National Grid USA Faces Fierce Competition After Deregulation

Case Type: business competition/competitive response.
Consulting Firm: Hitachi Consulting 2nd round full time job interview.
Industry Coverage: utilities; energy industry.

Case Interview Question #00315: Your client National Grid USA is a subsidiary of London UK-based multinational electricity and gas utility company National Grid plc (LSE: NG, NYSE: NGG). Headquartered in Waltham, Massachusetts, United States, the company operates over 9,000 miles (14,000 km) of electricity transmission and delivers electricity and natural gas to New England areas of the Northeast states of Massachusetts, New Hampshire, New York, Rhode Island and Vermont, serving over 3.3 million customers with electrical power and 3.4 million customers with natural gas.

National Grid USA has hired you because the company is facing increasingly fierce competition due to deregulation in their industry. Soon, the electricity carrier (wires) business will be separate from the electricity generation (power plant) business. Any power company generating electricity will soon be able to sell in their New England market. What would you recommend the client National Grid USA to do?

Possible Answer:

Suggested Framework: 3C’s (Corporation, Customer, Competitors).

1. Competition:

The electricity utility industry is a business with high fixed costs, and low marginal costs (like airlines and telephone). Therefore, consequences:

• Incentives to produce a lot in order to amortize the initial investments;
• High barriers to exit, which causes increase in competition intensity;
• However, it takes 7 year to build a power plant, creating huge barriers to entry;
• Also, economies of scale and learning curve will give a competitive advantage to existing big players.

Therefore, after deregulation, we can forecast few new entrants, industry consolidation (the biggest players buy out the smallest), but incentive to production increase and overcapacity.

2. Customers:

The client mainly has two kinds of customers: individuals and corporations. Right now, the level of services offered in this industry is not very differentiated by customer type (pricing, flexibility, maintenance).

You also have to talk about the definition of market boundaries here: customers may be loyal and/or they may not have so much choice for their electric company in their geographic location. This means that a good strategy might be to choose an area with small potential competition (Dakota for example) for the electric company. New England might not be the best.

Another issue is price sensitivity. Electricity is a COMMODITY and customers should be very sensitive to prices.

3. Company:

I (the interviewee) found out that the customers were not satisfied with the level of service of our client; that the client is not a low cost competitor.

Recommendations for Client:

Discuss issues with potential overcapacity, customer sensitivity to prices, incentives to decrease prices to marginal cost. Additionally, our client is not an excellent player and does not differentiate among its competitors. Because it is small and regionally located, no chances to benefit from economies of scale. The best way now is to find a way out. Our client will probably get a good price for their wires and power plants.

Additional Notes:

The candidate should always keep in mind that getting out of the business is OK to mention if you explore the other solutions and found that they were not viable!