Strategic model for the assessment of business opportunities:

Full text


Strategic model for the assessment of

business opportunities:

A case study in an electrical equipment manufacturer

Alejandro Viramontes Rodriguez



Strategic model for the assessment of business


A case study in an electrical equipment manufacturer

Alejandro Viramontes Rodriguez

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


Master of Science Thesis INDEK 2011: 80

Strategic model for the

assessment of business


A case study in an electrical equipment manufacturer

Alejandro Viramontes Rodriguez


July 02, 2011


Prof. Miguel Palacios


Prof. Miguel Palacios


Mikel Zaldunbide


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.





A case study in an electrical equipment manufacturer

International Master of Industrial Management

[Master of Science Thesis]



“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.“



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.





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


2.1. Strategic management overview ... 8

2.2. Strategy in the electricity industry ... 13

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



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


5.1. 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


6.2.3. 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


7.1. Recommendations ... 53

7.2. Limitations and further research ... 54

ANNEXES ... 56


1.1. World Electricity Scenarios ... 57

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



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




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


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



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.


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.



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


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


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


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.


• 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.


• 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.


1.5. Master thesis objective



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.


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.


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 Through Effective Use of



• 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.


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


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


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.


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).


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.


Figure 7 - Strategic planning process for RES

Source: Terrados, Almonacid & Perez, 2009.


Figure 8 - Multi-criteria group decision-making framework

Source: Haralambopoulos & Polatidis, 2003.



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.



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


(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



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)


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.



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















5.1. Theoretical Framework


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).


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


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


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).


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


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.

















































nnel for the 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.


Table 4 - Main stages of environmental analysis



1. 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



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.


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


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


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).


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% 4% 5% 6% 7%

USD Billion Growth

Historical Forecast


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


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


• RM price is volatile

• Larger companies have integrated backwards • Worldwide supply chain network enable access to different suppliers at the best cost.

• Overall: moderate


• Utilities and industrial users • High power in negotiations

• Low product differentiationÆ buyers will be likely to search for the best deal and cheapest


• Overall: moderate


• 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


• There are no real substitutes

• Growing environmental concerns could increase the usage of self-generation technologies, but is very costly. • Overall: weak


• 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


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


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


Figure 19 - Ansoff's product/market growth matrix Current Products New Products Current Markets MARKET PENETRATION PRODUCT DEVELOPMENT New Markets 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:


• 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.


Figure 20 - Directional Policy Matrix approach for the assessment and selection of business ideas

Unattractive Average Attractive

Weak Average Strong



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


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


Table 6 - DPM axes and criteria in different literature sources

Business sector prospects Company's competitive capabilities a. Market growth rate a. Market position

b. Market quality b. Production capability

c. Industry feedstock situation c. Product research and development d. Environmental aspects

Market axis Competitive axis

a. Market growth a. Market position b. Market quality Market share

Stable profitability Dealer network

Margins maintained in over capacity After sales service network Brand loyalty b. Production capability

Customer/producer ratio Production economics

Degree of substitutability Capacity in relation to market share Restriction of technology Component availability

Generation of after sales business Ability to handle product change

c. Market supply c. Engineering and support services

Are there major supply difficulties Capability in relation to market position in the industry? Production innovation ability

Product quality

Industry prospects Company prospects

a. State of the market a. Competitiveness

Rate of market growth Market share

Level and consistency of market profit margins Operating R&D technological status Security against new producers and substitutes Organizational status

b. Synergy b. Personnel attitudes

Sales, operating, investment, mgmt. synergies State of labor relations within the company

c. Security Attitude to take-over

Environmental factors Response to corporate management Possible physical

Statutory and social limitations Knowledge of the acquisition

Company’s activity within that industry

Personnel organization/labor relations within industry

Measures of market attractiveness Measure of comparative advantage a. Growth rate a. Organization's share of exports

b. Market size b. Organization's share of imports c. Stability of demand c. Organization's distribution network d. Competitive concentration d. Profitability

e. Technological risk e. Technological advantage f. Skills ratio (percentage of scientist and f. Product quality

engineers out of total manpower) g. Price competitiveness g. Capital intensity h. Production capacity

h. 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.


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.


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).





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