformations.
By identifying and exploiting their differentiating capabilities, they
can gain the right to win in their home markets and decisively position
themselves as vital and effective competitors in the world at large.
The nine key success factors for business transformations reinforce the
value of these core capabilities. The combination of rethinking strategy,
building distinctive capabilities, and strategy-based transformation
represents a prescription for strategic advantage — more valuable than
perhaps ever before in the electric power and gas industry.
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This report was originally published by Booz & Company in 2012.
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