Entering new markets

Abstract

Due to an asset swap in July 2008, Statkraft became a shareholder of two 20 MW biomass fuelled power plants in Emden (BKE) and Landesbergen (BKL), Germany. Both power plants are able to combust almost every solid biomass, but the main fuel is used-wood. Currently, the procurement of the fuel for both plants is outsourced to E.ON. Statkraft is not able to assess the current procurement activities on effectiveness due to a lack of knowledge of the used-wood market. This is a problem faced by all companies entering a new supply market: lack of knowledge. The research objective is to construct a pilot methodology and test this methodology in the case study of Statkraft. The methodology should generate and gather the required knowledge of a new supply market and procurement policies based on Transaction Cost Economic theory (TCE). From the research objective the following research question is derived: How can the most appropriate procurement policy be identified for companies that enter a new supply market? The methodology, which is set up to find an answer for this research question, is based on TCE. This theory addresses the question how to organize transactions, focusing on the internal and external exchange of transactions and transaction costs are recognized. However, this economic theory is not enough to cope with the multi-disciplinary, multi-level and multi-actor characters of a new supply market. Therefore, the methodology is to be augmented with several additional methods. The methodology is applied in the case study of Statkraft. The governance arrangements spot market, hybrid forms, and vertical integration are assessed by a inductive method based on TCE decision variables and a deductive method based on a Multi Criteria Decision Analysis (MCDA). Regarding the TCE decision variable method, the most appropriate policy is selected based on the decision variables asset specificity, uncertainty, frequency, complexity, and contestability. These variables have been identified in the case and valued based on the additional methods. Regarding the MCDA method, the governance arrangements are ranked based on weighted criteria selected by Statkraft. Both approaches have selected the hybrid form network of firms as the most appropriate policy in this case. In order to implement this option it is recommended to select experienced suppliers with a positive CSR-check and good quality standards. Exchange of knowledge on each others business, working manners, attitudes, interest and wishes is recommended in order to have a fruitful cooperation. In the agreements with the suppliers it is worthwhile to negotiate financial quality incentives, i.e. let the supplier benefit from a higher quality delivery. A direct feedback-loop on the delivered quality can be a tool to achieve a better quality. The conclusion is that TCE theory accompanied by several other methods form a successful and accurate methodology to identify the most appropriate procurement policy for a company that enters a new supply market. Further application of the methodology is recommended in order to get experience in other cases and test its usefulness. Regarding the level of generalization of this conclusion, in the TCE decision variable method the decision variables have no weights. If this methodology is used in other cases it might be helpful to add this to the analysis to prevent uncertainty in the results. In the MCDA methods the weighing of the criteria is also crucial. If this methodology is used in other cases it should be done accurate.