European Energy Utilities: In Search of New Strategic Options and Competencies

As a result of liberalization in the European electricity and gas markets, many utilities have attempted to exploit new business opportunities in other industries and/or foreign countries in order to contrast the likely decline of profit margins due to increasing competition. Far from being only a threat, deregulation is perceived also an opportunity by energy companies. International expansion allows incumbents to escape constraints to growth in domestic markets by entering foreign countries where they can play as newcomers. Hence, internationalization is the only strategic option for incumbents that seek to grow in the core business in spite of the loss of market shares due to the opening of their protected monopoly markets to competition. The European energy industry is also characterized by: - Convergence between electricity and gas markets; - Increasing number of multiutility players (which operate in two or more industries like energy, telecommunication, water, waste management and other related services). Particularly, the multiutility strategy is one of the most commonly pursued patterns of growth. By operating as a “one stop shop” for a bundle of services, companies expect to improve their performance for two basic reasons: a) synergies due to the existence of shared inputs and services across businesses should produce gains in terms of efficiency; b) the offering of packages of services can help a company develop a closer relationship with its customers and, therefore, make it more difficult for them to switch supplier. In a broad sense, the strategic and organizational changes that energy companies are experiencing can be summarized in the shift from a “product-oriented” provider of a commodity to a “market-oriented” supplier of value-adding services. Deregulation arises important “competence gaps” that modern utilities need to fill in order to effectively compete in a competitive environment. Especially competencies and skills in the areas of marketing and customer relationship management are emerging as important sources of competitive advantage. An exhaustive analysis of the effects utilities’ strategies on performance will be possible only in the medium-long run because: a) market opening to competition is still far from completion; b) internationalization and diversification are relatively new strategies, the payoffs of which will emerge in a longer period of time.