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

Strategic model for the assessment of business

opportunities:
A case study in an electrical equipment manufacturer

Alejandro Viramontes Rodriguez

Master of Science Thesis INDEK 2010:x

KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM

Master of Science Thesis INDEK 2011: 80

Strategic model for the

assessment of business
opportunities:
A case study in an electrical equipment
manufacturer

Alejandro Viramontes Rodriguez

Approved

Examiner

Supervisor

July 02, 2011

Prof. Miguel Palacios

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 Baales 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 - Porters 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

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

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.

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 Hgskolan (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

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. Ormazabals 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.

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 companys 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.

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. Companys 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.

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.

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 1980s, theories were characterized by addressing competitive aspects of the
market (Porter, 1980) and focusing on human resources. In 1990s, 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 companys strength or driving force (Michel
Robert, 1993), or regarding the usage of resources to improve firms 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.

Porters 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 firms strategy within an

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 - Porters five competitive forces

Source: Porter, 2008.

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

which starts by appraising companys internal resources and capabilities and then
focusing on those core competences that can create and maintain companys
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 todays business situation, as well as customer and product economics. The

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
Enabled Through
Effective Use of
Technology

Best Product

Customer Solutions

Product Economics
Rivalry
Achieving Product Share

Customer Economics
Cooperation
Achieving Customer Share

Source: Hax & Wilde, 1999.

10

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

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

11

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, companys 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 firms 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 ninebox 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.

12

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
companys mission and core competences - the mission and core competences decision
(MCC) matrix. In this model, the author argues that MCC or DPM, unlike BCC growthshare 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 decisionmaking 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.

13

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.

14

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 todays 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.

15

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 (Sderholm & 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 (Sderholm & 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.

16

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.

17

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.

18

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).

19

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

20

(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

LITERATURE REVIEW

INTERNAL SOURCES

DATA COLLECTION

FRAMEWORK

DATA ANALYSIS

FINDINGS

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.

21

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. Firms 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

22

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.

23

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

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

VISION AND MISSION

SCENARIOS,
TRENDS AND
IMPLICATIONS

BUSINESS
ROADMAP

BUSINESS
VALUE
CHAIN

BUSINESS
CASE

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).

24

Strategy formulation is a process that supports the definition of the firms long-tem
direction (Hernandez et al, 2004) by matching firms 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 companys resources and capabilities, enabling the firm to take on
the external opportunities (Grant, 1991).

Figure 11 - Core areas of corporate strategy

STRATEGIC
ANALYSIS

CORPORATE
STRATEGY

STRATEGIC
DEVELOPMENT

STRATEGY
IMPLEMENTATION

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).

25

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 firms 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.

26

As defined by Lynch (2009), the strategic analysis refers to the definition of the vision,
mission and objectives. Based on the firms 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

27

and involve the analysis of firms competences and asking whether the strengths can be
leveraged (ibid). Such firms 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
firms 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 stakeholders 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

28

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 companys 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
firms 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 companys 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.

29

30

STRATEGIC
ANALYSIS

IDENTIFICATION

SCENARIOS,
TRENDS AND
IMPLICATIONS

EVALUATION

BUSINESS
ROADMAP

STRATEGIC
CHOICE

DEVELOPMENT

BUSINESS
VALUE CHAIN

DEMOSTRATION

BUSINESS
CASE

STRATEGY
IMPLEMENTATION

MARKET

ACTION
PLANS

Figure 12 - Funnel for the analysis of long-term business opportunities and the strategic management process

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.

31

Table 4 - Main stages of environmental analysis

Stages

Techniques

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

MARKET
INFORMATION
MARKET
ANALYSIS
MARKET TECHNOLOGY
IMPLICATIONS

BUSINESS
ROADMAP

TECHNOLOGY
ASSESSMENT
TECHNOLOGY
INFORMATION

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.

32

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 companys 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 firms 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.

33

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

2.2. Electricity distribution losses

(Total generation, technology mix)

1.2. Electrical capacity

2.3. Quality of electricity supply

2.4. Network infrastructure

(Total capacity, technology mix)

1.3. Electricity demand

(Electrification rate, power network length, etc.)

(Final consumption per economic sector)

1.4. Investment

3. Technological factors

2.5. Electricity prices

4. Other factors

3.1 Technology competitiveness

4.1. Political and regulatory

4.2. Economical and social

(Levelized cost of electricity (LCOE), Technology

learning curves)

(GDP, population, etc.)

3.2 Technology trends

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

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

34

companys 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 enduser (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).

35

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.

36

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 Asiapacific 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.
USD Billion

140

Growth

Historical

7%

Forecast

6%

120

5%
100

4%
3%

80

2%
60

1%
0%

40

-1%
20

-2%

-3%
2005

2006

2007

2008

2009

Source: Datamonitor, 2010.

37

2010

2011

2012

2013

2014

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 companys
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 suppliers 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.

38

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

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

SUPPLIERS

BUYERS

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 differentiation buyers will be
likely to search for the best deal and cheapest
option
Overall: moderate

RIVALRY

SUBSTITUTES

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

There are no real substitutes

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

6.2.4. SWOT analysis

SWOT analysis supports the assessment of the industry environment by linking external
factors to companys 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, companys 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.

39

40

THREATS
Market is concentrating in big and few companies
Greater transparency in markets
Disappearance of trade barriers: entrance of new
competitors and new technologies
Increasing commoditization of products
Major competitors offering complete set of solutions Trend
to reduce prices and therefore margins
Oversupplied market
Ability of multinationals to influence the standards

Access to new customers and markets. Progressive

disappearance of technical barriers.
Stringent regulation on security and environmental issues
Electricity infrastructure needs in developing countries:
China, India, Brazil, Mexico, etc.
Global growth of renewable energy market:
- Tech evolution and economic competitiveness
- Increasing power capacity (wind and photovoltaic)
Increasing public spending on infrastructure
Enhancing M&A
Technological development in power distribution
networks
Long-term relationships with key customers

Little experience in strategic alliances

Low risk-taking culture
Room for improvement on logistics
Low time-to-market
Difficulties in expanding into international markets
Mature market
In other countries apart from the key countries:
Lack of customer management
Insufficient commercial presence worldwide

WEAKNESSES

OPPORTUNITIES

Leadership, experience and expertise in medium-voltage

Good competitive position across current markets
Increasing flexibility and better customer service
Professional trained staff and committed
Constant participation with European utilities
Brand awareness
Competitiveness in terms of technologies and industrial
processes

STRENGTHS

Figure 18 - 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 firms 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

41

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 Ansoffs growth
strategies.

42

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 longterm 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.

43

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 companys 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 companys competitive position.

One side of the matrix represents the market prospects and the other the companys
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).

44

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

MARKET INTEREST
Unattractive

Average

Attractive

BUSINESS STRENGTHS

Strong

Most Attractive

Average

Further Consideration

Weak

Phase Out

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.

45

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
companys 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 firms
objectives and goals attached to vision. In other words, there should be a clear
alignment between companys 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.

46

Table 6 - DPM axes and criteria in different literature sources

Matrix axes and criteria

Business sector prospects

Company's competitive capabilities

a. Market growth rate

b. Market quality
c. Industry feedstock situation
d. Environmental aspects

a. Market position
b. Production capability
c. Product research and development

Source: Shell International, 1975; Robinson et al., 1978.

Market axis

Competitive axis

a. Market growth
b. Market quality
Stable profitability
Margins maintained in over capacity
Brand loyalty
Customer/producer ratio
Degree of substitutability
Restriction of technology
Generation of after sales business
c. Market supply
Are there major supply difficulties
in the industry?

a. Market position
Market share
Dealer network
After sales service network
b. Production capability
Production economics
Capacity in relation to market share
Component availability
Ability to handle product change
c. Engineering and support services
Capability in relation to market position
Production innovation ability
Product quality

Source: Hussey, 1978.

Industry prospects

Company prospects

a. State of the market

Rate of market growth
Level and consistency of market profit margins
Security against new producers and substitutes
b. Synergy
Sales, operating, investment, mgmt. synergies
c. Security
Environmental factors
Possible physical
Statutory and social limitations
Knowledge of the acquisition
Companys activity within that industry
Personnel organization/labor relations within industry

a. Competitiveness
Market share
Operating R&D technological status
Organizational status
b. Personnel attitudes
State of labor relations within the company
Attitude to take-over
Response to corporate management

Source: Newton, 1981.

Measures of market attractiveness

Measure of comparative advantage

a. Growth rate
b. Market size
c. Stability of demand
d. Competitive concentration
e. Technological risk
f. Skills ratio (percentage of scientist and
engineers out of total manpower)
g. Capital intensity
h. Marketing expenses as a percentage of sales

a. Organization's share of exports

b. Organization's share of imports
c. Organization's distribution network
d. Profitability
e. Technological advantage
f. Product quality
g. Price competitiveness
h. Production capacity
i. Organization's relation with key suppliers
j. Program control requirements

Source: Ayal et al., 1987

47

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 companys 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 companys current position.
5. Competitive structure. It refers to rivalry among existing competitors. Think
about porters 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.

48

Analysis of business strengths. Three main criteria were considered by which the
companys strengths in the industry may be judged.

1. Synergy. The criterion aims to evaluate the integration of the business proposal
into the companys 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 companys group.
2. Competitive advantage. Based on the analysis of the companys 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 companys business portfolio. Proximity
criterion attempts to appraise the strategic fit of business ideas by linking those
ideas to firms 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).

49

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.

50

Figure 21 - Business opportunities plotted on the DPM

MARKET INTEREST
Unattractive

Average

Attractive
2

Strong

BUSINESS STRENGTHS

15

24

30

29

16

23 5

Average
20

13
18

28

19
14

25

27
4
22

10
26

Weak

21

12

11

17

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.

51

Figure 22 - Classification of business opportunities on the DPM

MARKET INTEREST
Unattractive

Average

Attractive
Summary:
2

15

Most attractive ideas: 5

1

BUSINESS STRENGTHS

Strong

Further consideration: 12
24

30

29

Phase Out: 13

16

23 5

Average
20

13
18

28

19
14

27
4
22

10
26

Weak

21

25

11

12

17

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.

52

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 companys 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

53

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 companys 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.

54

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.

55

ANNEXES

56

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

57

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 2C 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

IEA - World Energy Outlook 2010, Nov 2010.

www.iea.org/
58

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

59

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).

60

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)

45 000
40 000

Scenario
projections

Historical
35 000
30 000
25 000
20 000
15 000

iea - NP
iea - CP
iea - 450

10 000
5 000

EIA - Reference Case

1990

2008

2015

2020

2025

2030

2035

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.

61

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

(percentage)
Coal

Oil

Gas

Nuclear

Renewables

100%
90%

22

24

23

26

23

29

80%
70%

13

14

11

14

15

21
40%

21
3

21

20

21

42

39

22
2

30%
20%

13
14

60%
50%

23
39

43

39

37

34

19

20
2

20
1

41

21

10%
0%
2020

2020

2020

2020

2030

2030

2030

2030

CP

NP

450

Ref. Case

CP

NP

450

Ref. Case

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).

62

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

Efficiency

450
NP
Ref.Case

CP
Renewables
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.

63

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.

64

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

(Buildings sector includes tertiary and residential)

TFC
Industry
Transport
Buildings
Other

1990

Energy
Mtoe
2008
2015

6 289
1 808
1 576
2 247
657

8 423
2 351
2 299
2 850
923

9 525
2 882
2 514
3 082
1 046

2030

1990

11 045
3 304
3 035
3 570
1 136

9 708
4 412
244
4 696
356

Electricity
TWh
2008
2015
16 822
7 009
269
9 078
466

20 650
9 106
346
10 624
573

2030
27 954
12 009
558
14 606
781

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 energyintensive 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).

65

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

(Percentage)
Energy Use

Electricity Use

100%
90%

100%

11%

32%

70%

52%

1.6%

2.0%

42%

43%

2008

2030

60%
50%

50%

27%

27%

40%
30%

30%

20%

20%
10%

54%

80%

34%

60%

40%

3%

90%

80%
70%

3%

10%

28%

30%

2008

2030

10%
0%

0%

Industry

Transport

Buildings

Other

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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.

66

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

900

Projections

Historical
800
700

China
600

USA
India

500

EU
400

LAT
Africa

300

Middle East
200
100
1990

2008

2015

2020

2025

2030

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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.

67

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)

35 000

30 000

25 000

100%

3%

90%

16%

13%

Renewables
Hydro
Nuclear

80%

Gas
Oil

16%
14%

70%

Coal

14%
60%

21%

20 000
50%

5%

15 000

22%

40%

2%
30%

10 000

20%

41%
34%

5 000
10%
1990

0%
2008

2015

2020

2025

2030

2008

2030

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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.

68

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 nonhydroelectric renewables). Non-hydroelectric renewables include biomass and waste,
geothermal energy, wind energy, solar photovoltaic (PV) and concentrated solar power
(CSP).

69

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)

100%

4 500

90%

4 000

3 500

3 000

2 500

Marine
CSP

80%

Solar PV
Geothermal
Wind
Biomass and waste

70%

60%
50%

2 000
40%
1 500
30%
1 000

20%

500

1990

10%
0%
2008

2015

2020

2025

2030

2008

2030

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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

70

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 costcompetitive 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).

71

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

10,000

Other Renewables
9,000

Hydro
Nuclear

8,000

Gas
Oil

7,000

Coal
6,000

5,000

4,000

3,000

2,000

1,000

2008

2015
USA

2030

2008

2015

2030

2008

China

2015

2030

EU

2008

2015

2030

India

2008

2015

2030

2008

Africa

2015

2030

LAT

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

Chinas 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.

72

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)

Coal

Oil

Gas

Nuclear

Hydro

Other Renewables

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2008

2015

2030

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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.

73

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

2500

Other Renewables
Hydro
Nuclear
Gas
Oil
Coal

2000

1500

1000

500

0
2008

2015
USA

2030

2008

2015

2030

China

2008

2015

2030

2008

EU

2015

2030

2008

India

2015

2030

Africa

2008

2015

2030

LAT

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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
Country /
Region
World
European Union
Africa
North America
Latin America
United States
China
India
Spain
France
Germany

% RES-E
1990

2008

2015

2020

2030

19.6
18.6
11.8
12.1
19.5
24.8
73.0
18.0
17.2
13.4
4.1

18.7
16.1
9.3
17.1
17.2
15.7
66.2
15.8
20.8
14.0
15.9

21.2
19.6
13.3
25.0
18.1
15.4
63.9
19.2
32.2
15.5
18.6

23.6
21.6
15.6
30.0
21.2
18.6
64.3
23.2
35.0
16.4
20.7

26.4
24.0
18.4
34.3
23.8
23.5
65.9
28.4
36.6
16.3
23.8

74

European Unions 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, 20082015-2030
1200

Marine
CSP
Solar PV
Geothermal
Wind
Biomass and w.

1000

800

600

400

200

0
2008

2015
USA

2030

2008

2015
China

2030

2008

2015

2030

EU

2008

2015
India

2030

2008

2015
Africa

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

75

2030

2008

2015
LAT

2030

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 worlds 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.

76

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).

77

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, Chinas growth in
electricity demand will require a huge amount of new capacity installations. Additions in

78

capacity should increase Chinas 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, 2008-20152030

8000

Other
Buildings
Transport
Industry

7000

6000

5000

4000

3000

2000

1000

0
2008

2015

2030

USA

2008

2015
China

2030

2008

2015

2030

EU

2008

2015

2030

India

2008

2015
Africa

2030

2008

2015

2030

LAT

Source: Own elaboration. Data taken form IEA, World Energy Outlook 2010.

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.

79

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ACRONYMS
CSP
CP
ECN
EEA
EIA
EPC
EPIA
STEEP
EU
GDP
IEA
IMIM
LAT
MCDA
M&A
MV
NP
NREAP
OECD
PEST
PESTEL
PV
RES
RES-E
SWOT
TFC
USA
LCOE
DPM
CO2-eq
450

Concentrating Solar Power

Current Policies scenario (IEA)
Energy Research Centre of the Netherlands
European Environment Agency
U.S. Energy Information Administration
Engineering, Procurement and Construction
European Photovoltaic Industry Association
Social, Technological, Economic, Environmental, and Political
European Union
Gross Domestic Product
International Energy Agency
International Master of Industrial Management
Latin America
Multi Criteria Decision Analysis
Mergers and Acquisitions
Medium-Voltage
New Policies scenario (IEA)
National Renewable Energy Action Plans
Organization for Economic Co-operation and Development
Political, Economic, Social, Technological, Environmental
Political, Economic, Social, Technological, Environmental & Legal
Solar Photovoltaic
Renewable energy sources
Renewable energy sources for Electricity
Strengths, Weaknesses, Opportunities and Threats
Total Final Consumption
United States of America
Levelized Cost of Energy
Directional Policy Matrix
Carbon dioxide equivalent
450 scenario (IEA)

UNITS
KW
MW
GW
TW
TWh
Mtoe
ppm

Kilowatt
Megawatt
Gigawatt
Terawatt
Terawatt hour
Million tonnes of oil equivalent
parts per million

84

85