Essay: Centrica Plc Internal and External Analysis Report (SWOT, PESTLE, Porter’s)

Background Information
Centrica PLC is an energy providing company in the United Kingdom that supplies Electricity and Gas to households in the United Kingdom, Ireland and North America, the company’s headquarters is located in Windsor, Berkshire (Centrica.com). Furthermore, Centrica owns British Gas, British Gas will be used for comparison terms. They are currently the market leader in Electricity and Gas supply in the UK with a market share of 19% (Ofgem,2019).
This report aims to analyse Centrica’s strategic position in its internal and external environment using a range of tools that analyse business Environments.
Internal analysis
This report will conduct an Internal analysis of Centrica plc using the SWOT analysis and Value chain framework, the SWOT examines the strengths, weaknesses, opportunities and threats to a business, development of the tool is generally credited to Albert Humphrey (1960). Furthermore, the Value chain analysis which was developed by Porters (1985) will also be used to analyse the company’s operations along the value chain.
Advantages of swot
The SWOT is a cost-effective and simplistic tool a business can use to internally analyse their strategic position, furthermore, it prepares businesses in making plans for future strategies (David,2013). Finally, the tool has a benefit of wide application which means it can be integrated into other frameworks for better analysis.
Centrica SWOT analysis
Strengths
Centrica which owns British Gas has a very strong market position in the energy market, it has the largest market share with 19% (see figure 1 in appendix 1), furthermore, the company runs the country’s biggest storage reservoir of gas, according to the CEO, “it has a deliverability rate of 455 gigawatt hours and a total storage capacity of 35 TWH of natural gas” (FT,2017) thereby enabling the company to participate in the market efficiently. A strong customer relationship helps push the company’s popularity thereby making it a household name.
Weaknesses
The oligopolistic nature of the market makes the Centrica susceptible to lower demand as there is strong competition among the big 6 in the industry, the severe weather conditions of the UK leave the company open to infrastructural damage, this is more emphasised by the company’s use of third party infrastructure. The recent price cap setting has also put Centrica in a vital spot just as the CEO stated (FT,2017).
Opportunities
Centrica has recently acquired some strategic companies and made alliances (Conocophilips, Total, E&P UK, Statoil), these will enable the company to increase growth and undergo market expansion thereby improving profits (Thetimes, 2019). Furthermore, the company’s investment in developing offshore windfarms via its alliance with DONG energy will improve public perception in terms of being environmentally friendly. Additionally, the increasing use of smart meters in UK homes will give the company the opportunity to reduce monitoring costs.
Threats
As previously stated, the oligopolistic nature indicates a strong competition among the big 6, therefore market factors can move against the company to favour the competitors in terms of geographical or cost advantages. Regulatory factors are a constant threat to Centrica with the price cap legal battle that has pushed the companies share down by 10% proving this point (BBC,2018).
SWOT limitations
The swot is an effective too for internal analysis, however, it does not provide specific insight to strategists on how to effectively find the four key elements it describes. Additionally, the swot tool is ambiguous and works best for short term analysis (Helms and Nixon, 2010)
Centrica value chain
The value chain analysis examines the range of operations Centrica engages in to deliver the final product to its consumers. (developed by porter, 1985). Centrica possesses a strong product supply chain, due to its investment in offshore windmills and having its own power plants where it processes its own power, it is almost fully integrated, Centrica adds value by incorporating a set of pre-sale and after sale services that range from installation of meters to emergency maintenance services (ITC,2013). (See figure 2 in appendix 1 for full primary value chain framework).
External analysis
The external environment of Centrica Plc includes the macro factors that directly affect the business including competitive factors and other macro-economic factors. This report will analyse the external environment of Centrica Plc using the PESTLE analysis and the Porters 5 forces, the PESTLE is a framework developed and credited to Francis J. Aguilar in 1964. Additionally, the report will further analyse the environment using the five forces parameters developed by Porters in 1979 and the strategic group analysis.
Advantages of Pestle
Just like the Swot, the Pestle analysis is also a cost-effective tool, however, the tool goes beyond just analysing the external environment, it provides insight on how a business can improve its strategic position in the environment (Warner,2010). This means the tool helps business exploit opportunities that might not be evident at first and maximise profit.
Centrica PESTLE
The PESTLE analyses the Political, external, social, technological, legal, and environmental factors of a business. However, only the Key drivers will be analysed in-depth below, see appendix 2 for full PESTLE.
Political
Political variables affect Centrica in a large way due to the nature of the energy industry in the UK, with the long-term decline of the United Kingdom’s oil and gas resources, there has been a steady increase in the import of oil and gas in the UK (Keynote, 2018), this already signifies that the United Kingdom is already competing with the world superpowers such as China and the USA for Oil and Gas resources. However, with the Brexit situation looming, maintaining the relationship needed to continue International trading for Oil and Gas resources will prove challenging for Centrica, the share prices for the company have already fallen by 10% since the start of 2019, the continuous political instability due to the BREXIT debate is a major cause of this. Centrica CEO Iain Conn has stated that leaving the EU would not benefit the Energy industry as it will no longer be able to have a say in the international policy of the European energy industry (Utilityweek,2018).
Economic
Slowing GDP rates haves been forecasted to have a depressing effect on Centrica Plc, however, the demand for renewable energy from Centrica has been steadily increasing which correlates with the increasing demand for renewable energy in the energy industry overall, and forecasts show this demand to continue Increasing till 2021 at least (DECC,2017). Furthermore, despite unemployment rates in the UK coming down to 3.9% in the three months since the start of 2019 (ONS, 2019), there is still a large amount of unemployed UK citizens, there will still be a large number of citizens at home with a high demand for heating and gas especially during winter, thereby driving up the Centrica’s demand.
Legal
OFGEM which is the regulatory body for the UK energy industry has been working to improve competition and better quality and value for consumers, there is currently a price cap on all energy companies in the UK which was initially pegged at £1,137 per year for consumers who use dual fuel and pay by monthly debit (OFGEM,2019), this mean that Centrica will have to operate within this price cap and be cost efficient, Centrica CEO has stated that a price cap does not seem to be an efficient tactic for the consumers benefit in the industry, furthermore, Centrica is preparing a legal battle against the cap as it is losing customers, the CEO states that the company has not been taken under consideration and the cap set too low, due to this the company has lost 742,000 energy supply accounts (Utilityweek,2019).
Limitations of PESTLE
The PESTLE analysis is limited because macro-factors regularly change and need to be periodically reviewed, additionally, the data required to conduct an effective analysis is enormous, based on this, the PESTLE operates under too many assumptions (Tradingeconomics, 2014).
Porters five forces
Threat of new entrants
Centrica PLC is in a highly regulated industry, so legal barriers make it difficult for potential entrants to enter the marker (Bischoff,2016), furthermore, the high capital costs needed to set up in the energy will deter some potential entrants, Centrica faces lower threat of entrant because the high switching costs and time required to switch (See figure 3 in appendix1) make it difficult for new entrants to quickly capture new customers (OFGEM,2018). Threat of entry is relatively low for Centrica
Threat of Substitute
The threat of substitute is low for Centrica, the competition revolves around the big 6, however, the high switching costs and mental stress make it difficult for customers to easily switch and get a substitute (Telegraph,2018). Centrica is already the leading company in terms of energy efficiency and can further reduce the threat by improving consumer service and maximizing value for money thereby increasing consumer loyalty.
Competitive rivalry
Centrica’s competitive rivalry revolves around the big 6 energy companies (See appendix 3 for strategic group analysis), Centrica is already the market leader and already controls a larger percent of the market share, however, the other energy companies are moving ahead in percentage increase of profitability, furthermore, due to the homogenous nature of the product, there is not much differentiation and the exit barriers are low (Koh and Goucher,2014). The competitive rivalry is relatively strong, Centrica can reduce this by increasing its own profitability by differentiating in terms of its customer services, increasing consumer value benefits thereby increasing its market share.
Bargaining power of suppliers
Centrica runs its own power plants and produces its own energy, this integration makes them face lower bargaining power from suppliers, however, other energy companies who purchase from National Grid which has complete monopoly face a higher bargaining power (Lipczynski, 2005).
Bargaining power of Buyers
The bargaining power of buyers Centrica faces is low, this is because of the high switching costs which make it difficult for the buyers to leave or get a substitute (OFGEM,2019). There are other substitutes which can increase buyer power such as solar energy generation, however, they are not options that are not as popular as the Centrica product.
Porters 5 forces limitations
The porters five forces have two main weaknesses, firstly, it operates under the assumption that the market situation is perfect and static, additionally, it does not pay more attention to the forces that might be more relevant to Centrica (Grundy,2006), instead, it pays equal attention to all the five forces.
Conclusion
In conclusion, this report has attempted to analyse the internal and external macro-environment of Centrica using the SWOT, PESTLE, Porters five forces, Group analysis, Value Chain and has found that Centrica remains in a strong strategic position, however, depending on future development, this is likely to change or improve, pending final outcomes.
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