“You have to breathe all day to stay at your desk, don’t you?”

Jack Welch, CEO General Electric

Global market conditions for utilities are creating entirely new rules
for how companies conduct business and create value. In the past few years,
major shifts such as deregulation, globalization, the integration and
greater efficiency of capital markets, and the dramatic consolidation
and convergence of industries have created a new competitive landscape
for the electric power industry.

Connectivity among market participants – suppliers, customers, and partners
– becomes increasingly important across the entire value chain. The emerging
energy e-marketplace drives lower energy prices; lower cost of operations;
innovative products and services; enhanced business processes and efficiencies;
and increased customer quality and satisfaction.

This white paper surveys the e-business landscape of the power industry
and the many changes that are both taking place and on the horizon. Looking
beyond that horizon, the evolving market is examined to identify what
electric power companies should be doing now if they are to create value
and succeed in the future. “You have to be in e-commerce in every element
of your business, in all of your supply chains, in all of your information
flows, in all of your communications, in all of your customer interactions.
This is not some activity outside the business – this is the business.

E-Business: A New Stage of Development for the Energy Industry

For the power industry, e-business represents one of the most significant
business imperatives in recent memory. Industry leaders expect this phenomenon
to fundamentally change the ways in which the energy sector conducts commerce.
We should expect an industry that makes money on assets to one that focuses
on customers and makes money on information. Wall Street, which has traditionally
overlooked the potential for e-business applications in the power industry,
now places a premium on energy companies that demonstrate e-business strategies
and processes.

Figure 1
How e-business is transforming the power industry

E-Business Demands New Thinking

E-business encompasses more than just selling products and services through
an electronic medium. E-business is about the exploitation of information
networks to gain and systematically leverage competitive advantage.

Revolutionary Impact

E-business forces companies to ask the question, “What business am I
in?”

The advent of Web-based exchanges and private marketplaces for energy
and equipment, and information resources, software, and other energy-related
services disrupts the traditional value chain. Within this transformed
environment, significant opportunities for value creation exist in all
e-business spaces, provided companies account for and leverage the following:

• Redefining virtually every business process and function

• Changing conventional concepts and rules about strategic alliances,
  outsourcing, competition, industry specialization, and customer relationships

• Creating an unprecedented wealth of information about customers

• Challenging every business to continually reinvent themselves

This revolution causes us to rethink the traditional forms of competitive
analysis.

Figure 2
New competitive forces have far-reaching effects on the power industry

The New Competitive Forces

E-business drives new industry dynamics. Increased pressure on prices
and customer focus impacts the onset of new competitive forces, such as
alliance/partner relationships, existing competition, new offerings and
competitors, connectivity with customers, and connectivity with suppliers.1
Companies need to build specific competencies and overcome numerous challenges
to be successful.

Current business trends show that businesses are re-evaluating their
strategies and organizational structures to maintain a competitive edge
in the new economy.

Connectivity with Customers

The combined forces of increased customer choice and e-business push
power companies to more fully understand and fulfill customer needs. Connectivity
of the customer becomes a critical success factor. E-business provides
a 24×7 window into the customer’s mind, streamlining the customer service
process.

Customers will demand more from their suppliers – the provision of energy
coupled with unique products and services. The Web represents an important
channel for these new revenue sources. Customers will demand customization
and personalization in their Web experience. The Web not only allows for
this, it demands this. Connecting the utility’s processes with those of
the customers creates an additional and compelling reason for customer
loyalty in this increasingly commoditized business.

Connectivity with Suppliers

Connection with key suppliers represents a critical new aspect of the
changing economy. E-markets fundamentally change interactions with suppliers.
Connection through the new electronic marketplace greatly enhances these
relationships in a number of ways. Reduced costs and streamlined processes
are only the first benefits that will be realized. The greatest benefits
will be the new relationships that core suppliers to the industry will
have with the industry as a whole. E-markets will promote and enhance
this concept over a relatively short time.

New Offerings and Competitors

E-business will accelerate the introduction of new products and services
to customers. Through connectivity between customers and suppliers, companies
will be better able to anticipate and rapidly fulfill customers’ needs.
Furthermore, they will be able to shorten the product/ service development
cycle through their connectivity with key suppliers.

Alliance/Partner Relationships

The conduct of Web-enabled business disrupts “traditional” competitive
and friendly relationships and also creates entirely new means of conducting
business. Alliances among competitors are forming in many industries to
take advantage of economies of scale and to extract increased efficiencies
throughout the value chain.

Increased cooperation resulting from alliances enables companies to develop
offers that are not only cost-effective but also improved and innovative.
Many companies are engaging in co-branding and joint marketing to make
offers that cater more to their customers’ needs – an action that each
company alone might not have had the expertise to carry out before.

Existing Competition

E-business has, in many instances, put customers in the driver’s seat
with respect to availability, pricing, and quality of products and services.
It has become imperative that companies have strong marketing capabilities
and brand imaging to maintain and enhance competitiveness. The utilities
industry must move quickly to respond to this emerging trend. Otherwise,
companies ranging from energy service providers to consumer product companies
might enter the market to provide the same or better level of service.

Physical restrictions, such as service territories, pose less of a barrier
for new economy companies that want to enter the market. With deregulation,
customers may choose their energy providers, generating opportunities
for companies with sharp marketing skills and innovative bundles of products
and services.

E-Business Evolution

As commerce increasingly shifts to the Internet, power companies must
develop a keen understanding of their relative participation in Web-enabled
commerce. This understanding provides the framework for developing e-business
strategies necessary to deliver success in the new utilities landscape.

Stages of E-Business Evolution

Based on recent experience, there appear to be four stages that define
e-business evolution: Channel Enhancement, Value Chain Integration, Industry
Transformation, and Convergence. Power companies seeking to harness and
leverage the power of e-business must respond to the new competitive forces
along two paths:

• Enabling and Transforming: The “enabler” path represents incremental
  change to the organization’s existing model and provides the opportunity
  for “quick wins” in the areas of cost reduction and improved business
  processes.

• Channel Enhancement: Within the channel enhancement snapshot,
  companies use e-business technology as an enabler to modify existing
  business processes and, in some cases, to create new ones targeted at
  improving business performance. Within this, companies employ e-business
  technology primarily for information sharing and e-commerce – essentially
  establishing a new channel to market.

• Value Chain Integration: As the level of Internet competence
  and confidence grows, companies search for the next major step in e-business
  leverage-specifically, companies leveraging e-business as a vehicle
  for value chain integration.

In a mature state, value chain integration allows companies to share
real-time planning, cost, and production data between Enterprise Resource
Planning (ERP) systems, thereby allowing for creation of a fully-enabled
“entraprise,” a term used to describe an extended enterprise between the
company and its value chain partner(s).

As part of this analysis, some businesses take steps to seize the advantage
afforded by the low cost of moving data, and to revisit the idea of outsourcing
non-core business processes throughout the value chain. Other industry
players are seeking to transform themselves and, in turn, the industry,
through the radical application of e-business strategies, processes and
implementation methods. This path presents the greatest risk and the potential
for the most rewards.

• Industry transformation: E-business creates ways for companies
  to maximize shareholder value by completely transforming their industries.
  As the lines between businesses become less pronounced, companies will
  find ways to work together that leverage each other’s core competencies.

The phrase “going to market” will no longer be defined as the way a company
enters the marketplace. Rather, it will characterize the way an integrated
group of companies creates a set of cascading values to transform the
marketplace into a network of value providers.

Companies with a core competence in knowledge management will thrive
in this third snapshot. They will use business partners that have created
best-in-class processes in the physical world and others that build and
run the best value networks to transform the economic base and the operating
mechanics of their industries.

• Convergence: Convergence is the coming together of companies
  in different industries to provide goods and services to customers.
  It is as much a function of industry deregulation and globalization
  as it is of enabled business models. Convergence is not necessarily
  just an e-business phenomenon. In theory, convergence could occur in
  the complete absence of e-business. However, the continual decline of
  the cost of moving information makes convergence easier and cheaper
  to accomplish.

A supermarket’s offering of retail banking services is one example of
convergence. Others are the emergence of software providers as “infomediaries”
and the coalescing of many services and products in those segments of
the utility industry that are being deregulated. The Internet is fueling
more convergence by providing customers a one-stop shop for all of their
desired products and services. Companies that capture customer loyalty
and that can provide such one-stop shops for a customer market will be
positioned for enormous growth.

Many utility companies are moving from a single company model (e.g.,
an electric utility generates and sells electricity) to a two-company
model (e.g., an entity operates as a generating company and the other
as a sales company). The sales companies compete for customers not only
on the price of the electricity they transmit, but on the other value-added
services they provide (i.e., selling natural gas, connecting customers
to electric (or gas) appliance manufacturers and installers, or aggregating
utility bills into single monthly statements).

Categories of E-Business

There are three core categories of e-business, and each category has
its own set of unique strategic, performance, and technology considerations
that it must consider.

B2B

Analysts predict that 90 percent of e-business will be in this area.
B2B transactions cut capital and process costs, and decrease fulfillment
time. Companies are increasingly examining their core competencies and
are reshaping their own value chains and often the value chain of an entire
industry. Old intermediaries (e.g., wholesalers) disappear and next generations
of intermediaries emerge (e.g., exchanges, auctions, and e-catalogs).

B2C

Many companies have moved beyond the e-tailer phase into the market of
aggregation (e.g., Yahoo!) or Infomediary – the strategic use of customer
information.

B2E

Companies can obtain significant benefits by using intranets for transactions
in functions such as HR and finance. Paperwork decreases, communication
increases, and information can be delivered real time globally.

Figure 3
The B2B vertical marketplace

Emerging Dominance of B2B as Industry Transformer

The appeal of bringing together huge numbers of buyers, sellers, and
customers and reducing transaction costs for all parties will likely generate
the most activity and transformation in the B2Be-commerce space. This
evolving market is rewarding management teams that understand the new
market dynamics and are designing and building new business approaches
and models.

The B2B transformation is forcing major institutions to move quickly
to:

• Identify non-core processes, both supply/demand chain and back
  office that can be outsourced, so the company can focus on “core” financial,
  brand, and human capital.

• Develop very dynamic outsourcing markets, beginning with parts
  and other supply purchasing. The goal is to tap into the connectivity
  of the Internet to conduct efficient auctions and transactions and dramatically
  improve the performance of supply chain and back office processes.

• Create entirely new businesses to manage these new networks
  and disintermediate traditional businesses so that customers have increased
  access to the supply chain and can gain even more rapid response to
  their demands.

What Should Power Companies Be Doing Now?

The successful energy companies will be open to and encourage new business
models and ideas. They will aggressively seek to understand the e-business
drivers within the industry and adopt rapid, decisive strategies to dominate
the industry for the next few years. They will fundamentally change the
culture of their company – from an asset focus to an information focus.

This market demands an entirely new business culture and set of processes.
Companies need to be able to create as many options as possible to attack
the market, to change products, to improve processes, and to restructure
their organizations. At the same time, they need internal business management
approaches that identify the best of these options and rapidly adopt them
to create value.

Figure 4
Issues arise from e-business and competition

In this journey, leading energy companies are developing enterprise-wide
e-business strategies or aggressively pursuing e-business solutions. Some
of the most common value propositions include:

• Cost Competitiveness: E-business enables aggressive outsourcing
  of internal and customer service-related processes and significantly
  reduces supply chain transaction and material costs. E-procurement expertise
  and technologies will result in reducing the utility’s spend by more
  than 10 percent, reducing transaction costs more than 75 percent, and
  greatly enhancing internal productivity.

• New Competition: Web upstarts and industry convergences pose
  a significant threat given traditional utility industry characteristics
  (highly regulated, fragmented market, low brand value). The traditional
  utility must focus on a winning strategy comprehensive of branding,
  personalized websites, integration with front-end (CRM) and back-office
  (ERP) operations, etc.

• Retain and Reach Customers: In the competitive world, the Internet
  will become the main method of interaction with customers requiring
  personalization and effective Customer Relationship Management. This
  is especially critical for those utilities focused on serving large
  Industrial & Commercial customers on a national basis.

• New Business Ventures: Vertical industry portals and other
  equity ventures are becoming the norm in the market-place, and thereby
  providing utility companies with opportunities to realisze profit from
  new sources.

Recognizing and capitalizing on these value propositions is the first
step in developing a credible and sustainable e-business strategy. The
winning companies are those that create the best set of options and rapidly
adopt them. Winners will also recognize that not every e-business option
will engender immediate financial payback.

Conclusion

E-business represents one of the most significant paradigm shifts in
the energy industry. As the new economy shifts companies from an asset
focus to an information focus, executives need to be focused on several
key messages:

• E-business changes the way to look at business and is not only about
  technology and a website.

• E-business needs to be integrated into a company’s overall strategic
  vision.

• E-business will cause a major shift in a company’s overall infrastructure.

• Successful e-business transformations need to be done from the top
  of the organization.

Footnote

1 The model described is a PricewaterhouseCoopers’ adaptation of the
well-known Porters Five Forces Model to an E-Business Economy.