Identifying a core competency is not as easy as it seems.

Utilities have developed a "Gold Rush" mentality. That is, they have begun to chase after the latest (em and sometimes fleeting (em opportunities, often abandoning their roots and their long-held strengths in the process. Supposedly, this first-in-market race will allow traditional utilities to remain competitive. Yet, all this racing has caused strong regional players to enter markets blindly, without the competitive knowledge or strategic underpinnings that will allow them to succeed in the long term.

"Utilities are trying to substitute core competencies with products and services. ... 'Give me a low rate and don't ever let the power fail,' is really what the customer wants but then we tend not to believe him and develop other things like alarm systems, cable TV and telecommunications." These are the frank words of Bill Guyker, a planning and compliance consultant with Allegheny Power System. His concerns were echoed many times at a Massachusetts Institute of Technology Electric Utility Program forum this past winter.

In this sprint toward investment, utilities have gone in three directions. First, utilities have homegrown new ventures, such as IPALCo's development of new distributed generation and energy storage technologies. Second, they have bought into other ventures, as Western Resources is attempting to do with the security system firm ADT. Third, they have established alliances, as Southern Co. developed with Hewlett Packard to create better metering and data analysis capability.

Many of these mega-deals that have hit the press are the result of premature decisions. Such blind moves could strip away the unique resource of a utility, known as their core competency. However, a utility can enhance its strategic position by identifying that core competency and working to enhance it. The most productive way a utility can develop this competency is by benchmarking its strength against that of best-in-class operation and deciding which of the three directions to take (em make, buy or ally.

Shedding Expertise?

Harry Roman, a senior consultant with New Jersey's Public Service Electric & Gas, acknowledges the changes: "PSE&G no longer performs traditional utility type R&D, but emphasizes transfer and implementation. In the past there were 90-plus people involved in a centralized R&D function. Now, six perform technology transfers as well as monitor and assess emerging technologies for the company, with the major business segments themselves responsible for actual implementation. The R&D function has been dispersed to the operating groups within the company."

By losing this historical technology development base, PSE&G runs the risk of undermining its technological prowess.

As competition enters, utilities will make a variety of investment decisions. These decisions include selecting investments for R&D dollars, deciding which markets to protect and which to ignore and identifying how to streamline and harness their own resources without crippling them. Deciding will become easier once a utility chooses the ultimate service or product they expect to deliver in years ahead.

This is the Make-Buy-or-Ally juncture at which we find most utilities today. To preserve these core competencies, these concerns need to know themselves well enough to realize they will continue to make either the product or service or seek outside help to do so. In this resource-stingy environment, utilities will find it very tempting to move outside their organizations to acquire the necessary skills or competencies. At times, they will do so at the expense (em or sacrifice (em of resources they already have.

Utilities are not alone in making these decisions. Other competitive industries, such as telecommunications, high-tech and pharmaceuticals continuously ask themselves these questions. The winners are the ones who know when to grow a competency and when to go outside to find the resource.

For example, literally overnight, AT&T built a credit card business. It had all the core competencies in-house: the information and transaction processing systems, and the capital from its allied long-distance service. IBM, on the other hand, went outside to buy Lotus because it needed to become a major player in computer networking and did not find this expertise inside. Hoffman-LaRoche allied itself with a genetics engineering firm because it understood that the next big leap in diabetes treatment and obesity would come from biotechnology and not its traditional pharmaceutical expertise.

Technology: Improvement or Distraction?

For some utilities, recognizing competition has meant beefing up their identified core competency. According to Craig Harrison, manager of business strategy with Pacificorp, his organization has earmarked customer service as a core competency worth investing in. "We are definitely investing in customer service as a core competency. ... Most innovations would fall under the category of distribution automation, but we have also moved to 24-hour phone contact with our customers instead of the traditional walk-up centers."

"One of the primary challenges that today's electric utilities face is developing and maintaining a culture of continuous improvement and innovation," comments Stephen R. Connors, director of MIT's electric utility program.

"While enhanced customer interfaces are essential for identifying and vending new energy services, they can become one grand distraction. The competitive electricity/energy market will remain a technology-driven industry. Utilities need to retain their expertise in energy technology integration and management, such as distributed generation and enhanced monitoring and control. They must keep this technological talent in-house if they are to keep ahead of competitors.

"Lose this technological competency," Connors concludes, "and state-of-the-art call centers will wind up handling complaints and confusion, effectively transforming opportunity into overhead."

What Are the Strengths?

All these examples beg the question: What are a typical utility's core strengths? Do they lie with technology? What company already has some competencies that utilities will need 20 years from now? Just examine the AT&T case. Everyone considers this company one of the premier telecommunications firms. What reason does it have to enter the credit card market? That was the question some six years ago. Today, however, the answer is clear. AT&T has exhibited all the necessary core competencies for the credit card business. All the banks (em the traditional card issuers at the time (em were surprised. Not AT&T. It saw the credit card as a means to extend its telephone business. It also had all the knowledge, the competencies, to execute the process. This winning combination did not come from out of the blue.

A core competency is more than a simple strength or expertise. In their groundbreaking Harvard Business Review article, "The Core Competencies of the Corporation," professors Prahalad and Hamel identify three requisite tests that determine a true core competency.

• Test 1:

It provides access to a variety of markets.

• Test 2:

It should contribute to perceived customer satisfaction of the product.

• Test 3:

It must be difficult for competitors to imitate.

If the above definition holds true, then several utilities have misdefined the competency idea. "We do a lot of billing, making that one of our core strengths," states one senior manager. Yet, compare a bill issued by most utilities to that of American Express. Utility bills are typically inscrutable and inflexible, while the American Express invoices dispense information, telling customers where and how they spent their money. These value-added pieces of paper help the consumer understand usage patterns or change their buying habits.

Other misconceptions exist. Some utilities have identified a key technology without integrating the process or expertise throughout the corporation. Some have interpreted a competency as outspending your opponent in an area of strength, rather than improving that strength, such as increasing R&D spending. Still others have sought to outsource technology development, leaving them without knowledge of the process itself. But the worst misconception concerns time. It takes years to strengthen and capitalize on a core competency. It is a long-term commitment, embraced by the entire corporation. The yearly return-on-investment numbers cannot measure the success or failure of a core competency.

"To a certain extent, we are losing the ability to innovate and think medium- and long-term," states Shalom Zelingher, director of research and development at the New York Power Authority. "There is not enough patience to wait around for longer-term results, which would actually be better for the health of the company. ... We are limited to making incremental improvements rather than how to break through and really make a difference."

The wave of utility reorganization into strategic business units, or SBUs, generally does not promote this long-term view. No single SBU will feel responsible for maintaining a competence. Talent often gets locked up within SBUs and is not shared among them. Budget allocation frequently wins over talent allocation, preventing the sharing and growth of core competencies throughout the organization. The result: Competencies likely will atrophy or suffocate.

The regulatory environment has hampered the growth of core competencies within the electric utility industry. Regulations have long rewarded companies for compliance, not competitiveness. Regulators have only asked utilities to compare their efficiencies against other utilities. ("Which dinosaur is faster?" might be the question the regulators were forcing the industry to focus on.) Finally, the regulations kept competitive pressures at bay, denying recovery of costs needed for development of service/product offerings.

Betsy Krieg, director of R&D planning at Pacific Gas & Electric describes how the regulatory, double-edged sword is now eroding the utilities technological and market strengths. "Regulatory constraints drive us to focus on cost. It is clear what cost reduction will do for shareholders. It is less clear what effect research in new technologies (em that may not be salable (em will have on our investors."

Shifting the Focus

Utilities have chosen to focus on a handful of strengths deemed competencies. Most of the time they discover these are not true competencies. Among the most often selected areas of competency are: customer service; generation asset management; transmission or distribution system management, or both; billing and collection; and commodity fuel purchasing.

Examples abound of companies displaying core competencies that utilities wish to imitate. But if utilities look closely, then they will realize they need to work a lot harder (em and allocate investment dollars (em to develop these as true core competencies. Federal Express is a model of customer service, using information systems expertly to track, dispatch and fulfill customer orders. AT&T's credit card operation shows how to handle efficiently high-volume, high-quality billing and collection, managing 16 million card holders with only 250 employees.

The question is, how do these skills affect the performance and strategic value and cost of a company's real products and services? FedEx truly has a competency in customer service, because it scores relatively high in both the cost-reduction and value criteria for determining a core competency (see Chart 1). For FedEx, customer service has a high value rating because it contributes performance, quality or strategic value to the core product: getting a package to a customer in a timely manner.

While the value of the activity is important, its impact on the product's cost is also a significant determinate of a core competency. Once again as shown by its high cost-reduction score, FedEx's customer service is viewed as significantly lowering the cost of delivering the package. If a package is delivered properly it will not only keep the customer happy, but also will keep the costs down by not having to redeliver the package. The cost criterion can determine which company has the stronger competency in billing and collection (see Chart 2). Both AT&T and NYNEX score high on value by viewing customer billing and collection as key to their core business of providing telecommunications to consumers. However, AT&T scores higher on the cost reduction criterion and therefore would be considered more competent at lowering its cost of providing telecommunications to its customers. TCG, a telecommunications firm, matches MCI and Amex in cost reduction, but scores higher on value.

Arguably, power generation marks the one area that many utilities can claim as a clear core competency, yet it is the very area they are allowing to disappear. Many utilities are choosing to exit the generation arena, yielding the development of new generation technologies to other players.

"Over the last couple of years," says Krieg of Pacific Gas & Electric, "we have lost technical experts in areas where we are no long doing research. For example, we are no longer looking at wind or solar. ... Those people are no longer with us."

A rational, structured analysis, not shoot-from-the-hip decision making, is the most effective way for a utility to find its focus. This gold rush mentality has created too reactive a climate, where caution (em and a utilities long-developed resources (em are often thrown to the wind. Abandoning these critical resources in the name of cost cutting could prove a mistake.

Given a market that is rapidly heating up with new rivals, traditional utilities have little time to make some of these investment decisions. Yet, how they make these decisions likely will affect their competitive stature into the next century. t

Fuld & Company Inc., based in Cambridge, Ma., provides competitive intelligence and analysis for the utility industry. Diane Borska is director of the firm's utility practice. Leonard Fuld is company president and author of The New Competitor Intelligence (Wiley, 1995).

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