Synergy Group Paper Final Paper - Gulf Power PDF

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INNOVATION IN A RIGID INDUSTRY

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Contents Executive Summary.........................................................................................................................3 Firm History.....................................................................................................................................4 Regulation........................................................................................................................................7 Innovation Strategy..........................................................................................................................8 Values...........................................................................................................................................9 Methods.......................................................................................................................................9 Key Trends.................................................................................................................................11 Risk and Rewards......................................................................................................................13 Horizons.....................................................................................................................................14 Current Specific Efforts to Create Viable Innovations..................................................................14 Culture.......................................................................................................................................14 Measures....................................................................................................................................16 Signature Projects......................................................................................................................16 Value of Innovation....................................................................................................................18 Leadership Approaches..............................................................................................................20 Effectiveness and Questions..........................................................................................................20 References......................................................................................................................................22

INNOVATION IN A RIGID INDUSTRY Executive Summary While Gulf Power and its parent, Southern Company, have been innovating throughout the previous century, the current initiative to revitalize Gulf Power’s culture of innovation is still very much in the development process. Regulation makes it difficult for the firm to pursue projects that don’t provide an almost immediate return on investment, while flattening sales revenue from the company’s primary product is pushing the company toward innovative solutions as each day passes. Gulf Power is moving in a promising direction with the establishment of an “Innovation and Sales Support” team to focus on new and innovative ways to sell the firm’s primary product; this strategic approach coupled with technological advances such as electric cars will keep the company moving forward in the near future. Ultimately, the company recognizes the value of innovation and is working to create urgency among the staff while tying its processes related to innovation back to its “why” at every opportunity.

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4 Firm History

On February 6, 1926, Gulf Power Company officially became a public operating utility as it acquired Chipley Light and Power Company and Pensacola Electric Company (Gulf Power, 2017a). Headquartered in Pensacola, Florida, Gulf Power continues to grow its customer base of almost half a million consumers and is focused on offering superior service to Northwest Florida. Gulf Power was founded on the principle of safely providing exceptional customer value by delivering reliable, affordable, and environmentally responsible electricity while strengthening the local community (Gulf Power, 2017a). Gulf Power is one of the thirteen subsidiaries of the Atlanta-based Southern Company (Gulf Power, 2017a). Southern Company is currently the second-largest utility company in the United States by customer count and its $50 billion rate base is the industry’s largest (Gulf Power, 2017a). Gulf Power is considered a monopoly that is regulated by the United States Department of Energy (DOE), but more specifically Florida Public Service Commission (PSC) (ACEE, n.d.). Gulf Power’s primary service is providing electricity, but the company is also involved in a wide variety of other services. Gulf Power recently launched an online platform where consumers can buy energy products and applications directly from Gulf Power (Ware, 2017). Energy Select, Surge Protection, and Energy Checkup are a few of the additional services that are provided to help educate customers in ways of becoming more energy efficient (Gulf Power, 2017b). Gulf Power differentiates its services by putting customer service above all and being active in the community. In order to gather information for this case, Synergy Group conducted two meetings with influential innovators within Gulf Power. The first meeting was with the General Manager of Marketing and Sales, Foster Ware. The second was with the Manager of

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Innovation and Sales Support, Angela Carter, and the Manager of Energy Efficiency and Renewables, John Floyd. Throughout the interviews with Gulf Power employees, the firm’s customer focus was evident no matter what topic the discussion addressed. Gulf Power further differentiates itself by being highly involved in the community. In 2015, Gulf Power donated over $3.2 million dollars to charitable organizations (Gulf Power, 2017b). The firm also encourages workforce development by partnering with local schools and colleges to offer multiple part-time and full-time positions to interested students (Gulf Power, 2017b). Since Gulf Power is a regulated monopoly, a strong customer focus and intense community involvement is not required for the firm to be financially successful. However, Gulf Power separates itself from typical energy providers by maintaining its customer focus and making an active investment in its relationships not only with customers, but also with the community at large. With a new administration and natural gas prices reaching 20-year lows in 2016, the United States power sector was in the middle of a wholesale transformation (U.S. Energy Information Administration - EIA, 2017). Federal regulators acting to enforce regulations coupled with a push toward renewable energy will continue to reform energy-provider business models (Base, 2017). Due to the fact that Gulf Power is a regulated monopoly, the firm has no direct competitors (Ware, 2017). However, substitute products such as alternative energy sources and natural gas are fighting to steal market share from the utility industry (The Guardian, 2015). These companies compete on the basis of price, availability, technological advancements, service, and reliability (Basis of Competition, 2015). The culture of a firm is described as being the personality of the company and is largely based on the company’s founding values. Safety is considered one of the most important values at Gulf Power. For Southern Company and all of its subsidiaries, safety briefings are one of the

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first orders of business at employee meetings; the fact that the company practices this ritual each and every day is impressive (Ware, 2017). Safety is something that employees not only consider within the workplace but also when they are out living their personal lives as well. Ways that employees practice being safe by wearing seatbelts at all times in company vehicles, having CPR and AED certifications, and participating in scenario drills to prepare them in the case of an emergency (Ware, 2017). Gulf Power prides itself on being a continual learning environment with advancement opportunities for its staff (Ware, 2017). Employees are known to enjoy working at Gulf Power because of the work life balance, family atmosphere, and team focus (Carter, 2017). Southern Company places a high emphasis on healthy living and Gulf Power, as a subsidiary, echoes this sentiment by offering benefits such as comprehensive health insurance, on-site fitness facilities, department health challenges, a tobacco free policy and financial incentives that employees can earn by simply living a healthy lifestyle (Southern Company, 2016e). The firm’s strong emphasis on health shows that the organization truly strives to enrich the lives everyone it touches, customers and staff alike. With revenues flat to declining, Gulf Power is increasing its pursuit of internal innovations in order to leverage new revenue streams (Ware, 2017). Gulf Power is currently in the maturity stage of the business cycle and given a recent reduction in income, and the company’s push for new products and services to revitalize the business, may actually be advancing into decline. Currently, there are more products on the market than ever before that require energy. However, energy efficient products and an emphasis on energy efficiency has also increased at a similar rate. For example, a compact fluorescent bulb is more efficient that a traditional incandescent bulb as it uses much less electrical energy to produce the same amount

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of light (Energy-Efficient Light Bulbs, 2015). This case study will describe in detail Gulf Power’s current focus on innovation. Gulf Power is in need of new innovations that will help create a diverse revenue basket and not force the company to be solely dependent on traditional energy sales. Regulation Unlike publicly owned utilities, privately held utility companies in the United States are regulated by the federal or state governments, typically a state PSC. In the state of Florida, the Florida Public Service Commission regulates private utilities, including Gulf Power. The PSCs oversee a variety of business activities including investment activities, operations, and particularly customer rates (ACEE, n.d.). Florida statutes allow the Florida PSC to oversee a variety of Gulf Power’s business functions with the primary focus on setting the rates for residential, commercial, and industrial customers (Railroads and Other Regulated Utilities, 2017). In addition to setting rates, other primary functions of the Florida PSC are to oversee the transmission and distribution grids to ensure that they are robust and reliable for customer demand, occupational and public safety, and customer service. (Railroads and Other Regulated Utilities, 2017). Utility rate increases are a long and complicated process. The Florida PSC is a fivemember panel appointed by the Governor of Florida and confirmed by the state Senate (Florida Public Service Commission, n.d.). In addition to the panel, a staff of experts serves to assist in analyzing any rate increase request by the power companies. Power companies must file an application for a rate increase with the PSC that outlines the business need for the increase; the PSC then follows a process of reviews, public notifications, and hearings that must be completed within eight months. Although the Florida PSC is required by statute to consider the

INNOVATION IN A RIGID INDUSTRY financial position of the power company when reviewing the request and ensure that the utilities have the opportunity to generate enough revenue to cover costs and be profitable, there is no guarantee that rate increases will be approved as requested; additionally, there is no guarantee that if approved the approval will be at the rate requested (Florida Public Service Commission, n.d.). Regulation has a very critical impact on Gulf Power’s ability to generate margins on their electricity product by not only directly controlling those margins, but also by adding a significant delay to Gulf Power’s ability to adapt to internal or external influences in a timely manner. Regulation directly affects the company’s ability to implement innovative ideas and must be considered before an innovation strategy can be addressed. Innovation Strategy In building an innovation strategy, there are several important aspects that must be considered including how company values and structure may or may not contribute to a culture of innovation, whether or not there is an opportunity to innovate in a way that is beneficial to consumers rather than just the bottom line, whether or not the firm’s attitudes toward risk will support intrapreneurs or initiatives, and how the company will evaluate and reward employees who contribute to the cause. Gulf Power, along with its parent Southern Company, have been responsible for many innovations within the energy industry throughout the previous century; however, as the company grew and became comfortable within its dominant position, the urgency to innovate waned. With new threats in the form of environmentally-friendly energy initiatives and recognition that the market and consumer needs are changing, the company is currently undergoing an innovation revitalization that is spreading company-wide.

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Values In order to monitor change that is taking place within the industry, Gulf Power places a heavy emphases on consumer involvement and focus (Carter, 2017). Gulf Power often holds focus groups with consumers to stay engaged with shifting consumer preferences and ensure that the company is moving in the right direction. Constant participation with various community organizations including the University of West Florida and the Florida Department of Economic Opportunity is another method that Gulf Power employs to stay abreast of changes taking place outside the industry that may affect the way that the product is viewed or consumed (Carter, 2017). Methods Each subsidiary of Southern Company has its own innovation team that focuses on innovation as it relates to sales (Carter, 2017). Gulf Power currently has an “Innovation and Sales Support Team” which is made up of staff from various departments and divisions within the company. The team is multi-functional in nature and dedicated to finding innovative ways to market Gulf Power’s existing products and increase energy usage, not necessarily to develop new innovations related to electricity. In addition, of the approximately 15 members of the team dedicated to innovation, all members are dual-hatted and have taken on innovation as an additional duty; members of management estimate that only 1.5 people are dedicated directly to innovation which equates to each member of the team devoting approximately 10% of their time to innovation. Gulf Power’s approach to innovation is mandated by the regulations that the company must comply with in order to continue operations; since electricity is so heavily monitored and controlled, the only real opportunity for immediate innovation lies within sales strategies (Carter, 2017).

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Understanding that innovation will drive the future of the business, the team has been quietly working on an innovation-focused initiative that will encourage employee engagement in the company’s quest to foster a truly innovative culture. “Create One” is an innovation initiative centered on safety that will be introduced to employees in 2018 (Carter, 2017). Gulf Power hopes that the initiative will further reinforce the company’s culture-driven focus on safety while also furthering the company’s innovation initiative through employee-generated ideas and input. Currently, “Create One” is expected to have rewards at designated levels beginning with ideation and advancing through implementation, although the reward levels have not yet been specified. “Create One” will be made available to employees through the company intranet and is intended to give all employees the opportunity to directly participate in innovation while also increasing employee engagement with the company’s embrace of an innovative culture (Carter, 2017). During discussions about the innovation process within Gulf Power, it became evident that advancing ideas is no easy task (Carter, 2017). Ideas that are brought forward are first subjected to a precursory evaluation for viability; if the idea is found to be feasible it is advanced to a business case stage that could take anywhere between six and eight weeks for the business case to be assembled which addresses the full implementation of the idea and an approximation of the cost and return on investment. Once the business case is assembled, the case is presented to the business council within the organization. If the idea advances beyond the business council, it is then presented to a management council who evaluates the idea specific to its potential for financial return, and if the idea is approved by the management team it may then be implemented (Carter, 2017). Management within Southern Company acknowledges that the rigid structure of the organization as a whole is not conducive to innovative idea creation in a manner that can be

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easily executed. As a result, Southern Company, with feedback and support from its subsidiaries, created the Energy Innovation Center (EIC). The EIC was Southern Company’s recognition of the difficulties that innovators within their company or subsidiaries may experience and an outlet for creativity to come to life with the full support of the parent company (Southern Company, 2016a). The EIC gives intrapreneurs the opportunity to bring their ideas to fruition. Synergy Group could not gather any definitive information on Gulf Power’s current innovation budget or strategic funds devoted specifically to supporting innovation beyond that no part of the budget has been specifically devoted to innovation (Ware, 2017). However, it is clear that Gulf Power’s innovation strategy is still very much in the development stages; this is demonstrated by the lack of staff devoted specifically to the effort and no visible budget set aside specific to innovation. Key Trends Gulf Power faces challenges in the forms of energy consumption, consumer accessible technology advances, and usage of alternative energy sources. The company, like others within the industry, is experiencing a steady decline in overall energy usage. Generation and delivery of energy are now more efficient than ever, but there is a marked increase in the efficiency of energy usage in commercial and residential building standards. Locally, a booming real estate market is steadily expanding the customer base. Until it reaches the tipping point at which the boom outpaces efficiency savings, the increase in number of households only serves to keep growth flat. A dip in the housing market could result in a corresponding decline in revenue, a risk which Gulf Power is actively working to hedge the company against. Although consumers are increasing the number of devices plugged into outlets, many of today’s devices are built to use less energy (Ware, 2017). Smart hubs and devices put an ever-

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increasing amount of energy control in the hands of consumers. Utilization of smart thermostats such as EcoBee and Nest allow customers to monitor and limit when and how long heating and air conditioning devices operate (Ware, 2017). Devices such as the Wink hub allow lights and appliances to be turned on through the use of simple programs known as "robots" & "recipes" or through the use of mobile apps (Wink, 2017). Monitoring of specific devices and their energy usage within the home is also easily achievable by installing a Sense Home Energy monitor in the home's electrical panel (Floyd, 2017; Sense, 2017; Ware, 2017). Even though the company is exploring the addition of alternat...