CAPSTONE PROJECT REPORT STATEGY FORMULATION FOR THE INTEGRATION OF PHUMY THERMAL POWER PLANT INTO VIETNAM COMPETITIVE POWER MARKET 1 GRIGGS UNIVERSITY GLOBAL ADVANCED MASTER OF BUSINESS ADMINISTRATION PROGRAM CAPSTONE PROJECT REPORT STRATEGY FORMULATION FOR THE INTEGRATION OF PHUMY THERMAL POWER PLANT INTO VIETNAM COMPETITIVE POWER MARKET Group No: 7 Student’s name: Phan Thi Minh Loan Nguyen Lan Huong Nguyen Thi Thu Ha Hoang Huu Dong HANOI, 2009 2 Acknowledgement We would like to express our deep gratitude and sincere thanks to Center for Educational Technology and Career and all of professors here for all their instructions, valuable guidance and comments. We also would like to thank our friends of GEMBA E01 for their help and boundless inspiration. We are particular grateful to the Leaders of Electricity of Vietnam for granting scholarship and for support in providing time, information and advice for fulfillment of this study. we also wish to thank the Leaders and Colleagues of Power Generation Department and Phumy Power Plant people who have provided with support during conducting this Milestones.
We also wish to thank all the Lecturers and Administrative staff of Grigg University, Global Advanced Master of Business Administration Program for assistance and kindness throughout the process of MBA program. 3 Abstract Previously, power sector in Vietnam is know as monopoly sector and there is no competition. All of enterprises operating in this field received the subsidiary and assignment from the Government. The growth in power sector is major for purpose of fulfillment of the assignment, but not is driven by the market incentives.
Recently, in order to expand the power output to meet the increasingly demand of the economy and society, the Government has introduced the power market into the power sector. This is regulated by the Law on Electricity 2005 and provided details in the Decision No 26 dated 26 January 2006 (“Decision No 26”). It is actually considered as a restructuring process in power sector, from the state monopoly and vertically integrated model to the competitive market model. According to the Decision No 26, in the period from 2009-2015, the single buyer model shall be introduced in which the power generation plants shall compete to each other to supply the energy output to the market.
This is actually a challenge for EVN’s power plants, who fall in a habit of monopoly mechanism with the whole subsidization from EVN. Phu My Thermal Power Plant (“PMTPP”) is not an exception. In order to exist and be successful in the power market, it is advisable for PMTPP to carefully prepare an intensive business strategy for the competition. This study is intended to provide the recommendations for the formulation of PMTPP’s business strategy for its integration into power market as the road map drawn by the Government.
By way of applying the theoretical framework on strategy formulation, this study analyzed the situation of PMTPP in transition to power market and made recommendations for its business strategy on integration. The suggested strategy for PMTPP is growth strategy with the horizontal integration for core business and related diversification for non-core business. It also recommended the cost leadership for integration and cost focus for diversification. 4 Table of Contents Strategy Formulation for the integration of Phumy Thermal Power Plant into Vietnam Competitive Power Market.
3 List of Abbreviations.1 Rationale of the Research Study. 16 Chapter 2 Theoretical Framework.1 Strategy and Strategy Management.1 External environment analysis.2 Industrial environment analysis.3 Competitor analysis: Strategic Group Mapping. Internal environment analysis.1 Analysis on sustainable competitive advantages.2 Strategic Implementation Analysis. Combination of external analysis and internal analysis :.
Corporate Level Strategy. Growth Objective and Strategies. Business Level Strategy. Choosing the best strategy alternative.
Summary on Strategic Formulation Theory Framework.48 Chapter 3 Analysis Of PMTPP’s Situation In Transition To Power Market. The Context of the Power Sector Restructuring Process. History of Power Sector Restructuring in the world. The trend of power sector reform in the world.2 The goal of power sector restructuring.3 Prerequisites for effective competition.4 The specific features of electricity commodity.5 Range of market restructuring models.
The Characteristics of Vietnam Power Market. The existing structure.3 Single Buyer Model for 1st phase of power market in Vietnam. Diagnoses and Finding on PMTPP in the context of transition. PMTPP’s External Environ ment Analysis.
PMTPP’s Macro Environ ment analysis. PMTPP’s Industrial environment analysis.3 PMTPP’s Competitors analysis. Internal Environment Analysis. Analysis on sustainable competitive advantages of PMTPP.
Above that enable us to formulate strategy for concretion of PMTPP’s competitive position in the power market.2 PMTPP’s Strategic Implementation Analysis. Vision and mission. Corporate, business and functional strategies. Analysis on PMTPP’s Business Performance.
Combination of Internal and External analysis: SWOT Analysis.1 Power Market – Rather Opportunity Than Threat.2 Increasingly demand for power – opportunity and liability.3 Other gas turbine power plants – Threats but also opportunity.4 The Strong Bargaining Power Of Supplier–A Threat Hardly To Mitigate.5 ODA Loan-Low Cost But High Risk Of Foreign Exchange Rates. Gas Turbine Technology – Advantages and Disadvantages.7 Salary Policy – Weakening the Competitive Advantage of PMTPP.8 Price Determination Mechanism – Possibility of Unfair Competition. 110 Chapter 4: Recommendations on formulation of business strategy for integration of PMTPP into Vietnam Competitive Power Market.111 Chapter 4: Recommendations on formulation of business strategy for integration of PMTPP into Vietnam Competitive Power Market.1 Vision and Mission Statement. Corporate Level Strategy.
What should be our growth objectives and strategies?. What should be our portfolio strategy?.3 Business Level Strategy. Cost Leadership is selection for Core-Business Strategy. Financial and Commercial Solutions.
Cost Focus Is Selection For Non-Core Business Strategy. Planning and Marketing Department:. Human Resource Department. Business objectives of PMTPP.
Assignments to functional departments in charge and time scale.143 8 List of Abbreviations BOT Built- Operation-Transfer ICGM Internal Competitive Generation Market IPP Independent Power Plant SO System Operator JV Joint Venture EOH Equivalent Operation Hour EPC Engineering Procurement Construction EVN Electricity of Vietnam ERAV Electricity Regulation Administration of Vietnam Genco Genenration Company IPP Independent Power Plant MOIT Ministry of Industry and Trade NLDC National Load Dispatch Center ODA Official Development Assistance OEM Original Equipment Manufacturer O&M Operation and Maintenance GSA Gas Supply Agreement PPA Power Purchase Agreement PMTPP Phumy Power Plant SOE State Owned Enterprise WB WorldBank 9 List of Tables Table 1: Relevant situation for different research strategies (Source: Yin, 2003).14 Table 2: Technial Charactericstics of PMTPP – Source PMTPP.52 Table 3: Indicators of Vietnam electricity upon changing into power market.67 Table 4: Comparison of tarriff by areas in Southest Asian Countries.80 Table 5: Comparison between the power tariff between the Southeast country.80 Table 6: Electricity Production of PMPP vs. Total Production of Vietnam (in thousand kWh). 91 Table 7: Production Data of PMTPP during recent three years.99 Table 8: Financial Performance Data over recent three year.100 Table 9: Financial Performance Ratio over recent three year – Own calculation.101 Table 10: Adjustment of the capacity charge in 2008.104 Table 11: Summary of financial analysis for power augmentation by fogging inlet air.115 Table 12: Estimated cost for maintenance of gas turbine power plan annually.119 Table 13: Estimated cost for maintenance of gas turbine power plan annually.121 Table 14: Demand for foreign currency of PMTPP (unit USD) - Source:PMTPP.125 Table 15: Below is summary for suggestion in business level strategy.130 10 List of Figures Figure 1: Formulation Process – Own illustration.19 Figure 2: PEST- Analysis Framework (Campell & Craig, 2005).21 Figure 3: Strategic Group Analysis Graph, (Johnson et al.27 Figure 4: Threshold Matrix (Johnson et al.30 Figure 5: SWOT-Matrix (Friend & Zehle, 2008).34 Figure 6: PMTPP’s organisation bar chart - Source: PMTPP annual reports.51 Figure 7: Output by year and accumulated.53 Figure 8: Monopoly in power sector.54 Figure 9: The trend of power sector reform in the world.56 Figure 10: Single Buyer Model - Source: Sally Hunt and Graham Shuttleworth.59 Figure 11: Wholesale Model. 61 Figure 12: Retail Model.
62 Figure 13: Existing Model for power supply in Vietnam – Own illustration.63 Figure 14: Increase of capacity from 2005-2010 and share by EVN.64 Figure 15: Power Supply Balance Sheet (2010-2015).65 Figure 16: The Structure of Single Buyer Model at the initial stage.68 Figure 17: Two- parts of energy supply – Own illustration.70 Figure 18: A Two-Way Contract for Differences.73 Figure 19: Power Demand Forcast (2001-2015) – Source: Planning Dept, EVN.76 Figure 20: The Schedule for entrance of gas turbine power plants.82 Figure 21: A typical cover of the System Load in August 2008.85 Figure 22: Threshold Matrix for PMTPP – Own Illustration.88 11 Figure 23: Five largest power plants in the system (2008) - Souces: NLDC.90 Figure 24: Comparison of investment cost between gas turbine power plants.92 Figure 25: Major conditions of loan agreements for PMPP.92 Figure 26: Comparison of O&M cost - Source: NLDC.93 Figure 27: Comparison of Heat Rate by power plants.94 Figure 28: Availability and Productivitiy of PMTPP’s unit - Source: PMTPP annual report, 2008. 95 Figure 29: PMTPP competitive advantages vs. competitve features of the market Own inlustration.97 Figure 30: SWOT matrix of PMTPP – Own illustration.1 Rationale of the Research Study The open economy policy of Vietnamese government in 1990s has opened a new pace of the development of the power industry. In 1995, Electricity of Vietnam (“EVN”) was established as sole state owned enterprise responsible for overall management of the entire power industry, including planning, investment, development, operation and maintenance of the power system.
EVN’s business cover all phases from generation, transmission to distribution the power to the end customers all over the country. Recently, in order to expand the power output to meet the increasingly demand of the economy and society, the Government has introduced the power market into the power sector. This is regulated by the Law on Electricity 2005 and provided details in the Decision No 26 dated 26 January 2006 (“Decision No 26”). It is actually considered as a restructuring process in power sector, from the state monopoly and vertically integrated model to the competitive market model.
According to the Decision No 26, in the period from 2009-2015, the single buyer model shall be introduced in which the power generation plants shall compete to each other to supply the energy output to the market. This is actually a challenge for EVN’s power plants, who fall in a habit of monopoly mechanism with the whole subsidization from EVN. Phu My Thermal Power Plant (“PMTPP”) is not an exception. In order to exist and be successful in the power market, it is advisable for PMTPP to carefully prepare an intensive business strategy for the competition.
This study is intended to provide the recommendations for the formulation of PMTPP’s business strategy for its integration into power market as the road map drawn by the Government.2 Objectives 13 The objective of this study is to address the challenge faced by PMTPP during its transition into power market by way of formulation of a business strategy for its adaptation into the new competitive environment.1 Research approach In our study, we use the inductive approach, deductive approach and abduction approach. According to Downward, (2003), induction approach is defined as a research approach whereby the researcher collects data and then develops theory as a result of data analysis, or “research-then-theory strategy”. Deduction on the other hand is more a “theory-then-research strategy”, whereby a theory is developed and then a research strategy is developed to test the theory. Abduction approach is seen as a mixture of the inductive and deductive approach and most frequently used approach in case study.
In addition to abduction approach, we also use systematic combining approach, which is a process of simultaneous development of theoretical framework, empirical findings and the case analysis, combining of theory and reality, direction and redirection (Dubois and Gadde, 2002). In applying those approaches, in our research, we developed our theoretical framework, empirical findings and case analysis simultaneously during our research process. First, we present a theoretical framework by a deductive approach. Secondly, a inductive approach was used to determine our existing information, analyzing the information and then comparing the empirical study with the theoretical framework.