Electric utilities are informationally dysfunctional. When we surveyed electric utility managers from around the country, we found a general consensus: Individual employees may possess vital information, but typically they do not know what to do with it. They don't understand why it's important or who may need it. As a result, decisions proceed on the basis of old data or generally held beliefs (em not on reality.
Managers, feeling assaulted by competitive change, fear that the increasing number and type of new market entrants will only increase the data deluge. They also realize that, for the most part, their organizations have not built an effective "information infrastructure" to effectively channel and apply vital intelligence. More specifically, these managers feel their organizations suffer from intelligence deficits that will affect them in three areas:
s Customer Retention. Customer (em not competitor (em intelligence is desperately needed.
s Competitor Costs. As prices drive markets, utilities must learn how competitors use technology to gain a cost advantage.
s Market Savvy. Recognizing threats means more than just crunching the numbers. It means converting raw data into a strategy that will expose a competitive weakness.
Alex Mandl, head of AT&T's Communications Service's Group, was quoted recently in the Wall Street Journal on opportunities in the telecommunications industry: "It's a fast-moving business. You can't be a ponderous machine that studies everything as opportunity passes you by. Our challenge is to take advantage of our scale, but still act like a small company."1
This quote exposes the great irony. Electric utilities, according to the managers we spoke with, have always behaved like large corporations, complete with all the usual bureaucratic complexities. Yet, compared to large, multinational corporations like Corning, Canon, Xerox, and Kraft (em nonutilities that have used intelligence successfully (em nearly all utilities appear relatively small. Why can't utilities, with their relatively compact employee base and regional markets, use intelligence as effectively as companies many times their size, with a far greater mix of products or services, whose market is truly global?
The key to successful use of intelligence in all these companies is focus: A focus on the competitive issues that matter most, and on how to gather and apply the information to quickly and expediently address these issues. Corning and Xerox will reverse-engineer a competitor's product and then communicate the findings to a broad audience, knowing that an engineer will use the resulting intelligence differently than a marketer. Corning's management realizes that the entire corporation will benefit from the information in the end. When Kraft realized that much of its competitive data was squirreled away throughout the corporation, it decided to audit and index these "hidden" resources so all managers could benefit from them. Canon knows that much of its market knowledge lies outside Japan and has decided to translate critical technical and competitor information into Japanese, thus making it accessible to all company management.
None of these approaches to organizing and using intelligence are profound. They are simple and effective. Nevertheless, the new competitive forces have launched utilities on a strategic roller coaster, leaving them somewhat unsure and unfocused. For example, when we asked managers to decide which of the three most-cited factors (em customers, competitors, and regulators (em were most important, they could not pick one (see Figure 1). All the competitive balls appear to be in the air.
Clearly, utilities are finding it difficult to strike a moving target. Many managers we spoke with expressed concern about how to effectively monitor future competitors without knowing when and under what conditions regulators and legislatures will permit competition. One manager even said, "Our greatest intelligence challenge is to clearly define and identify not only our current but our future competitors." In the face of such major changes, many utilities struggle both to define and set priorities for their strategic business goals. This struggle creates real obstacles to establishing a productive, focused intelligence system.
The Unexplored Terrain
The utility industry has traditionally viewed electricity purchasers as "ratepayers," and ratemaking authorities as "customers." As the industry faces deregulation and increased competition, utility managers have
re-characterized ratepayers as "customers." In part, utilities emphasize "customer-focus" as a way to retain or protect market share. Participants in our survey ranked customers either first or second in importance, clearly reflecting the recent move toward customer-centric thinking at utilities. As one manager explained, "Customers drive the actions of all other entities including regulators and competitors."
Despite their stated focus on customers and concerns about market share retention, over two-thirds of the participants lack any intelligence infrastructure for collecting, analyzing, and disseminating information about their customers, as typified by the two quotes seen above. Without this infrastructure, utilities are unlikely to uncover current, pertinent information about their customers' operations, such as electric generation technology, expansion or consolidation plans, or how energy costs stack up as a proportion of total operating expenses. Some utilities do not even employ the simplest intelligence procedure (em that of using the utility's own field force to collect this kind of information.
If an electric utility pinpoints customers as its primary focus (em as many already have (em then it must design its intelligence system to reflect that aim. The managers we spoke with all described an increasingly common practice: Negotiating rates with key customers. As this practice grows, detailed customer information will be vital not only to effective rate negotiations but to the design of value-added services. One study participant put it this way, "In the short term, the return [on an intelligence system] is for us to get closer to our existing customers,
to show improved customer retention figures, and an overall increase in the number of customers."
Morphing the Competition
Electric utilities generally appear uncertain about their future competitors, as to both their number and category. Most managers seem to measure the increase in competitive threats by the sheer number of competitors they will have to face in years ahead. They project, on average, a 50-percent increase in the actual number of competitors in their service territories by 2000.
As in telecommunications, a utility's metamorphosis from being "all things to all people" to a more specialized entity may bear watching. It may not be the "how many" but the "what" that electric utilities should target in their intelligence gathering. If managers target a traditional, full-service electric utility, they miss understanding a new (em and perhaps more potent (em long-term threat, such as a cogenerator, an independent power producer (IPP), or an energy service company. At the same time, the expected increase in mergers and acquisitions (see Figure 2), may create mega-utilities with considerable market power and economies of scale.
MCI offers an example of a powerful company that could not even have existed before deregulation of telecommunications. At first AT&T did not know how to compete against this new competitor and had no idea how aggressive MCI could be: "It was lean and mean. It gave employees the chance to grow along with it, and rewarded those who made the company money. . . . It broke a lot of corporate rules along the way, and took a lot of flak for it."2
New, lean competitors that break all the rules are exactly what the long-quiet electric utility industry will face in the decades ahead. We will see many MCI-types entering the generation and distribution side of the business, and they will play by a very different, very aggressive and very clever set of rules (em rules that they will help shape. Are traditional utilities prepared for this onslaught?
Despite the widespread belief that competition will intensify over the next 10 years, fewer than 10 percent of the participating utilities have set up business intelligence systems to monitor and analyze their competitors.3 You could argue that a strategic paralysis has set in. This malady will cause utilities to look at everyone and at no one, all at the same time (see Figure 3). The outcome: A large number of utilities, unsure of whom to watch, will likely encounter numerous competitive surprises over the next decade. It won't be enough for an electric utility to "stay close to the customers" if it cannot also track the competition.
Regulatory Intelligence (em
Control or Be Controlled
No doubt that regulatory departments hold a great deal of market intelligence. How much of that intelligence is realized or applied to utility strategy is the real question.
Although virtually all of the survey participants expressed similar views about the importance of monitoring regulatory developments, few, if any, have set new goals for a regulatory staff that cut its teeth on rate case strategy. Most managers we spoke with described their regulatory staff as extremely competent in dealing with state or federal agencies, but expressed doubts about the staff's customer focus. Only two of the surveyed managers described any kind of process for analyzing and communicating regulatory trends and then considering that information in customer or competitor assessments.
Nevertheless, some utilities see new roles for their regulatory experts. Those utilities have begun using the regulatory process to secure new revenue opportunities, rather than as a means to recover previously incurred costs and investments. Central Maine Power Co., for instance, recently negotiated a sweeping rate decrease with regulators for its major industrial customers. The company sought the new rate structure after realizing many of its major customers were seeking more competitively priced electricity.
The Organization (em
A House Divided
To support the range of regulatory requirements associated with electric generation, transmission, and distribution, utilities have traditionally organized their staffs by specialty or technical discipline. This structure proved successful under the regulated environment, but will probably not survive the next decade. The managers we spoke with feel that this structure has created an insular culture that discourages, if not prohibits, the flow of information across functional boundaries.
In addition, many utilities literally isolate various groups from one another by forming rigidly autonomous service areas. "Our organizational setup lends itself to the formation of information traps," commented one participant. "We have [several] marketing/customer service divisions set up on a geographical basis. The divisions will not share information with each other or with the corporate staff. One of the original goals of this structure was to foster competition among divisions. Today we find that is less meaningful and even counterproductive."
Instead of a consistent, coordinated information flow, most utilities have created little information whirlpools of market and competitor information that spin around and around within each group. That information is rarely shared or compared. But until it is, uniform market and competitive strategies cannot succeed.
Top management should direct the intelligence effort. The CEO cannot push responsibility down in the organization, expecting middle management to read minds. The single glaring weak spot that emerged from this study is that many managers do not yet understand the intelligence process and appear unlikely to give it direction.
Historically, it has taken three to five years for an intelligence system to reap companywide rewards. Even in utilities with existing intelligence systems, management often runs the risk of overreaching its capability or expecting too much from the system. "We have defined a process for using a competitive intelligence system," states one participant, "but we are having real disagreements within management as to scope. Some managers want to limit it to a few departments, while others want a companywide system right away."
Also, management itself needs to be educated as to what intelligence is and is not. "Consistency of expectations is a real problem. Some senior managers just want data, whereas others want data and analysis," comments one individual.
Management needs one final ingredient if it is to make an intelligence system work. It must act even if all the information isn't yet in, or may never arrive. Action, taking risks, distinguishes the successful from the unsuccessful intelligence user. Perhaps that is the meaning behind the comment "senior managers just want data." They may want more data for the security it supposedly bestows upon them. So, rather than act, they collect (em a dangerous trait in an increasingly risk-taking utility world.
Utility industry management must lead by example and focus the company on the information it needs to collect; then, act upon that information.
From Prudence to Risk
The utilities of 10 or 20 years from now will behave very differently than they do today. They will have to be nimble in their actions (em quick and decisive. Today, prudence is still the watchword; tomorrow, it will be risk. This shift will not come overnight, but it must come. Along with this shift will come a different way to use intelligence.
Most of our survey participants predict that the new utility marketplace will reward those companies that can compete on price. The complex economics will demand a far better coordination of internal information than exists today in most utilities. It will require companies to apply all types of intelligence (em regulatory, customer, and competitor (em to solve competitive problems. This coherent intelligence approach requires changes in the way both management and the organization handle vital intelligence.
Unfortunately, no financial ratio exists to measure return on investment for intelligence systems. But for companies that prize competitiveness, intelligence becomes part and parcel of business operations. In their view, intelligence does not add incremental costs, it benefits the bottom line. t
Leonard Fuld is president of Fuld & Company (em a Cambridge, MA-based business intelligence research and training firm (em and author of a new book, The New Competitor Intelligence (Wiley, 1995). Diane Borska, senior consultant to Fuld & Company's utilities practice, has over 14 years' experience in the electric utility industry, including work in generation engineering, rate cases, and regulatory compliance.
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