MBA F617 Organizational Theory for Managers. The Transition: Berkshire Hathaway Energy s Next Phase

Transcription

1 MBA F617 Organizational Theory for Managers The Transition: Berkshire Hathaway Energy s Next Phase Mikayla Savikko UNIVERSITY OF ALASKA FAIRBANKS, SPRING 2016

2 ORGANIZATIONAL DESCRIPTION: Berkshire Hathaway Energy Company (BHE) is a holding company made up of 10 subsidiaries focused on generating, transporting, storing and delivering energy to communities across the world. BHE is headquartered in Des Moines, Iowa with utility companies located in 11 states in the west and Midwest of the United States, England and Canada. The generating capacity of BHE is 25,300 MW with 178,000 miles of electric lines and 39,000 miles of natural gas pipelines. The company has a diverse energy portfolio including sources from wind, solar, biomass, hydro, geothermal, natural gas and coal (Marketline Company, 2015). The primary industries for the company are regulated electric utilities, oil and gas exploration and production and real estate. BHE is the largest transmission owner in the Western Interconnection, it delivers 7% of the natural gas consumed in the U.S., operates 7% of the U.S. s solar energy market and 6% of the wind energy sector, and also serves 85% of Alberta, Canada s population. BHE s competitors are other international energy and holding companies, such as Iberdrola, S.A., Entergy Corporation, Alliant Energy Corporation and SSE PLC (Marketline Company, 2015). BHE is also a company of Warren Buffett s $20 billion conglomerate, Berkshire Hathaway. Prior to 2014, BHE was known as MidAmerican Energy but changed its name to BHE to gain more brand recognition as a Berkshire Hathaway company. The name change also reflected Berkshire Hathaway s major interest in MidAmerican Energy (Marketline Company, 2015). BHE consists of five top executives as well as a president and CEO of each of its subsidiaries. Each subsidiary functions as its own company, but shares the same values, culture and core principles as BHE (Berkshire Hathaway Energy, 2015). Those core principles are customer service, environmental respect, operational excellence, employee commitment, regulatory integrity and financial strength. BHE s vision is to be the best energy company in serving customers, while delivering sustainable energy solutions (Berkshire Hathaway Energy 1

3 Energy, 2016). BHE like most regulated utilities often follows the mantra of delivering safe, reliable and affordable energy to its customers. STRUCTURE/CULTURE BHE s current organizational structure consists of five executives and a Board of Directors. The five executives include the Chairman, President and CEO, an Executive Vice President and Chief Financial Officer, a Senior Vice President of Legislative and Regulatory Strategy, a Senior Vice President and General Counsel and a Senior Vice President of Environmental Services and Chief Environmental Counsel. The Board of Directors consist of six members, which are comprised of BHE s owners, senior management and Berkshire Hathaway s senior executives. Each of BHE s subsidiaries also has its own President and CEO (Berkshire Hathaway Energy, 2015). Currently, BHE has 21,000 employees and serves 11.6 million customers and end-users around the world. The major source of BHE s financial strength comes from its private ownership structure. This structure also provides BHE with a major competitive advantage as it is able to reinvest 100% of its net income back into its subsidiaries by not paying out dividends (Abel, Gregory, 2016). There are three private investors for BHE, Berkshire Hathaway who owns 89.9%, Walter Scott, Jr. owns 9.1% and Gregory Abel owns 1%. These private investors are also the members of the Board of Directors (Berkshire Hathaway Energy, 2015). BHE is categorized as having a symmetric organizational complexity, although it does have characteristics of both a flat and symmetric typology. Berkshire Hathaway has minimal involvement with the day-to-day operations and activities of its subsidiaries, including BHE, and admittedly operates its companies in on a decentralized basis (Berkshire Hathaway Inc., 2015). Although BHE does provide its subsidiaries with centralized services for accounting, acquisition, 2

4 regulatory strategy, legal matters, and environmental services, each of its companies are locally managed by their own Presidents and CEOs. BHE s companies are able to make independent operating decisions that best meet the needs of their individual markets. The structural configuration of BHE is divisional (see Appendix A). This is also one of BHE s greatest weaknesses as it has no material assets and is dependent on its subsidiaries in order to meet its goals. Each of BHE s subsidiaries have their own earning power and are separate legal entities (Berkshire Hathaway Energy, 2015). Although this has the potential to limit BHE s effectiveness in achieving its goals, it has not impacted its success yet because BHE s efficiency leads to effectiveness (Daft, 2010, p. 75). This is a mutually beneficial relationship in which BHE gains from its subsidiaries specific geographical locations and tight markets, while the subsidiaries take advantage of BHE s ability to take risks and invest in new innovation. It is not a traditional divisional structure but more of a transnational model where the management philosophy is based on interdependence rather than either full divisional independence or total dependence of these units on headquarters for decision making and control (Daft, 2010, p. 237). The individual subsidiaries operate more on a defender strategy focusing more on internal efficiencies and reliable safe energy (Daft, 2010, p. 70). BHE also has a mission organizational culture. This type of culture promotes affective commitment, not only at the employee level but for the individual companies to the parent. BHE s culture plays a significant role in it achieving its goals because it reinforces the goals and strategy of the company. BHE s culture lays the foundation for the internal relationship of the companies and how they deal with the external environment as well. In order to adhere to the vision of the organizational, employees are held to a higher degree of ethical conduct than what is spelled out in business and legal standards. According to 3

5 BHE s Code of Business Conduct, members of the BHE team are expected to accept responsibility, make a personal commitment to excellence and lead others by example (Abel, Gregory, 2014). BHE emphasizes integrity and product quality to earn customer loyalty. It expects its employees to demonstrate the qualities of honesty, loyalty, discipline, uncompromising character and continuous learning. In return, BHE has made employee commitment one of its core principles. The internal core principle of employee commitment emphasize uncompromising safety. BHE s employee commitment is clearly demonstrated in an interview with Rich Walje, the President and CEO and former lineman at PacifiCo, one of BHE s largest subsidiaries. Walje describes an incident that occurred while he was a lineman where his partner was looking out for Walje on the job. Now as the President and CEO of PacifiCo, Walje stresses that safety is not just a personal matter it is the right thing to do to get employees home safely (Berkshire Hathaway Energy Employee Commitment, 2016). According to BHE s 2016 Corporate Brochure, BHE has achieved a 66% improvement in recordable incidents rates since 2006 (Abel, Gregory, 2016). Safety is also a key factor in delivering safe and reliable energy to BHE s companies customers and maintaining regulatory integrity. BHE s mission culture focuses on safe reliable service and is influenced by the external environmental laws and safety regulations, many of which have become internalized in its the core principles. The external environment imposes a large amount of formalization upon the structure of regulated utilities. For example, public utilities are regulated by state agencies to help ensure rates are just and reasonable. In addition to state regulatory bodies, utilities are also scrutinized by federal agencies who set national standards and policies for the transportation of energy. These regulating agencies are cause for a large amount of written documentation on 4

6 procedures and policies. BHE has purposefully identified regulatory integrity as one of its core principles. It has pledged to adhere to a policy of strict regulatory compliance and pursue frequent, open communication with regulators regarding [their] business performance (Berkshire Hathaway Energy Regulatory Integrity, 2016). Although BHE s environment is relatively stable, it is subject to regulatory changes most of which can be anticipated. For example, there are instances in which a utility will have to request a rate case hearing because it has updated its infrastructure to maintain its system dependability. The integrity of the system directly impacts the efficiency and reliability in its delivery of energy to customers and end users. Therefore, BHE s regulatory integrity core principle is very strategic as it emphasizes the need for all of its companies to maintain good external relationships with these regulators. The core principles of employee commitment and regulatory integrity are also tied into the core values of customer service and operational excellence. Another significant external environmental influence on BHE is the ever evolving energy industry. New power sources are changing the energy industry (Berkshire Hathaway Inc., 2015). Fossil fuels are now competing with energy from renewable resources such as wind, hydro and solar generation. However, instead of viewing changes in this external environment as a threat BHE sees renewable energy sources as an opportunity. It s important that BHE remain ahead of regulations, policies and laws by strategically investing in alternative energy projects. BHE companies are proactive in anticipating its changing external environment and have identified a core principle of environmental respect. Currently, BHE has invested $16 billion in renewable energy and was the first company to join the American Business Act Climate Pledge. BHE has pledged to invest an additional $15 billion in renewable energy generation, retire 75% of its coalfueled generation capacity and support advancements in the electric grid to integrate renewable 5

7 energy (Berkshire Hathaway Energy joins American Business Act on Climate Pledge, n.d.). This investment in alternative sources of energy also helps BHE s diverse portfolio, which increases its financial strength, yet another one of BHE s core principles. STATEMENT OF THE ISSUE OR PROBLEM Although BHE is great at anticipating external environmental changes it may not be as aware of the internal shifts. BHE s organizational complexity and configuration are not aligned with its strategy and organizational goals because it is transitioning between stages in its life cycle. BHE is transitioning to the formalization stage where control of its effectiveness should become more of a priority. Unfortunately, BHE lacks complete control over its ability to be effective. As a holding company BHE s power and control over its subsidiaries comes from the ownership through stock and influence of capital (Echanis, 2009). This control includes decisions that involve shareholder approval. For example, the election of directors to the Board of Directors of PacifiCorp, Nevada Power and Sierra Power. According to BHE s 2015 Annual Report, cash flows and the ability to meet BHE s obligations are largely dependent upon the earnings of its subsidiaries and the payment of such earnings to BHE in the form of dividends or other distributions (Berkshire Hathaway Energy, 2015). As BHE transitions into its next stage of organizational life, it is important that the company begin to reevaluate its current configuration as it relates to its goals. BHE s does not have any tangible assets and is reliant on its subsidiaries to meet its goals. Its subsidiaries are managed autonomously. BHE s diverse portfolio does provide it with a safeguard against a market downturn in one area. However, a significant decrease in demand for electricity or natural gas in the markets served by each [company] would decrease its operating revenue, could impact its planned capital expenditures and could adversely affect its 6

8 consolidated financial results (Berkshire Hathaway Energy, 2015). BHE s issue is how to overcome the difficulty of controlling and managing 10 subsidiaries who operate with their own interests in mind. CRITICAL EVALUATION: BHE is currently in between the collectivity and the formalization stage of its life cycle. Although BHE s name is relatively new, the organizational structure was created long before under MidAmerican Energy. The company will soon be entering into the formalization stage of its life cycle in which the goals of the company shift from growth to internal stability and market expansion. The management style will need to move from direction-giving to delegation and control. The need for innovation and investigation on further investments needs to become formalized (Daft, 2010, p. 342). BHE s divisional structure currently does not provide the necessary internal system for its control over its effectiveness. Unfortunately, the divisional structural configuration of BHE is inherent to holding companies (Gilani, n.d.). Divisional structures provide some necessary advantages such as responsiveness to complex unstable environments, clear roles and responsibilities, adaptation to different geographical needs and has a decentralized decision making (Daft, 2010, p. 108). As with most configurations, the divisional configuration weaknesses including, encouraging competition between the subsidiaries for corporate-level resources. Top management is not always clear on how much authority and control to give division managers. There is a lack of policy consistency between divisions and the potential for increased costs due to duplication functions [and] the overall company often finds it difficult to maintain an overall corporate image (Gilani, n.d.). Unlike some divisional structured organizations, BHE does provide its subsidiaries with key centralized services based on the core 7

9 principles of the company, however, these executive vice presidents are limited in their role to support subsidiaries and are more focused on just BHE s needs. BHE s tendency to operate in more of a flat hierarchy where operating decisions are made at the local subsidiary level and the company provides guidance, is also out of alignment with its structural configuration. The amount of vertical and horizontal controls in which BHE displays in its organization chart (See Appendix A) lends its hierarchy to more symmetric than flat. Having characteristics from both flat and symmetric hierarchies may cause confusion as to where the control and power of the company lies. Flat hierarchies tend to be most effective in smaller companies, in larger more complex companies such as BHE flat hierarchies can impact productivity and efficiency (Meehan, n.d.). It would be difficult for BHE s CEO to listen to the concerns and ideas of all of his 21,000 employees and be responsive. In addition, decreasing BHE s ability to be efficient in reaching its goals will also impact its ability to be effective. RECOMMENDATIONS: In order to better align BHE s organizational complexity and structure to its strategy and organizational goals, BHE will need to 1) change its configuration 2) implement a quality management program, 3) increase integrator roles. In the formalization life cycle stage the organization, formalizes procedures, and establishes a clear hierarchy and division of labor (Daft, 2010, p. 344). It s important that BHE recognize this life cycle transition and begin to put in place the necessary responses to help this change. The three recommendations above are appropriate responses to help BHE transition into the formalization stage. Change in Configuration As BHE transitions into the formalization stage and begins to expand in the energy markets in its established geographic regions, it may want to consider adopting a global matrix 8

10 structure. The global matrix structure works best when pressure for decision making balances the interests of both product standardization and geographic localization and when coordination to share resources is important (Daft, 2010, p. 224). The majority of BHE s interests are in the United States, but it has companies in Canada and the United Kingdom. In 2014 BHE s revenues were derived 91.5% from the US, only 7.4% from the UK and [the] rest from Canada (Marketline Company, 2015). By increasing the company s operations in the UK and Canada it is expanding its growth markets in those countries. In a global matrix structure the Presidents of BHE s subsidiaries would report to two authorities. One would be the BHE CEO and the other would be the CEO for that country (See Appendix B). The matrix structure would provide BHE with more parameters on the authority of individual subsidiaries Presidents, while at the same time providing them with a stronger voice within the organization. Having three equal CEOs representing the interests of the different global location provides BHE with a better idea of needs of that specific areas. In addition, it would hold more than just one subsidiary President accountable. The use of matrix structures by utilities is nothing new, during the 1980s and 90s, companies adopted the matrix organization as a tool to capture economies of scale, as they consolidated divisional overheads and support staff groups Utilities focused more on overlapping accountability for budget dollars than on shared ownership of labor resources (Shearman). The global matrix structure will also increase BHE s vertical information linkages, which will help it to move more solidly into a symmetric hierarchy. The market expansion in Canada and the UK will require local knowledge, but also resources from the corporate headquarters. The matrix structure, provides utilities with an effective means of addressing the changing needs of different customer groups and 9

11 government/regulatory agendas, while operating a varied set of asset types and business units across multiple territories (Shearman). A change in BHE s structure from a divisional to a global matrix structure will help to resolve the issues surrounding power struggles between regions, authority of the subsidiary Presidents and help to reinforce a clear consistent strategy. Quality Management Program While the matrix structure will help to align the subsidiaries Presidents to BHE s strategies and vision, a quality management program will provide managers at every level with the tools needed to increase performance in their areas. The most effective way to align strategy and structure is to implement a quality management system such as the balanced scorecard (Kaplan, 2006). A balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company s critical success factors (Daft, 2010, p. 305). This tool allows for managers to provide their teams with a visual of how their actions directly impact the mission and vision of the organization. The major perspectives of the balanced scorecard are financial performance, customer service, internal business processes, and the organization s capacity for learning and growth (Daft, 2010, p. 305). These four perspectives reinforce short-term activities with long-term strategies. BHE is in an ideal situation to utilize balanced scorecards as their six core principles can easily be integrated into the four major perspectives of the balanced scorecard. In fact, BHE s core principles already build off of one another. For example, operational excellence relies on BHE s financial strength, which ultimately impacts customer service. Financial performance is a major perspective for balanced scorecards. The balanced scorecards allow BHE s individual subsidiaries to tie in their local priorities to the overall strategic goals of the organization. This tool is complimentary to both the decentralized divisional and matrix structures. It empowers the 10

12 employees to influence the success of an organization, while it also provides BHE with more opportunity to influence subsidiaries in achieving its overall goals. Increasing Integrator Roles BHE has four vice presidents all tied to specific areas related to the core principles of the organization. These positions are primarily to serve BHE and to support or assist the subsidiaries. For example, the Executive Vice President and Chief Financial Officer describes his position as, supports the evaluation, negotiation and closing of the company s domestic and international financings, acquisitions and project developments (Goodman, n.d.). This team of executives could expand their roles to become integrators. As integrators BHE s leadership team would continue to focus on outside environmental influences, but would bring a more comprehensive internal strategy for innovation and investment within the company as a whole. Integrator roles are defined as a position or department created solely to coordinate several departments (Daft, 2010, p. 617). Utilizing the expertise and knowledge of the leadership team and tapping to the local companies authorities, BHE s vice presidents can collect important information about the changes external and internal to the company as a whole and not just on one front. This is especially important as BHE is transitioning into its next stage of life and is more focused on strategic acquisition, innovation, internal stability and unity of BHE s image. For example, the regulatory laws that apply in the United States are not the same as those that apply in Canada or the UK, but by creating an integrator in regulatory strategy that Vice President can take lessons learned from any country and create a strategy that can be adapted to each subsidiary. It is important that integrators get people together, maintain their trust, confront problems, and resolve conflicts and disputes in the interest of the organization (Daft, 2010, p. 97). Another example, would be BHE s Vice Presidents local finance managers. 11

13 By bringing together this group of specialized professionals, BHE can coordinate their priorities for capital spending and strategic investments allowing each subsidiary to have a voice at the table and to hear others as well. The integrator role can help to bring a cohesive strategy for acquisitions, reduce the competition for limited capital funding and lessen the conflict between subsidiaries priorities and BHE s goals. This role would continue to strengthen the horizontal linkages of BHE, while allowing the Vice Presidents to reinforce their specific core principle and the goals of BHE as a whole. CONCLUSION The above recommendations address the issue of how to overcome the difficulty of controlling and managing 10 autonomous subsidiaries. The issues of control and internal stability are factors of BHE s transition to the formalization stage of its organizational life cycle. The recommends to change to a global matrix structure, implement balanced scorecards and increase integrator roles all help to align BHE s organizational complexity and structure to its strategy and organizational goals. In addition, these recommendations allow for BHE to gain more control by enhancing BHE s goals with its subsidiaries. These recommendations strengthen BHE s effectiveness because they allow the companies to buy into the overall purpose of the company. BHE will never have complete control over its subsidiaries, but it can continue to implement certain programs, roles and strategies to increase its influence. 12

14 WORK CITED Abel, Gregory. (2014, April 30). Berkshire Hathaway Energy Code of Business Conduct. Retrieved from PacifiCorp About Us: _Ethics.pdf Abel, Gregory. (2016) Corporate Brochure. Berkshire Hathaway Energy, 2016 Leading the Way. Des Moine, IA , IA: Berkshire Hathaway Energy. Berkshire Hathaway Energy. (2015) Annual Report. Des Moines: Berkshire Hathaway. Berkshire Hathaway Energy. (2015). Berkshire Hathaway Energy Annual Report. Retrieved from Berkshire Hathaway Energy: Berkshire Hathaway Energy Employee Commitment. (2016). Retrieved from Employee Commitment: Berkshire Hathaway Energy Energy. (2016). Retrieved from Investing in Energy: Berkshire Hathaway Energy joins American Business Act on Climate Pledge. (n.d.). Retrieved from Berkshire Hathaway Energy news: e%20pledge.pdf Berkshire Hathaway Energy Regulatory Integrity. (2016). Retrieved from Regulatory Integrity: Berkshire Hathaway Inc. (2015). Berkshire Hathaway Inc annual report. Retrieved from Berkshire Hathaway Inc.: Cunningham, L. (2014). Berkshire Beyond Buffett: The Enduring Value of Values. New York: Columbia University Press. Daft, R. L. (2010). Organizational Theory and Design. Mason, OH: South-Western Cengage Learning. Das, A. (2015). Buffett's Successor: A Jain and Abel Story. Wall Street Journal, C.1. Echanis, E. (2009). Holding Companies: A Structure for Managing Diversification. Philippine Management Review, Gilani, N. (n.d.). Divisional Structure of a Holding Company. Retrieved from Chron: Goodman, P. (n.d.). Our Leadership Team. Retrieved from Berkshire Hathaway Energy: Kaplan, R. a. (2006). How to Implement a New Strategy Without Disrupting Your Organization. Harvard Business Review. Larcker, D. a. (2015, December 14). Harvard Business Review. Retrieved from What It s Like to Be Owned by Berkshire Hathaway: Marketline Company. (2015). Berkshire Hathaway Energy Marketline Company Profile. Retrieved on April 4, 2016, from Meehan, C. (n.d.). Flat Vs. Hierarchical Organizational Structure. Retrieved from Chron: Munger, C. (2014). Berkshire Hathaway Inc. Berkshire Hathaway Inc. Shearman, J. (n.d.). Making the Matrix Organization Work In Multi-State Utility Holding Companies. UMS Group Inc. Sorkin, A. (2014). Berkshire s Radical Strategy: Trust. The New York Times. 13

15 APPENDIX-A: ORGANIZATIONAL STRUCTURE FOR BHE 14

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