Operations Strategy in Energy/Electricity Production
Strategisches Operations Management in der Energiewirtschaft: eine Analyse von Zielen, Strategie und Umsetzung in der Energieproduktion
Research Paper (undergraduate) 2010 19 Pages
Table of Contents
2. Operations strategy at EXAMPLE Power
2.1 Internal perspective – resources-based perspective
2.2 External perspective – market-based-perspective
2.3 Hierarchical perspective: top-down vs. bottom up
3. Performance improvement of the EXAMPLE Power operations strategy
3.1 Performance issue 1: strategic investments
3.2 Performance issue 2: renewable generation technology
3.3 Performance issue 3: supply network strategy
3.4 Strategic Performance Management
Appendix A: Operational Objectives of EXAMPLE Power (as deducted in Coursework 1)
Whereas “operations” are the key corporate function, its strategic importance has been critically discussed for a long time (Krcal 2008). However, developments in the field now strongly suggest an important role to develop, implement and dynamically adjust an “operations strategy” (Hua-Tan / Matthews 2009). Operations strategy is seen in a framework of internal (resources) and external (market requirements) factors, as well as between overall corporate strategy and day-to-day execution on the operational level (Slack et al. 2008).
Previous research (Coursework 1, please see Appendix for a summary), amongst other, defined the operational objectives of a case organization (EXAMPLE Power, an electricity generating company). This report will analyse the operations strategy of EXAMPLE, determine potential performance gaps and recommend potential actions of how to close them.
The analysis will be based on secondary research, both for the theoretical basis of the analysis, as well as for the evaluation of the model company EXAMPLE. It is hereby important to consider that EXAMPLE Power is actually the “operations company” of the EXAMPLE Group, being responsible for the power generation as the core operational process.
2. Operations strategy at EXAMPLE
In the following chapter, the operations strategy of EXAMPLE Power will be analysed and evaluated based on the framework provided by Slack (Slack 2008). It sees operations strategies at the centre of
1) an internal (resource usage) vs. external perspective (market competitiveness) (please see Figure 1 below)
2) a top-down vs. bottom-up perspective
The contents of EXAMPLE’s operations strategy will be critically discussed in the light of the decision areas of resource usage and the market performance competitiveness objectives. Moreover, corporate strategies will be weighted against bottom-up, operational influence on operations strategy.
illustration not visible in this excerpt
Figure 1: Operations Strategy Matrix (Source: Slack 2008, p.26)
2.1 Internal perspective – resources-based perspective
As can be seen in Figure 1, four decision areas determine the internal aspect of an operations strategy.
One of the key operational objectives is “dependability” (also see Appendix A). This requires EXAMPLE to provide sufficient capacity to fulfil the demand, but also sets the challenge of utilising their power plants to a very high extent in order to amortise the investment in their facilities (EXAMPLE Power 2006 / Hayes and Wheelwright 1984). Operations strategy at EXAMPLE is focusing on two major aspects in order to provide sufficient capacity:
1. a reliable, coherent system of levelling capacity across the power plant fleet and beyond (EXAMPLE 2005)
2. steady investment in existing power plants (to maintain or improve efficiency) and power plant new build projects (EXAMPLE Power International 2008)
Levelling of the existing capacity is an important part of the operations strategy. The higher the utilization of the facilities, the higher the financial benefit is (Miltenburg 2005). However, in case of under-utilization, fixed costs cannibalise profits easily. Thus the capacity provided should not aim at just providing maximum capacity, but also needs to consider flexibility. EXAMPLE achieves this by operating a power plant fleet that consists of a mixture of plant types (VDEW 2002). Whereas large nuclear and coal-fired power plants provide a high capacity to cover the “base load” of the demand volume (with high fixed costs and long set-up times), smaller plants (e.g. gas and steam) are used to ensure the flexibility to cover for volume peaks. Moreover, a European system of pooling and trading energy is considered as an additional “capacity buffer” in the EXAMPLE operations strategy (EXAMPLE 2005).
Due to the long life of power plants (>40 years), the decision of setting up additional capacities (in the form of new power plants) is literally a strategic one (Drbal et al. 1996). Therefore, EXAMPLE Power considers the development of power plant as a major part of their operations strategy (EXAMPLE Power International 2008). Decisions made here will affect capacity levels in the long term, and require careful investment planning. However, as for many other utility companies, EXAMPLE has had very low investment activities in new power plants for a considerable period of time (Werthschulte 2008). Whereas this did not directly affect capacity availability in the short term, problems in existing plants (Dow Jones 2009) as well as in new build projects (Flauger 2009) seem to prove that the strategic decisions taken here do affect the operational objectives negatively (e.g. cost, dependability). This will be discussed in chapter 3.1 in more detail.
Supply network decisions as the second area do affect the EXAMPLE operations strategy mainly on two levels (Slack 2008):
1) Supply of fuels (e.g. coal) for the power plants
2) Provision / maintenance of power plants
A stable supply of fuels to run the power generation process (e.g. coal) is critical for the smooth operation of the plant (Dyckhoff 1994). It therefore plays a very important role in the procurement strategy as part of the EXAMPLE operations strategy. Coal is hereby procured in two main ways: First, by maintaining a global network of suppliers providing the coal (EXAMPLE 2006). Timely procurement and a close interlink between capacity planning and fuel supply is required, especially when considering the relatively slow transport speed of coal. On the other hand, coal is relatively cheap with respect to volume, and easy to store (Porter / Schmitz 1995), thus inventory planning is an important, but not critical part of EXAMPLE’s operations strategy.
Due to the importance of the facilities (power plants) (Miltenburg 2005), relations to the contractors/suppliers that build the plants should play a vital role in EXAMPLE’s operations strategy. However, with power generators in Europe not investing in large power plant projects for years if not decades, many of the equipment suppliers were forced out of business or lost critical expert know-how (Accenture 2009). Resulting delays now heavily affect EXAMPLE’s two major new build projects (Flauger 2009 / Piel 2008), with little option to alternate suppliers for EXAMPLE. This affects several performance objectives and creates a gap between what EXAMPLE’s strategy should be and what is actually achieved (please refer to chapter 3 for a more detailed discussion).
The third internal decision area of the selected model is “process technology”. A key characteristic of power generation is the production process, which is usually described as a “continuous process production” (Brown et al. 2001). However, due to the maturity of the process, innovations and major changes to the process technology do not seem likely (Miltenburg 2005). The importance within the EXAMPLE operations strategy thus seems rather low. On the other hand, cost efficiency of production is a key operational objective of EXAMPLE (please refer to Appendix A). Very often, changes to the process technology / equipment result in a higher output whilst inputs remains stable (Energielexikon 1999). Regular technology updates and innovations seem to be part of the EXAMPLE operational strategy. This is shown by recent research developments driven by EXAMPLE (IZ Klima 2008).
Product development and organisation is the fourth decision dimension of resources-based operations strategy areas. Due to the product characteristics of electricity, it is less the product itself that is developed, but far more the generation technology (Greasley 1999). EXAMPLE seems to have focused mainly on fossil fuel powered plants (Zilius 2005). This seems to be reasonable from a purely internal perspective, as EXAMPLE can focus on highly-developed, efficient and thus profitable generation technologies. The picture however looks widely different of considering the consumer requirements. Consumers increasingly demand their electricity to be generated “sustainable” (e.g. wind, solar…) (FOCUS 2008). Here a link between the internal and the external perspective on operations strategy becomes obvious. EXAMPLE is generating only very little volume from these technologies (Peer / Jahn 2009), pointing out a gap between the operations’ resources and market requirements. Please refer to section 2.2 and 3 for a more detailed discussion.
2.2 External perspective – market-based-perspective
As part of a previous report, operations performance objectives (as can be seen in Appendix A) for EXAMPLE have been derived. These findings will be critically discussed in context of the operations strategy matrix, with a stronger focus on actual market requirements. The more focal objectives should be hereby seen as “order winning factors”, the other ones (e.g. “Speed”) as “qualifying” or even “less important (Slack et al. 2004, pp.72-73).
One of the key expectations of customers is the infinite, immediate availability of electricity. Therefore, it seems reasonable to state that dependability remains the key performance objective for the operations strategy. As stated in 2.1, this customer expectation requires EXAMPLE to carefully manage their capacity, proving the dependency between the internal and the external perspective.
As another important performance objective, cost seems to drive EXAMPLE operations strategy considerably. With electricity being a commodity, consumers may be especially price sensitive (Kotler et al. 2008). Thus, EXAMPLE operations need to aim at minimizing unit costs (e.g. by maximizing plant utilization and minimizing overproduction) to satisfy price expectations of customers – but also remain competitive compared to their competitors (Slack 2008). With a strong profitability in recent years, EXAMPLE seems to be able to fulfil this goal (EXAMPLE 2009a).