Sustainable strategic transformation: Leveraging capabilities to develop and sustain your right to win

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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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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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. 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?

Preparing for the pending transition requires many utilities to take a hard look at their strategy and operations.

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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 – Grow or acquire products and services that leverage your core capabilities and assets

Divest Align and grow selectively
Financial potential

Grow and expand

Manage to divest/discontinue
Below par Low

Leverage coherence or divest
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 “Lights-on” – Activities required to “keep the lights on”/operate (legal requirements, etc.) – Look for opportunities to increase efficiency
*

Essential capabilities – 3 to 6 differentiating capabilities that build sustainable advantage – Streamline for effectiveness and efficiency – Invest in critical activities Table stakes – Activities required by industry dynamics to compete in a given sector – Look for opportunities to increase efficiency

Source: Strategy&

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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. 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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Successful utilities have sought to transform their operations in line with their strategy.

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
– Establish baseline – Define desired end state – Identify, quantify, and prioritize opportunities

Design
– Design processes – Identify enablers – Develop implementation road map

Implement
– Define requirements – Ensure commitments – 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. 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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Putting the right team in place requires effort but is necessary to move the organization to the next level.

Exhibit 6 Nine keys to successful transformations
Nine key success factors
1 2
The right team

Build the team

An aligned and wellmobilized organization

3

A disciplined willingness to challenge the status quo

People & culture

4 Operational Excellence

A concrete rallying cry and case for change

5
Clarity about change management and culture

6
A “try something” mentality

Set the stage

7

8
A relentless focus on communication

9
A commitment to accountability

Measure progress

An unwavering commitment to execution

Execution

Source: 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. 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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To prevent the goals from eroding too much, a disciplined commitment to performance accountability is required.

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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