Strategic model for the assessment of business opportunities430078/FULLTEXT01.pdf · Strategic model for the assessment of business opportunities: ... The scope of the thesis is on

Strategic model for the assessment of business opportunities: A case study in an electrical equipment manufacturer

Alejandro Viramontes Rodriguez

Master of Science Thesis Stockholm, Sweden 2011



Master of Science Thesis INDEK 2010:x KTH Industrial Engineering and Management

Industrial Management SE-100 44 STOCKHOLM

2

Master of Science Thesis INDEK 2011: 80



Approved July 02, 2011

Examiner Prof. Miguel Palacios

Supervisor

Prof. Miguel Palacios Commissioner

Mikel Zaldunbide

Abstract This study suggests a model for the assessment and development of new business

ideas. The scope of the thesis is on the early stages of the model, specifically on the first

two steps which refer to screening and identification of global trends in the electricity

market and the assessment and selection of business opportunities. The framework is

an adaptation of portfolio management methodologies and multi-criteria group decision

models. The study was developed and applied through a case study in Ormazabal, an

electrical equipment manufacturer and supplier of power network solutions.

There are three main theoretical contributions in this work. First, it outlines a five-step

model for the development of business opportunities. Second, it suggests a guide for

screening the macro-environment and for the identification of global trends in the

electricity market and finally, it provides a new approach to the directional policy matrix

for the assessment and selection of business ideas. The proposed model has been

tested in a real case and the results reveal a practical approach to strategic decisions

based on team collaboration and group discussion.

STRATEGIC MODEL FOR THE ASSESSMENT OF BUSINESS OPPORTUNITIES: A case study in an electrical equipment manufacturer International Master of Industrial Management [Master of Science Thesis] ALEJANDRO VIRAMONTES RODRIGUEZ June 2011.

“If we could first know where we are, and whither we are tending, we could better

judge what to do, and how to do it.“

Abraham Lincoln, 16 June 1858.

ACKNOWLEDGEMENTS

I would like to thank all the people that assisted the development of this work, to Prof.

Miguel Palacios for his support and advice during the last six months. I would also like to

express my sincere gratitude to all involved parties at Ormazabal, especially Mikel

Zaldunbide for his assistance during my stay at the company and for introducing me into

the fascinating electricity industry, and to Santiago Bañales for bringing the opportunity

to join the project.

Finally, to my life partner and all colleagues and friends I have met in the last two years,

with whom I have lived great moments and experiences that shaped my life.

KEYWORDS: strategy, strategy development, strategic management, directional policy

matrix, assessment of business opportunities, long-term planning, electricity outlook.

TABLE OF CONTENTS

INTRODUCTION ................................................................................................................ 1

1. MASTER THESIS CONTEXT ........................................................................................ 3

1.1. Context of the research ........................................................................................... 3

1.2. Company presentation ............................................................................................ 4

1.3. Thesis supervision ................................................................................................... 5

1.4. Case study presentation .......................................................................................... 5

1.4.1. Opportunity statement ...................................................................................... 5

1.4.2. Goals and scope of the project ......................................................................... 6

1.5. Master thesis objective ............................................................................................ 7

2. LITERATURE REVIEW .................................................................................................. 8

2.1. Strategic management overview ............................................................................. 8

2.2. Strategy in the electricity industry .......................................................................... 13

2.3. Strategic planning and multi-criteria group decision models ................................ 15

3. RESEARCH QUESTIONS ........................................................................................... 19

4. METHODOLOGY.......................................................................................................... 20

4.1. Justification of the research paradigm .................................................................. 20

4.2. Justification of the methodology ............................................................................ 20

4.3. Research procedure .............................................................................................. 21

4.4. Data collection ....................................................................................................... 22

5. THE FIVE-STEP MODEL ............................................................................................. 24

5.1. Theoretical Framework .......................................................................................... 24

5.2. Scenarios, trends and implications ........................................................................ 26

5.3. Business road-map ................................................................................................ 27

5.4. Business value chain ............................................................................................. 28

5.5. Business case ........................................................................................................ 28

5.6. Action plans ........................................................................................................... 29

6. ANALYSIS..................................................................................................................... 31

6.1. Analysis of scenarios, trends and implications ..................................................... 31

6.2. Analysis of the electrical equipment market .......................................................... 35

6.2.1. Electricity industry value chain ....................................................................... 35

6.2.2. Market overview .............................................................................................. 36

6.2.3. Five Forces Analysis .............................................................................................. 38

6.3. Strategic evaluation of business opportunities ...................................................... 41

6.3.1. Outline of the technique .................................................................................. 41

6.3.2. Development of the list of business opportunities for analysis ...................... 42

6.3.3. Assessment of the strategic direction of proposals ....................................... 42

6.3.4. Directional Policy Matrix design ..................................................................... 44

6.3.6. Rating and weighting system design .............................................................. 49

6.3.7. Evaluation of business proposals and results ................................................ 50

7. CONCLUSIONS ............................................................................................................ 53

7.1. Recommendations ................................................................................................. 53

7.2. Limitations and further research ............................................................................ 54

ANNEXES ......................................................................................................................... 56

1. REVIEW OF ELECTRICITY SCENARIOS .................................................................. 57

1.1. World Electricity Scenarios .................................................................................... 57

1.2. Scenarios for the European electricity market ...................................................... 58

2. ANALYSIS OF SCENARIOS ........................................................................................ 61

3. ELECTRICITY OUTLOOK ............................................................................................ 64

3.1. World energy and electricity demand .................................................................... 64

3.1.1. Energy demand .............................................................................................. 64

3.1.2. Electricity demand .......................................................................................... 65

3.2. World trends in electricity generation .................................................................... 68

3.3. Regional comparison of electricity projections ...................................................... 71

3.3.1 Electricity generation ....................................................................................... 71

3.3.2 Electrical capacity ............................................................................................ 73

3.3.3. Non-hydro renewable energy sources ........................................................... 75

3.3.4. European energy targets ................................................................................ 77

3.3.5. Final Consumption of Electricity ..................................................................... 78

REFERENCES ................................................................................................................. 80

ACRONYMS ..................................................................................................................... 84

FIGURES AND TABLES

Figure 1 - Ormazabal organization Chart ........................................................................... 3

Figure 2 - Grupo Ormazabal business structure ................................................................ 4

Figure 3 - Porter’s five competitive forces .......................................................................... 9

Figure 4 - Resource-Based framework to strategy analysis ............................................ 10

Figure 5 - Options for strategic positioning in The Delta Model ....................................... 10

Figure 6 - Directional Policy Matrix for portfolio analysis ................................................. 12

Figure 7 - Strategic planning process for RES ................................................................. 17

Figure 8 - Multi-criteria group decision-making framework .............................................. 18

Figure 9 - Flow diagram of the methodology for a case study research ......................... 21

Figure 10 - Five-step framework for the analysis of business opportunities ................... 24

Figure 11 - Core areas of corporate strategy ................................................................... 25

Figure 13 - Market and technology analysis and business implications .......................... 32

Figure 14 - Electricity distribution network ....................................................................... 36

Figure 15 - Electrical equipment market segmentation ................................................... 37

Figure 16 - Revenues of the electrical equipment market, 2005-2014. ........................... 37

Figure 17 - Five forces analysis in the global electrical equipment market ..................... 39

Figure 19 - Ansoff's product/market growth matrix .......................................................... 43

Figure 20 - Directional Policy Matrix approach for the assessment of business ideas ... 45

Figure 21 - Business opportunities plotted on the DPM .................................................. 51

Figure 22 - Classification of business opportunities on the DPM .................................... 52

Figure 23 - SOER 2010 umbrella ..................................................................................... 59

Figure 24 - World generation of electricity by scenario, 1990-2035 (TWh) ..................... 61

Figure 25 - World electricity generation mix by source and scenario, 2020-2030 .......... 62

Figure 26 - Scenario comparison map: iea (CP, NP, 450) and EIA (Ref. Case) ............. 63

Figure 27 - Change in energy demand share by sector, 2008-2030 ............................... 66

Figure 28 - TFC of oil by region, 1990-2030 (Mtoe) ......................................................... 67

Figure 29 - World electricity generation mix, 1990-2030 (TWh) ...................................... 68

Figure 30 - World renewables electricity generation mix, 2008-2030 (TWh) .................. 70

Figure 31 - Electricity Generation mix by source and region, 2008-2015-2030 (TWh) ... 72

Figure 32 - European Union share of electricity by source (percentage) ........................ 73

Figure 33 - Electrical Capacity by source and region, 2008-2015-2030 (GW) ................ 74

Figure 34 - Other RES for electricity generation by technology and region .................... 75

Figure 35 - Total final consumption of electricity by sector and region ........................... 79

Table 1- Characteristics of the strategic positioning options in the Delta Model ............. 11

Table 2 - Uncertainty in deregulated markets ................................................................. 14

Table 3 - Strategy formulation methods for utilities .......................................................... 15

Table 4 - Main stages of environmental analysis ............................................................. 32

Table 5 - Market and technology drivers .......................................................................... 34

Table 6 - DPM axes and criteria in different literature sources ........................................ 47

Table 7 - World energy and electricity consumption, 1990-2030 .................................... 65

Table 8 - Share of electricity generated from renewable sources ................................... 74

1

INTRODUCTION The increasing concern about climate change and the challenge of securing energy

supply are some of the drivers boosting the modernization of the electric power industry.

World electricity demand continues to grow stronger than any other energy sources and

there is an urgent need in world governments to undertake the shift toward a more

sustainable energy supply.

Electricity sector is in an age of transformation where the trend shifts to low-carbon

technologies for power generation. Thereby, renewable energy sources will play a main

role in the path towards a more efficient and sustainable energy supply. Under this

scenario of uncertainty, there is the need to analyze the roadmap to drive forward the

change and build the strategy over a solid foundation. World energy agencies and

associations have already started the planning process to roadmap these challenges

facing the electricity sector. Together, these bring the possibility for companies to

restructure their strategy and think about new business opportunities.

Accordingly, the main objective of this thesis is to outline a framework to support the

strategic management process for the analysis of the market and the evaluation and a

preliminary selection of business opportunities. This is accomplished by a case study

conducted during a six-month research in a manufacturer of medium voltage equipment

for power distribution. The model is supported by common methodologies and provides

a different approach to portfolio analysis tools, specifically on the Directional Policy

Matrix (DPM), which is tested for the assessment and selection of new business

proposals.

This study is organized in seven chapters. Chapter 1 provides a contextual

understanding of the thesis and the case study is presented. Chapter 2 is the literature

review that introduces on relevant strategic management models and the strategic

planning tools used in the electricity industry. In chapter 3 the research questions are

listed, followed by chapter 4 where the methodology for the case study research is

explained as well as the data collection process. Chapter 5 can be seen as the

backbone of what is going to be analyzed and discussed in the following sections; it

provides a brief description of the overall framework suggested in this study. The

2

proposed model of the strategic analysis of the power sector is presented in chapter 6,

followed by the suggested methodology for the assessment and selection of business

alternatives. Chapter 7 provides the contributions of the thesis and concludes by

analyzing the limitations of the study and providing suggestions for further studies. The

writing structure remains constant along the whole document. At the beginning of each

chapter there is a brief introduction that provides an overview about the topic and then it

is developed and broken down into different sections.

At the end of the report is the annex section which provides information to support the

analysis. While the analysis chapters are more focused on the methodological aspects,

the annexes are more about the facts and include the analysis of scenarios and global

trends in the electricity sector, providing a regional comparison regarding electricity

supply and demand projections.

The academic contribution of this thesis is based on the fact that the suggested

framework, which has been proven on a case study with positive results, can be used as

guideline for further studies about strategic management and by any company facing a

similar strategic challenge.

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1. MASTER THESIS CONTEXT

This chapter describes the background and context for the study and provides an

introduction of the company on which this master thesis was conducted. This section

also provides the presentation of the case study and the objective of this master thesis is

presented by the end of this chapter.

1.1. Context of the research This master thesis is part of the International Master of Industrial Management

(IMIM), a two-year Master of Science programme offered by a consortium of universities:

Universidad Politecnica de Madrid (UPM) in Spain, Politecnico di Milano (POLIMI) in

Italy and Kungliga Tekniska Högskolan (KTH) in Sweden.

The study was conducted during a six-month research period, from January to June

2011, in collaboration with the company Grupo Ormazabal located in the Basque

Country, Spain. This research is based on a practical context to support a real need of

the company. During the time this study was conducted, my collaboration in Ormazabal

was for the department of Strategy Development and Technology (see organizational

chart in Figure 1). In this department I served as strategy analyst, working as an integral

part of a team working for the development of company project on which this thesis was

conducted.

Figure 1 - Ormazabal organization Chart

Human Resources Finance

Business Process Improvements

Marketing Supply Chain Operations Strategy, Development& Technology

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1.2. Company presentation Founded in 1967, Grupo Ormazabal is a worldwide manufacturer of medium voltage

equipment that provides solutions for power distribution networks. Ormazabal

headquarters are located in Zamudio, Spain. The group has manufacturing facilities in

Spain, France, Germany and China. Ormazabal’s distribution network consist of 33

subsidiaries that support its presence over 50 countries. Ormazabal offers a complete

range of products for electrical distribution. Its product portfolio includes:

• Electrical switchgear for primary and secondary distribution

• Protection, telemanagement and communication of electrical power networks

• Distribution transformers

• Low-voltage boards

• Transformer substations

• Medium voltage applications for renewable energy (Ormazabal, 2011)

In recent years, the company has been moving to a more diversified product portfolio,

covering different industries such as telecommunications, security and aeronautics.

Nonetheless, the electrical equipment business remains as its strongest and most

important operation (Figure 2).

Figure 2 - Grupo Ormazabal business structure

Source: Grupo Ormazabal website, 2011.

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1.3. Thesis supervision This thesis was supervised by professor Miguel Palacios at the Universidad Politecnica

de Madrid (UPM) in Spain. Monthly meetings were carried out to track the progress of

the study and to provide direction about the future progress of the thesis. Telephone

conferences were also carried out to discuss relevant issues of the thesis.

In Ormazabal, Mikel Zaldunbide was the person in charge of the project. As the project

leader, Mikel supervised the contributions to the project and also provided support and

guidance for the development of this study. During the six-month research period,

regular meetings were scheduled to discuss the project and to provide feedback in order

to improve the progress of project and thesis.

1.4. Case study presentation Building strategy over sound foundations is a must in present changing situation in

electricity industry. Electrical equipment manufacturers need to be able to adapt rapidly

to the market conditions and to identify and seize profitable business opportunities. For

previous purposes, there exists the need to develop a strategic framework that can be

used as a guideline for identifying, evaluating and selecting new business opportunities

in order to define a long-term positioning of the company’s electrical business operating

unit, following a business case analysis procedure.

1.4.1. Opportunity statement Electricity sector is evolving in terms of legislation, market structure and technology. This

is bringing new opportunities for companies to adjust its business portfolio. New market

and technology trends, such as smartgrids or renewable energy sources, are changing

the state of the industry and electrical equipment manufacturers are currently assessing

the implications of these changes on their current operations. Nevertheless, this

changing environment not only brings uncertainty or threats for companies, but also a

good chance to think about possible business opportunities to take on.

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1.4.2. Goals and scope of the project Te purpose of this strategic project was to identify the most relevant trends in the

electricity industry within two time horizons, 2015 and 2030, and to translate those

trends into business implications. Company’s vision and mission is presented below.

VISION

• Gaining international leadership as supplier of solutions to the medium-voltage

distribution system.

• Diversifying into trades that capitalize on our competencies.

• Maintaining a solid industrial base, high technological qualification and permanent innovating spirit.

MISSION

• To generate a growing, solid value base through our capability to interpret the

needs of those markets in which we operate.

• To reach and sustain such an excellent level of response as will contribute to our

customers' competitive edge.

Taking into consideration the framework of the vision and mission and the opportunity

statement, the scope of this project ranges from the identification of trends in the

electricity industry and the evaluation of potential business opportunities to the

preparation of business plans for the selected businesses. Based on this, the next goals

were established:

• Identify the most relevant trends in the electricity industry within two time

horizons: 2015 and 2030.

• Translate these trends and scenarios into business implications.

• Define the current business portfolio, and complete it with suggestions about

additional businesses under Ormazabal vision.

• Identify business gaps and decide those to be taken up.

• Identify value and profitability drivers.

• Draw the value chain of selected businesses.

• Develop the corresponding business plan of selected opportunities.

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1.5. Master thesis objective The objective of this thesis is to outline a framework that supports the strategic

management process for the assessment of business opportunities. The practical

approach of this study is to satisfy a company need while its sound theoretical

foundation enables this thesis to provide a scientific contribution. Beyond context on

which the thesis is based, this study aims to suggest a framework that can be used as a

reference for further studies in strategic management and serve as a guideline for any

company facing a similar strategic challenge.

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2. LITERATURE REVIEW This chapter will introduce and elaborate on concepts regarding strategic management

by presenting a review about how different authors have proposed models and

frameworks for strategy development. The research is presented into three sections; the

first part provides an overview about strategic management and frameworks for strategic

analysis. The following sections elaborate on strategic planning models applied on the

electricity market. To support this chapter, Annex 1 ‘Review of electricity scenarios’

provides the brief explanation of the most recent energy scenarios published by

international agencies and organizations.

2.1. Strategic management overview In business economics there are many definitions and opinions about strategy. The

historical context of strategy has evolved from different perspectives along history.

During the 1980’s, theories were characterized by addressing competitive aspects of the

market (Porter, 1980) and focusing on human resources. In 1990’s, strategies put more

emphasis on analyzing resources and capabilities (Grant, 1991) and the last decade

was characterized by strategies with a new emphasis on innovation, social responsibility

and industrial networks (Hax & Wilde, 1999).

Porter (1996) defines strategy from a more competitive point of view, while Henry

Mintzberg (1987) proposes a more dynamic approach in which strategy is constantly

emerging. As defined by Michael Porter (1996), “strategy is the creation of a unique and

valuable position, involving a different set of activities”. Other authors define strategy in

terms of taking decisions to support the company’s strength or driving force (Michel

Robert, 1993), or regarding the usage of resources to improve firm’s performance in

their environment (Nag, Hambrick & Chen, 2006). Nevertheless, most of the authors

agree that strategy is a plan to achieve objectives, a set of actions and decision that

have to be taken to move from the current-state to a desired position.

Porter’s approach to the strategy development process begins by looking at the industry

and then evaluating the strategy that supports the firm to excel among competitors

(Porter, 1980). There exist five competitive forces that shape firm’s strategy within an

9

industry: bargaining power of suppliers, bargaining power of buyers, threat of new

entrants, threat of substitutes and rivalry among existing competitors (Porter, 2008).

Those five forces characterize the competitive structure of the industry by considering

the most important factors affecting the competitiveness in the market (Figure 3). Porter

(1985) suggests three generic strategies to achieve and maintain a competitive

position in the market: low cost, differentiation or focus.

Figure 3 - Porter’s five competitive forces

Source: Porter, 2008.

The resource-based view approach to strategy formulation is a more intrinsic process

which starts by appraising company’s internal resources and capabilities and then

focusing on those core competences that can create and maintain company’s

competitive advantage in the industry (Grant, 1991). The resource-based framework for

the strategic analysis is shown in Figure 4.

Based on Porter and Grant ideas, Hax & Wilde (1999) provide a new framework in

strategy. The Delta Model expands the spectrum of strategic positions that were

previously suggested by Porter. According to Hax & Wilde (2003), cost and

differentiation are not only two ways to compete in the market. Their model takes into

consideration the economics of the industry from a network perspective, which best

describes today’s business situation, as well as customer and product economics. The

10

model defines three main strategic positions that reflect new sources of profitability

(Figure 5). Table 1 shows the comparison of the strategic positioning options suggested

in the model.

Figure 4 - Resource-Based framework to strategy analysis

Source: Grant, 1991.

Figure 5 - Options for strategic positioning in The Delta Model

System Lock-In

• System Economics• Market Dominance• Achieving Complementor Share

Customer Solutions Best Product

• Product Economics• Rivalry• Achieving Product Share

• Customer Economics• Cooperation• Achieving Customer Share

Enabled ThroughEffective Use of

Technology

Source: Hax & Wilde, 1999.

11

• System lock-in. Competitive advantage is achieved by controlling the

economics of the system as a whole and attracting “complementors” to enhance

the firm’s offering (Hax & Wilde, 1999).

• Customer solutions. This position focus on satisfying customer needs by

offering a complete set of solutions

• Best product. Based on a product economics perspective, competitiveness is

achieved by a low cost or differentiation strategy (ibid).

Table 1- Characteristics of the strategic positioning options in the Delta Model

Source: Hax & Wilde, 1999.

There are three core areas of corporate strategy: analysis, development and

implementation (Lynch, 2009). Strategic analysis refers to the mission and vision;

strategy development encompasses the development and selection of different

alternatives which are going to be executed during the strategy implementation phase

(ibid). These areas somehow provide a brief guideline of structure about strategic

development; however different methods and approaches can be implemented to

support each of the core areas.

Literature distinguishes three main levels of strategy formulation: corporate, business

and operational strategy (ibid). Most of the research focuses on the implementation at

business unit level, while corporate strategy implementation is still an under-research

area (Li, Guohui, Eppler & Martin, 2008). Literature can be classified in two general

categories of studies: those considering individual tools for strategy implementation and

those that address how different tools and factors are interrelated in a single

12

methodology or framework (ibid). This study fits into the second classification and is also

considering an emergent approach to strategy.

Literature provides evidence about the implementation of a variety of portfolio management techniques. It is not surprising that recent techniques for the analysis of

different business sectors, company’s position or investment decisions are the result of

progressive improvements and modifications of pioneering theory. Hedley (1977)

proposes model for the analysis of a business portfolio and the implications in the

strategy development. The business portfolio or growth-share matrix, commonly known

as the Boston Consulting Group (BCC) matrix, is a straightforward technique that

suggests that firm’s competitive position and business growth are the two fundamental

criteria for developing a portfolio strategy (ibid). In the same direction, Shell Chemicals

developed the Directional Policy Matrix (Shell, 1975), see Figure 6. The DPM is a nine-

box matrix for the analysis of the competitive strengths of the businesses in specific

markets and defines a set of strategies for each zone of the matrix (Robinson, Hichens &

Wadet 1978).

Figure 6 - Directional Policy Matrix for portfolio analysis

Source: Hussey, 1978.

13

Portfolio management techniques for strategic planning have been widely used among

different industry sectors. Hussey (1978) highlighted some of the problems relate to the

matrix developed by Shell Chemicals and provided a comparison of the different

experiences and approaches taken by Guinness and Rolls Royce Motors when

implementing the technique. Hussey argues that risk analysis may be considered as an

additional dimension of the DPM. This is accomplished by a secondary matrix, the Risk

Matrix (RM), in which prospects of market sector profitability and environmental risk are

considered (Hussey, 1978).

In the other hand, Robinson, Hichens & Wadet (1978) propose a different approach of

the DPM and suggest a second order matrix to prioritize the strategic options. The same

authors suggest that the DPM matrix can be applied not only for the assessment of

market and financial conditions of competing business units but to perform a strategic

analysis of competitors (ibid).

A combination of different matrix arrays considering the industry life cycle and market

positioning theory has been suggested in literature (McNamee & Polytechnic, 1984).

John Nicholls (1995) introduces a new matrix for analyzing investment options by linking

company’s mission and core competences - the mission and core competences decision

(MCC) matrix. In this model, the author argues that MCC or DPM, unlike BCC growth-

share matrix, can provide guidance for any claim of resources or future investments

(ibid).

It can be inferred that the logic behind all these techniques, regardless of the context in

which they are used, is to support the development of strategies and the decision-

making process.

2.2. Strategy in the electricity industry Liberalization and deregulation process in utilities are affecting all the different players

along the value chain of the electricity industry. Electricity industry is becoming more

competitive and companies are being acquired by the big players. In a turbulent

environment like this, there is the need to develop more sophisticated strategic plans to

cope with the increasing risk and uncertainty of the market in order to remain

competitive.

14

Dyner & Larsen (2000) analyze the implications of the deregulation process in utilities

and concludes that a more sophisticated strategic approach is needed to cope with

uncertainty. In the same publication, the authors suggest a list of tools for strategy

formulation in a deregulated market that includes modeling methods such as scenario

analysis and business dynamics. Table 2 shows how uncertainty is changing as utilities

companies are deregulated.

Table 2 - Uncertainty in deregulated markets

Source: Dyner & Larsen, 2000.

As mentioned before, companies in the electricity industry are changing their traditional

planning approach to a more complex process for strategy development, which is

supported by soft modeling tools. Scenarios and multi-criteria analysis can be very

useful methods for the evaluation of different strategies, even though the preference for

certain strategies does not only depend on the scenarios but in the several decisions

along the strategic development process (Lootsma, Boonekamp, Cooke, Van Oostvoorn,

1990; Beccali, Cellura & Mistretta, 2003). Table 3 presents a list of tools for strategy

formulation in electricity utilities with respect three different levels of planning decisions:

strategic, tactical and operational.

15

Table 3 - Strategy formulation methods for utilities

Source: Dyner & Larsen, 2000.

In the field of management control, strategies for electricity utilities are changing from a

vertical integrated structure to a more horizontal structure in which companies are

consolidating through merges and acquisitions (Dyner & Larsen, 2000). Nowadays, at

least in the European electricity market, there are few companies but focused in each

step across the value chain. This is new model implies a more competence-based

approach, changing the business dynamics and therefore companies need to leverage

its few core competencies in different markets and regions in order to remain competitive

(Hosein, 1999).

2.3. Strategic planning and multi-criteria group decision models It is a fact that renewable technologies are increasing importance in today’s society.

There are a lot of publications regarding these technologies and in order to focus this

review, it have been selected the most relevant journals related to strategy applied in

this arena as well as relevant models used to assess the competitiveness of different

power generation technologies.

16

Competitiveness of renewable energy sources is often evaluated in relation to the total

generation cost of electricity which is compared to the generation cost of conventional

energy sources and sometimes including the environmental factors such as potential

savings on carbon emissions (Kobos, Erickson & Drennen, 2005). There are many

quantitative approaches to appraise the economics of renewables. Two main

approaches remain recurrent in literature: learning curve analysis and levelized cost of

electricity (LCOE).

Learning curve analysis is a bottom-up approach based on the relationship between

performance of a technology gained by the experience against the money or effort

invested (Söderholm & Sundqvist, 2007). In other words, as the technology improves by

the time, power generation cost decreases. Although the analysis is mainly based on

assumptions that lead to inaccurate cost estimations (ibid), technology S-curves provide

an insight about the payoff of the investment in renewable technologies in relation to

other technologies, while providing some perspective about the market penetration of

renewable energy sources (Söderholm & Sundqvist, 2007; Schilling & Esmundo, 2009).

From a financial point of view, literature suggests that new entrants may benefit by

investing on renewable technologies, in terms of a direct participation in the

development of generation technologies or by the development of the support equipment

needed to enable its integration (Schilling & Esmundo, 2009). Thereby firms may start as

soon as possible to think about possible strategies in order to benefit from the transition

to renewables.

Complexity in the environment for renewable technologies suggests that a combination

of different methodologies and frameworks can provide a better understanding of market

conditions and the assessment of opportunities. Planning and decision-making

techniques had been successfully tested for the assessment of energy projects.

Terrados, Almonacid & Perez (2009) argue that the combination of SWOT, Delphi and

MCDA (Multi Criteria Decision Analysis) methods improves the effectiveness in the

decision making process and provides significant contributions for the development of

strategies for sustainability and energy assessment. They propose a seven-phase

framework to assist the decision-making for the establishment of long-term strategies.

Their contribution is presented below in Figure 7.

17

Figure 7 - Strategic planning process for RES

Source: Terrados, Almonacid & Perez, 2009.

In the same vain, other decision-making frameworks have been tested for the selection

of investment projects involving numerous players in the decision process.

Haralambopoulos & Polatidis (2003), among other authors, described a framework

assisted with multi-criteria analysis techniques, considering outranking methods such as

ELECTRE and PROMETHEE to evaluate several business alternatives across different

scenarios. Their framework (Figure 8) was tested to assist group consensus on a case

study in renewable energy projects with positive results.

18

Figure 8 - Multi-criteria group decision-making framework

Source: Haralambopoulos & Polatidis, 2003.

As a conclusion, there is a lot of information about strategic models and methodologies

as well as research about renewable energy sources. Nevertheless, the link between

both literature backgrounds, strategic management models and research on strategy

applied on the electricity sector, will be a solid foundation on which this thesis is based.

19

3. RESEARCH QUESTIONS

After reviewing the state of the art in the literature and considering the need to outline a

framework for the assessment and selection of business opportunities in the electrical

equipment market, the following research questions arose.

• Which models and tools can be used for the development of a business strategy

in the electrical equipment market?

• How would be a strategic management model for the assessment of business

opportunities?

Both of these questions are related to the strategic analysis for the identification,

assessment and selection of business opportunities. The first question aims to identify

the strategic tools and methodologies that are suitable to evaluate market opportunities,

which has been partially answered in the literature review and will lead to describe the

outlook of the electricity industry.

As shown in the literature review, most of the strategic models are used separately;

there is not a clear structure of using different models along the strategic management

process. Therefore, the last question aims to propose an organized framework for the

assessment of business opportunities within the context of this study (chapter 1).

20

4. METHODOLOGY The research methodology is the guideline that supports the study towards the

achievement of its objectives and describes the methods and procedures to use. The

choice of the methodology depends on the nature or the research problem and thereby

this method will be the basis for answering the research questions. The following section

describes the research methodology, the theoretical approach and the scientific

paradigm that has been taken to accomplish this study.

4.1. Justification of the research paradigm There are two main theoretical approaches that can be used in the research

methodology: deductive and inductive (Perry, 1998). Perception about the object of

study is influenced depending on the selected approach. The inductive approach

attempts to infer general patterns based on particular sets of data. In contrast, deductive

approach attempts to test the theory in a particular situation. Literature suggests not

being obsessed in focusing only on a one of the approaches, a blend of induction and

deduction can be used. In reality, both approaches are inseparable and it is unlikely to

absolutely separate induction and deduction process from theory development (Parkhe,

1993).

This master thesis suggests a model which builds on existing theories that may result

more appropriate for the purposes of the case study. In other words, a mix of induction

and deduction is more suitable for this study. In epistemological terms, this thesis has an

interpretative foundation, where theory is build from a qualitative study. In order to avoid

as much as possible personal judgments, an objective approach towards social science

is considered when observing the phenomena. Finally, this analysis is conducted by a

case study methodology.

4.2. Justification of the methodology Case study is defined as an empirical study focused on a contemporary topic which is

analyzed within its real context (Yin, 1994). When using a case study methodology, the

number of cases depends on the context and the replication logic of the study, if the

case represent a critical test to existing theory then a single case study is suitable

21

(Perry, 1998). On the other hand, if the replication logic is able to support theory with

similar or contrary results then selecting multiple cases methodology is better (ibid). This

master thesis is a company-based study that aims to support a real problem while

providing a scientific contribution. Because of its context, this study is carried on a

single case but challenging and worthy of in-depth study.

4.3. Research procedure Eisenhardt (1989) suggest an eight-step model for building theory through the case

study research, which includes aspects from the selection of the research questions to

the closure of the study, using an incremental theory building approach. Inspired on this

model, Figure 9 shows the procedure implemented in this study.

Figure 9 - Flow diagram of the methodology for a case study research

COMPANY NEED

RESEARCH QUESTION

DATA ANALYSIS

DATA COLLECTION

FINDINGS

INTERNAL SOURCES

FRAMEWORK

LITERATURE REVIEW

The presented procedure has been the guideline for developing this thesis. Albeit the

flow seems to be linear, in reality it is an iterative process considering feedback between

the stages. The process starts from the analysis of the problem; in this case, the need to

carry on a strategic project emerged in the company and concludes with the findings,

where conclusions, recommendations and discussion take place.

22

4.4. Data collection Once the research questions have been defined, then the information was collected from

two main areas: external information from the literature review about the topic of interest

and internal information which refers to primary information coming from the company

(sources of information and the collection process are discussed in the following

section). Based on this, the theoretical framework was designed and tested to finally get

into a relevant conclusion.

The case study has been conducted based on primary and secondary data, considering

both internal and external sources of information.

Primary Data. The main source of primary information has been obtained through

groups meetings and complemented by face-to-face unstructured interviews.

Secondary Data. Information was collected by the literature research. Because of the

vast variety of information sources, the main challenge was to discern the most relevant

sources regarding each specific topic of analysis. The information was classified

according to its origin:

a. Journals

b. Scientific Publications

c. Thesis

d. Energy utilities

e. Firm’s competitors

f. Energy agencies and associations

g. Consultancy reports

h. Internal documents

i. Other sources (which includes a range of statistical databases about energy

topics)

Two teams were participating on this project: core and expert team. The core team was

the engine of the project and responsible of the organization and operational aspects.

This team defined the guidelines and was in charge of the project management. Weekly

23

communication boards were carried out in order to check any issue related to the project

and to discuss ideas about tools and methodologies that can be implemented.

In other hand, the expert team was made up with the representatives of different

departments in the company. The purpose of follow-up meetings was to collect

information via brainstorming among all the experts. Meetings were scheduled in

ordered to discuss the progress of the project and to receive feedback. Group meetings

were useful to track the progress and to validate the findings along the development of

the project. A set of objectives and deliverables was defined in each stage during the

process.

In order to improve the reliability of the information, notes were taken during the

meetings and personal interviews were conducted to support the information. Secondary

data was carefully selected using reliable reports published by well known sources. The

validity of this study is only in the context on which it was conducted – a company-based

master thesis. Nevertheless, literature explains that theories can be built using a single

case study approach (Eisenhardt, 1989). In other words, it is possible to reach external

validity until some extent.

24

5. THE FIVE-STEP MODEL This section describes the five-step methodology that supports the identification and

assessment of business opportunities in the electricity market (Figure 10). The first

section on this chapter is the theoretical framework that describes the analysis of the

theories and concepts on which this model is grounded. The main focus of this study is

on early stages of the methodology, specifically on the first two steps, which are going to

be described in detail in chapter 6. Nevertheless a complete description of the model is

presented below in order to provide a broad picture of each phase. As described in the

methodology (chapter 4), this framework is the result of the literature analysis, and

company’s monitoring boards while being applied in parallel to the company case study.

Figure 10 - Five-step framework for the analysis of business opportunities

SCENARIOS, TRENDS AND IMPLICATIONS

VISION AND MISSION

BUSINESSROADMAP

BUSINESSVALUE CHAIN

BUSINESSCASE

ACTION PLANS

LEARNING AND IMPROVEMENT

5.1. Theoretical Framework Regardless of the context, literature provides evidence on the sequential approach for

strategy development. As defined by Lynch (2009), strategy development is prescriptive

when the objective has been defined in advance and emergent when the final objective

is unclear and the elements of the strategy are evolving during the implementation

process. Either sequential or simultaneous is the approach, strategy development

process involves three core areas (Figure 11): strategic analysis, strategic development

or strategic choice and strategy implementation (ibid).

25

Strategy formulation is a process that supports the definition of the firm’s long-tem

direction (Hernandez et al, 2004) by matching firm’s structure, activities and resources to

its environment (McDonald, 1996). Kinnuen et al. (2011) proposed a framework for

business case analysis that defines a logical flow of task for the evaluation of potential

investments which involves market, technology, financial and strategic fit assessment.

As shown in the literature review, strategists agree that strategy formulation is a process

which encompasses different stages, from the conception of the ideas to the

implementation. Thereby, the selection of the strategy should be according to the choice

that best exploits the company’s resources and capabilities, enabling the firm to take on

the external opportunities (Grant, 1991).

Figure 11 - Core areas of corporate strategy

STRATEGIC ANALYSIS

STRATEGY IMPLEMENTATION

STRATEGIC DEVELOPMENT

CORPORATE STRATEGY

Strategic management theories define two levels of strategy, business unit strategy,

which refers to the competitive position in the industry, and corporate strategy,

concerned with the strategic direction of a diversified business (Porter, 1987; Lynch,

2009). Both levels are interrelated and dependant to each other. As the strategy

formulation process goes from the macro analysis to the implementation, strategies are

defined from corporate level and applied and complemented at business unit level. To

support this relation, the five-step model suggests a sequential process for strategy

development which aims to provide a clear direction by identifying core competences

and focus (Jett, 2009).

26

In a different perspective, considering development funnel theories, strategy

development can be seen as a process where the ideas are coming down the pipe until

those are finally launched to the market (Dunphy, S., Herbig, p. & Howes, M., 1996). The

innovation funnel is described as the process trough which many ideas flow into the firm,

then those ideas are tested across different stages and only emerge the projects with

strong potential for being launched to the market (Acklin, 2010). Literature provides

evidence of innovation funnel theory for the screening and selection of business

opportunities (Das, 2002).

The design and the numbers of stages across the funnel may vary in different context,

but the logic remains the same (Kinnunen et al., 2011). According to Dunphy et al.

(1996), the path through the funnel involves a series of sequential steps, starting by the

analysis of macro level factors and passing through different stages, where each stage

is a “go or kill” decision point in which deliverables are presented and the ideas are

evaluated to ensure the efficiency of the process. (Kinnuen et al., 2011).

Based on the strategic management models and the funnel approach for the

development of ideas, the suggested model covers five layers of analysis (Figure 12). As

described in the previous paragraphs, this model is built on grounded theories and its

main purpose is to provide direction along the strategy development process, supporting

strategic decisions for the assessment and selection of business ideas. This model was

analyzed and discussed by the team members at the company and it was considered as

the pathway for the strategy development for the firm’s project on which this theory was

tested.

5.2. Scenarios, trends and implications The analysis of the macro-environment and the identification of global trends is the first

part of the process. Companies are adapting their strategy development process to stay

abreast of the changes in the competitive environment (Kachaner & Deimler, 2008), so

the analysis of historical information and scenario projections with the assessment of

technology evolution contributes to a better understanding of the dynamics and transition

pathways in the electricity market (Foxon, Hammond & Pearson, 2010). Based on this,

the strategic analysis considers two main areas: market and technology assessment.

27

As defined by Lynch (2009), the strategic analysis refers to the definition of the vision,

mission and objectives. Based on the firm’s vision, the time frame for the analysis is

defined. Accordingly, scenarios must reflect market and technology prospects within the

time frame of the analysis. The drivers of analysis are those research variables that

support the evaluation of the attractiveness of the market as well as providing insight

about new business opportunities. These drivers are defined by the group in order to

gather information to support the understanding of market and technology trends. It is

important to focus the research; otherwise it will be easy to get lost while collecting

information. Thereby the selection of the variables of analysis should be discussed and

carefully defined among the decision-makers. Once that scenarios, trends and

implications are analyzed, the expected output of this phase is the brainstorming of

ideas about business opportunities.

5.3. Business road-map On the basis of the current business portfolio and the business implications that were

discussed during the previous phase, the purpose of the business road-map is to identify

business opportunities and then select the most attractive ideas. Those business ideas

on which the company can take advantage are suitable for analysis, e.g. new product

development, international expansion through new or/and existing products, product

improvements, etc. There are many group decision-making models; nevertheless most

of them show a general path which consist on the definition of the decision criteria, the

evaluation procedure and the final selection that is based on group consensus

(Haralambopoulos et al., 2003).

In contrast to the technology roadmaping models where the technological evolution of a

certain product is represented over time (Phaal, Farrukh, & Probert, 2003), this phase is

an strategic map for all the business ideas coming from the analysis of market and

technology trends and it serves as the first “filter” for the selection of business ideas.

Cooper & Edgett (2010) define the strategic map as the graphical representation of

potential arenas on two dimensions, arena attractiveness and business strength. Arena

attractiveness refers to the external factors and captures the analysis of market

characteristics, such as growth, size, rivalry intensity, margins and the assessment of

the potential for developing the new ideas. Business strengths are the internal factors

28

and involve the analysis of firm’s competences and asking whether the strengths can be

leveraged (ibid). Such firm’s resources and capabilities exist in different forms such as

knowledge, experience, culture, orientation and learning (Yaprak, Xu & Cavusgil, 2011).

As the first filter of ideas, this phase requires the involvement and commitment of the

firm’s stakeholders and decision makers. In order to support this task, a portfolio

analysis approach is suggested to be implemented for the analysis and selection of

business opportunities (Hedley, 1977; Robinson et al., 1978). A detailed explanation of

this phase is presented in the following chapter. The expected output of this process is

to have a short list worthy of in-depth development.

5.4. Business value chain Once business opportunities have been selected, the next step is to perform a deeper

analysis about the industry structure as well as the organization structure and the

activities needed for the development of each business opportunity. The development of

this phase is supported by the value chain analysis methodology as defined by Porter,

which consist on the description of the primary and support activities performed by the

organization that may contribute to create value from the design to the delivery of a

product or service to the final customer (Porter, 1985). This analysis provides direction

about which activities and business processes may be consider in order to achieve a

competitive position in the industry.

The expected outputs from this phase are the identification of quantitative and qualitative

value drivers, the identification of activities where the organization is able to create and

maintain a competitive advantage and the selection of business alternatives that are

going to be considered in the next phase - business case. Form a development funnel

perspective (Dunphy et al., 1996), business value chain phase is the second filter

business alternatives, so it may support the stakeholder’s decisions by providing a

broader perspective about the business proposals.

5.5. Business case Business case is a commonly used term for assessment of potential projects and

selection of best alternatives for investment (Kinnuen et al., 2011). This step will bring

29

together all the selected business ideas from the previous phase in order to carry out the

evaluation as a whole. The thorough description of the business proposals is required

during this phase in order to provide enough evidence to take the final approval before

they become “marketable projects”. This analysis is supported by a common business

plan methodology, covering issues related to the opportunity statement, market analysis,

competitor assessment, marketing plan, financial and operating plan. The expected

output is a final business case document that can be presented to company’s top

management. Although literature suggests a general structure on how to write a

business plan, the document must be customized to provide supporting evidence to take

a final decision (Mason & Stark, 2004). This document should draw the analysis of the

general steps that are necessary for bringing the business ideas to reality (Lamb, 2006).

Accordingly, the business case must be seen as a mean of communication so that all

firm’s stakeholders are in the same direction and it must be precise enough to be easily

understood (Kawasaki, 2004).

5.6. Action plans The process for developing an effective strategy starts by the definition of business

goals, followed by the strategic roadmap and ends with the resource allocation and the

guidelines to put the plan into action (Cooper & Edgett, 2010). This phase is the

implementation of the strategies for launching the selected product/service ideas to the

market. In this phase the business proposals are now defined as company’s long-term

projects. The action plans will set the guidelines for bringing the project into the market

within a certain time frame. Project management techniques will be used for planning

and managing the resources.

In order to keep up to date in relation to the assessment of market changes and

technology developments, it is suggested an annual revision of the entire process. This

will enable the organization to update the strategy and make corrections to the plan. This

feedback loop is displayed in the five-step model as “learning and improvement” (Figure

10). As a conclusion of this chapter, the methodology described above is mainly

sustained upon two theoretical pillars: the strategic management process (Lynch, 2011)

with a development funnel approach. Figure 12 shows the schematic illustration viewed

from this theoretical perspective.

30

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31

6. ANALYSIS This section explores the first two steps of the model that was introduced in chapter 5.

The analysis is divided in three main sections. The first part is about the methodology in

the strategic analysis for the identification of global trends and also describes the market

and technology drivers considered for the analysis. Then, the analysis of the electrical

equipment market is presented. The last section is about the strategic assessment of

business opportunities and describes the framework that is suggested for the selection

of business opportunities based on market and business strength criteria.

6.1. Analysis of scenarios, trends and implications The conventional planning process in the electricity industry starts by estimating the

increases in consumption for electricity over a specific time frame (Soontornrangson,

Evans, Fuller & Stewart, 2003). Literature suggests that scenario planning models have

often been used to identify trends in the market (Lootsma, Boonekamp, Cooke, Van

Oostvoorn, 1990) and to assess investment opportunities (Beccali, Cellura & Mistretta,

2003). There are several organizations dedicated to the research about energy and

electricity topics. Worldwide energy agencies and associations publish scenarios

regarding electricity supply and demand projections which also consider possible

changes in regulation and policies (see annex 1, Review of electricity scenarios). In

order to screen the macro environment of the electricity outlook, these sources of

information can be used as the baseline for the analysis. Annex 2 (Analysis of

scenarios) provides a comparison between four different world electricity scenarios. This

analysis considers projections in total electric power generation by technology source.

There are nine main stages in the environmental analysis (Lynch, 2009). These stages

are listed in Table 4 together with some of the techniques that could be used to support

each stage of the analysis. The approach taken in the case study was more

straightforward to the identification of global trends. Nonetheless, it is important to take

into account the complete process for further studies.

32

Table 4 - Main stages of environmental analysis

Stages Techniques1. Environment basics Market definition, size, growth & share

2. Degrees of turbulence General considerations

3. General environment PESTEL analysis & scenarios

4. Market growth Industry life cycle

5. Industry specific factors Key factors for success

6. Industry balance of power Five forces analysis

7. Industry cooperation Four links analysis

8. Immediate competitors Competitor analysis & product portfolio

9. Customer analysis Market & segmentation studies

Source: R. Lynch, 2009.

Figure 13 - Market and technology analysis and business implications

MARKET INFORMATION

MARKET ANALYSIS

TECHNOLOGYASSESSMENT

TECHNOLOGYINFORMATION

MARKET -TECHNOLOGYIMPLICATIONS

BUSINESS ROADMAP

Market and technology assessment are the two main areas of analysis. Figure 13

illustrates the suggested framework for the macro analysis of the electricity industry.

Both market and technology assessments for the development of new ideas can be

done simultaneously (Kinnuen et al., 2011). Market analysis refers to factors related to

electricity supply and demand projections and infrastructure, while technology analysis

refers to the assessment of trends in power generation, transmission and distribution.

33

Once trends and scenarios have been identified, those are translated into business

implications in order to provide a better understanding about the impact of changes on

the company’s operations.

Electricity scenarios and PEST analysis, or any of its derivatives (e.g. PESTEL,

PESTLED, STEEP, etc.), are complementary models for identification of the factors

affecting the industry environment (Burt et al., 2006). As a part of the strategic analysis,

PEST framework provides a simple tool for analyzing the external environment. The

external analysis aids managers to assess the changes and trends in the industry in

order to identify new business opportunities in the market and build the strategy over a

solid foundation.

In our case study, the drivers in the analysis of market and technology trends were

discussed with the firm’s representatives in this arena. Those drivers were grouped into

four different categories that consider factors related to market, technology,

infrastructure and policies (Table 5). The main issue of the analysis was to discern which

information may be the most relevant for the organization, so it is important to focus the

research; otherwise it will be easy to get lost while the information is gathered. It is

recommended that the selection of the variables of analysis should be discussed and

defined among the decision-maker team. Therefore, the proposed framework is flexible

enough to include information which may be relevant to the specific context of the

organization.

34

Table 5 - Market and technology drivers

1. Market size and growth 2. Infrastructure and market conditions

1.1. Electricity generation 2.1. Energy/Electricity intensity (Total generation, technology mix) 2.2. Electricity distribution losses

1.2. Electrical capacity 2.3. Quality of electricity supply (Total capacity, technology mix) 2.4. Network infrastructure

1.3. Electricity demand (Electrification rate, power network length, etc.)

(Final consumption per economic sector)

1.4. Investment 2.5. Electricity prices

3. Technological factors 4. Other factors

3.1 Technology competitiveness 4.1. Political and regulatory

4.2. Economical and social

(GDP, population, etc.)

3.2 Technology trends

(e.g. smart grids, electric vehicle, HVDC, etc.)

(Levelized cost of electricity (LCOE), Technology learning curves)

Note: The analysis may consider the geographical segmentation and scenario projections when available.

Market and technology drivers consider both qualitative and quantitative data about

electricity supply and demand trends as well as regulatory and technological factors. In

the case of Ormazabal, this was only used as to support the gathering of information and

to organize the research. As expected, some of the data was not very easy to find for

every market segment. It is important to mention that some of these quantitative

variables may be correlated, so proxy indicators and other assumptions may support the

analysis.

Annex 3 (Electricity outlook) presents the analysis of world electricity supply and

demand trends, followed by a regional comparison of the electricity market in the

selected countries. According to the literature research, in order to analyze the strategic

position of the organization it is important to consider three main areas: external

environment, analysis of internal resources and capabilities, and the expectations of the

35

company’s stakeholders (Johnson, Scholes, 2005). Therefore, the analysis of market

and technology trends will provide an insight for the strategic development process by

assessing the consequences that industry changes may have on the organization.

6.2. Analysis of the electrical equipment market This section describes the analysis of the electrical equipment market on which the main

operations of the company belongs. This analysis provides the general overview about

the current situation in the market by analyzing the five forces affecting the competitive

environment and carrying a SWOT analysis to assess the business implications.

6.2.1. Electricity industry value chain Before starting the analysis, it will be very useful to understand the different parts of the

electricity value chain. The electricity value chain is defined as the process of

transforming the primary energy sources into electrical power and delivering to the end-

user (Sanderson, 1999). There are four main stages in the value chain of the electric

power industry: generation, transmission, distribution and end-use. Power

generation refers to the different technologies available to produce electricity, including

renewable or conventional energy sources. The transmission of electricity consist of the

high voltage overhead power lines that transfers the bulk of electricity generated in the

power plant to regional power networks (ibid). In the distribution substation, the

electricity coming from the high voltage overhead power lines is reduced to medium

voltage values and then distributed into secondary networks that provide connection and

access to electricity for the final users (ibid). Figure 14 shows a typical electric power

distribution network where different energy sources are integrated along the value chain

to supply electricity for industrial and residential customers (Lorenz & Mandatova, 2011).

36

Figure 14 - Electricity distribution network

Source: Lorenz & Mandatova, 2011.

6.2.2. Market overview The global electrical equipment market refers to revenues of power distribution

equipment. Basically, the market covers two main sub-sectors: electric power cables

and electrical switchgear (Datamonitor, 2010). It is a mature and highly competitive

market with a slow growth rate in most parts of the world. The total market value is

evenly distributed in both sub-sectors. In 2009, electrical switchgear equipment

accounted for 47% of the total market value of $104.9 Billion USD dollars (ibid).

The market dominated by a few large companies such as: Schneider, Siemens and ABB

(Datamonitor, 2010). The electrical equipment market is fragmented, meaning that there

are many numerous and local players competing in the different stages of the value

chain and there is not a single company with enough presence to influence the direction

of the industry (Porter, 2008). Nonetheless, approximately 28% of the total market value

is occupied by only four large multinational companies while the rest of the market is

distributed in smaller companies which less than 2% share of the total market (ibid).

Figure 15 shows the total share of the market segmented in sub-sectors, industry

players and world regions.

37

Figure 15 - Electrical equipment market segmentation

Source: Datamonitor, 2010.

After two years of declining revenues (Figure 16) the market is expected to recover and

continue to grow at an average rate of 4.5% for the upcoming years from 2009 to 2014

(ibid). Although the electrical equipment market is mature, there are still growth

opportunities in certain regions, mainly in developing countries (IEA, 2010). The Asia-

pacific market accounts for 50% of the total market value in 2009 (Dataminotor, 2010),

mainly because of the rapid economic development in economies such as China and

India which is supported by their increasing expending in infrastructure for electric power

generation.

Figure 16 - Revenues of the electrical equipment market, 2005-2014.

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-3%

-2%

-1%

0%

1%

2%

3%

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5%

6%

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Historical Forecast

Source: Datamonitor, 2010.

38

6.2.3. Five Forces Analysis Figure 17 shows the analysis of the five forces affecting the electrical equipment

market. Some of the conclusions from this analysis are that the electrical equipment

market is an extremely competitive market and its slow growth intensifies the

competition and rivalry among players. Almost one third of the total market value is

occupied by four large multinational companies and there not so much differentiation in

the product offering, so competitiveness in the market mainly relies on company’s

expertise, price and additional services. It is a capital-intensive market that requires

huge investment in manufacturing, technology and product development. Large

companies may benefit from economies of scale and their worldwide distribution

network. However, there are a few opportunities for new entrants who may benefit from

the new trends the market. The increasing concern in renewable energy sources for

power generation, the evolution in the power distribution network towards the smart

grids, distributed energy sources and energy islands, just to cite a few of them, are

bringing new bossiness opportunities. Market players are dependent on suppliers; hence

some companies are vertical integrated in order to reduce supplier’s power. On the other

hand, most of the customers in this market are large utilities and industrial customers

with a dominant position and strong negotiation power.

The current competitive situation in the market is boosting the industry players to look for

diversification strategies in order to reduce their dependency on electrical equipment

operations. In recent years, a lot of merges and acquisitions have occurred in the market

and so competitiveness has increased. Large companies are acquiring the small

players. Nevertheless, the market can still be considered as fragmented, so small and

medium size companies survive by occupying niche positions.

39

Figure 17 - Five forces analysis in the global electrical equipment market

SUPPLIERS• RM price is volatile• Larger companies have integrated backwards • Worldwide supply chain network enable access to different suppliers at the best cost.• Overall: moderate

BUYERS• Utilities and industrial users• High power in negotiations• Low product differentiation buyers will be likely to search for the best deal and cheapest option• Overall: moderate

NEW ENTRANTS• Large scale manufacturers benefit from economies of scale• Large capital outlay• Only niche opportunities• Technology and production development is essential to compete• Mature market. Scope for expansion in certain developing areas• Environmental concerns and RES enticing new entrants• Overall: moderate

SUBSTITUTES• There are no real substitutes• Growing environmental concerns could increase the usage of self-generation technologies, but is very costly.• Overall: weak

RIVALRY• 4 large scale companies occupy 28% of the total market • High fixed costs and low-switching cost• Slow market growth• Some players operate in diversified markets, reducing dependency on the market• Overall: strong

6.2.4. SWOT analysis

SWOT analysis supports the assessment of the industry environment by linking external

factors to company’s strategic capabilities (Terrados et al., 2009). SWOT methodology is

described as a management support tool that allows the comparison of internal

characteristics against environmental factors (Hernandez et al., 2004). It was conducted

a SWOT analysis of the electricity sector and is displayed in Figure 18. Together, the

analysis of the environment, company’s capabilities and strategic objectives are the

basis of the strategic analysis and provides managers with information to think about

future business opportunities. According to the strategic management process (Lynch,

2009), the following phase is the strategic choice, which means translating the previous

analysis of scenarios, trends and implications into a list of business opportunities.

Following the five-step model, the next section presents the suggested methodology for

the evaluation and selection of business which is based on team collaboration,

brainstorming and group discussion.

40

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41

6.3. Strategic evaluation of business opportunities The framework described next is a strategic planning tool for the analysis and selection

of businesses opportunities. The suggested model proposes a new approach to the

Directional Policy Matrix (DPM) introduced by Shell Chemicals (1975), and is

supported by multi-criteria and decision-making frameworks in the electricity sector

(Haralambopoulos & Polatidis, 2003; Lootsma et al., 1990) and portfolio management

techniques for the evaluation of business proposals (Ayal, Peer & Zif, 1987). In a

situation where many stakeholders are involved and there are many variables to

consider when making a decision, this model proposes a structured and practical

approach to the decision-making process.

6.3.1. Outline of the technique Portfolio management techniques for strategic planning have been widely used among

different industry sectors. Hussey (1978) highlighted some of the problems relate to the

directional policy matrix developed by Shell (1975) and provided a comparison of two

different experiences regarding the implementation of this technique. Besides the

original use of the DPM for the analysis of a firm’s business portfolio, literature suggests

different approaches of the technique, arguing that it can be used for the analysis of

business sectors, perform a competitor analysis (Robinson, Hichens & Wadet, 1978) or

for the evaluation of investment opportunities (Ayal et al.,1987).

Taking into consideration the pros and cons from previous applications of DPM, which

has been used extensively in literature (Hussey, 1978; Newton, 1981; McNamee &

Polytechnic, 1984; Ayal et al., 1987), our approach consist on implementing the DPM for

the assessment and selection of new business opportunities. The suggested framework

comprises the following data collection and analysis stages:

1. Development of the list of business opportunities for analysis

2. Assessment of the strategic direction of proposals

3. Directional Policy Matrix design

4. Selection of evaluation criteria

5. Rating and weighting system design

6. Evaluation of business proposals and results

42

This framework was implemented in Ormazabal. The analysis of the model is presented

in the following sections and is illustrated through its application on the company case.

6.3.2. Development of the list of business opportunities for analysis As a part of the strategic management process, the analysis of scenarios, trends and

implications provide an insight of the internal and external factors affecting the business

environment. The strategic analysis of the industry brings the possibility to think about

growth opportunities for the organization. Therefore, the next step is to collect all ideas

about potential business opportunities.

In the context of the case study, data was collected through personal interviews. Face to

face informal interviews were held with managers in different functional areas of the

organization. During the Interviews managers were asked to provide their ideas about

business opportunities. The main purpose of the interviews was to allow the

stakeholders to have an equal opportunity to express and to contribute with their opinion.

At this point of the analysis, brainstorming was used during the interviews. It was very

important to encourage people to participate but not forcing people to provide relevant

inputs for the project, otherwise the results would have been different. As a result of this

process, thirty business ideas were collected from the involved parties at the company.

6.3.3. Assessment of the strategic direction of proposals Once the ideas are collected, the next step is to assess the strategic direction of the

ideas in terms of product development and market growth needs. Sustained company

performance is supported by the exploration of new business opportunities and

exploiting existing products (Smith & Tushman, 2005). On that basis, four growth

strategies are derived (Ansoff, 1957): market penetration, product development, market

development and diversification (Figure 19). As an attempt to evaluate the strategic

direction of the business ideas, these were classified according to Ansoff’s growth

strategies.

43

Figure 19 - Ansoff's product/market growth matrix

Current Products

New Products

CurrentMarkets

MARKET PENETRATION

PRODUCT DEVELOPMENT

NewMarkets

MARKET DEVELOPMENT DIVERSIFICATION

Source: Ansoff, 1957.

The application of this model in the given case study served as a reference to analyze

the possibility for the company to expand by any of the four strategies. Nevertheless, the

categorization showed that collected business ideas leaned toward the right side of the

matrix. Considering the context where the company is looking for a long term positioning

strategy, it results more convenient to think about growth strategies for new products

and new markets. Experience suggests that diversification strategies are better for long-

term growth, but those should be aligned with long-range product and market objectives

(Ansoff, 1957).

As a result of this categorization, the ideas were arranged in three groups:

• Traditional product strategy. This category contains all the ideas that are

closely related to the market where the company competes. From a

diversification perspective, this category refers to horizontal diversification

strategies in which the activity of the company remains in the same stage of the

industry value chain and complementary products or services are being

considered.

44

• Engineering, procurement, construction (EPC) and maintenance. EPC in the

electricity market context refers to a kind of contract agreement in which the

contractor is in charge of the design, installation and the purchase of materials

required by the project and sometimes it also includes maintenance operations.

This group refers to the ideas that fall into vertical diversification strategies,

considering the integration products and services along the value chain of the

electrical components and equipment market.

• New business models. Ideas into this group suggest moving to new markets

where the company has little experience, but company’s strengths and external

opportunities bring the possibility to think about competing in such a situation. In

other words, this is a lateral diversification strategy where the company is moving

beyond the industry to which it belongs.

6.3.4. Directional Policy Matrix design In order to evaluate and select the ideas, it was decided to implement the Direction

Policy Matrix (DPM) on the case study. The DPM is a modified version of the Boston

Consulting Group (BCG) portfolio matrix (Hedley, 1977). Unlike the simplistic approach

of the BCG matrix, the axes on the DPM are evaluated according to the criteria that are

internally defined by the organization. These criteria provide a better assessment of the

business sector and company’s competitive position.

One side of the matrix represents the market prospects and the other the company’s

internal capabilities. These two dimensions will be the axes supporting the evaluation of

the business opportunities in order to select the most attractive ideas in relation to

external and internal factors. The suggested matrix is a slightly modified version of the

DPM matrix (Hussey, 1978), where the internal factors are represented on the vertical

axis labeled as ‘Business strengths’; the external factors are on the horizontal axis as

‘Market Interest’ (Figure 20).

45

Figure 20 - Directional Policy Matrix approach for the assessment and selection of business ideas

Unattractive Average Attractive

Weak

Average

Strong

BU

SIN

ESS

STR

ENG

THS

MARKET INTEREST

Phase Out

Further Consideration

Most Attractive

In a conventional DPM matrix each axis is divided in three sections, representing good,

regular or poor fit. Our version of the DPM suggests a three-square division in the

matrix: ‘Most attractive’, ‘further consideration’ and ‘phase out’. Once the business

opportunities have been plotted on the matrix, these are grouped into one of the

categories and this will be the starting point for further discussion. A description of each

suggested area in the matrix is presented below.

a. Phase out. This area refers to the business ideas with fewer possibilities for success

in terms of market and business strengths. This area comprises business opportunities

that were ranked low in market interest and business strengths or unbalanced ideas,

which consider high ranked ideas but only in one of the axis. The objective is that the

decision-making group agrees to phase out those ideas by analyzing if there is any idea

that could move to the ‘further consideration’ area. The ideas that remain in this area will

be discarded for subsequent analysis.

46

b. Further evaluation. Under this category are the business ideas located across the

middle-upper side of the matrix. These are business opportunities without enough

potential to be highly attractive but very well placed in relation to market interest and

business strengths, ranking as average or above in both axes. The group is to decide

whether any of the ideas has the potential to be considered for further development and

passed to the ‘most attractive’ zone. Otherwise, the remaining ideas are discarded.

c. Most attractive ideas. Here are the business opportunities with the greatest success

potential, ranked above the average in both market interest and business strengths and

located at the top right of the matrix. In other words, external market conditions and

company’s internal capabilities are the best for carrying out those business proposals for

further analysis and development. Nevertheless, the decision-making team must agree

about this final selection of ideas.

6.3.5. Selection of evaluative criteria

This part of the analysis involves making trade-offs in order to decide what are the most

important factors to consider to evaluate business opportunities. The selection of the

evaluative criteria may be related to strategic context of the organization (Robinson et

al., 1978), so it should consider the industry characteristics as well as the firm’s

objectives and goals attached to vision. In other words, there should be a clear

alignment between company’s strategic objectives and criteria. The decision criteria will

be the basis on which the business alternatives are going to be judged, so it must be

able to provide evidence that supports the selection of any of the alternatives among

others. Research literature provides empirical evidence regarding the selection of the

decision criteria for each of the axis in the DPM (Robinson et al., 1978; Hussey, 1978;

Newton, 1981; Ayal et al., 1987). A review of different literature sources about the

criteria selected for the implementation of the DPM model in different industries is shown

in Table 6.

47

Table 6 - DPM axes and criteria in different literature sources

Business sector prospects Company's competitive capabilitiesa. Market growth rate a. Market positionb. Market quality b. Production capabilityc. Industry feedstock situation c. Product research and developmentd. Environmental aspects

Market axis Competitive axisa. Market growth a. Market positionb. Market quality Market share

Stable profitability Dealer networkMargins maintained in over capacity After sales service networkBrand loyalty b. Production capabilityCustomer/producer ratio Production economicsDegree of substitutability Capacity in relation to market shareRestriction of technology Component availabilityGeneration of after sales business Ability to handle product change

c. Market supply c. Engineering and support servicesAre there major supply difficulties Capability in relation to market positionin the industry? Production innovation ability

Product quality

Industry prospects Company prospectsa. State of the market a. Competitiveness

Rate of market growth Market shareLevel and consistency of market profit margins Operating R&D technological statusSecurity against new producers and substitutes Organizational status

b. Synergy b. Personnel attitudesSales, operating, investment, mgmt. synergies State of labor relations within the company

c. Security Attitude to take-overEnvironmental factors Response to corporate managementPossible physicalStatutory and social limitationsKnowledge of the acquisitionCompany’s activity within that industryPersonnel organization/labor relations within industry

Measures of market attractiveness Measure of comparative advantagea. Growth rate a. Organization's share of exportsb. Market size b. Organization's share of importsc. Stability of demand c. Organization's distribution networkd. Competitive concentration d. Profitabilitye. Technological risk e. Technological advantagef. Skills ratio (percentage of scientist and f. Product quality

engineers out of total manpower) g. Price competitivenessg. Capital intensity h. Production capacityh. Marketing expenses as a percentage of sales i. Organization's relation with key suppliers

j. Program control requirements

Source: Newton, 1981.

Source: Ayal et al., 1987

Matrix axes and criteria

Source: Shell International, 1975; Robinson et al., 1978.

Source: Hussey, 1978.

48

In the case of the company, the first list of criteria was proposed by the author based on

the literature review. This list was presented and discussed within the team and then it

was asked to the experienced managers about what they consider as critical factors to

evaluate business opportunities. The resulting list was a simplified list of criteria that best

fit company’s business context. In our specific case, the evaluation of the criteria was

based mainly on qualitative information but supported by experts’ opinion.

Analysis of market interest. It was considered six main criteria by which the market

interest may be evaluated. These are:

1. Market size. This criterion can be evaluated based on market estimations on

revenue and/or sales volume. As its name implies, serves to estimate the market

size of the sector where the business idea belongs.

2. Market growth. Based on a technology life cycle perspective and the analysis of

scenarios and trends described in annex 3, this criteria aims evaluate market

growth prospects for each of the alternatives. This market growth prospects can

be described as: excellent, good, average, bad or declining (Hussey, 1978).

3. Profitability. Sectors with the highest market growth record are not always those

with the best profit (Robinson et al., 1978). Hence, this criterion allows the

comparison of the alternatives in terms of expected earnings. Average industry

ratios such as profit margin, return on assets and return on equity can be used to

support the appraisal of the criterion.

4. Development cost. This criterion refers to industry barriers related to technology

and product development. The appraisal of this criterion can be supported by a

broad estimation of the amount of resources needed to enter in that market

based on the company’s current position.

5. Competitive structure. It refers to rivalry among existing competitors. Think

about porter’s five forces analysis when appraising this criterion. As this is an

early step of the methodology which requires only filtering ideas, a broad

estimation of the competitive structure is quite useful.

6. Vulnerability. The criterion refers to regulatory and political issues and how

vulnerable is the market in matters of legislation.

49

Analysis of business strengths. Three main criteria were considered by which the

company’s strengths in the industry may be judged.

1. Synergy. The criterion aims to evaluate the integration of the business proposal

into the company’s current structure. Synergies can be achieved from leveraging

core competences, manufacturing capabilities or existing technological

resources. (Kinnuen et al., 2011), so this criterion strives to check if there is any

opportunity to achieve synergies among business units or other partner

organizations inside the company’s group.

2. Competitive advantage. Based on the analysis of the company’s internal

capabilities and competitive position, this criterion evaluates the possibility to

reach a sustainable competitive advantage in the long-term.

3. Proximity. This criterion is about the assessment of the degree of fit of the

business alternative in relation to the company’s business portfolio. Proximity

criterion attempts to appraise the strategic fit of business ideas by linking those

ideas to firm’s objectives.

6.3.6. Rating and weighting system design The initial approach to the rating systems suggested by Shell Chemicals (1975) consists

in a ‘five-star’ rating system where one star scored 0 points, two stars 1 point and so on.

Accordingly, the use of stars gives more visual impact than display of numbers (ibid).

Robinson et al. (1978) suggest it is convenient to consider half star increments for the

evaluation and the definition of the scale depends on the industry and its center point

must reflect the average growth rate of the industry (Robinson et al., 1978). In contrast,

Guinness and Rolls Royce Motors argued that stars do not add any value, so they

moved directly to assignment of points and implemented a scale system from 0 to 4

points (Hussey, 1978).

In relation to the weighting system, Shell Chemicals (1975) approach is given an equal

weighting while other authors attach different weights to criteria (Newton, 1981; Ayal et

al., 1987), arguing that in certain industries it is unrealistic to assume all criteria is

equally important (Robinson et al., 1978).

50

In our specific application, business opportunities were evaluated according to the

degree of fit in relation to each criterion. The philosophy under this system was on the

premise “the higher the score, the better fit”. Therefore, It was defined a rating scale

from ‘0’ to ‘4’ points. Accordingly, scores close to ‘0’ mean a poor fit, where ‘0’ points

implies that there is no fit, ‘4’ points is the best degree of fit and ‘2’ points is on the

average. It was assumed to attach an equal weight in the criteria, so each factor has the

same impact on the overall assessment for market interest and business strengths.

In the context of our case study, there were six criteria used to evaluate the market

interest and only three criteria for business strengths. The maximum value in each axis

is calculated by multiplying the highest value of the rating system by the total number of

criteria in the axis. Consequently, for market interest there is a maximum value of 24

points and 12 points for business strengths. In order to have a square matrix to plot the

alternatives, business strengths overall score is multiplied by 2 as a conversion factor. In

this way both axis will be measured in the same scale.

6.3.7. Evaluation of business proposals and results According to literature, two possible approaches to weighting are discriminant analysis

and the use of expert opinion (Ayal et al., 1987). When the data is available it is possible

to evaluate the criteria based on a quantitative judgment. In the other hand, the expert

opinion method makes it possible to involve decision makers in the process of selection

of ideas (ibid).

The approach used in the case study for the evaluation of criteria was based on the

expert opinion method. There were evaluated thirty business ideas. The evaluation

was done by a multidisciplinary team. The scoring of ideas in respect to criteria was

mainly based on qualitative judgment, but supported by qualitative facts when the

information was available. The overall rating in each business idea was calculated for

market interest and business strengths. Thus, thirty business ideas were plotted on the

matrix. Figure 21 displays the results of the evaluation of the thirty business ideas that

were collected.

51

Figure 21 - Business opportunities plotted on the DPM


Weak

Average

Strong

BU

SIN

ESS

STR

ENG

THS

MARKET INTEREST

1

2

3

4

5

6

78

9

10

11

12

1314

15

16

17

181920

21

22

23

24

25

26

27

28

29

30

When plotting business ideas on the matrix some of these may overlap, so it is

recommended to avoid the overlapping by relocating ideas next to each other. In this

way, the matrix provides a better visual assessment of the ideas. After this, considering

the theory explained in the design section (6.2.4. Directional Policy Matrix design), the

ideas were grouped into the three categories. The results shows there are 5 ideas

located in the ‘most attractive’ area, 12 ideas in ‘further consideration’ and 13 ideas in

‘phase out’ zone (Figure 22).

The results displayed on the matrix provided enough information to trigger the

discussion during the plenary meeting. The selection process began with the discussion

of the 13 ideas in the ‘phase out’ area. Among those ideas, 10 were eliminated and the

other 3 were moved to the ‘further consideration’ zone. Then, the15 business ideas

under the ‘further consideration’ zone (12 from the initial evaluation and 3 moved from

‘phase out’) were discussed. After an intense discussion, the group agreed on 5 ideas

for further analysis to be evaluated in the next round together with the ideas under ‘most

attractive’ area.

52

Figure 22 - Classification of business opportunities on the DPM


Weak

Average

Strong

BU

SIN

ESS

STR

ENG

THS

MARKET INTEREST

Most attractive ideas: 5

Further consideration: 12

Phase Out: 13

Summary:

1

2

3

4

5

6

78

9

10

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12

1314

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181920

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The remaining 10 business ideas were openly discussed among the decision makers.

By the end of the plenary meeting, it was possible to achieve a joint agreement. From

the initial thirty business ideas only seven were selected. As explained in the five-step

model (Chapter 5), the resulting business ideas will be de developed in detail during the

next phases of the methodology.

53

7. CONCLUSIONS This thesis addresses strategy at the corporate level, which is concerned with vision and

decisions about the strategic direction of the organization (Lynch, 2009), and includes

the evaluation of new business opportunities for different products/services and markets.

To carry out this task, the study proposes a practical approach to the assessment of

business opportunities. It provides a framework for the strategic analysis of the market

conditions and a model to perform a preliminary evaluation of business alternatives. This

thesis proves the application of the Directional Policy Matrix (DPM) in the electrical

business and brings a different approach based on qualitative judgment and group

discussion.

Experience on applying the model in Ormazabal showed positive results. The strategic

analysis of the electricity market allowed company’s stakeholders to think and reflect

about diversification opportunities. So many different business ideas came out during the

plenary meetings and those were organized and structured. As shown in the analysis

(chapter 6), from an initial identification of thirty business ideas, by the end of the second

phase, only five business ideas were selected for further development.

The relevance of this work can be summarized and discussed from two perspectives. On

one hand, the contribution of this work to the company is that provided a methodological

support for the identification and evaluation of business ideas. On the other hand, the

scientific input for literature is that this thesis provides a five-step model for the

assessment of business ideas and a new practical experience of the DPM which

suggests a different approach to this model. The frameworks covered along the study

can be used as a baseline for further studies in related topics.

7.1. Recommendations The described methodologies in the analysis section should be seen an open process to

trigger the discussion and support managers during the decision-making process for the

evaluation of business opportunities. The suggested DPM approach aims to enable the

decision group to carry out with a more organized discussion when evaluating and

selecting business ideas. This model is not a black magic box that will always throw the

54

right answers. At the end, managers are the ones taking the decisions. Nevertheless,

the model provides a more structured way to reach group consensus and can be used

as a guideline during the decision making process when many business opportunities

are being analyzed.

As literature suggest, there are many options to name each of axis in the matrix as well

as many different criteria that could be used in different contexts. It important to be sure

that decision makers have the same understanding about the factors considered in each

criterion. The selection of criteria may not be the same for every industry. In this study,

the set of criteria was selected by a group consensus and was specific to the context of

the company. Thus, probably certain relevant criteria have been omitted or are not

relevant or valid in other context. It is also important to be aware about the strategic

importance of criteria and decide whether criteria in each axis should have the same

impact on the assessment. In our case, as a preliminary stage for filtering most attractive

ideas, criteria were weighted the same but in other businesses is not so realistic to

assume that each factor is equally important.

In the presented company case, the evaluation of criteria was mainly based on

qualitative judgment but supported by the opinion of experienced managers. Anyway, it

may be more relevant to include historical data and a quantitative analysis to the

greatest extent in order to have a more solid foundation to justify the decisions.

7.2. Limitations and further research There are several limitations of this model. First, this thesis only provides evidence of its

practical application on the first two phases. The overall framework presented in Chapter

5 as the ‘five-step’ model for the development of business ideas is a quite broad

approach to strategy. This study was developed in parallel to the company’s project and

because of time limitations, the scope of the thesis was only on the early stages of the

overall methodology, specifically the market analysis, brainstorming and filtering of

business ideas. By the time this thesis was finished the project was still in development,

so it would have been very interesting to keep on with the analysis and register the

results and implications throughout the entire implementation process.

55

The first idea of the study was to develop a specific approach for the development of

long-term projects in the electrical business, but at the end it was difficult to keep away

the methodology from generalizations and the resulting model can be applicable to

almost any industry. The selection of the market drivers for the strategic analysis as well

as the selection of the evaluative criteria for the strategic assessment of ideas (chapter

6) is very specific to the case study but probably not for other players in the electricity

industry. The particularity of some variables in the analysis would be a limitation during

the application of the model even in a similar context. Nonetheless the methodological

approach can serve as a backup for similar studies.

Another limitation is that the study was conducted on a single case, so that its validity

may be limited to the context where the framework was applied. However, the

methodological aspects covered in the study are quite general per se and validity can be

reached until some extent. Remember that strategy is not an exact science, it is flexible,

it is an art. Adapting to the changes in the environment is a key challenge for managers

to ensure the competitiveness of the organization. Beyond the constrains, this work can

be used as a reference for further studies about strategic management and the

assessment of business opportunities since it provides supportive evidence of the

methodology applied in a real business situation.

56

ANNEXES

57

1. REVIEW OF ELECTRICITY SCENARIOS There are many publications from international agencies and associations in relation to

the research about energy and electricity issues. In 2010, some of these organizations

have made available international energy outlooks which include scenarios on this

matter. The aim of this section is to provide the reader a general understanding about

the most relevant publications regarding world electricity scenarios.

1.1. World Electricity Scenarios Some of the most complete electricity scenarios in terms of geographical coverage,

recent information and comprehensiveness are the ones published by two autonomous

agencies: Energy Information Administration (IEA), which is a subsidiary of U.S.

Department of Energy; and the International Energy Agency (EIA), based on Paris and

created to promote security in the energy supply and to provide advisory on energy

issues.

U.S. Energy Information Administration (EIA) - International Energy Outlook 2010, Jul 2010. The report contains information about international energy trends considering

current policies and regulations announced before early 2010. Potential changes on

legislation are omitted on projections. The full report is available on the EIA web page1.

• The Reference case. This is the business as usual scenario proposed by EIA.

The energy dataset draws the future development on international energy

markets, and consider regional and country trends about demographic and

economical issues (IEA, 2010). The analysis provides the energy outlook up to

2035.

International Energy Agency (IEA) - World Energy Outlook 2010, Nov 2010. Present

a complete analysis about world and regional energy trends. Energy report are revised

annually and published online. IEA reports are support with historical information and

projections based on current market conditions and future expectations. For the first

time, in 2010 the world energy analysis contains projections on three scenarios:

1 EIA - International Energy Outlook 2010, Jul 2010. www.eia.gov/oiaf/ieo/index.html

58

• Current Policies. This is the business as usual and assumes the policies

announced up to mid 2010. The objective of this scenario is to provide a

baseline to assess the impact of new policies (IEA, 2010).

• New Policies. Takes into consideration all the policies, laws and legislations

from the current policies scenarios but also considers plans and commitments

related to environmental issues such as carbon emissions and future plans to

phase out fossil-energy sources. The objective is to evaluate the impact on the

energy markets if those policies are implemented.

• 450. This scenario has more ambitious targets regarding the integration of

renewables within the energy portfolio to support a faster removal of fossil-fuels.

Projections on this scenario assume policies not yet being announced. Its name

comes from the 2°C target on global warming and the limitation of greenhouse

gasses to 450 ppm (parts per million) of CO2-eq (carbon dioxide equivalent)

(ibid).

Both agencies provide an extensive database regarding world energy topics. Information

about world, regional or country-specific data can also be accessed online2.

1.2. Scenarios for the European electricity market A brief review of some of the most relevant scenarios published by European

administration, agencies and association is presented below.

European Environment Agency (EEA). In 2010 the EEA carried out the analysis about

the imprecations of global megatrends on the European market (Figure 23). On this

report implemented a comprehensive framework to perform the strategic analysis taking

into consideration social, political, technological, economical and environmental factors.

Results from this analysis provide in scenarios for the evaluation of the impacts on

2 IEA - World Energy Outlook 2010, Nov 2010.

www.iea.org/

59

climate change, with special focus on the global implications which are affecting the

European market (EEA, 2010).

Figure 23 - SOER 2010 umbrella

Source: European Environment Agency, 2010.

National Renewable Energy Action Plans (NREAP). Within the framework of the

European Union, there are several studies for each member country which contains

scenarios to assess energy supply and demand prospects. In June 2009, the

commission defined the template for the renewable plan to be submitted by each

European member by 30 June 2010 (Beurskens & Hekkenberg, 2011).

The NREAP is a compiled dataset on renewable energy trajectories extracted from the

submissions of the member states of the European Commission and the accompanying

document which summarizes the most important information (ibid). The latest version of

these plans was consolidated and published by Energy Research Centre of the

Netherlands (ECN) and the European Environment Agency (EEA) in February 2011. The

document provides projections about energy supply and demand prospects of the 27

60

countries within the time frame 2010-2020. The information is presented in two

scenarios:

• Reference scenario. This scenario considers only policies on energy savings

and efficiency measures adopted before 2009 for each European Union member

country. This is the baseline scenario or business as usual (Beurskens et al.,

2011).

• Additional efficiency. This scenario is presented taking into account future

energy targets and more ambitious consideration towards a more rapid transition

of renewable energy sources.

Results from this analysis confirm the possibility for the European Union to exceed by

0.3% the expected 20% integration RES into the energy mix (ibid).

Eurelectric, the role of electricity. The union of electricity industry Eurelectric

published in 2007 a study aiming to quantify potential impacts of electricity in Europe

from the supply and demand side. A brief description of each scenario is presented next

(Bulteel & Capros, 2007):

• Baseline Scenario. This scenario represents business as usual trends but still

reflecting a dynamic projection based on assumptions in the current market

situation.

• The Supply Scenario. This is a more competitive projection that promotes the

development of efficient technologies for power generation. This scenario

provides a roadmap to reduce dependency in fossil fuels while cutting carbon

emissions.

• The Efficiency & RES Scenario. This scenario assumes a more radical change

in the energy system, especially in power generation where renewable energy

sources take the main role. In the demand side, this scenario does not consider

the promotion and development of new electro-technologies.

• The Role of Electricity Scenario. Similarly to the efficiency scenario, this

projection considers the same assumptions but also taking into account the

development of electro-technologies to achieve a higher efficiency targets in the

demand of electricity (ibid).

61

2. ANALYSIS OF SCENARIOS This section provides a very general comparison of the different world electricity

scenarios. This analysis compares the most recent scenarios published by two of the

most relevant organizations: International Energy Agency (IEA) from Europe, and

Energy Information Administration (EIA) from the United States. In order to evaluate

the data and indentify major differences among the scenarios, projections about

electricity generation were plotted in a graph (Figure 24). This can provide a general

overview about the main differences between each of the scenarios.

Figure 24 - World generation of electricity by scenario, 1990-2035 (TWh)

-

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

1990 2008 2015 2020 2025 2030 2035

iea - NPiea - CPiea - 450EIA - Reference Case

Historical Scenario projections

Source: Own elaboration. Data from EIA and IEA.

Scenario 450 expects a more efficient consumption of energy, thereby this scenario

projects less demand of electricity. Reference Case is more conservative about demand

during the first yeas but recovers by the end while CP scenario projects more demand

than the others. The gap in electricity generation increases over time among all

scenarios. In 2015, according to these scenarios, total power generation ranges

between 22,000 TWh and 24,800 TWh, while in 2030 ranges between 30,000 TWh and

34,800 TWh.

62

Figure 25 - World electricity generation mix by source and scenario, 2020-2030 (percentage)

42 39 37 39 4334

2141

3 3 2 3 22

1

2

21 21 21 20 2122

20

20

13 14 15 14 1114

19

13

22 24 26 23 23 2939

23

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2020 2020 2020 2020 2030 2030 2030 2030

CP NP 450 Ref. Case CP NP 450 Ref. Case

Coal Oil Gas Nuclear Renewables

Source: Own elaboration. Data from EIA and IEA.

Regarding the technology used to produce electricity, there are no radical differences

among the scenarios besides renewables and coal sources (Figure 25). As mentioned

before when describing each of the scenarios, 450 scenario has more ambitious targets

in relation to renewable sources. That is the reason why in this scenario there is a

greater participation of RES and thereby a faster phase out of fossil fuels. As expected,

business as usual scenarios (CP and Reference Case) both are very similar in relation

to the generation mix.

In general terms, the selected energy scenarios can be compared in relation to two big

variables: efficiency and the renewable sources. Efficiency refers to improvements in

electricity consumption; the other axis refers to the integration of renewable energy

sources in the supply of electricity. By positioning the scenarios within these two

variables can provide, to some extent, a summary of the major assumptions that were

considered on each scenario (Figure 26).

63

Figure 26 - Scenario comparison map: iea (CP, NP, 450) and EIA (Ref. Case)

450

NP

Renewables

Effic

ienc

y

Ref.Case

CP

The NP policies scenario is in the middle of the graph. This scenario is not so

conservative in terms of policies and legislations as the Reference case and CP, while

assumes a reasonable penetration of renewable energy sources for electricity

generation.

64

3. ELECTRICITY OUTLOOK

This section is about the analysis of energy trends and is based only on supply and

demand projections. The first part of the analysis covers world energy and electricity

trends, followed by a regional comparison of selected countries and regions in order to

provide a general outlook of the relevant trends affecting the electricity market. The

objectives of the analysis are listed next:

• Identify of the most relevant trends in the energy and electricity sector based on

projections in two time horizons: 2015 and 2030.

• Understand world perspectives in relation to:

- Electricity generation mix by type of technology

- Electrical capacity

- Demand of electricity by sector

• Based on the same guideline, to perform a comparative analysis on the selected

countries and regions to identify regional trends and emerging markets.

• Provide a general understanding about the evolution of renewable energy

sources for electricity generation.

3.1. World energy and electricity demand Although the focus of this section is on the electricity market, it is important to analyze

the role of electricity as a source of supply within the world energy mix. Due to this, this

chapter aims to discuss world energy and electricity trends.

3.1.1. Energy demand World energy demand continues to grow for the following years at an average of 1.2%

from 2008 to 2030. Energy consumption is expected to have faster growth in developing

countries, especially in Asian economies. Table 7 shows the total final consumption

(TFC) of energy and electricity considering historical data in 1990 and 2008 and

projections for 2015 and 2030.

65

Table 7 - World energy and electricity consumption, 1990-2030 (Buildings sector includes tertiary and residential)

1990 2008 2015 2030 1990 2008 2015 2030 TFC 6 289 8 423 9 525 11 045 9 708 16 822 20 650 27 954

Industry 1 808 2 351 2 882 3 304 4 412 7 009 9 106 12 009 Transport 1 576 2 299 2 514 3 035 244 269 346 558 Buildings 2 247 2 850 3 082 3 570 4 696 9 078 10 624 14 606 Other 657 923 1 046 1 136 356 466 573 781

Energy Mtoe

ElectricityTWh

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

In 2030 energy demand almost doubles the energy consumed in 1990, increasing from

6,200 Mtoe to 11,000 Mtoe by 2030. After industry, transport is the largest energy-

intensive sector. Transport is projected to grow by 1.3% per year until 2030, while

buildings grow by 1% yearly. Energy consumption in transport is getting closer to the

consumption in buildings. In 2030, industry will remain as the major consumer of energy

and electricity in the world. In general, demand in all sectors is growing steadily in a

range of 1% to 2% per year.

3.1.2. Electricity demand Electricity consumption is growing faster than other energy sources. Between 1990 and

2008, share of electricity in total energy consumption increased from 13% to 17% and is

expected to rise up to 18% of the total energy consumption by 2015 and 22% in 2030.

Consumption of electricity in transport is expected to grow at 3.4% per year, while the

increase in other sectors is within an average range of 2.2% to 2.5% per year between

2008 and 2030. Despite the rapid growth in transport, the demand in this sector remains

moderate and does not represent a big share within the total mix – increasing from 1%

to 2% of the total share during projected time horizon.

Based on the information presented in this scenario, it can be concluded that it is not

expected to happen a big change in relation to the mix in demand for both energy and

electricity. The overall consumption of energy and electricity is increasing steadily until

2030. Shares in demand for each of the different sectors remain relatively stable until

2030 (Figure 27).

66

Figure 27 - Change in energy demand share by sector, 2008-2030 (Percentage)


The world financial crisis considerably affected the demand of energy in most of the

countries. According to the statistical information provided by the U.S energy information

and Administration (EIA), world energy demand dropped by 1.3% in 2008 and 2.2% in

2009 as a result of the collapse of GDP in most of the economies and the decline in

demand of goods and services (IEA, 2010).

World gross total oil demand continues to grow but in a different pace among countries.

As can be seen in Figure 28, demand of oil grows faster in developing countries. The

increasing dependency of this source for the industrial and transport sector drives its

growth. Even though, the use of liquid fuels as a source of energy is expected to grow at

a slower pace in relation to other energy sources such as renewables or natural gas. As

a result, energy demand share of oil declines from 42% of total energy consumption in

2008 to 38% in 2030.

Industry Transport Buildings Other

Energy Use

28% 30%

27% 27%

34% 32%

11% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2030

Electricity Use

42% 43%

1.6% 2.0%

54% 52%

3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2030

67

Figure 28 - TFC of oil by region, 1990-2030 (Mtoe)

-

100

200

300

400

500

600

700

800

900

1990 2008 2015 2020 2025 2030

ChinaUSAIndiaEULATAfricaMiddle East

Historical Projections


In developed countries oil consumption seems to slightly decrease by 2015 (the United

States and European Union in the graph), while in the developing economies oil demand

keeps increasing up to 2030, growing faster in the first years up to 2015 and slightly

declining up to 2030. China is the top growing country in the demand of oil. By 2030

China has surpassed the amount expected in Europe for the same year, while

positioning very close to the United States consumption levels.

Nevertheless, from a worldwide perspective the trend towards a more balanced energy

mix can not be neglected. Current and future government initiatives will support the

diversification of the energy sources. The role of alternative energy sources such as

renewables is increasing importance. Renewable energy can be seen as a possible

solution to meet future energy demand, while reducing dependency on fossil fuels and

lowering carbon emissions.

Some of the highlights about world energy and electricity demand are listed next:

• Electricity has been the fastest growing source of energy consumption and this

trend is expected to remain until 2030.

• The increasing concern about environmental issues will be a major driver for the

future world energy outlook, considering issues about carbon emissions, security

in the supply, energy efficiency and renewable energy sources.

68

• Technological development is a key issue to boost the integration of renewable

energy sources. Government support and incentives are critical to boost market

growth of renewables in order to achieve price competitiveness.

3.2. World trends in electricity generation World electricity generation increases 62%, rising from 20,200 TWh in 2008, 24,500

TWh in 2015 and to 32,700 TWh in 2030. Although the financial recession has slowed

the growth in all sectors, electricity generation will recovered by 2015, increasing at a

rate of 2.8 % up to 2015 (Figure 29). Below is presented a brief analysis about the main

global trends for the different technologies in power generation.

Figure 29 - World electricity generation mix, 1990-2030 (TWh)

-

5 000

10 000

15 000

20 000

25 000

30 000

35 000

1990 2008 2015 2020 2025 2030

RenewablesHydroNuclearGasOilCoal

41%34%

5%

2%

21%

22%

14%

14%

16%

16%

3%13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2030


Oil. World dependency on oil as a source for electricity generation has been improving

during the last years. In 2008, 1,100TWh of electricity in the world were generated from

Oil, almost a 20% reduction from 1990 generating values. This negative trend remains

until 2030; electricity generation from oil is decreasing at an average rate of 3.3%

annually. Between 2008 and 2030, it is reduced more than half, from 1,100 TWh to 500

TWh – accounting about 2% of the share in the world electricity supply.

69

Coal. In the coming years, coal continues as the main source of electricity generation,

despite its share in the total mix is reducing from 41% of the total generation in 2008 to

34% by 2030. Coal is growing at an average rate of 1.4% annually, although its growth is

lower than other generating source. Coal supply will be critical in order to meet future

demand of electricity.

Natural gas. It is second largest electricity generating source with more contribution to

the total generation and remains until 2030. Both, gas and coal are the bulk in electricity

generation in the world. In 2008, 62% of the world total electricity was generated with

gas and coal, 8300 TWh and 4300 TWh respectively. Among fossil fuels, natural gas is

lees capital intensive than oil or coal, so electricity generated by this source is cheaper.

Therefore, natural gas demand for generating electricity is growing even faster than coal

with an average rate of 2.3% annually until 2030. In the same year, total generation from

gas will increases about 60%, from 4,300 TWh in 2008 to 7,000 TWh in 2030.

Nuclear. In 2008, electricity generated from nuclear plants accounts 14% (2,730 TWh)

of the total mix, very close to the magnitudes generated by hydro sources. Before the

events occurred in Japan during March 2011 (A magnitude 9.0 earthquake followed by

the nuclear meltdown in Fukushima), nuclear generation was increasing interest a

around many countries due to its efficiency in terms of low-carbon emission and cost

competitiveness. Although the projections showed in the graph provide a general

perspective about nuclear development, the future of nuclear energy is uncertain and

projections most probably are going to be drastically affected by new policies.

Renewables. Renewable energy sources (RES) are alternative technologies that can be

used to generate energy through natural means such as wind, sun, water, tides or

geothermal heat. According to EIA definition, RES are those inexhaustible and naturally

replenishing sources but limited in the flow per unit of time (EIA, 2010).

RES are often grouped in two categories: hydropower and other renewables (or non-

hydroelectric renewables). Non-hydroelectric renewables include biomass and waste,

geothermal energy, wind energy, solar photovoltaic (PV) and concentrated solar power

(CSP).

70

The incorporation of green technologies will be the key to phase out fossil fuels. Among

RES, hydroelectric is the main generating source in the world, 3,200 TWh in 2008, and

is growing at 2.2% annually up to 2030. Non-hydro renewables technologies have the

fastest growing rates in electricity generation (Figure 30).

Figure 30 - World renewables electricity generation mix, 2008-2030 (TWh)

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

1990 2008 2015 2020 2025 2030

MarineCSPSolar PVGeothermalWindBiomass and waste

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2030


On average, other RES grow 9.6% per year from 2008 to 2030. Some of the highlights

in its rapid growth are listed below:

• Wind power. Wind is the non-hydro RES that contributes the most to world

electricity generation until 2030. In 2008 wind turbines generated only 219 TWh

of the world electricity demand - 1% of the total generation in the world. For the

next years up to 2015, wind power exceeds the amount of electricity generated

by biomass and waste, growing at an average rate of 19% annually and

positioning itself as the non-hydro renewable technology that generates more

electricity in the world. In 2030, wind power supplies 7% (2,300 TWh) of the

world electricity, up from just 1% in 2008.

• Concentrating solar power. In 2008 CSP generated less tan 1 TWh. For this

reason, CSP is the fastest growing renewable technology. CSP generation

71

increases at an average growth rate of 24% annually; the importance of this

technology is expected to emerge in the near future.

• Solar photovoltaic. PV generation increases from 12 TWh in 2008 to 430 TWh

in 2030. There is a very strong interest around the world about the development

of this technology in order to become economically competitive in relation to

conventional energy sources.

World electricity generated from RES nearly triples by 2030. As a result, RES share in

the generation mix rise from 18% (3,800 TWh) in 2008 to 29% (9,450 TWh) in 2030.

Recent trends about sustainability and environmental issues have increased the concern

about carbon emissions and the importance of the green energy sources in the

electricity generation. As technology evolves, renewable energy is becoming cost-

competitive and has the potential to respond to the new challenges in energy demand

and climate change. In this scenario, RES have a very important role in the future of

electricity supply. Nevertheless, its growth will be subject to future energy policies and

changes in the legislation. Government support is critical to accelerate RES integration

in the generation of electricity.

3.3. Regional comparison of electricity projections Once the relevant world electricity trends have been analyzed, the next part of the

analysis covers aspects of power supply, capacity and demand across different

geographies. For this, the market has been segmented in different regions. This

segmentation will be the radar for the identification of regional trends and to support the

assessment of supply and demand changes across different electricity markets.

3.3.1 Electricity generation Developing economies (China, India, Latin America, and Africa) expect a very fast

growth in electricity demand. In China, demand of electricity almost triples between 2008

and 2030, from 3,500 TWh in 2008 to 8,800 TWh by 2030. By 2015, China has gone

beyond generating levels of the Unites States, positioning itself as the most demanding

country in the world, trend that remains for the following years. In absolute values, China

is expecting to have the biggest growth in generation from both renewable and

conventional sources (Figure 31).

72

Figure 31 - Electricity Generation mix by source and region, 2008-2015-2030 (TWh)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030

USA China EU India Africa LAT

Other Renewables

Hydro

Nuclear

Gas

Oil

Coal


China’s electricity generation mix remains driven by fossil fuel sources, particularly coal.

The same situation, but at a different magnitude, is occurring in other developing

countries, where demand of coal and gas continue increasing. The demand of natural

gas for electricity generation continues to grow in most of the regions but at faster rate

for developing economies. Although electricity generated from oil does not have big

share in most of the countries, the trend is towards phasing out its use in electricity

generation.

India is also experiencing a very rapid growth in electricity demand. In 2009, according

to the International Energy Agency information (2010), approximately 1/3 of the

population (404 millions) in India had no access to electricity. In 2030 its electrification

rate is expected to increase up to 80%, but even 290 millions of people will remain

without access to electricity (ibid). As India is developing economically, electricity

demand is increasing too, but it seems that there is still a room in terms of the

improvement of living conditions.

In developing countries, much of the electricity generated depends on hydro sources.

For example, hydro power generates around 60% of the total electricity in Latin America

and the same share remains during the projected horizon.

73

In the European Union, total electricity demand grows at a pace of 0.6% annually. There

is a clear trend towards more diversified mix in electricity generation, where the

participation of non-hydro RES will be critical to meet future demand of electricity (Figure

32).

Figure 32 - European Union share of electricity by source (percentage)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2015 2030

Coal Oil Gas Nuclear Hydro Other Renewables


3.3.2 Electrical capacity These trends in power generation are supported by the projected increase in electrical

capacity for each of the regions analyzed in this study (Figure 33). According to IEA

World Energy Outlook 2010, the total additions in capacity in the world, considering

power installations to replace obsolete power plans and to generate additional capacity,

amount approximately 5,900 GW from 2009 to 2035, 25% increase in relation to current

generating capacity in 2010.

74

Figure 33 - Electrical Capacity by source and region, 2008-2015-2030 (GW)

0

500

1000

1500

2000

2500

2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030


Other RenewablesHydroNuclearGasOilCoal


Table 8 shows the increasing share of electricity from renewable sources between 2008

and 2030. If the projections on this scenario are accomplished by 2020, 23.6% of the

world electricity will be generated through renewables (including Hydro), almost 6,500

TWh in electricity generation.

Table 8 - Share of electricity generated from renewable sources (Including Hydro), 1990-2030

1990 2008 2015 2020 2030 World 19.6 18.7 21.2 23.6 26.4European Union 18.6 16.1 19.6 21.6 24.0Africa 11.8 9.3 13.3 15.6 18.4North America 12.1 17.1 25.0 30.0 34.3Latin America 19.5 17.2 18.1 21.2 23.8United States 24.8 15.7 15.4 18.6 23.5China 73.0 66.2 63.9 64.3 65.9India 18.0 15.8 19.2 23.2 28.4Spain 17.2 20.8 32.2 35.0 36.6France 13.4 14.0 15.5 16.4 16.3Germany 4.1 15.9 18.6 20.7 23.8

Country /Region

% RES-E

75

European Union’s share of electricity from RES is expected to rise up to 21.6%,

surpassing the 20% target established by the European commission. Renewable

electricity in France, Germany and Spain contributes up to 35% of the total RES

generation in the European Union.

3.3.3. Non-hydro renewable energy sources In order to overcome the global warming challenge and the rising prices of fossil fuels,

renewable electricity generation is expected to continue its rapid growth over the next

years. The share of RES in power generation increases in all regions. There is a clear

global trend towards the integration of RES in the electricity mix.

Renewable sources are the fastest growing technologies in the electricity supply. China

is expecting to have the most rapid growth in non-hydro RES for the upcoming years,

growing at an impressive pace of 47% annually up 2015 and 20% to 2030.

Biomass and waste. The use of biomass in electricity generation remains growing in

the selected countries. In China, India and mainly in Africa, biomass is expecting to have

a rapid growth rate for the next years (Figure 34).

Figure 34 - Other RES for electricity generation by technology and region, 2008-2015-2030

0

200

400

600

800

1000

1200

2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030


MarineCSPSolar PVGeothermalWindBiomass and w.


76

Wind Power. In absolute terms, wind power is the technology with the biggest share in

power generation followed by biomass and solar PV. Wind generation is rapidly

expanding worldwide, rising from 220 TWh in 2,008 to almost 2,300 TWh by 2035.

Europe continues leading the wind market, but in the next years china is getting very

close to European generating levels. In terms of installed capacity, the world’s leading

regions in wind technology (Europe, China and the Unites States) are projected to have

150, 80, 73 GW by 2015 and 260, 240, 260 GW respectively by 2035.

Solar PV. In the last decade, solar PV technology has achieved a boom in countries

such as Germany, Spain, Italy, Japan, USA and China. Among the selected regions,

European Union remains leading the PV market. By 2030, European PV capacity has

expanded six-fold, from 11 GW in 2008 to 66 GW. Projections show that the European

Union, China and the United States expect to have 30, 5, 6 GW of installed capacity in

2015, and 66, 51, 43 GW in 2030 respectively. China and the United States are just

taking-off in the use of PV technology, followed by India which plans to have 31 GW in

installed capacity by 2030.

In other regions of the world, where sunlight is abundant such Latin America or Africa,

PV technologies are starting to take-off but having still a very low share within the total

electricity demand. In 2030, Africa and Latin America expect to have around 15 GW in

PV installed capacity.

CSP, geothermal and marine. Other technologies such as CSP, geothermal and

marine are expected to grow for the next years, but their total contribution to the total

electricity generation remains very modest. CSP is rapidly growing very in the European

Union and the United States, mainly due to the government interest in developing this

technology. CSP plants produce 185 TWh of electricity in 2030, from less than 1 TWh in

2008. Installed CSP capacity increases from 1.4 GW to over 52 GW in the same period.

Geothermal power continues rising its capacity in the selected regions although at a

moderate pace, while marine technology seems to be stuck. Beyond the increments in

capacity in European projections, marine technology remains null most parts of the

world.

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Africa is just starting to move forward the integration of renewable sources. If things go

right in Africa, by 2030 is expected to have a relatively diversified mix of non-hydro

renewables, but in absolute terms the generation mix will be still dependant on

conventional energy sources.

3.3.4. European energy targets In 2007 members of the European Union discussed about the energy challenges in

order to establish the political framework needed to cope with the climate change

challenge, while establishing country-specific compromises regarding carbon emissions

and the integration of renewable sources in the energy consumption. The revised

pledges are set in what is known as “20-20-20 target”, which basically consist on the

achievement of the next three main objectives by 2020:

1. 20% reduction in greenhouse emissions, taking as a reference the levels emitted

in 1990.

2. 20% share of RES in the total energy consumption

3. 20% reduction in the total primary energy demand in relation to projected levels

(European Commission, 2010).

In the recent years, the European council has been working in the project called “An energy policy for Europe” (European Commission, 2007). This energy policy consist

on the development of future plans and favorable policies and framework to promote

energy efficiency practices in Europe, moving forward to a low consumption economy

and promoting sustainable energy practices. Among the main objectives are: the

liberalization of the market, security of energy supply, reduction of greenhouse gases,

development of low carbon technologies and the integration of all European members

into a common vision to face the energy challenge (ibid).

According to the National Renewable Energy Action Plans (NREAP) published by the

European Commission with the support of the Energy Research Centre of the

Netherlands (ECN) and the European Environment Agency, the European Union will

exceed by 0.3% the expected 20% integration RES into the energy mix; taking as a base

the pledges published by each country in the NREAP (Beurskens & Hekkenberg, 2011).

78

Some highlights about the trends in renewable energy sources are listed next:

• Increasing importance of RES technologies around the world and China seems

to be leading the market.

• Economies are moving towards a more balanced energy mix where fossil fuels

such as coal is phased out in developed countries but still increasing in

developing economies.

• Gas demand remains growing in all the regions, but faster in developing

countries.

• Wind power is the technology with the largest share in power generation followed

by biomass and solar PV.

• Based on the presented analysis, more than 20% of the European electricity is

expected to be generated from RES by 2020.

3.3.5. Final Consumption of Electricity World electricity demand continues growing faster than any other energy sources.

Between 2008 and 2030 is expected to increase around 66% at a pace of 2.3% per

year, from 16,800 TWh to 28,000 TWh. This increase in demand requires around 5,500

GW in capacity additions.

The vast majority of the world increments in electricity demand occur in developing

economies. The economical development somehow is proportional to energy

consumption, hence countries and regions such as China, India, Latin America and

Africa among others are experiencing the fastest growing rates in electricity consumption

and this trend remains in the projected time frame. Thereby, electricity consumption in

the industrial sector significantly increases in developing economies. The trend is similar

in the sector labeled as “buildings”, which includes residential and tertiary sectors and

where the growth rates project a moderate increase in consumption among developed

economies.

In China, demand of electricity increases by 8% per year between 2008 and 2015, then

it grows at 4.5% up to 2030. The total final consumption of electricity almost tripled

between 2008 and 2030, from 2,800 TWh to 7,600 TWh. In 2030, China’s growth in

electricity demand will require a huge amount of new capacity installations. Additions in

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capacity should increase China’s generating power by around 1,200 GW in ration to

2008 values, equivalent to total current capacity installed in the United States.

Figure 35 - Total final consumption of electricity by sector and region, 2008-2015-2030

0

1000

2000

3000

4000

5000

6000

7000

8000

2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030 2008 2015 2030


OtherBuildingsTransportIndustry


In terms of electricity demand by sector, electricity consumed in the transport sector

expects to grow with higher rates in relation to other sectors but in absolute term its

share remains modest, reaching only 2% of the total final consumption of electricity.

China and the European Union are demanding more electricity for transportation among

the selected countries. Demand in the European Union grows steadily at a moderate

rate of 1.2% per year until 2030 (Figure 35).

Some of the highlights regarding the total final consumption of electricity are

summarized next:

• Consumption of electricity in all sectors is growing faster in developing countries,

except the transport sector where developed countries expect more rapid growth.

• World electricity demand is rising at an annual rate of 3.4% between 2008 and

2015, and 2% per year over the period 2020 to 2035.

• In China, electricity demand triples between 2008 and 2035.

• World total capacity additions, to replace obsolete capacity and to meet demand

growth, amount more than 5 500 GW in the period 2009-2035.

80

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ACRONYMS CSP Concentrating Solar Power CP Current Policies scenario (IEA) ECN Energy Research Centre of the Netherlands EEA European Environment Agency EIA U.S. Energy Information Administration EPC Engineering, Procurement and Construction EPIA European Photovoltaic Industry Association STEEP Social, Technological, Economic, Environmental, and Political EU European Union GDP Gross Domestic Product IEA International Energy Agency IMIM International Master of Industrial Management LAT Latin America MCDA Multi Criteria Decision Analysis M&A Mergers and Acquisitions MV Medium-Voltage NP New Policies scenario (IEA) NREAP National Renewable Energy Action Plans OECD Organization for Economic Co-operation and Development PEST Political, Economic, Social, Technological, Environmental PESTEL Political, Economic, Social, Technological, Environmental & Legal PV Solar Photovoltaic RES Renewable energy sources RES-E Renewable energy sources for Electricity SWOT Strengths, Weaknesses, Opportunities and Threats TFC Total Final Consumption USA United States of America LCOE Levelized Cost of Energy DPM Directional Policy Matrix CO2-eq Carbon dioxide equivalent 450 450 scenario (IEA) UNITS KW Kilowatt MW Megawatt GW Gigawatt TW Terawatt TWh Terawatt hour Mtoe Million tonnes of oil equivalent ppm parts per million

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