This thesis takes on an investigation of the European electricity industry with focus on the electricity distribution companies. Included is an extensive outlay of the structural drivers and changes affecting the industry, dating back to the beginning of 1990s, all the way to year 2004. The aim of the thesis is to in depth, explore diversification as undertaken by companies within the industry in terms of: rationales for diversification, how diversification is carried out, and how the outcome of the diversification can be described.
The dramatic change of the European electricity and heat industry, brought about by advances in technology and deregulation as well as large social and economic restructuring, expands and opens up the market for competition. This signals a big change in the environmental conditions and the mergence of new rules and priorities for becoming and staying successful. It marks the end of a previously successful mindset and of strategies that are no longer effective.
The changing landscape of the European electricity industry has in the eyes of the largest companies, meant that they have had to grow and restructure their product offers to defend or better their respective positions. It is found that this is mostly done by acquiring other companies.
Directly, the recent changes have incurred heavier financial restraints on the companies within the industry. Indirectly, this increases the pressure on the generation, transmission and distribution, and sales companies of the unbundled companies to generate more revenues. When it comes to the distribution companies, the prices or net tariffs are set in collaboration with the authorities, whereby the risk of overcharging the customers is minimized. But, this means that the revenue side is also more or less fixed and in order to deliver more profits to the parent company the most obvious solution is to cut costs and to rationalize. Facing these operational conditions it is shown that the transmission and distribution companies focuses inwardly at their resources and the utilization of the same and become more concerned with just daily survival.
Increased resource utilization is the most important rationale for diversification both within the strategic as well as the operational perspective. The focus on rationalization impedes the ability to venture into other lucrative business areas. Hence, possible diversifications are based on already existing skills, competences, equipment, technologies, operations, and the amount of available human capital.
In general, the findings of this study give support to the resource-based view of the company. The focus on existing resources and the search for efficient deployment of these may be explained in several ways. One possible explanation is that when industry structure is under reconstruction, it is hard to assess attractiveness and thus hard to determine which businesses that are attractive. Finally, it was found that all the diversifications studied had been rather successful as measured by various measures.
Author: Gunnarsson, Johan; Gustavsson, Johannes
Source: Lulea University of Technology
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