Differentiation into Environment Friendly Energy

The product (electricity) is the same in all electricity companies, but the way how it is sold and the price at which it will be sold, vary. What strategy should be selected to be competitive in the market?

Porter (1980) says that the base for success of the company is a functioning and competitive business strategy, where separate business processes have connected to the real needs of customers and bring them added value continually.

STRATEGIC BENEFIT The customer observed

uniqueness Low cost level STRATEGIC

Whole Branch

Differentiation Cost leader OBJECT Only certain

Segment

Concentration

Figure 6. Three basic strategies (Porter 1980).

Thecompetition strategy consists of principles which have been defined as all-inclusive analysis for every separate situation. In the Porter strategy window (figure 6, Porter 1980: 63 and modified by Porter 1985: 25) there is the possibility to reach success with the three main basic strategies.

Successful companies have been able to follow more than one basic strategy. Porter advises, however, that a normal company should select between the strategies or it will stay in - between, in other words the company will have no competitive advantage. The company serves some particular destination segment by following a concentration strategy. If the company has at the same time to serve many other segments, where at the same time cost leader or differentiation strategy are followed (Porter 1985: 31) then the company will have difficulties.

A company which has selected the Cost leader strategy tries to achieve cost leader status, in other words a low cost level with respect to competitors. The target will be reached by adapting earlier experience, following exactly the cost generation and by minimising the costs. To reach a low cost level big production volumes are needed when the market share of the company must be rather high. A low cost level demands that the production emphasises simplicity and at the same time a wide production range (Porter 1980).

How well does cost leader strategy suit this case? In chapter 1.2 in researching the use of ”green electricity” (Satakunnan Kansa 21.7.00, p. 6 and Surugiu et al. 1999: 586) the majority (60 %) of people surveyed were not willing to pay more than for ”normal”

electricity. To win a majority of customers the ”green electricity” seller must be a cost leader. Cost leader position is important in this market, the only difficulty being to get into the position of being cost leader. This research handles this question.

An alternative strategy to cost leader strategy could be differentiation strategy. In cost leader strategy companies compete by price but in differentiation strategy they try to produce unique products. In differentiation strategy this is a will to separate from the competitors. The target is to be beyond the reach of competitors by being superior, unique; aiming at the customer. This can be achieved by product image, design of the product, technology or customer service. Often it includes originality, through which it will not reach big market shares. The companies have very limited intuition concerning

the potential source of differentiation. It will not be noticed that there is potential all over in the value chain. All parts of the company should co-ordinate the operation, not only the marketing department, which is a base for successful differentiation strategy.

How appropriate is a differentiation position in this case? The differentiation, as mentioned earlier, can happen for example through product image. Wind power electricity has by nature an environmentally friendly energy image. This differentiation helps to win customers and gain market share. In the research of Suomen Hyötytuuli Oy (Satakunnan kansa 21.7.00, p. 6) 87 % and 97 % of the respondents of two groups recommended building more wind power stations and other highly favourable comments were received from other countries in the research of Surugiu et al. (1999:

586).

According to the research 40 % of people were willing to pay more for “green electrici-ty” than “usual electricielectrici-ty”. In Finland today the difference is about 0.01 c/kWh for customer. The problem is, however, that the electricity distribution companies buy electricity much more cheaply than wind power electricity. The buying price is less than

”usual electricity”, minus 0.01 c/kWh. That means, in other words, that the electric company makes a loss with every wind power electricity kWh sold. The distribution companies buy a positive image but make a loss. One example of compromise is to sell, for example, 20 % ”green electricity” and 80 % ”usual electricity”. That means”green electricity” is image and”usual electricity” economy.

Porter (1985: 211) states that technical change decreases costs or promotes differentia-tion and that the technical leading posidifferentia-tion of the company is constant. Technical change alters the cost factors or the originality incentive to favour the direction of the company. The realisation of technical change first brings to the company the advantages of reaching benefit first and in addition the benefits of the technology. The content of this research tries to follow this strategy.

The cost leader and differentiation strategy clearly include the whole branch, but the third alternative, concentration, means focusing the actions on a certain segment or on a certain geographical area like differentiation (Porter 1980). The target is to serve the selected group with expertise. This strategy is based on the assumption that the company can better serve a limited strategy target more effectively by focusing the

resources. By doing so concentration will be effected either through differentiation and/or low production cost bringing benefit to the selected marketing target. The condi-tion of concentracondi-tion is always barter between pricing and sales volumes. In adapting this strategy barter may be used with total cost just as in differentiation strategy.

In adapting concentration to this research, in selling only wind power electricity means today in Finland a very limited market. Although nearly all people in the neighbourhood of wind parks recommend building more wind power plant and parks, real wind electricity buyers are a very marginal group.

What conclusion can we make from the preceding discussion? Real competition takes place not in the end customer market but in the electricity distributor’s market. The differentiation by environmentally friendly energy helps a little but the main competi-tion is by price among the other energy producing methods. Being a cost leader or at least nearby the other competitors is achieved in this case by technology or/and by the support of the community.