Marketing & Competing

Fortnightly Magazine - October 15 1996

There's more to meeting marketing challenges than first meets the eye.

Imagine you've just taken over as chief executive officer (CEO) of a $1-billion gas utility in a major metropolitan market. Your predecessor retired early, leaving this mythical local distribution company (LDC) (em let's call it Total Gas (em unprepared to engage the competition on the home front and ill-equipped to grow unregulated earnings.

Time is short. Some LDCs are pushing ahead of you and choosing joint-venture partners. Others are merging to create the critical mass that will likely be needed to compete in the new millennium. To complicate matters, the state Public Utility Commission (PUC) has just approved a pilot program offering 5,000 of your residential customers the opportunity to choose their supplier.

Your job, as you read this column, is to make some quick judgment calls that will frame your approach to reengineering and repositioning your company for the battles ahead.

Drawing on a survey of what several LDCs consider their major threats and advantages, we pose 15 challenges. Based on the admittedly cursory background information provided, what strategy would you choose to meet them? In each case, we tip our hats to the companies and managers who have already made such decisions.

#1 (em Payroll Reductions

Total Gas must reduce overhead by at least 20 percent. A big bulge exists in your unionized workforce. How do you take a big bite out of total wages, gain the flexibility to reassign workers, and get them to buy into a "win-win" culture?

a) Lower the body count with an aggressive early retirement program; let your human resources people make the numbers work.

b) With enough time, try mutual-gains bargaining that earns paybacks for organized workers commensurate with returns for the company.

c) Execute a 7-percent, across-the-board cutback of salaried as well as union workers; reorganize with new job descriptions that many employees will have to apply for.

#2 (em Winter Reliability

The past winter created havoc between many gas suppliers and their commercial customers. Some failed miserably to live up to their contractual commitments. How can you earn some new customers before the winter kicks in?

a) Survey the companies that have cut into your supply business, and work to beat them on service and price.

b) Team with an aggressive, low-cost gas marketer and earn back as much market share as possible with prices as low as your chief financial officer will permit.

c) Segment the commercial market that Total Gas can reasonably pursue; identify and target those segments that offer the most long-term earnings potential.

#3 (em A Price War

An unregulated subsidiary of a nearby energy utility has just launched a print, radio, and direct-mail promotional campaign to service your residential customers under the pilot program. This company is offering $50 to every customer who makes the switch. Your unregulated energy marketing unit is permitted to participate, but is it worth the risk and the expense, since the LDC makes money whether it sells or transports the gas?

a) Match the $50 offer because just about every part of the supply market is worth fighting for.

b) Ignore the competitor's campaign; just wait and see how many customers bother to switch. After all, this is only an experiment.

c) Send out brochures to the largest-volume residential customers, offering incentives like discounts on appliances.

#4 (em Rebuilding Management

The departure of the previous CEO has left Total Gas with little bench strength in senior management. As you focus on long-term strategy, you need a corps of lieutenants who can assist you and handle day-to-day problems and opportunities. How do you build up the senior management ranks quickly?

a) Don't worry. Run the ship on your own until you pinpoint the kinds of people you need to take the company into the next decade.

b) Quickly identify a tier of executives. Delegate responsibilities that can demonstrate their management prowess and earn one of them the privilege of succeeding you.

c) Create an Office of the Chief Executive that immediately puts those chosen on notice that you're in the market for a clear-cut Number 2.

#5 (em Corporate Image

As a nondescript LDC, Total Gas is not well known outside of its service territory. How do you start building a name for your company? And what, at a minimum, must you do to help your unregulated subsidiary market gas and energy services away from home?

a) Research brand names and choose the one that can help you create a corporate persona separate from the company's name and reputation.

b) Skip the branding gimmicks for now. Until enough customers can choose, no brand will make enough of a difference in the marketplace. Let UtiliCorp's EnergyOne spend the time and money to educate potential buyers.

c) Use "Total Gas" as your brand, because that's how energy buyers in the region know you.

#6 (em Strategic Alliances

You need increased size and more customers, and the best merger partners are going fast. How do you most efficiently and quickly increase your critical mass to compete with the regional and national giants that are emerging?

a) Forge supply contracts with two good-sized utilities in healthy growth regions of the country (em probably the Southeast (em and use the evolving relationships to decide whether they'd be good acquisition candidates.

b) Make your company as attractive to potential suitors as possible, and try to remain independent for another five years (em that's when you could retire early with a lucrative severance package by selling the company to the highest bidder.

c) Find a sizable electric utility in the snow belt that could use a gas capability to deal with lost revenues, and begin talks about a merger of equals.

#7 (em Load Building

The looming deregulation of electricity is sure to reduce the price of electric power enough to take away gas sales in your local market. How do you grow gas consumption?

a) Invest the necessary time and resources to commit as many transportation fleets as possible to natural gas, including metropolitan transit authority buses. Also target commercial fleets, such as service vehicles at airports.

b) Create a program to demonstrate new technologies at industrial customer facilities. This effort can forge bonds leading to new business and take some of the risk out of developing technologies only in house.

c) Give up on natural gas vehicles and focus on one or two new applications (em such as Connecticut Natural Gas's co-firing process, which burns gas with coal to lower emissions at utility plants and industrial boilers while increasing their efficiency.

#8 (em Public Relations

As CEO you need to increase your presence in customer circles. And it wouldn't hurt for the industry to better understand the niche that Total Gas intends to fill and the value of teaming with your company. What communications can have an impact this year?

a) Reach out to national business publications with a progressive message about integrated energy solutions.

b) Seek invitations to speaking forums that will put you in front of targeted market segments.

c) Fine-tune presentations to financial analysts to make sure they fully grasp how you're connecting with customers.

#9 (em Reputation

As part of your effort to improve the company's image with customers, Total Gas is reengineering its basic approach to customer service. What core approach will be most effective in building a customer-service reputation that's second to none, while giving you the most bang for your buck?

a) Abandon the old residential, commercial, and industrial customer categories. Instead, create new, more specialized customer segments that enable you to better focus your products and services.

b) Set satisfaction targets for each customer segment, recognizing that the costs of trying to achieve 100-percent satisfaction for every customer can exceed the potential rewards.

c) Create more internal accountability for customer service by dedicating an account representative to each customer.

#10 (em Customer Service

Despite some important strides in customer service, many employees still don't live, eat, and breath the necessary commitment to customer service. How do you reorient your customer service department?

a) Make sure you articulate a clear and genuine vision that can inspire and guide employees.

b) Give employees the opportunity to sharpen their interviewing and listening skills so they understand all client dynamics and build bonds that can produce new business.

c) Research the issues that differentiate Total Gas from the competition. Focus on what means most to your customers: reliability, price, problem-solving ability, and convenience.

#11 (em Metering and Billing

Customer service is one area where technology can help reduce costs significantly. What can help the company most within a few years?

a) Provide customers with the option to electronically pay their bills.

b) Begin installing a radio technology that can read gas meters remotely from the street or sidewalk.

c) Redesign the gas bill to accommodate more information that customers can use to better understand and manage their gas consumption.

#12 (em Pipeline Competition

A major gas marketer has announced plans to build a new pipeline into your service territory, giving your big industrial customers an opportunity to connect directly to its supply system. You now risk losing not only gas sales, but also transportation

revenues as some of your most important customers opt to bypass your distribution system altogether. What steps can you take to counter this looming risk?

a) Join with neighboring LDCs that face a similar bypass threat to launch a campaign to build public and political opposition to the new pipeline.

b) Ask the PUC for flexible rates (em especially for industrial customers (em to put you in a stronger position to compete with the pipeline.

c) Start a capacity-brokering program that allows your customers more direct access to producers by "buying" a portion of the interstate pipeline capacity you control.

#13 (em New Markets

You know that just defending your market isn't enough; in the new gas market, you have to grow or die. But how do you start building new markets and, maybe even more important, where?

a) There are plenty of untapped local markets, and new gas technologies promise to create even more, so it makes sense to focus your expansion efforts on the area you know best: your home territory.

b) Gradually build your market in "concentric circles," starting with local customers in and near your territory, then moving into regional markets, and eventually becoming a national player.

c) Pull together resources to become a national marketer as quickly as possible; competition at the national level is getting stiffer every day, and customers with nationwide operations want a gas supplier that can deliver to all of their outlets.

#14 (em Moving Overseas

Some companies, like Southern California Gas (SoCalGas) and CMS Energy, see aggressive moves into international energy markets as promising avenues for growth. Energy utilities around the world are privatizing, and energy demand in some countries is soaring much faster than in the United States. At the same time, moving overseas can be risky. What can Total Gas do to get a piece of the international action while minimizing risk to its bottom line?

a) Sell your management and technical expertise to newly privatized foreign LDCs.

b) Establish an international presence by buying a gas LDC in another country.

c) Negotiate product distribution or technology exchange agreements with foreign energy companies.

#15 (em Diversification

One of your priorities is to increase profits by building new revenue streams, but you want to stay focused on Total's strength: energy. How do you find new sources of revenue while sticking to the same basic business?

a) Follow the "Baby Bell" telephone companies; they built revenues by

creating new services like call waiting and "Star 69." You can develop new service "extras" (em gas appliance maintenance insurance or specific service-appointment times, for example (em that you can offer to customers for a fee.

b) You can expand markets by aggressively promoting new gas technologies (em like gas air conditioning and natural gas vehicles (em in your service territory and beyond.

c) Total Gas has decades of valuable energy expertise. Offer that expertise to large customers to help them buy and use energy as efficiently as possible.

As you have probably figured out, no single answer lies waiting for any of these challenges. Each LDC has particular strengths and weaknesses and, depending on the circumstances, each of these responses could make sense.

LDCs have special challenges to overcome as the gas market transforms itself, especially the ever-present oversight of PUCs and the social obligation to serve as the gas suppliers of last resort to all customers in their service territories. But they also have special advantages.

"LDCs are more than just a network of pipes," notes Debra Reed, SoCalGas's senior vice president in charge of energy distribution services. "They're a connection to customers." The familiarity and name recognition that connecting with customers has built over the years will serve LDCs like Total Gas well as they defend their home markets.

Ultimately, Total Gas's success or failure will depend on the CEO's personal vision. Does he see the new competitive gas market as full of defensive challenges and obstacles? Or is his attitude more like that of Craig Matthews, the new president of Brooklyn Union? His greatest ambition? "I want to be able to look back at the end of my career and be able to say that the gas LDC I came to work for has been transformed into a tight, competitive, aggressive leader in the new energy industry."

Those are words that anyone in command of a gas LDC can live by. t

James R. Pierobon and Adam Findeisen counsel energy providers and other companies on strategic marketing initiatives through Potomac Communications Group, Inc., in Washington, DC.

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