Table of Contents
2. Business Model & Strategy
2.1 Business Model
2.2 Corporate Strategy
3. Strategic Human Resource Management
3.1 Human Research Management Approach .
3.2 Human Resource Configuration & Modes
3.3 Knowledge Management
4.1 General challenges
4.2 HR specific challenges
Historically the importance of human resources was long underestimated and the job of the HR departments in large corporations was mainly administrative (Noe et. al., 2010). The term human resource management only arrived in the United States of America in the 1980s. Only in the last decade business leader became aware of the importance of human resource decisions for the firm’s success (Malik, 2009). Previously companies mainly saw this function as an unimportant and inferior department, more and more corporations today are realizing the strategic value a good human resource management can have for the company, especially in service-driven western economies (Noe et al., 2010).
One of the most conservative industries concerning human resource management was the energy market, which placed less emphasis on it than most other industries. After all the common assumptions was that one is supplying a commodity and faces a stable demand. At the beginning of the millennium more than half (55%) of them engaged in outsourcing some or all of their HR functions in order to focus on the primary business and free up time for strategic action (Accenture, 2004). The energy market in Europe has been quite stable after its deregulation. Over time the industry consolidated and a few large corporations evolved. As one of the dominant players in the European energy market RWE AG is a good illustration of the changes the human resource department underwent. Founded in 1898 in Essen, Germany, RWE grew to become a dominant player in the European energy market with leading market positions in the largest European countries. Today, RWE employs around 72000 people and its revenues amount to € 52bn (RWE AG, 2011). Furthermore, today it views its employees as its most important asset for the long-term success of the company and the HR department as essential for the future success of the company (RWE AG, 2011). The purpose of the paper is to explore the human resource practices used by RWE and how these align with the overall strategy and the business model of RWE.
Primo, the business model of RWE is described according to the Johnson et al. framework. Based on the business model the corporate strategy is outlined. Secondo, the human resource strategy is explored and the fit with the overall strategy is evaluated. Additionally, the contribution to the success (current failure) of the human resource functions is examined. Terzo, a general outlook is given and the challenges the company faces. Finally, some suggestions for the future human resource management are given.
2. Business Model & Strategy
2.1 Business Model
In order to be able to analyze what role HRM plays and what practices are used at RWE one has to initially understand their current business model. According to Johnson et. al. (2008) a business model needs to consist of four interdependent elements: the customer value proposition, the profit formula, the key resources and processes. Combined they determine the delivered value to a customer. In the following section RWE’s business model and the resulting strategy are examined in detail.
The first step in a business model is the customer value proposition. One needs to identify the actual job that needs to be done (Johnson et al., 2008). In the case at hand, it is the production and supply of energy. RWE produces and offers energy in various forms, such as gas or electricity. It delivers energy in a reliable and speedy manner by being fully vertically as well as horizontally integrated. Thereby, it keeps control of all major steps in the value chain, such as the acquisition of raw materials, power generation and the final supply to the consumers (Figure 1, Appendix). As a consequence RWE is expected to have a higher profit than a non-integrated supplier. Moreover, a cost-efficient energy supply and the overall minimization of classical emissions (CO2) can thereby be guaranteed. RWE`s target customers consist of energy-demanding businesses and private consumers, who are either directly served with energy or via a distributor (RWE AG, 2011).
The profit formula, which is the second element of the business model, describes how the company provides value for itself while providing value to the customer (Johnson et al., 2008). Revenue at RWE is calculated by price (per kWh/ consumption) times volume (kWh). As part of the profit formula, it is necessary to determine the overall cost structure. While it is not possible to determine the exact cost structure of RWE with the information given in the annual reports, one can speculate about certain elements that have large impacts on it. With economies-of-scale, the fixed overhead costs are divided among more units, thereby reducing the cost per unit. This allows RWE to deliver energy to the customer at reduced costs. In addition, high initial investment and maintenance costs in power plants (nuclear or coal) dominate RWE`s cost structure. Regulatory influences such as taxes (i.e. nuclear fuel tax) and the purchase of CO2 allowances on top of the already volatile commodity prices lead to fluctuating energy prices. The resource velocity in the energy industry is small as electricity can be used and delivered on demand, thus low lead times and no inventory lead to higher profits and lower costs. However for the oil and gas production inventory costs are present, as these materials can be physically stored. According to RWE`s 2011 annual report RWE has a desired profit margin of around 8%, however profit margins keep decreasing since 2009 from 7,48 to 3,494% in 2011 (Figure 2, Appendix).
As a third and fourth element of the business model, key resources and processes of RWE that create value for the customer and the company need to be identified (Johnson et al. 2008). RWE`s key resources emerge from the different channels, technologies, partnerships and people inherent. Due to the regulatory changes especially in Germany energy is increasingly produced through newer channels such as wind-, solar- and geothermal power plants (RWE AG, 2011). RWE`s long-term goal is to decrease the dependency on nuclear power and rely more on “greener” technologies. Currently the company mainly uses three different emerging methods of producing renewable energy and gas: marine tidal, biogas and solar thermal (RWE AG, 2011). Furthermore, people are a critical resource. RWE always needs specialized engineers, especially to foster the development of renewable energies. Additionally, by 2018 almost 80% of their current workers will be over 50 years causing further problems, which will be elaborated in more detail in section 4 (Strack, Baier & Fahlander, 2008). The fourth element of the business model is the key processes, which need to be considered when maximizing the delivery of value to the customer. Value is being delivered through three main pillars. Firstly through various CSR activities, for instance by engaging in community projects (RWE AG, 2011). Secondly, high investments in R&D were made to ensure to stay ahead of competition in the field of renewable energies, which are expected to replace nuclear power as indicated earlier. IT also plays an increasing role at RWE. Where IT is in place to monitor their key processes and overall synthesis of the value chain.
2.2 Corporate Strategy
Strategic management is a process, where a company responds to competitive challenges through correctly formulating the right strategy and implementing the strategy successfully (Noe, et. al, 2010).
In order to formulate the right strategy a SWOT analysis is needed to identify RWE`s internal and external environment in order to make the right strategic decisions (Noe, et. al, 2010). Firstly, RWE faces different key opportunities as well as threats in their external environment. On the one hand, RWE has the opportunity to gain a higher oil and gas market share by increasing their production in these markets (Datamonitor, 2011). Moreover, as implied by the phase out an expansion of their existing renewable energy business is also advisable. On the other hand, regulatory interventions such as the nuclear phase out impose severe threats (Datamonitor, 2011). In addition, highly volatile prices and an increased competition currently reduce RWE´s overall performance. Secondly, RWE needs to consider their internal strengths and weaknesses: RWE has a strong market position in Germany, the UK and the Netherlands. Furthermore, their integrated business model helps RWE, as mentioned earlier, to deliver energy in a cost-efficient manner. On the downside, RWE is over dependent on the German market and might face future business risk. Moreover, Oil production from RWE DEA has been declining for the past few years to a compounded annual decrease of 12%. This severe decline in production may have an overall negative impact on the revenue growth of RWE.
According to Porter (1980), value can be created in two ways: First, value can be delivered by reducing costs or second, value can be delivered by differentiating a product in a way that permits a premium on the final selling price of the product (Noe, et. al, 2010). Thus, a company either pursues a differentiation or a cost leadership strategy. However, for RWE it is difficult to clearly identify either one of them as a main generic strategy, hence they are stuck in the middle. RWE`s strategy delivers value by focusing on three main pillars: firstly becoming more sustainable, it does so by increasing the share of energy generated by renewables to at least 20% by 2020 (RWE AG, 2011). Moreover a reduction of specific CO2 emissions by more than 20% is planned for 2020 compared to 2005. In addition, RWE`s environmental awareness should be increased by improving the overall plant efficiency and promoting new ways for customers to save energy in their households. Secondly, RWE will try to become more international by securing their market shares in core markets, i.e. Germany, the UK and the Netherlands (RWE AG, 2011). Furthermore, RWE’s reliance on organic growth will help in acquiring shares in Central Eastern and South Eastern Europe. Finally, RWE is becoming more robust by stabilizing earnings through the entire energy value chain by maintaining a balanced portfolio of regulated and unregulated activities (RWE AG, 2011). All in all, their focus on becoming more sustainable and relying on renewables does not differentiate RWE anymore as their main German competitors EON and ENBW respond to the phase out in similar ways. By having an integrated model RWE is able to offer a superior service and assurance of overall product quality. This definitely differentiates themselves from their main competitors. However, as implied by the business model their main efforts lay in increasing their plant efficiency and delivering energy in a cost-efficient manner, which supports a cost leadership strategy. To conclude, RWE follows a cost leadership strategy with differentiating features in their strategy.
- Quote paper
- MSc, Eda Aydin (Author), 2013, RWE. Analysis of the Human Resource Practices of one of Europe’s leading energy suppliers, Munich, GRIN Verlag, https://www.grin.com/document/282185