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Future Imperfect: Managing Strategic Risk In an Age of Uncertainty

Part 1 of a 2-part article explores new technologies most likely to influence competitive success.

Fortnightly Magazine - January 2007

generation costs.

Digital grid control also appears in this reinforcing quadrant because, in its earliest phases, the digital grid actually makes the dispatch of existing power plants much more efficient. And if automotive fuel cells never become practical, then digital grid technologies actually might reinforce the electric utility business model.

Integrated gasification combined-cycle (IGCC) technology also appears in both “Paradise Gained” and “Paradise Lost,” but for a different kind of reason. This technology essentially “cooks” the coal under high pressure to set in motion a series of chemical reactions that produce a synthetic gas, “syngas.” The syngas chiefly contains hydrogen, carbon monoxide, methane, and other gaseous constituents whose content varies depending upon the conditions in the gasifier and the type of feedstock. The gas can be burned in a combined-cycle power plant or processed to create a broad slate of other fuels and chemicals. Thus, in principle, the output can be tailored to the relative prices of electricity, synthetic fuels, or synthetic chemicals. Currently, the IGCC technology achieves efficiencies in the range of 45 percent, and future systems might reach the 60 percent range.

Great potential plainly exists for growth in IGCC technology. The real issue concerns the ability of the electric utility companies to include IGCC as a reinforcer of their business model—as distinct from allowing others to use the technology to attack it. The good news is that electric utilities count the building of large-scale industrial facilities among their core skills. But on the bad news side, the essential operating characteristics of an ICGG unit appear closer to an oil refinery or chemical processing plant than to a coal-burning power plant. Further, the slate of products offered by IGCC will require utilities to understand fuels and chemical markets if they are to gain full value from the technology.

Thus, utility companies need to adopt new skill sets to succeed with this technology. New skills, of course, are not without precedent. For example, utility companies had to reach well beyond their customary licensing, construction, and operating practices when nuclear power plants were introduced in the 1970s. Utilities that mastered the new skills did well; those that did not reaped costly mistakes, illustrating the strong link between an effective corporate culture and strategic risk—a link that we shall revisit in Part 2 of this article.

What ... Me, Worry? Finally, we reach the strategically unimportant quadrant where niche technologies attack the business model. Rooftop photovoltaics and merchant-power producers illustrate this well. As long as strategic management can remain confident that these niches will remain so, then little more needs to be done here.

Managing Strategic Risk

All this demands the most important question: How should strategic leaders of utility companies identify and manage the risk that a capricious future will “turn inside” strategic decisions made today? Deferral of choice offers no solution, as new uncertainties always lie beyond the unfolding horizon of foreseeable events—and failure to make decisions becomes itself a decision.

In Part 2 of this article, I shall propose two management tools—real options analysis and scenario planning—which can combine to