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The Danger for British Gas

The news that British Gas is declaring annual profits of £571m for its residential business – a jump of around 500% on its 2006 figures – with an anticipated increase of 17% in dividend payouts, only a month after announcing a 15% increase in its charges for supply of gas and electricity, is astoundingly bad PR (public relations) management. Especially when the profits reflect cost-cutting exercises that cost 2,000 employees their jobs, with another 1,000 redundancies planned for the coming year.

The critical furore right across the news media, the vicious attacks from consumer interest groups and the welcome for the investigation by the energy regulator, Ofgem, could easily have been foreseen – and should have been!

Ostensibly British Gas looks like a company in ‘Aristocracy’ on the Organisation LifeCycle – arrogant, flaunting its wealth, insensitive to public perception of its actions, with a determined focus on shareholder interests and profit maximisation, rather than customer (consumer) needs

As the newspapers dig deeper, in a bid to see who can splash British Gas with the most mud, we see figures bandied about like Centrica, the owner of British Gas, declaring profits of £2bn this year while the average household energy bill has risen by 77% since 2003.

As so often, the story is much more complex than the headlines would have us believe. Points about instability in wholesale gas prices, earlier price reductions to woo customers away from competitors and the need for major investment in the country’s power infrastructure can all be found towards the bottom of the articles eviscerating British Gas. However, many readers will have broken off by then and gone onto something else, their minds made up by headlines and the first damning paragraphs.

British Gas have made a phenomenal PR blunder that may yet hurt them severely.

What a contrast to the days of ‘Sid’!

From Bureaucracy to Prime
Mind you, it was an era when hundreds of thousands of people who never thought they would own their own property bought their council houses (at very beneficial rates).The ORANGE vMEME was running rampant through entire sections of the government of Margaret Thatcher, raising tantalising possibilities of social and economic advancement for those individuals with the ability to catch the opportunities presented.

By the mid-1970s, British Gas, created from the Area Gas Boards set up by the 1948 nationalisation of the gas industry, was, like so much of the public sector in those days, a ‘Bureaucracy’ kept alive only by virtue of its monopoly position and reliance on public funds. Dominated largely by BLUE  thinking in a Procedures meta-programme, British Gas was unionised to the point of near control, overmanned, inefficient and despised by many outside the public sector.

The transformation of British Gas, the publicly-owned monopoly, into a highly-competitive, innovative and customer-focused organisation was by no means overnight. While the details are for another, much more-detailed study, a culture of ORANGE thinking was grown in British Gas in the late 80s and early 90s, with notice served by the 1992 Monopolies & Mergers Commission inquiry that competition was on the way. When that competition came in 1996, British Gas was ready and showed itself more than capable of taking on the challengers. Innovation, customer focus and aggressive sales strategies were major priorities for the company, with a move into electricity supply in 1998 and then telecommunications in 2000. The company had all the hallmarks of an organisation flourishing in the ‘Prime position’ in its LifeCycle.

Heavens, GREEN even appeared to exert some influence on British Gas for its 1999 partnership with Help the Aged to combat ‘fuel poverty’!

However, as the noughties have worn on, the energy supply market has become increasingly dominated by a handful of ‘big players’ and the edge seems to be wearing off the ‘competition’ motif.

Certainly, as said at the beginning of this piece, British Gas is acting more like a company in Aristocracy. Have its rivals – nPower, Powergen, Scottish Power, etc -also slipped through Prime and onto the ageing side of the LifeCycle? And is there a price-fixing cartel of sorts – formal or informal – going on since they all are taking very similar steps in relation to price rises? (While it might look like a reaction to this week’s British Gas announcements, the Ofgem investigation is into the whole energy supply industry and was, in fact, finally triggered by nPower’s recent price rises.)

Blind to the consequences?
If British Gas has slipped into Aristocracy, them most likely the type of thinking driving the bulk of the company’s strategic management will be RED. Given RED’s tendency to extreme self-indulgence and near-total inability to appreciate consequences, this would explain why the company thought it could make the announcments it has and then act surprised by the negative reactions it has received.

While the apparent price-fixing cartel may make a lot of money for the energy supply companies in the short-term, the regulator’s investigation into the industry is a real threat to it. BLUE-led investigations like this can be very successful in exposing such fixing operations – eg:last year’s exposure of price-fixing between Virgin Atlantic and British Airways. If an investigation were to be successful, the kind of punishments that can be levied would have a quite noticable negative effect on the balance sheets.

Equally threatening is the possibility of one of the existing players breaking ranks and introducing competitive pricing regimes – which would gave them a major advantage. (To be fair to British Gas, they did go through a form of this strategy last year with their short-lived wave of low prices for new and returning customers before sinking back into their increasingly Aristocratic habitual patterrns.)

Probably more threatening is the possibility of a major new player entering the market with attractive pricing. The new player would most likely have extra advantage because they would lack all the public opprobium attaching to the current players.

British Gas has been a remarkable success story since its privatisation – effectively a company born in a state of Bureaucracy which has been nurtured and developed to become an effective operator in Prime. Only now it seems to be slipping into Aristocracy – and possibly beyond.

The company needs urgently to regain its customer focus and get a sense of purpose beyond shareholder returns.

As (Rank) Xerox learned so well in the late 1980s, good shareholder benefits are a by-product of committed and motivated employees delighting satisfied customers.

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