Master’s Thesis MSc in Business Administration – Strategy Track How high institutional embeddedness affects the responses of a mixed owned firm to an environmental jolt?
Supervisor: Francesca Ciulli
Anastasia Bakoglou-10602836 8-31-2015
How high institutional embeddedness affects the responses of a mixed owned firm to an environmental jolt?
Statement of originality
This document is written by Student Anastasia Bakoglou who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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How high institutional embeddedness affects the responses of a mixed owned firm to an environmental jolt?
Table of Contents Abstract ...... 3 Introduction ...... 4 Literature Review ...... 8 Institutional embeddedness ...... 8 State Ownership ...... 14 Environmental jolt ...... 21 Strategic Response ...... 24 Methodology ...... 29 Research design ...... 29 Case Selection...... 31 Data collection ...... 32 Results...... 34 PPC’s Background ...... 34 Electricity Market in Greece ...... 37 2009: Realising the upheaval ...... 38 2010: Untouched by the crisis...... 49 2011: On the edge ...... 57 Discussion ...... 68 Conclusion ...... 73 Limitations ...... 75 References ...... 76
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Abstract The study, building upon the concept of institutional embeddedness, aims to investigate how the latter, as a firm’s antecedent, affects and shapes the responses of a firm to an environmental jolt. Institutional embeddedness represents the degree to which a firm corresponds and fits to its environment by complying with the rules and norms imposed by the institutions. During times of upheaval the once enacted strategies might prove insufficient, ineffective and become obsolete. An environmental jolt, an economic crisis in particular, amplifies all weaknesses and rearranges the power held by economic actors. An exogenous disruption, interrupts the routines adopted by companies, even those that had held them successful and profitable. Nevertheless, the extent of the impact it is defined by the firm’s ties with the institutional environment in which it operates. Thus, this study aims to shed some light on how institutional embeddedness affect a firm’s responses to an environmental jolt by employing a longitudinal single case study.
The unit of analysis is the Greek Public Power Company, partially owned by the Hellenic
Republic. Its mixed ownership signals the degree of its institutional embeddedness and the ongoing economic crisis in Greece represents the ideal environmental jolt and context of study.
The results suggest that high institutional embeddedness directly affects the firm’s strategy, initially by exposing the company to dangers and challenges its less embedded counterparts are not faced with and subsequently by dictating its responses and shaping its reactions to the environmental jolt.
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Introduction
“Oftentimes, to win us to our harm,
The instruments of darkness tell us truths”
William Shakespeare (Macbeth)
What it certain about any crisis it that it sheds light to the most dark places. A crisis acts like a magnifying glass; it amplifies the smallest detail and highlights any vulnerability. The forces that stay quiescent during times of prosperity are awakened by the environmental jolt and impose pressures to organizations. Those that are well prepared have nothing to fear and they can even capitalize on the opportunities that might arise during a crisis (Wan and Yiu, 2009) but for those unwilling to adapt and adjust their actions to the circumstances can even become extinct (Miles and Cameron, 1982).
It is by now an undeniable fact that the recent financial crisis kneeled even those companies that were “too big to fail” let alone those of less significant size. Nonetheless, it also brought to the forefront of discussions the need of state intervention; governments and central banks provided the necessary safeguards so as the crisis would not be further deteriorated
(Kellermann, 2011). States’ intervention in economic life has been longed considered as a cause of market failures and many governments were induced by the World Bank to proceed in massive privatizations especially in the Eastern-European countries (Hamm et al., 2012).
Nevertheless, scholars have argued how in times of upheaval, like the one we are facing now, states arise as those institutions entrusted by the public to bring the economy back to equilibrium. As Borisova et al. (2012) aptly describe: “the ongoing global financial crisis has led to the largest increase in state intervention since the Great Depression. Direct government ownership in public-traded corporations has increased dramatically since 2008”. This shift,
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however, towards state ownership has several implications for firms and eventually, their performance (Borisova et al., 2012).
In addition, Bortolotti and Faccio (2009), using a sample of firms from OECD countries, showed that the project of privatization is far from complete, since governments are owners of almost one-third of firms as they can still exercise control through golden shares. As a result, there is a need to explore how governments affect organizations by integrating these effects into strategic management theories (Pearce et al., 2009). So far, studies on state-owned enterprises (SOEs) have been focusing on emerging or transition economies (eg. Doh et al.,
2004; Ramamurti, 2003; Puffer and McCarthy, 2007; Tian and Estrin, 2007), yet developed countries cannot be left outside considering the vast amount of SOEs performing in these economies (Okhmatovskiy, 2010). Moreover, studies focusing on SOEs are limited to the extent that they examine the implications of state vs. private ownership while they should also examine different forms of state ownership (Okhmatovskiy, 2010).
Indeed, most firms, especially in developed countries, are only partly controlled by governments, making mixed-owned enterprises (MEs) the dominant model. Yet, only few studies have used MEs as their unit of analysis (e.g. Sun and Tong, 2003; Qi et al., 2000; Vining and Boardman, 1992). Moreover, extant literature has neglected an important aspect related to state-owned firms, which is their level of institutional embeddedness, and as a result even fewer studies have examined issues of embeddedness expressed as the relation between firms and the state (Okhmatovskiy, 2010). Additionally, those studies that addressed institutional embeddedness, they mostly did it in relation to multinational firms (MNEs) (eg. Rugman and
Verbeke, 2003; Cantwell, 2009; Cantwell et al., 2010; Rizopoulos and Sergakis, 2010).
Highly institutional embedded firms can have different characteristics and they stand in the middle of several opposing forces. A mixed-owned firm represents a particular kind of embeddedness which has to cope not only with its competitors, as any other company, but also
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with the pressures that institutional constituents exercise upon it and, in particular, with the ones of the government. Indeed, having the government as an owner results in a higher degree of embeddedness which is likely to impact the firm’s strategy and performance.
It is certain that environmental pressures constrain a firm's strategic choices (Zammuto, 1988) and in times of upheaval existing strategies become obsolete (Meyer et al., 1990). The environmental jolt coupled with the power that institutions exercise over firms narrow the scope of action and call for certain responses. The rearrangements in environment induce the firm to reconfigure its strategy yet, institutional embeddedness has been disregarded in the investigation on the impact it has on firm’s responses to an environmental jolts.
Most studies have focused on how firms respond to institutional pressures (eg. Oliver, 1991;
Pache and Santos, 2010) but only limited attention has been given to firms located within highly institutionalized environments (Rodrigues and Child, 2003). There is a general consensus that a fit between environment and strategy is of critical importance for a firm's success (Venkatranan and Prescott, 1990). In particular, the turmoil that an environmental jolt creates in the institutional environment triggers organizational responses. These responses are influenced by the firm's characteristics, like its structure and ownership, which can play an important role that, however, has been overlooked (Greenwood et al., 2011)
Any crisis can be interpreted either as a threat or as an opportunity, but one thing is certain; a crisis dictates change. The question though is, whether a highly institutionally embedded firm has the same tools in its arsenal as any other firm. In order for firms to be able to harness the momentum and turn a crisis into an opportunity they must be flexible and capable of adapting to the changing environment. As Teece et al. (1997) would say, firms have to have dynamic capabilities, meaning “the ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments”. In other words, firms must have the ability to sense, seize and manage opportunities and threats.
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However, for organizations operating in highly institutionalized environments, their ability to act in a completely autonomous manner is limited, since they have to act in alignment with the institutions' expectations and they can only resist these pressures when they are not dependent in institutional constituencies (Goodstein, 1994). Organizations in highly institutionalized environments face internal and boundary-spanning contingencies and are expected to align their activities with those that the institutional environment suggests in order not to undermine their ceremonial conformity and jeopardize their legitimacy (Meyer and Rowan, 1977).
Nevertheless, Uzzi (1997) claimed that any positive effects rises up to the a certain threshold and that “the same processes by which embeddedness creates a requisite fit with the current environment can paradoxically reduce an organization's ability to adapt”. Dacin et al. (1999) though, suggested that embeddedness might seem to impose limits on organizational actions, but also provides opportunities.
Nevertheless, institutional embeddedness is a significant factor that poses certain constraints on firms especially in times of upheaval when agility and flexibility are the sine qua non of a firm’s survival. Thus, the purpose of this paper will be to answer the following research question:
How high institutional embeddedness affects the responses of a mixed owned firm to an environmental jolt?
In order to answer this question, a longitudinal single case study design will be adopted having as unit of analysis the partially state-owned Public Power Corporation S.A. (hereinafter PPC).
The Greek economic crisis presents a unique opportunity and serves as the environmental jolt while PPC, a mixed-owned enterprise, since 51% of its shares are being held by the Hellenic
Republic, is an ideal representative of highly institutionally embedded firms. The period of study is 3 years (2009-2011) and the data used were collected from various sources including
PPC’s documents and reports as well as articles regarding the company derived from two Greek
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newspapers, “Ta Nea” and “Elefterotupia” which are the two newspapers with the highest circulation (Argos S.A., Press Distribution Agency).
The paper is organized as follows: The next section discusses the theoretical background and presents an overview of the literature review upon which the study is built. Subsequently, the methodology and the data sources are presented followed by the results section in which the actions of PPC during the years of study are illustrated. In the following section, the results are further discussed and finally, the paper is completed with the conclusion part and the presentation of the limitations of this study.
Literature Review
Institutional embeddedness
“Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete, ongoing systems of social relations. (…) The behaviour and institutions are so constrained by ongoing social relations that to construe them as independent is a grievous misunderstanding”
(Granovetter, 1975, pp. 481-82, 487)
The concept of embeddedness was first introduced by Karl Polyani (1944) who suggested that no economic model can be applied on non-market societies due to the lack of economic institutions. Hence, in market societies, in which the evolution of institutions has rationalized economic activity, the application of economic models is possible and essential.
Granovetter (1985), drawing upon Karl Polyani, applied embeddedness in market societies and suggested that economic behaviour is influenced by the context within which it is expressed and hence, organizations and institutions are related to a greater extent than that economists and sociologists assumed. As a result, economic exchange is socially embeddded, economic
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organisations such as business companies are embedded in networks of interpersonal relationships and larger social structures (Nell and Andersson, 2012; Halinen and Tornroos,
1998) such as the state, families, professions, religion and ethnicity.
Zukin and DiMaggio (1990), in their study on the influence of social organisations on economic activities, further developed the concept of embeddedness suggesting that it refers “to the contingent nature of economic action with respect to cognition, culture, social structure, and political institutions” (p.15). Their point is that we cannot study economic activities regardless of the social organisational traditions which influence economic actors and define economic action.
Since “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy, and to create competitive advantage” as Ingram and
Silverman (2002, pp. 20) aptly described, the focus of this study will be on the firms’ embeddedness in the institutional context.
Institutions serve as the foundation upon which economy is built. They are the backbone of market economies and besides the increase in bureaucratization that they might cause, they manage to reduce uncertainty resulting to lower transactions costs, and eventually they determine firms’ profitability (North, 1991).
A firm cannot perform regardless of its environment, which is composed by several institutional actors each of whom exercises pressures upon the firm and dictates, to a certain extent, its behaviour. These interconnections between an organisation and its institutional environment, represent the degree of institutional embeddedness of an organisation (DiMaggio and Powell, 1983; Baum and Oliver, 1992).
Institutions consist of “both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)” (North, 1991: p. 97).
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Yang and Modell (2013) approach institutional embeddedness as a multi-layered phenomenon constituted by institutionalized expectations as well as internalized values and beliefs of individual actors. Both these facets are important in studying institutional embeddedness yet, for ease of reference, we will follow Scott (1987) and Oliver (1997) in addressing institutions mostly as regulatory structures, governmental agencies, laws, courts, and professions.
Extant literature has argued that institutional embeddedness affects firms, their strategy and/or performance, and while some scholars stress the positive impact of institutional embeddedness on firms, others highlight its disadvantages and a consensus regarding this issue has not been reached. Peng et al. (2008) argued that national institutions affect a firm’s strategy and outcomes as powerfully as do industry and resource, and hence it should be taken into consideration when designing a firm’s strategy.
In a stable environment, this conformity to institutional expectations can be a vital factor to organizational success and survival (Baum and Oliver, 1992; DiMaggio and Powell, 1983;
Oliver, 1991). Institutions affect the capacity of firms to interact and therefore affect the relative transaction and coordination costs of production and innovation (Mudambi and
Navarra, 2002), their presence minimizes the level of transaction costs as previously discussed
(Williamson, 1973; Wan and Hoskisson, 2003). An example of the advantages represented by institutional embeddedness is the liability of foreignness (Zaheer, 2002) suffered by foreign firms which have no or weak ties with “the cognitive, normative and regulatory domains of the local institutional environment (Scott, 1987, 1995; Kostova, 1999)” (Zaheer, 2002, p. 352). In other words, there are institutional costs for firms that do not share ties with the actors of the institutional environment in which they operate or they want to operate. This means that a firm’s position in an institutional environment and its linkages with important actors will determine its access to information and resources (Zaheer, 2002). Institutionally embedded firms can lobby institutional actors, shape, through institutional entrepreneurship (Maguire et
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al., 2004), favourable policy changes (Dieleman and Sachs, 2008), gain public support
(Hillman and Hitt, 1999; Henisz, 2003) and acquire better access to government-controlled resources (Henisz, 2003; Boddewyn and Brewer, 1994). Firms’ survival depends on resources controlled by institutional actors and those firms highly embedded in this environment can exploit their strong ties with the salient institutional actors and guarantee the unhindered flow of these resources (Frynas et al., 2006; Pfeffer and Salancik, 1978).
This asymmetric possession of resources, which embeddedness supplies firms with, opens the channels through which firms can contribute to the evolution of governments and practices
(Child et al., 2012). Constraints on firms are mostly imposed through regulations which to a great extent are related to specific resources and capabilities of the firms within the institutional environment (Prinkse and Kolk, 2012). With countries generally allocating resources to their domestic industries (Lenway and Murtha, 1994), institutionally embedded firms can develop firm-specific advantages (Lenway and Murtha, 1994) and gain a sustainable competitive advantage, since they can ease the uncertainty stemming from government regulations in their favour (Peng, 2008).
Nevertheless, for a firm, to be institutionally embedded means also that there are several forces pressuring it for compliance. We could therefore argue, that institutional embeddedness is a constraining power exercised upon firms.
If, on one side, institutional embeddedness can provide advantages to firms, on the other side, extant literature has identified also disadvantages, in particular in situations of environmental change. Indeed, if change can be an opportunity for firms (Rodrigues and Child, 2003), less embedded firms might be in better position to harness this opportunity and show better reflexes
(Sun et al., 2010). Siegel et al. (2010) argue that “outsider-based” firms have an advantage over highly embedded firms since they are less constrained by institutions, they can identify the emerging opportunities and cope with change better and quicker.
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Selznick (1992) claims that ‘institutionalization constrains conduct in two main ways: by bringing it within a normative order, and by making it hostage to its own history’ (pp.322).
Institutional embeddedness, thus, may lead a firm to a path-dependent behaviour, making it more difficult to adjust to radical changes, since formal and informal institutions often reflect past preferences (Cantwell et al., 2010), and any path-breaking behaviour is excluded (Sydow et al., 2009).
Uzzi (1997) has identified a key disadvantage of embeddedness, the “paradox of embeddedness”, which implies that firms might become too embedded in their environment which as a result might lead to inertia and inability to adjust to any change. Sun et al. (2010) argue that high embeddedness can lead to a declining, and even negative, effect on long-term firm performance “through cost-inefficiency and under-development” (pp. 1179) of market- based capabilities.
Moreover, firms, in many cases, by complying with their institutional pressures, might adopt practices for legitimation reasons and not necessarily for efficiency reasons (Meyer & Rowan,
1977; Zucker, 1987; Kostova and Roth, 2002). For example, Hillman and Keim (2001), argue that firms might use corporate resources for social issues which may not create value for the firm and its shareholders. Profit maximization lies in the core of business action, yet firms in their effort to placate institutional pressures, might incline from their profit-seeking road and engage in actions merely for the cause of satisfying socially and institutionally expressed needs.
In addition, a highly institutionalized environment generates conditions of low selection and therefore restricts choice in different ways, as information is restricted and selective, which encourages managerial inertia and reinforces institutional isomorphism and conformity
(Oliver, 1991; Rodrigues and Child, 2003).
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The literature on institutional embeddedness does not provide solid conclusion about the effect of institutional embeddedness, signalling that it can be either an advantage or a disadvantage and, in many cases, it can be both at the same time. Institutions set the ‘rules of the game’
(North, 1991), and however strict these rules might be, they ensure that the game will continue to be played. The pressures that institutions pose on firms, are the forces which ensure the continuance of economic life and the resulting structure is at the very least the structure upon which economic action is based.
While the role of institutions has been stressed throughout the years by many authors (eg.
Meyer and Rowan, 1977; North, 1991) and there is a general consensus that institutions pose pressures on firms and in a sense influence their behavior and performance, its managerial implications are mostly addressed to multinational enterprises (MNEs). Namely, Rugman and
Verbeke (2003) studied institutional pressures expressed as environmental regulations and how the latter affects corporate strategic decisions. The link between MNEs’ political strategies and institutional environments has also been investigated by Rizopoulos and Sergakis (2010) in their effort to develop a framework on how MNEs influence political decisions and how their strategies regarding host countries are influenced by political forces in their home country.
In addition, Cantwell et al. (2010) suggested that historical changes on the character of MNE activities are linked to the changes in the institutional environment and by using this co- evolutionary analysis they tried to understand the interrelationships between MNE activities and public policy. Cantwell (2009) also studied the firm-location interactions and how this affects its knowledge sourcing. He suggested that the greater institutional distance between the host region and the headquarters of the MNE, the harder it will be for the latter to engage in local contexts, concluding that this explains why most of MNEs are regionalized rather than globalized. Murtha and Lenway (1994) studied institutional arrangements from a strategic
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standpoint, suggesting that they can contribute to state strategic capabilities and presented a framework to help us analyze how these interact with MNEs and affect their strategies.
However, in all these studies, authors address the implications that institutional embeddedness can have on MNEs performance vis-à-vis their embedded competitors as well as what practices they should adopt in order to enter national markets. They do not study institutional embeddedness per se, nor the firms actually embedded in their local context. Thus, there is a gap in our knowledge with regards to highly embedded firms and their strategic decisions. All these studies have applied and extended the concept of institutional embeddedness trying to figure out how it can be of managerial use to MNEs. Descriptive in nature, all these studies, gave us great insight on how MNEs have addressed the “problem of embeddedness” as described by Granovetter (1975) and provided suggestions on how they should act in the future.
Nevertheless, studying an actually institutional embedded firm would unarguably add to our pool of knowledge and we could then apply this knowledge both upon local and foreign firms.
State Ownership
Not all firms are subject to the same level of institutional embeddedness since different degrees of relationships with their institutional actors define the extent to which firms are embedded in, and attend to, their institutional environments (Oliver, 1997; Hung, 2005). Furthermore, there is a large number of studies which suggest that governments intervene in the economy coercing firms into pursuing political strategies and developing ties with state in order to achieve competitive advantage (Shaffer, 1995; Hung, 2005). Nevertheless, not all firms share the same relations with the state, hence the degree to which they attend to governmental expectations and comply to institutional pressures also might differ (Hillman and Hitt, 1999;
Hung, 2005).
As discussed in the previous section, there is no consensus among researchers regarding the type of impact of institutional embeddedness on organizations; however, it is agreed that
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institutions do affect and shape the behavior and eventually the performance of firms. The most salient actor, in the institutional environment of a firm, is the government.
This study will follow Spencer et al. (2005) in distinguishing between the state and the government. States make the laws and incorporate all these institutions that defend and enforce these laws (courts, police and armed forces) while governments come and go and are formed by those elected to hold state power for a certain tenure in order to develop and administer all these laws and policies (Spencer et al., 2005; Benjamin & Duvall, 1985; Goldstein & Lenway,
1989; Skocpol, 1979, Pearce et al, 2009)
Governmental actions create or moderate the uncertainties that organizations must manage, and therefore governments are able to shape organizations in powerful and important ways (Pearce et al., 2009). The leading role of the government in economic life is undeniable since they provide the infrastructure as well as the regulatory framework that rules economic activities
(Fligstein, 2001; Pearce et al., 2009). Certain industries, such as the electric sector, are particularly subject to government interventions since private objectives, like profit maximization, have to be balanced with public policy and non-commercial objectives, like country-wide economic growth for example (Henisz, 2003) or equal access to services.
For these sectors, a key form of government intervention is state-ownership. By definition, state-owned firms are those in which the majority of stocks is held by the state meaning that state has the ultimate control over the enterprise and the management is executed by a dependent agent (Yarrow and Jasinski, 1996).
When governments are involved actively in firms’ activities through ownership, this results in highly institutionally embedded companies since the distance between the firm and the main institutional actor in its environment, the state, is annihilated. As discussed previously, institutional embeddedness can decisively affect firms’ behavior and performance in a positive
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or negative way, therefore ties with the government can be advantageous or disadvantageous for a company. Thus, examining institutional embeddedness in the case of state-owned firms is particularly relevant, yet this type of institutional embeddedness has not been studied thoroughly. The studies that did use state-owned firms as their unit of analysis mostly focused on performance differentials juxtapositioning private-owned enterprises (POEs) and SOEs
(e.g. Goldeng et al, 2008; La Porta et al., 2002). The latter seems to lose the battle since most findings tip the balance in favor of private firms and a consensus is relatively near to be reached.
The majority of research has concluded that state-owned enterprises are less efficient than their private-owned rivals (Goldeng et al, 2008; Child & Yuan, 1996; Qi et al., 2000; La Porta et al.,
2002; Dewenter and Malatesta, 2001). Namely, Shirley and Walsh (2000, cited in Goldeng et al., 2008) mention that among the 52 studies they surveyed, only five indicate that SOEs outperform POEs, verifying that private ownership is more effective compared to state ownership.
Nevertheless, state ownership was considered the best option with regards to satisfying societal demands for economic growth (Henisz and Zelner, 2005). Vining and Boardman (1992) have argued that in cases where there are massive economies of scale and scope, high entry barriers, or externalities, public ownership may be preferred. In line with their suggestion is the work of
Kwoka (2005) who used evidence from U.S. Electric Utilities and demonstrated that public enterprise may have an advantage in producing goods and services whose quality attributes are difficult to specify a priori. Nevertheless, Caves and Christensen (1980) implied that most of the studies assessing the efficiency of public and private firms is usually compared in industries which have heavy regulation and limited competition. Yet, they too, in their study of the
Canadian Railway industry concluded that any tendency toward inefficiency resulting from public ownership has been overcome by the benefits of competition suggesting the SOEs can be efficient when they perform in competitive markets.
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Chen et al. (2009), and Vining and Boardman (1992) have argued that POEs don't always perform better. Consistent with their arguments are also those by Martin and Parker (1995), who suggest that it is difficult to sustain the hypothesis that private ownership is unequivocally more efficient than nationalization. Kole and Mulherin (1997) studied a sample of U.S. corporations in which the federal government held 35 to 100 percent of the outstanding common stock for between 1 and 23 years, during and following World War II, and found that the performance of the government-owned companies was not significantly different than that of private-sector firms in the same industry.
Nevertheless, despite the benefits that might accrue when a firm’s shares are owned by the state, there are certain constrains related to SOEs. The most salient argument against state- ownership is that SOEs do not act as profit maximizers but they pursue socio-economic goals
(Nombela, 2001) and this is a potential cause of bias in the way they assess their efficiency as they are regarded as an instrument for the attainment of non-economic goals such as the need for public control over natural resources, regional policies, employment or social issues (Grout and Stevens, 2003; Goldeng, 2008).
Moreover, public ownership typically results in larger firms (Nombela, 2001) and despite the fact that they are more labor intensive than their private-owned competitors, they fail to attract managerial talent (Goldeng, 2008) and as a result government ownership is associated with lower governance quality (Borisova et al., 2012). This is explained by the fact that SOEs, trying to meet government’s objectives for higher employment rates, they will hire more workers and without providing any further incentives, SOEs tend to have lower labor productivity (Xu and Wang, 1999; Boycko et al, 1996, Dewenter and Malatesta, 2001).
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Authors have related this drawback to less effective monitor mechanisms and correlated SOEs’ inefficiency with the agency problem1. It is suggested that managers of SOEs have weaker incentives to perform and to pursue firm’s objectives, and that their principals have less efficient means of monitoring the managers, since they are less exposed to the disciplining and learning forces of markets (Goldeng, 2008). Yet, Caves and Christensen (1980) stated that the problem of SOEs is not ownership, but rather a lack of explicit goals and objectives, and an absence of organization cultures and systems that support and encourage the fulfillment of those goals and objectives. This is exactly what Boycko et al. (1996) claimed: that the agency problem can explain the inefficiency of public firms but it is not caused by managers, as it would be expected, but by politicians.
Nevertheless, the study of state-owned enterprises should be expanded to include, if not focus on, mixed enterprises (MEs), which are firms that the state along with private investors jointly own the company. Delios et al. (2006) in their study of ownership identity in China's listed enterprises, suggested that to better understand performance implications of state ownership, researchers need to distinguish between different forms of state ownership. Thus, SOEs and
MEs bear different characteristics which might lead to relevant differences in performance and behavior.
Yet, extant literature focuses mainly on comparing wholly state-owned enterprises with privately owned enterprises, with limited investigation of firms which have a mixed ownership, both private and public, and have arisen, mostly, as a result of partial privatization by governments. In addition, considering the fact that states have in some cases gained control
1 The agency problem has two facets. Firstly, it arises when there is a conflict between the goals and desires of the principal and the agent, and when it is difficult or expensive for the former to verify whether agent is behaving appropriately. Secondly, the agent and the principal might prefer different actions because of their different risk preferences. K. M. Eisenhardt, Agency Theory: An Assessment and Review, The Academy of Management Review, Vol. 14, No. 1 (Jan., 1989), pp. 57-74
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over firms as a response to the crisis, ME is the dominant model since most of those firms are only partly rather than wholly controlled by governments.
Although, as regards the SOEs, a relative consensus on their drawbacks has arisen among scholars, research on firms with mixed ownership is limited and consensus is absent. Namely,
Schmitz (2000) argued that partial privatization could well be the optimal ownership structure since it mitigates the disadvantages of public ownership and of privatization, an option that
Peda et al. (2013) also agree with. Eckel and Vining (1985) suggest two cases where MEs may be a preferred organizational form. The first is where dual goals (profitability and social objectives) are pursued; indeed, where the product or service has both private and public facets, it may be more efficient to combine market and political monitoring within a mixed-ownership model. The second arises when capital market imperfections prevent efficient risk-sharing.
Partial state ownership provides a means of absorbing risks unacceptable to private shareholders. Sun et al. (2002) found that partial government ownership and firm performance can result in a positive relationship even though this relation is not linear. For their study they used a sample of firms listed in the SHSE and SZSE2, from 1994 to 1997, and they showed firms’ performance is positively impacted by the partial state ownership.
On the contrary, Enderwick (1994) argued that in many ways MEs could “combine the worst of both worlds; the shortcomings of SOEs and of POEs” (p. 142). For example, Vining and
Boardman (1992) studied MEs in competitive markets and pointed that they behave differently but not better than SOEs and they might even be worse than POEs and SOEs in profitability.
Their results are in line with that of Tian and Estrin (2008) and Tian (2001) who suggested that the state can actually improve corporate value when it holds a large portion of firm’s shares
2 Shanghai Stock Exchange and Shenzhen Stock Exchange
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but only to a certain threshold beyond which the firm’s value decreases. Hence, it is better for the state to either hold the vast majority of firm’s sharers or to be a minor shareholder.
Xu and Wang (1999) found a negative relationship between state ownership and performance.
They claimed that ownership concentration is good but as state shares rise, productivity falls, which adds to the notion that state's involvement results in inefficiency. Additionally, Qi et al.
(2000) also showed that there is a negative relationship between state shareholdings and performance after studying listed firms.
Sun and Tong (2003) came up with mixed results in their study of 634 enterprises listed on
China's two exchanges upon share issuing privatization (SIP) in the period 1994–1998. They found that SIP is effective in improving SOEs’ earnings ability, real sales, and workers’ productivity but is not successful in improving profit returns and leverage after privatization.
Thus, only few studies have used MEs as their unit of analysis (eg. Sun and Tong, 2003; Qi et al., 2000; Vining and Boardman, 1992) and their results were also mixed. Moreover, they neglected an important aspect related to state-owned firms, their level of institutional embeddedness, and as a result even fewer studies have examined issues of embeddedness with regards to the relation between firms and the state (Okhmatovskiy, 2010).
Having presented the main findings of the studies on MEs it is evident that we cannot come to any safe conclusion on whether this type of ownership positively or negatively affects the firm.
Nevertheless, all these studies, besides their mixed results, have two features in common. The vast majority of them are conducted within the Eastern-Asia environment and all of them assess the performance of firms. With regards to the former, the differences between East-Asian countries and developed ones lead to argue that the results of these studies cannot be applied in developed markets. Emerging economies have different characteristics and most importantly higher growth rates. China, for example, has an average continuous 7% growth for a quarter
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century (Safadi and Lattimore, 2009), a rate that many countries in developed world cannot achieve anymore. Enterprises in post-industrial economies are faced with fierce competition and have to fight each other just to claim a small share in a mature and fragmented market, while their counterparts in emerging and transition economies enjoy the fruits of economic growth. Inasmuch market characteristics are not alike, so are the strategies implemented. Thus, studies focusing on emerging economies can be only of limited use when our desire is to investigate firms in developed markets.
Hence, there is a gap in our knowledge on how firms with the peculiar characteristic of institutional embeddedness, meaning a mixed-ownership status, respond to their environment especially in cases where the latter suffers from a jolt.
Environmental jolt
According to Hoffman (1999) environmental jolts are “events that can take multiple forms, but irrespective of their form they are disruptive events that create uncertainty and by acting as a trigger they cause a reconfiguration of an organizational field and the institutions that guide behavior” (p. 353). Additionally, Meyer (1982) defines of environmental jolts as a “transient perturbations whose occurrences are difficult to foresee and whose impacts on organizations are disruptive and potentially inimical” (p. 515).
Therefore, an economic crisis can be consider as an environmental jolt since it “ (1) threatens high-priority values of the organization, (2) presents a restricted amount of time in which a response can be made, and (3) is unexpected or unanticipated by the organization” (Hermann,
1963, pp. 64). According to Haveman et al. (2001) “such discontinuities disable organizations' routinized responses, plunging decision makers into strange and bewildering new worlds” (pp.
253). Thus, it is not surprising that environmental jolts have been seen as threats for organizations.
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However, extant studies suggest that firms should not address jolts as threats but rather as opportunities and that they should try to build upon them. In particular, Wan and Yiu (2009), considering the Asian economic crisis as an environmental jolt, showed that corporate acquisitions during a jolt would be positively related to firm performance and argued that firms can capitalize on the opportunities created in times of upheaval. Moreover, Sine and David
(2003), in their study on US electric power industry, showed that despite the fact that in cases of crisis the rearrangements in firm’s institutional environment might have eroded their existing advantages, they also triggered entrepreneurial action.
In addition, scholars have argued that environmental jolts provide the impetus for entrepreneurial actions since they evoke active cognitive processing (Zellmer-Bruhn, 2003) and there is a positive relation between environmental jolts and entrepreneurial actions (Liu et al., 2007). The ways a firm used to interpret its environment become obsolete and in order for a firm to take advantage of all these changes driven by the environmental jolt it has to re-invent itself. Aggestam (2014) suggested that, in their effort to survive, firms change their performance from “passive conformity to interest-seeking active divergent adaptation to external demands and expectations” (pp. 66).
Meyer (1982), focusing on a doctors’ strike as an environmental jolt, examined how hospitals reacted when they were confronted with this unpredictable crisis. The results showed that despite the severe crisis and the changes that this jolt triggered, hospitals managed to recover and many of them exited the crisis in a better position. Thus, firms can capitalize on jolts and use them as means to address chronic drawbacks by implementing different, but appropriate strategies, and eventually this strengthens their position.
Smart and Vertinsky (1984) divided strategic responses to crises into entrepreneurial and adaptive. The choice depends on the posture the firm takes against its environment, whether it thinks it controls it or not, and the time horizon over which the decisions will take place,
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meaning whether the responses’ objective is to improve long-term or short-term outcomes. All of these strategies can be implemented when the external environment of the firm is undergoing a shift that calls for change. The firm can adapt in the short-term to the environmental pressures or seize the opportunity and implement entrepreneurial strategies that will be beneficial in the long-term. However, according to Smart and Vertinsky (1984) an entrepreneurial response can also be combined with short-term objectives and vice versa. Yet, they claimed that “the degree to which organizations rely upon other organizations in their environment (dependency) for growth and survival is related to the decision horizon in managing a crisis. As environmental dependency increases, tendencies to respond with long term strategies rather than short term ones also increase” (Smart and Vertinsky, 1984, pp. 211).
In conclusion, previous studies suggest that environmental jolts can represent threats but also opportunities depending on how organizations interpret them and on whether they are willing and able to change.
Scholars have considered different antecedents to a firm’s response to an environmental jolt.
In particular, Meyer (1982) states that a firm's response to an environmental jolt is affected by its structure, its ideology, its overall strategy and the level of its slack resources. Therefore, the environmental jolt triggers a response, yet this response is a result of all these antecedents.
Though, extant literature has overlooked how a firm’s institutional embeddedness affects the response to an environmental jolts.
In extant literature, institutional embeddedness has been seen as an element in firms’ environment and the majority of scholars have tried to explain how firms can address the problems resulting from it and how they can benefit by exploiting their ties with their institutional actors. However, in the case of a highly institutional embedded firm, the actors that rule and decide its actions do not hold a seat in the organization as it normally happens
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with those who are assigned to direct a firm’s actions. Thus, we should consider the cases in which institutional embeddedness is a core element of a firm.
In the previous section it has been illustrated that MEs, even though they are becoming the dominant model of state ownership, have not been studied thoroughly and when they have, mostly with regards to their performance, they gave results that matched their identity, mixed.
The aim of this study is to contribute to this debate and will try to add one more aspect to the subject. Considering that most studies focused on MEs performance, this study will focus on what precedes and decisively affects firm performance, its strategy and its strategic responses.
Performance is the product of many factors and not the outcome of actions executed in vacuum.
Not all firms perform the same, since they do not share the same resources, natural and human, and most importantly they do not operate in the same environment. There are, of course, firms that managed to define their environment and change the rules of the game in their favor, however in most cases, it is the environment within which they perform that defines the scale and scope of their activities. Having discussed how decisively institutions affect economic action and how the degree of embeddedness can mark the degree to which firms have to comply with institutional pressures, it is rather interesting to investigate a highly institutional embedded firm under an environmental jolt. In the end, the answer on whether jolts are positive or negative events depends on how firms react in order to address them. Their actions indicate the outcome of the jolt, yet there is not a firm answer to how a highly institutional embedded firm responds to an environmental jolt.
Strategic Response
As said by Dacin et al. (1999, pp.324) “as the institutional features of market shift, this impacts what strategies are available and adopted”. That is, during times of upheaval, selection is restricted and firms must employ alternative practices in order to survive and subsequently succeed. It has already been stressed how an environmental jolt can affect all instructional
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actors and how important it is for firm’s survival to appropriately respond to that exogenous event so as to exit the crisis with limited casualties and hopefully at a better position. Thus, in this section, we have to consider how it will respond to the crisis considering also the degree of its institutional embeddedness.
A firm’s strategy must be tailored to its needs and it will be shaped by its embeddedness (Baum and Dutton, 1996). Hence, we can assume that a highly embedded firm will respond in a different way to the environmental jolt. While a firm's response to the jolt is influenced by its structure, ideology and strategy (Meyer, 1982), in our case all of these antecedents are influenced by its institutional embeddedness, thus our concern is how the latter influences the former.
Under an environmental jolt existing firm strategies might become obsolete and thus ineffective (Meyer et al., 1990). The threats and opportunities that arise during a jolt trigger responses against the new dynamics that transform the environment. As Baron (1995) claims
“the environment of business is composed of market and nonmarket components, any approach to strategy formulation must integrate both market and nonmarket considerations” (pp. 47). In other words, a firm’s strategy cannot be considered complete if it does not include both market and nonmarket actions.
A firm’s market strategy defines how it will develop its resources in order to create value
(Becerra, 1964) nevertheless, according to Baron (1995) non-market strategies can complement market strategies and increase overall firm performance. Thus, a firm cannot design its strategy without considering its nonmarket environment which, together with the market environment, affects the outcome of its actions. The market environment consists of all these parties with whom the firm is engaged in economic transactions while the social, political and legal principles which govern firm’s interactions constitute its nonmarket environment
(Baron, 1995). The concept of integrated strategy hence posits that the firm's performance is
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affected both by market and nonmarket powers and a complete strategic plan should address both of these forces in order to be successful.
From a strategic stand point, scholars have argued that a firm, in order to outperform its competitors and gain a competitive advantage, should create more value than its competitors by implementing generic strategies (cost leadership, differentiation, or focus strategy) as Porter
(1979) dictated and by having superior resources (Peteraf, 1993; Barney, 1991). In times of upheaval though, a firm must at least respond to the changes triggered by the environmental jolt. According to Smart and Vertinsky (1984) a firm’s strategic responses to a crisis are to great extent related with the way it used to interpret its environment prior to the crisis, that is whether it operated in a dynamic or static environment, and the time horizon within which the firm has to develop its response. The latter, determines whether a firm will attempt to exert control and try to modify its environment by employing entrepreneurial strategies or whether it will just adjust to the present situation trying to maintain the status quo with adaptive responses (Smart and Vertinsky, 1984). Consequently, a high institutionally embedded firm operating in a rather stable environment, favored by the previous situation is more likely to react defensively and allocate its resources towards the returning to the previous status quo.
Moreover, Smart and Vertinsky (1984) note that in stable market environments where firms are expected to “make heavy investments in standard operating procedures” (p. 202), this increases the cost of long-term change “hence the emphasis on incremental remedial responses” (p. 203). Hence, a firm that has heavily invested in a market and has developed certain efficient and effective routines is less likely to relinquish its practices in order to respond to an ephemeral event; it will only try to retain the losses in the short-term and remain faithful to its long-term strategic plan. Also considering that an institutional embedded firm is less able to adjust to radical changes and path-breaking steps are excluded (Cantwell et al., 2010; Sydow et al., 2009) leads us to the following proposition:
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Proposition 1. A highly institutional embedded firm due to its path-dependent behavior it is more likely to employ an adaptive strategy and allocate its resources towards retuning to or maintaining the favorable status quo rather than adopt an entrepreneurial strategy in order to capitalize on the environmental jolt.
Nevertheless, when the whole environment is in flux, and the salient actors in addressing the crisis emanate from its nonmarket environment, nonmarket strategies might prove more important (Baron, 1995). Hence, firms must adopt political behavior in order to influence the current and future arrangements that will configure firm’s interactions (Smart and Vertinsky,
1984) and due to the significance of the nonmarket forces this political behavior can be used as a means to achieve strategic objectives (Boddewyn and Brewer, 1994).
The nonmarket environment constitutes another arena in which firms compete to outperform and isolate their competitors and according to Boddewyn and Brewer (1994) firm’s political behavior can take two forms: bargaining and non-bargaining. Their framework is addressed to multinational enterprises, yet as the authors claimed: “a political emphasis is not limited to international business as there is a sovereign ruling (state, government) over domestic business as well as business-government relations within all market-based political economies” (p. 125), so it is also applicable for firms operating only in one country.
With respect to the non-bargaining political behavior, it can take the form of compliance, avoidance and circumvention while the bargaining political behavior can be further analyzed as conflict, partnership and intensity (Boddewyn and Brewer, 1994). Whether a firm will employ bargaining or non-bargaining political behavior depends on firm’s and industry’s characteristics and on its nonmarket environment and the relative power each actor holds
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(Boddewyn and Brewer, 1994). Additionally, since firm’s conformity with the institutional environment directly affects not only their success but most importantly their survival, institutionally embedded firms are more likely to shape their activities in alignment with the preferences of their most salient institutional actors (Meyer and Rowan, 1977). Furthermore, when institutional changes are of limited strategic importance and the firm might even be favored by the rearrangements, then it is most likely that it will employ non-bargaining political behaviors by complying with the newly-imposed conditions (Boddewyn and Brewer, 1994). A non-bargaining behavior is aligned with a highly institutional embedded firm’s character since its survival and success is directly affected by its compliance with the laws and decisions imposed by the institutional actors.
Nevertheless, a highly institutional embedded firm it’s more likely to leverage its close ties with the environment and to lobby institutional actors in order to shape in its favour the policy changes and acquire better access to resources (Dieleman and Sachs, 2008; Henisz, 2003;
Boddewyn and Brewer, 1994). When a firm has the power to directly affect the evolution of the non-market environment which interprets as hostile, is rather possible to fight over reclaiming institutional support (Boddewyn and Brewer, 1994). A highly institutional firm has better access to both resources and information (Zaheer, 2002; Dieleman and Sachs, 2008;
Henisz, 2003; Boddewyn and Brewer, 1994) which suggests that it can leverage that resources in order to manipulate the rearrangements and claim further gains. Considering also the fact that the whole environment is disrupt, and especially during an economic crisis, the institutional actors are also seeking -for legitimate reasons- to set economy in motion and are expected to facilitate economic activities, an incumbent firm has the power to affect their decisions and shape the environment in its favour. A firm’s political behaviour has to be in accordance with its market strategy; a highly institutional embedded firm is mainly interested in retaining its power and its overall strategy cannot deflect from that route. Hence, it will not withdraw from
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its right to sustain its power and it will use its pivotal role in the society so as to control and influence the environment. All these leads us to the following proposition:
Proposition 2. A highly institutional embedded firm is expected to leverage the power accumulated during the times of its dominance and bargain with the salient institutional actors in order to retain its power and benefit from the rearrangements resulting from the environmental jolt.
Considering the above, the next section illustrates the results of the research. In addition, Table
1 summarizes the main concepts discussed in the literature review, lists the main definitions as accrued by the study and furthermore, it includes the propositions the study aims to verify.
Methodology
Research design
This paper aimed to research how institutional embeddedness affects the responses of a mix- owned firm to an environmental jolt. In order to provide an answer to this question this study employed a longitudinal single case study design. According to Yin (2009) the case study is the ideal method of research when ““how” questions are posed, when the investigator has little control over the events and the focus is on a contemporary phenomenon within a real-life context” (pp. 2). An environmental jolt is a phenomenon that has to be studied over a period of time for its effects are not immediately apparent, thus a longitudinal study is pertinent to explore the firm’s responses to the jolt and how they changed over time since it allows to research “the same single case at different points in time” (Yin, 2009, pp. 49).
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Table 1. Definitions of the main theoretical concepts & Propositions
Institutional embeddedness: It refers to the interrelationships between an organization and its institutional environment and represents the degree to which firms have to comply with the forces executed by the institutional actors placed in the environment within which they operate (Granovetter, 1985; DiMaggio and Powell, 1983; Baum and Oliver, 1992).
Environmental Jolt: An upheaval caused in the environment that regardless of the various forms it can take, disrupts organizational routines and practices and erodes existing advantages (Hoffman, 1999; Haveman et al., 2001; Sine and David, 2003).
Strategic Responses: The actions employed by a firm in order to address changes in its environment which have to address both market and non-market issues and can be either entrepreneurial or adaptive. (Baron, 1995; Smart and Vertinsky, 1984).
Proposition 1. A highly institutional embedded Proposition 2. A highly institutional firm due to its path-dependent behaviour it is embedded firm is expected to leverage the more likely to employ an adaptive strategy and power accumulated during the times of its allocate its resources towards retuning to or dominance and bargain with the salient maintaining the favourable status quo rather institutional actors in order to retain its than adopt an entrepreneurial strategy in order power and benefit from the rearrangements to capitalize on the environmental jolt. resulting from the environmental jolt.
In general, qualitative research can add to our knowledge base since its results can generate propositions and hypotheses that can be tested in larger-scale studies (Ryan et al., 2002) which subsequently can lead to theory building (Eisenhardt and Graebner, 2007). Thus, the rationale behind the choice of a single case is that the unit of analysis is ‘representative or typical’ (Yin,
2009, pp. 48) and the conclusions of this study will be informative about all those mixed-owned firms.
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In addition, theory developed from case studies can “have important strengths like novelty, testability, and empirical validity, which arise from the intimate linkage with empirical evidence” (Eisenhardt, 1989, p. 548). The problem of breadth (Flyvbjerg, 2006) was moderated by the depth of the research, and results provided a firm answer to the research question as we were able to investigate a firm's reactions “in depth and within its real-life context” (Yin, 2009, p. 18).
Case Selection
The unit of analysis of this study is the Public Power Corporation S.A. (PPC), the main electric company in Greece and among the largest industrial enterprises in Greece in terms of assets.
In 2009, PPC generated approximately 91% of the electricity produced in the whole state
(Eurostat, 20133) and its sales at the end of the same year reached Euro 5,507 million (PPC,
Annual Report, 2010).
Until January 2001, PPC was wholly owned by the Greek state and under the Liberalization
Law (2773/1999) was incorporated as a Societe Anonyme. Through offerings over the next two years, the Hellenic Republic further reduced its stake in PPC and, at the time of this study, it holds 51.12% of the company share capital.
PPC’s mixed ownership signals its high institutional embeddedness and it represents an ideal until of analysis. Besides the fact the PPC is partly owned by the state, it also operates in a quasi-deregulated market and it has to comply with decisions and laws imposed by the government and the authorities that monitor the energy market. Also, and most importantly,
PPC operates in an environment severely hit by an economic crisis.
3 http://ec.europa.eu/eurostat/statistics-explained/index.php/Electricity_market_indicators, , last accessed 05/02/2015
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The Greek economy found itself in midst of the global crisis, triggered by the collapse of
Lehman Brothers in September 2008, which “amplified the cumulated negative effects of chronic weakness and accelerated the downturn of the economy” (Bank of Greece, 2009).
Subsequently, the newly elected Greek government admitted that the fiscal problems the country was facing were underestimated (The Economist, December 2009) and sought help in its European counterparts. On May, 2010 the Greek government reached an agreement with the International Monetary Fund (IMF), the European Commission (EC), and the European
Central Bank (ECB) on a focused program to stabilize Greek economy and regain investors’ trust (IMF Country Report No. 13/156).
Nevertheless, and besides the billions of euros provided to Greece, the implementation of austerity measures, that were essential terms in the whole agreement, the Greek Economy is far from recovered, the Greek program is the least successful one and in 2011 its public debt was at 170.3 percent of GDP (Eurostat)4. Between 2009 and 2014, Greece has seen its real domestic demand drop by around 30 percent, real GDP fell more than 20% while the unemployment rate rose to over 15% (Economic and Monetary Affairs Committee Study,
2014).
All in all, the severe economic crisis that hit Greece along with the highly institutionalized profile of PPC represented the ideal context of study. Additionally, the fact that the researcher is from Greece allowed an in depth insight on the case, given the possibility to use national sources.
Data collection
The global financial crisis that sparked after the bubble burst in 2008 in the United States eventually revealed the pathologies of the Greek economy which led to a severe economic
4 http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&pcode=tipsgo10&language=en
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crisis. This fact sets the time boundaries of my research. The economic crisis in Greece started in 2009, reached a pick during 2010 and it is going till today, yet the study examined PPC's responses during a three year period, from 2009 to 2011. The rationale behind choosing this period of time, was that the research should capture the beginning of the crisis, investigate the immediate responses of PPC and then examine the potential changes in its long-term strategy for a sufficient amount of time. For this period of time, archival data were derived from multiple sources; media sources, corporate documentation as well as government documentation
Regarding the media sources, the main ones were the newspapers “Ta Nea” (TA NEA in Greek) as well as the newspaper “Elefterotupia” (Ελευθεροτυπία in Greek). These particular newspapers have been chosen for two reasons; they represent the newspapers with the highest circulation in Greece according to the biggest distribution agency in Greece Argos S.A. and their archives are easily accessible, covering the actions of the firm during the whole period of the study. Using “PPC” as a keyword the research yielded 647 relevant articles in total. Every available documentation provided by the firm like press releases and annual reports which were all accessible online in PPC's website (ww.dei.gr) and already archived in chronological order, were also used as sources. As far as the government is concerned, I gained data from its press releases as well as from the decisions being published in the Government Gazette of the
Hellenic Republic. Additional information was also derived from the website of the Greek
Regulatory Authority for Energy (www.rae.gr).
Additionally, in order to better illustrate the environment within which PPC operates and to understand the changes that occurred in its market environment, data regarding PPC’s main competitors were also collected. The exact amount of data used in the research are listed in
Table 2.
The present study revolved around two main actors; the firm and the government. Their interactions which result in the firm's high embeddedness dictated its actions. Thus, in order to
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examine the research question this elaborate set of data derived from all the above mentioned sources should have been identified and classified before being analysed. A chronology of the major events that occurred during the years of the study was developed and all events in PPC’s environment were classified either as institutional or market related. The arrangements in the institutional environment in terms of changes in regulations, tariffs, decisions and laws imposed by the government and all the institutional actors were coded under the “institutional environment” while all the events related to PPC’s competitors, the effects of the crisis in the market and in the customers were classified in PPC’s “market environment”. Subsequently, using the concept of integrated strategy developed by Baron (1995), firm's strategies were coded as market and non-market and the study addressed how these responses were affected by the firm’s institutional embeddedness.
Results PPC’s Background PPC was founded in 1950 and the company’s task was to develop and implement a national strategy plan so as every Greek citizen would have access to electricity. The state was in need of an organization which would invest throughout the country and provide energy to the entire territory, exploiting Greece’s rich lignite reserves and balancing the costs through economies of scale.
Electricity was formally introduced in Greece by Thomson-Houston in 1889, when it bought the first plant that was built in Greece and along with the National Bank of Greece, founded
Compagnie Hellénique D'électricité (Hausman et al., 2008). During the following years, however, the market got remarkably segmented and by 1950, almost 400 companies were operating in the Greek energy market. Considering the geography and the morphology of the country and the low margin profit, many remote areas were depending to small-scale power
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plants for their electrification since major companies found it unprofitable to invest in power plants.
Table 2. Overview of Resources
PPC’s official website: 322 documents including: annual reports, media www.dei.gr announcements, press releases, financial reports
Newspaper “Ta Nea” 227 articles and interviews of the relevant actors www.tanea.gr
Newspaper “Elefterotupia” 405 articles and interviews of the relevant actors www.enet.gr
Regulatory Authority for Energy 15 documents with decisions and regulations www.rae.gr
Information regarding PPC’s competitors was derived from their official websites: www.terna.gr www.energa.gr www.protergia.gr www.elpedison.gr
Consequently, PPC acquired all private and municipal power generation companies, bundled all these companies under a central management and integrated all networks into a national energy interconnected system. PPC has been a main pillar in Greece’s growth endeavour and played a huge role in country’s development, not only by providing energy, which is the
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driving force of every economy, but also through its investments throughout the country and by providing employment to thousands of people.
Until January 2001, PPC was wholly owned by the Greek state and under the Liberalization
Law (2773/1999) was incorporated as a Societe Anonyme. Through offerings over the next two years, the Hellenic Republic further reduced its stake in PPC and at the time of the study participated in 51.12% of company’s capital stock. Pursuant to the above mentioned law, the
Greek state cannot hold any less than 51% of PPC’s shares. Additionally, even if a shareholder, other than Hellenic Republic, acquires more than 5% of PPC’s share, his/her voting rights would be limited to 5%.
According to article 9 of the Articles of Incorporation of the Company, the Board of Directors
(BoD) consists of 11 members elected for a three-year term: a) eight members, including the
Chief Executive Officer, elected by the General Assembly of the shareholders of the company. b) Two members representing the employees of the company and c) One member designated by the Economic and Social Committee.
PPC is a vertically integrated company and operates in mining, generation, transmission, distribution and supply services. It is the sole owner of transmission and distribution network but it only manages the latter. The distribution network is managed by the Hellenic
Transmission System Operator (HTSO), which is 51% owned by the state, and it is obliged to compensate PPC for the usage of its network. Additionally, PPC is the exclusive wholesale supplier and buyer for the non-interconnected islands and since it supplies energy at the same rates per category as those of the interconnected system, is compensated for these Public
Service Operations (PSOs) and the amount of this compensation is approved by a Decision of the Minister of Development, after a relevant opinion by the Regulatory Authority for Energy
(RAE), an independent administrative authority responsible to monitor the operation of all sectors of the energy market.
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PPC generates electricity in its own power generating stations and it has been granted by the
Greek state exploration and exploitation rights that amount to 62.6% of total public deposits5.
In addition, it participates in other 7 companies, which are either wholly owned subsidies or joint ventures, and one them, PPC Renewables S.A. also participates, holding majority or minority shares, in 24 companies all operating in renewable energy production. PPC’s installed capacity in 2008 was 12.8 GWh, approximately 84% of the total installed capacity in Greece, with almost 23.000 employees, assets that amount to Euro 14 billion and 7.5 million customers that range from households to large industrial consumers.
Electricity Market in Greece PPC has been for years the only power company in Greece, being the sole producer and supplier in the Greek market. Following European Union’s Directive however, which dictated the deregulation of the electric market, the state was obliged to enforce laws towards the liberalization of the market which also resulted in reducing its shares in the company.
Over the past 10 years the electricity demand in Greece increased by 3.8%, outpacing the average increase in EU-15 for the same period (EU-25: 2.04%) which was 2.1% (Kavouridis,
2008). Hence, the electricity production had to speed up pace in order to meet the increased demand and consumption. The latter explains partly, the interest of many private companies to enter the market, claim a share in this profitable market and challenge the local monopoly.
The main raw material used in power generation in Greece is lignite, with a share of 60.5% which results in about 30% of primary energy consumption (Kavouridis, 2008). With PPC having the majority of extracting rights, most private companies that entered the energy market turned to renewable energy. Around 57% for primary energy consumption comes from oil
(Kavouridis, 2008), however the volatility in fuel oil prices, and fossil fuels generally,
5 European Commission; “COMMISSION DECISION of 5 March 2008 on the granting or maintaining in force by the Hellenic Republic of rights in favour of Public Power Corporation S.A. for extraction of lignite” http://ec.europa.eu/competition/antitrust/cases/dec_docs/38700/38700_517_3.pdf, accessed on 12/07/2015
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prevented private companies in investing in fossil-fuel power station and they rather invested in RES.
Thus, alongside the deregulation process, there were many companies which tried to claim a share in PPC’s pie. One of the first private companies was Terna Energy S.A. Founded in 1997, and being part of one of the biggest contracting companies in Greece, GEK Terna Group, it installed its first wind park in 2000 and later on, in 2007, it acquired VIOMAGN, a move that signalled its will to also operate in the field of mining. In 2000, Heron Thermoelectric S.A. was established, as a 100% subsidiary of GEK Terna, and its first gas fired plant Heron I, located in Viotia, came into commercial operation. Later, on 11 December 2008, a partnership between
GEK Terna and GDF Suez were formed wherein both groups hold a 50% stake in the two power plants of GEK TERNA (Heron I & Heron II).
In 2006, a joint-venture, between the Austrian leading electricity company Verbund and Energa
Hellas S.A. came into life aiming to trade electricity from their own production. In the years to follow, two more companies entered the market, Protergia and Elpedison. The latter is the result of the alliance between the Italian Edison and Hellenic Petroleum while Protergia is the company that resulted after Mytilineos Group bought Endesa Hellas.
Having described the context within which PPC operates, the following sections will illustrate how all these actors interacted in the years 2009-2011 considering the ongoing financial crisis and PPC’s responses in order to maintain its dominance in the market.
2009: Realising the upheaval The year 2009 was the year that Greece realised that the financial crisis that the rest of the world was facing was not just a headline in daily newspapers but an imminent danger threatening to upset the entire economy. Major events happened during the year that affected the Greek economic activity and PPC in particular. The public company had to respond to a
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gradually declining energy demand, to the European Commission’s decision which requested
PPC to relinquish its rights over Greek lignite deposits, and to its competitors who were working hard enough to abolish its dominance. The economic crisis triggered actions both inside and outside of the organization, and the Greek elections that took place in October 2009 further disturbed its operations.
Institutional Environment. PPC operates in a highly regulated industry thus, it is decisively affected by the changes in its regulatory framework. Namely, even though PPC’s competitive advantage lied in lignite, this was also its “Achilles heel”. It might be a cheap energy source but at the same time it is not considered a “clean” one. Following the Directive 2003/87/EC of the European Parliament and of the European Council, a scheme was established for greenhouse gas emission allowance trading within the Community (Official Journal of the
European Union, 2003)6 which set the -gradually decreasing- limits of the total amount of certain greenhouse gases that could be emitted by factories and power plants. PPC had to acquire CO2 emission rights in order to meet its obligation and avoid the fines imposed by the
European Union for exceeding its limit. Prior to the crisis, PPC’s strategic plan was to replace obsolete units, with new ones, environmentally friendly, with state of the art technology and higher performance. The economic crisis however, forced it to reconsider many of its plans as it will be illustrated in the next sections. At the moment though, that seemed the least of PPC’s problems.
Back in 2008, the European Commission had decided against the Greek company regarding the granting of lignite extractions to PPC by the Greek state. The latter intervened and advocated in favour of the electric utility and PPC filled before the Court of First Instance an application for the annulment of Commission’s decision. After several weeks during which
6 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:275:0032:0046:en:PDF accessed on 25/6/2015
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observations were submitted by both sides, and while two competitors of PPC filed against it, the European Commission addressed both to PPC and the Hellenic Republic its decision.
Accordingly, the Greek State should launch a public tender for the concession of lignite rights for several mines to private producers excluding PPC, ensuring also that those parties that would acquire these lignite rights would not sell back to PPC any extracted lignite. PPC would only be allowed to engage in both circumstances only in case that there was no other offer.
Certainly, the implementation of this decision would hurt PPC’s core business and allow competitors to erode its competitive advantages.
Additionally, PPC and the Hellenic Republic, had also to comply with the Directive of the
European Parliament which requested the unbundling of supply and generation activities from the Transmission System Operator giving them the opportunity to decide between two suggested models. Specifically, the ISO model proposed an Independent System Operator which should be detached from the vertical integrated company. Alternatively, and according to the ITO model, PPC could remain the owner of the system as long as certain rules could guarantee its independence.
Furthermore, the European institution noticed to the Greek State that the voting rights cap, stated in PPC’s Article of Association, could be considered a restriction to the free movement of capital and that subsequently was an infringement of the Article 56 of the EC treaty. The rationale behind this decision was that private investors were excluded from PPC’s management and control. In defence, the Hellenic Republic, claimed that this restriction was due to the peculiarities associated with PPC; energy security was of critical importance to the state and unquestionably a matter of public interest. The Greek State was given two months’ notice in order to provide a more adequate response otherwise the case might be escalated to
European Court of Justice.
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In parallel, the elections that were held on October 4th, 2009 resulted in the change of the cabinet and the former major opposition party PASOK took charge. It should be noted that
PPC falls under the jurisdiction of the Ministry of Environment, Energy and Climate Change
(MIECC). Mrs Tina Birbili, was appointed the new Minister. As soon as she settled in her new position, she subsequently appointed PPC’s new Chief Executive Officer and President, Mr
Arthouros Zervos. The CEO succession signalled government’s decision to remodel PPC and update its image (Tushman and Rosenkopf, 1996). Mr Zervos, a respectable academic, at the moment was President of the European Renewable Energy Council (EREC), Chairman of the
Global Wind Energy Council (GWEC) and President of the European Wind Energy
Association (EWEA) and he was the lead author of the White Paper on Renewable Sources of
Energy of the EC in 1997. Despite his indisputable authority, Mr Zervos was not really welcomed within the company since workers, especially those related to mining and generation activities, considered him a “Trojan horse” entrusted by the government to terminate lignite- fired plants and surrender PPC’s extraction rights to competition.
Nevertheless, in its statements in the press, he claimed that he would try to achieve higher RES penetration in generation of electrical power but not at lignite’s expense, which would remain
PPC’s main fuel. Under his presidency, Mr Zervos was willing to enhance RES role in PPC’s energy mix with further investments that would aim on redesigning the network so that it could uphold more RES projects. Additionally, he expressed his will to rationalize PPC’s pricing model and educate the company’s customers on the benefits of energy saving.
PPC was not able to independently adjust its tariffs based on the fundamental forces of demand and supply. Being a state owned and utility company, it had to take into consideration the effects a rise in tariffs would have on certain consumer categories. All it could do, was to submit its proposals to RAE and then await for a Ministerial Decision to enforce RAE’s and not PPC’s proposals. PPC in the past has fought for the imposition of the fuel clause on tariffs. For PPC,
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a mechanism should be put in practice to minimize the risks caused to it due to the high volatility of imported fuel prices and allow the company to handle the changes in prices. Hence, a “fuel clause” was established in 2007. Surprisingly enough, the Minister of Development, in
2008, requested RAE’s opinion, and RAE agreed, on postponing the implementation of the fuel clause until January 1st, 2010.
Additionally, the Minister of Energy and Climate Change, firmly declared that a further increase in PPC’s tariffs was out of the question. As of 2008, an average of 7.5% increase was imposed on all tariff categories and given the current domestic environment, the Greek government was not willing to add extra burdens to Greek consumers
Market Environment. While PPC was in and out of courtrooms trying to maintain the advantageous “status quo”, its competitors were getting more and more vigorous implementing aggressive strategies aiming decisively to gain PPC’s market share. The revaluation by PPC in retail tariffs which occurred in 2008 and became effective during 2009, the system marginal price that was halved compared to the previous years and the decrease in fuel prices, made the market much more attractive regardless of the high barriers of entry and new entrants decided to target at its most vulnerable point: medium voltage tariffs.
PPC serves three main customer categories; high voltage customers (28 large local industrial companies); medium voltage customers (industrial and commercial companies; and, low voltage customers (residential and small commercial customers). There are different tariff structures based on the types of energy use and most importantly, PPC’s tariffs are cross- subsided, which means that the real cost is not reflected on the tariffs since medium and high voltage customers pay higher prices in order to subsidize low voltage tariffs for vulnerable customers.
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This fact, that PPC’s tariffs were not cost-reflective allowed competitors to target PPC’s high- end customers. Low voltage tariffs could not be further decreased since PPC provided prices close or below cost, but there was a great profit margin in medium voltage customers. Hence, having the flexibility to offer lower tariffs, relieved from the burden of cross-subsiding, they could provide medium voltage costumers with attractive prices and in fact claim PPC’s most profitable clientele. As a result, a profitable part of PPC’s portfolio was weakened when 64 medium voltage customers, in their attempt to reduce their energy costs, decided to change supplier.
Besides the competition in retail market, PPC’s competitors were enhancing their presence in the generation market. By forming alliances and by constructing new units, they increased their installed capacity and added further vigour in the competition.
The current situation thought did not facilitate their plans, not for PPC’s nor its competitors.
Since the beginning of 2009, the marked decline in energy demand along with the increasing inability of the costumers to repay their bills in a timely manner, added further obstacles in firms’ strategic and investment plans, directly affecting their liquidity. It was not only households that were struggling to meet their obligations but also industrial and commercial customers which were hit by the crisis and were unable to pay their bills.
Unarguably, there were also those that used the crisis as a means in order to renegotiate their contracts with PPC and request lower prices. One of PPC’s biggest industrials client was
Aluminium of Greece S.A. The latter had outstanding invoices for over Euro 50 million since it refused to pay since June, 2008 when PPC decided to apply a decrease of 10% in its industrial tariffs. Additionally, there were articles and interviews in the media by workers in other companies that were also in dispute with PPC, stressing PPC’s social role and requesting favourable regulations and arrangements so as their companies will continue to operate and they will not become redundant. Even the General Confederation of Greek Workers was
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mobilized and requested a smooth solution for both parties in order no company to be closed due to the controversy with PPC over unpaid invoices.
PPC’s responses. Considering the rearrangements in PPC’s environment, both institutional and market, in this subsection, we have to see how the firm responded to the crisis and whether its institutional embeddedness affected these responses. PPC’s strategic objectives prior to the crisis were based on three pillars: modernizing its generation units; improve the level of services provided to customers; and, increase the penetration of RES in its energy mix. Part of this strategic plan was a response to the changes in its institutional environment. If PPC were to avoid the increasing cost of the CO2 emission rights as well as the fines imposed by the EU regarding the CO2 emission rights, it had no other option than to invest in modern, environmental friendly units. In order to finance its investment plan it had to increase its capital expenditure, secure its profits, seek alternative sources of revenue and decrease all controllable costs.
In a nutshell, PPC’s responses were mostly adaptive (Smart and Vertinsky, 1984). The firm did not deviate from its initial strategy and any minor differentiation was in line with the firm’s strategic objectives.
Certain events though, affected its responses. Namely, part of PPC’s investment plan was to be financed by the alleged increase in tariffs as well as by the imposition of the fuel clause which as a “neutral and fair tool” would accurately calculate generation cost and secure that it was at least reflected on the tariffs. Nevertheless, considering the current environment, the Greek state was not willing to impose any increase in tariffs while any imposition of taxes aimed at increasing state’s revenues not PPC’s. That, of course, came at PPC’s disappointment which had no other choice than to comply with the government’s decision even if this development directly affected PPC’s production cost, a cost which the firm could not transfer to its customers due to the regulated tariffs. What PPC actually did, was to employ the policy of oil hedging
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transactions against the volatility of oil prices and hedged around 70% of its estimated oil consumption.
Hence, PPC was not only refused to increase its tariffs but also had to cope with the decrease in electricity demand, the rise in unpaid invoices and additionally to address the challenges imposed by its competitors.
With regards to the decrease in electricity demand, it was one of the first signs that signalled the economic crisis. Surprisingly enough, it was also one of the reasons that PPC’s economic performance was improved. Actually, in 2009 PPC’s total revenues exceeded Euro 6 billion and its EBITA rose exponentially by 388.2% compared to 2008. PPC managed to present these results due to two additional reasons: the significant drop in oil fuel prices and PPC’s ability to adjust its energy mix. Therefore, PPC managed to control its generation cost and adjusted its energy mix by employing less expensive resources, like indigenous lignite and water reserves in its generation plants. The decrease in energy consumption was more intense in low voltage consumers, for which PPC charged close or below its marginal cost and hence, the less demand on low tariffs resulted in an increase in its profitability.
Regarding the rise in unpaid invoices, PPC decided on extending the payment due date to one month, from 20 days that it was until 2008, and also implemented a customer-centred strategy in order to enhance its brand image in the eyes of its customers. It offered more payment options, adding e-banking, phone banking, direct debit as well as payment through the post office network, and initiated the incorporation of some telephone companies for payments through their networks. On a pilot basis, it launched one-stop shops at which customers could be served on supply and network requests and upgraded its call centre so as to receive and accommodate all customers’ requests and provide full customer support by phone.
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What underlined PPC’s actions, was the effort to retain its market share and respond to the vigorous competition. Even though it was the leader in the industry in terms of market share and installed capacity, it was rather a follower with respect to its marketing strategy. PPC, having performed in a monopoly for years, considered its market share as given and while the market was shifting, the firm had limited capacity in initiating effective and entrepreneurial marketing strategies, especially given the fact that it was unable to shape its own pricing policy and retain and/or attract customers.
PPC’s ability to capitalize on the jolt would be related to its level of slack resources (Wan and
Yiu, 2009, Meyer, 1982) since during an economic crisis access to external financing is limited.
The extraordinary thing with the Greek economic crisis remained that it was a result of the insufficiency of the public sector thus, the firms closer to the state were in higher danger. A collapse of the Greek State would drift all state-owned companies along. Namely, Standard &
Poor’s (S&P) lowered PPCs’ credit rating from BBB- to BB+ and upgraded the Outlook from negative to stable stating that this downgrade was not resulted by the company per se but was due to PPC’s close ties with the Greek State; in case of need, the state would not be able to provide the necessary support.
However, due to the fact that 2009, was a profitable year, PPC’s capital expenditure amounted to Euro 1,103.6 million, increased by 8.1% compared to 2008. The vast majority of this capital was invested on production and distribution units according to PPC’s plan to make business more effective and replace obsolete units. In a nutshell, PPC’s investment plan aimed at sustaining its competitive advantage vis-à-vis its competitors.
Given the lignite extraction rights that were granted to PPC since the time it used to be a wholly state-owned enterprise, the firm -unintentionally- was the cost-leader (Porter, 1985) in the industry. PPC’s competitive advantage lied in its lignite extraction and processing rights granted by the Greek state which is consistent to what Lenway and Murtha (1994) claimed
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regarding the allocation of resources by states and the firm-specific advantages they can generate. That is, even if in 2009 PPC was a mixed-owned firm, only partially owned by the state, it was still granted exclusive access to a valuable yet cheap energy source; lignite. That competitive advantage could be sustained as long as its lignite extraction rights as a resource remained valuable, rare, imperfectly imitable, and non-substitutable (Barney, 1991) allowing it to enjoy Ricardian rents. However, especially since PPC’s competitive advantage was not a result of its superior performance but rather based on its previous monopolistic character, the
European Union and independent energy producers and suppliers, were pressing towards the concession of these rights to third parties.
PPC exploited its close ties with the government, and by implementing a bargaining strategy
(Boddewyn and Brewer, 1994) opposed the decision of EU by employing the Greek government as an advocate in order to achieve the annulment of EU’s decision. The Greek state was also of use to PPC in one more occasion. The European Investment Bank (EIB) alarmed by the economic crisis in Greece requested the provision of a guarantee for certain PPC’s outstanding loan agreements. Contrary to S&P projections mentioned above, the Greek state successfully granted its guarantee of Euro 429.3 million (EIB requested 488.3 and the remaining amount was granted by commercial banks).
Nevertheless, PPC’s interdependence with the state was not always in its favour and in many occasions undermined its ability to implement certain decisions. PPC’s pivotal role in society’s prosperity as a utility company restricted its actions especially towards its major industrial customers. The economic crisis had affected the whole economy, many companies were failing to meet their obligations towards their suppliers and PPC was the “easy victim” since it was expected that the Greek Power Company would turn a blind eye to their inability to repay their bills. PPC however, did not comply and in the case of Aluminium S.A the dispute led to an arbitration agreement by virtue.
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PPC did not only try to ensure its profits but also engaged in partnerships with both national and international companies in order to find new sources of revenue by exploring opportunities outside of Greece.
PPC came to agreement with the Spanish company Urbaser for the development of projects related to waste management and waste water treatment and also signed two Memoranda of
Understanding, one with the Restis Group of Companies - Golden Energy One Holdings Ltd and one with Quantum Corporation Limited and the Bank of Cyprus. Both referred to potential cooperation between the firms in projects in Greece and Southeast Europe, specifically to joint participation in the tender launched by the government of Montenegro for the partial sale and share capital increase of the electric utility "EPCG" and the examination of the possibility to participate in the construction and operation of power plants in Bosnia-Herzegovina respectively. Additionally, PPC engaged in a joint venture with Halyvourgiki S.A., the second largest steel producer in Greece, in order to potentially participate in the construction and operation of two combined natural gas units and transform two other units to be used during summer’s peak demand period.
Furthermore, PPC sought to decrease its energy purchase cost and signed a MoU with
MEDGAS S.A. to evaluate a proposal for supply of compressed natural gas (CNG) to the
Power Plants of Crete as well as an alternative solution to the supply with liquefied natural gas.
PPC aimed to decrease its dependence in DEPA for gas supply. DEPA was also a ME, partially owned by the Greek State and until the liberalization in gas sector in 200, was the only provider of gas in Greece. PPC saw the opportunities that risen from the new regime and sought to reap the benefits of competition in the gas market.
Additionally, PPC announced its plan to operate a new unit, Ptolemaida V, of pulverized lignite technology, and installed capacity of 550-660 MW with a total budget that amount to Euro
1.320 million.
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PPC also reconsidered some of its previous partnerships, for example, it decided to decrease its share capital at SENCAP, a joint company formed by PPC and Contour Global LLC back in 2006 in order to explore business opportunities in South East Europe. SENCAP’s geographical scope of work had been limited to Kosovo and the much anticipated energy projects of lignite mines and generation units which nevertheless, had not produced any results until 2009.
Market-wise, PPC invested in its generation and production units and complemented this strategy with political behaviour so as to sustain its competitive advantage. In sum, it is undoubtable that PPC in the end of 2009 was in a better shape than in the year before. Yet, the year to follow, would be the year that the Greek economy would dive deeper into recession.
The newly appointed CEO, Mr Zervos, would have to ensure PPC’s smooth operation and manage to maintain the company’s profitability and dominance in a rapidly changing environment.
2010: Untouched by the crisis By 2010, the economic crisis was even more evident in every aspect of economic life and it was the year that the Greek government was forced to sign the Memorandum with the
EC/IMF/ECB and subsequently, implement a harsh package of austerity measures. This was by far the most significant event of the year and had direct and drastic effects on the economy, resulting in changes in PPC’s institutional environment and forcing it to redeploy its strategy.
PPC according to the directives given by the “Troika” that was composed by the representatives of the three international institutions had to separate its transmission and distribution activities, a development that would result in changes of PPC’s organizational structure. Additionally, the Troika requested a further liberalization of the energy market and competitors intensified their efforts towards that direction.
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Institutional Environment. As the economic crisis deepened day by day, the situation was further deteriorated by the austerity measures the Greek state had to implement as dictated by the international institutions in order to recover. Accordingly, the Hellenic Republic had to find alternative sources of revenue and the sale of its state-owned profitable companies and valuable assets was included in the requests. PPC was included in the list of the companies to be sold and as a result the energy market would be further liberalized.
Nevertheless, that was not an easy task. At first it was PPC’s personnel who totally opposed and threatened both the company and the government with indefinite strikes. Then, the government itself and PPC’s executives were also against the complete privatization of the company. The Minister of Environment, Energy and Climate Change, since the beginning, was working on the issue and tried to find alternatives so that PPC’s state of ownership would remain unharmed. The EC was requesting the gradually transfer of 40% of PPC’s lignite-fired and hydropower plants to third parties, a development which would drastically decrease PPC’s capacity. However, Mrs Birbili, was examining further options and alternatively proposed PPC to swap electricity produced from lignite for power of equal value from a producer in another country of the European Union. Implementing this alternative, PPC would maintain the ownership of lignite-fired generation units and enhance its presence outside of the Greek territory. Additionally, PPC could lease units with 15 years lasting contracts –with the possibility of five-year renewals- for units that would function beyond 2020.
It has already been stressed that PPC would have to comply with the Directive of the European
Parliament which imposed the unbundling of supply and generation activities from the
Transmission System Operator giving the Greek Government the opportunity to decide
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between two suggested models: the ISO and the ITO model7. The Greek Government decided that the most advantageous solution would be the implementation of the ITO model.
With respect to PPC’s tariffs, the government was still unwilling to impose any further increase in prices and rejected all relative proposals by PPC and RAE. What the Ministry actually approved was the reduction in tariff categories and not in prices per se, which remained stable.
Accordingly, the low and medium tariffs were reduced from 30 to 9. This development was not expected to financially impact the company but to limit the distortions in the retail market and furthermore, to contribute to the development of competition on equal terms. Furthermore, the government decided to apply the “Social Household Tariff” for the supply of electricity to vulnerable groups of customers as they were defined previously by a ministerial decision.
Although PPC’s tariffs were not increased, the invoiced amount that customers had to pay increased, as the Greek State imposed more taxes related to electricity consumption. The fuel clause through which PPC was hoping to rationalize its tariffs was again suspended after its implementation for the period 01.01.2010 – 31.07.2010. Additionally, the government decided to abolish the exception PPC had from the excise tax for diesel while an excise tax on consumption of electricity was imposed which PPC, as well as all energy suppliers, were required to collect and attribute to the Greek government.
Market Environment. PPC’s competitors were in favour of the ISO model and would have preferred the transmission and distribution activities to be detached from PPC. Furthermore, they repeatedly complained to the EC that PPC abused its dominant position and manipulated the System Marginal Price. Nevertheless, they were able to offer better prices to customers,
7 The ISO model proposed an Independent System Operator which should be detached from the vertical integrated company. Alternatively, and according to the ITO model, PPC could remain the owner of the system as long as certain rules could guarantee its independence.
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and Verbund, namely, managed to enhance its portfolio with 1,300 new customers while
Elpedison was aiming to claim a 15% of market share. PPC itself projected that its market share would further shrunk by 3%. PPC’s competitors were more flexible in configuring their pricing policy and using hedging tools and techniques as well as targeted marketing strategies, were able to offer prices -5% to -20% compared to PPC. Actually, due to PPC’s competitors targeted strategies, its sales to the commercial sector were decreased by 10.7% resulting to an overall market share loss of 3.7%.
Additionally, they managed to increase their installed capacity by 168% and formed an alliance against PPC. The establishment of the “Hellenic Association of Independent Power Producers”
(HAIPP) was initiated by the largest private power companies aiming to promote the deregulation of the market, and of course, to challenge PPC’s dominance.
Nevertheless, the effects of the economic crisis, were more evident during 2010 with respect to customers’ ability to pay their bills. Hence, the amount of outstanding invoices increased and the energy demand did not recover after the drop in 2009.
PPC’s Responses. In 2010, PPC found itself amidst major changes in its environment which dictated even its organizational structure including the unbundling of its activities as well as the extensive rumours and plans regarding its alleged further privatization.
First of all, PPC had to implement the government’s decision regarding the unbundling of the
Transmission and Distribution activities. Accordingly, PPC initiated the procedures for the transfer of all of the activities of the Transmission of electricity and all of the parent company’s assets, to its wholly owned subsidiary “PPC Telecommunications” and established a
Distribution Company (PPCs’ 100% subsidiary), which would undertake the role of the Grid’s
Operator as well as the provision of all the network’s services.
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PPC in that occasion had no other option than to comply with the government’s decision and unbundle the transmission and distribution activities, pursuant to the EC directive. However, even if that development affected the firm’s organizational structure, PPC was rather favoured by the adopted model since it maintained the ownership of all fixed assets and had only to ensure that both companies would act independently and comply with certain rules and procedures. Hence, PPC did not object the decision which was in line with its interests.
Additionally, and according to the Memorandum of Understanding between the Hellenic
Republic and the EU/IMF/ECB, the Greek Government was obliged to enforce certain laws that directly affected PPC including the firm’s further privatization. PPC in its presentation to stakeholders in 2010, declared that it had “mobilised all its available resources for the timely implementation of all requirements and provisions under the MoU”, yet the wide spreading rumours of its impending sale, had a negative effect especially in its stock price resulting in a loss in its capitalization.
Nevertheless, reviewing PPC’s results in 2010, the company seemed detached from its collapsing environment. Despite the loss of high margin customers and the extensive increase in fuel prices, PPC presented pre-tax profits of Euro 740.7 m. with an EBITDA margin of
25.8%. Its electricity generation including electricity imports, covered 77.3% of total demand
(2009: 85.6%) and, along with a favourable generation mix, managed to offset the increase in energy purchases. Additionally, the company, by implementing a wage cut policy, same as in all public companies, managed to save Euro 294.1 m. out of payroll reduction.
PPC indeed managed to produce profits yet, this was not due an increase to its sales revenue but resulted by the reduction in its controllable costs, mostly payrolls, as well as from its ability to adjust its energy mix. Actually, PPC’s market share in 2010 was decreased by 3.7% since its competitors were becoming more effective in attracting PPC’s customers by providing better prices and enhanced customer services. PPC, on the other hand, claimed that its
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competitors could afford these prices since they did not attribute PSOs. The state-owned company was the sole responsible company for supplying energy to Non-Interconnected
Islands, a task performed at a cost not fully recovered, which every supplier should consider in its tariffs, collect through the bills and then attribute it to the respective authority in order PPC to be compensated. Indeed, RAE in investing the issue, called one the companies operating in the retail energy market, Verbund, to account for its refusal to comply with the regulatory framework and attribute PSOs.
Hence, PPC preferred to outplay its competitors in the political arena partly because of its incompetence to implement effective marketing strategies. PPC operated in a highly concentrated industry which enhances the benefits that might accrue by political activities
(Schuler et al., 2002) and its access to legislators and regulators could be of use especially in the case that its dominance was threatened. However, this practice, adopting political behaviour to complement market strategy, was also employed by PPC’s competitors themselves since they repeatedly resorted to RAE and to the EC in order to influence the relevant decisions and regulations in their favour and challenge PPC’s dominance. That, of course it is not surprising since according to institutional theory, firms tend to imitate their competitor’s political practises (Schuler et al., 2002). PPC’s executives repeatedly claimed that they would welcome the expansion of competition yet, firm’s actions indicate that PPC was not to surrender easily to competition and would use its dominant position in order to affect those –regulators and legislators- whose decisions shaped the industry.
Nevertheless, the industry itself was still under the influence of the economic crisis. Energy demand fluctuated around the previous year’s low levels, the unpaid invoices remained stable at around 10%. Given the circumstances and the vast majority of customers who were struggling to meet their obligations, RAE imposed power cuts as a tool to press customers
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towards repaying their outstanding invoices and PPC intensified its actions in order to collect the total amount of its receivables.
With regards to its investment plan, PPC’s capital expenditure amounted to Euro 962.7 m. mainly placed on distribution and network investments. Also, the company announced an investment plan of Euro 2 billion in RES project until 2015 and in line with that it examined the possibility of partnerships with companies active in this sector while it further expanded its business network through partnerships and joint ventures.
EDF Energies Nouvelles and PPCR, PPC’s wholly owned subsidiaries, came to an agreement for the potential joint development and exploitation of large-scale, complex and technologically advanced RES projects within the Greek territory. Moreover, with the purpose of further expanding its presence in the Greek RES market, PPC signed a MoU with ELIKA
S.A and also came to an agreement with EP Global Energy Ltd to jointly establish REA Lts, a holding company, based in Cyprus, aiming at the development of RES projects in the Balkans and Middle East regions.
Regarding the alliances and joint ventures already formed in the past, Waste Syclo, the joint venture of PPC and URBASER, submitted an expression of interest for the development and operation of a waste management system in the West Macedonia region while the PPC-Contour
Global collaboration, together with another three competitors, were short-listed to participate in the second phase of the international tender for the Kosovo Energy Project. PPC also expressed its interest for conducting a feasibility study to the government of Republic of
Srpska, for the construction and operation of power plants in Bosnia-Herzegovina following the MoU signed with Bank of Cyprus and Quantum Corporation Ltd.
PPC however, also re-examined some of its previous agreements. Namely, PPC decided to terminate its business collaboration with Halyvourgiki and also, reconsidered its partnership
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with RWE since they claimed that these collaborations seemed incongruous with the current developments in Grreece and were not aligned with its current business plan to invest in RES projects.
Considering PPC’s investments described above, they were indeed in line with its strategic objectives to modernize its units and expand the company’s involvement in RES projects yet, once again illustrate the adaptive nature of PPC’s. PPC stayed faithful to its initial strategic plan that aimed at securing PPC’s dominance in the industry and did not deviated from that.
As long as PPC had the exclusive access to lignite and was able to outperform its competitors being the cost-leader in energy generation, there seemed to be no reason for change. Even if the government was planning to sell part of its installed capacity which would directly affect the scale and scope of business of PPC, its executives were rather acting like nothing was going to change. Most of their decisions and actions did not take under consideration the upcoming changes in its structure and ownership but they were mostly based on PPC’s current state.
Additionally, PPC, as a partially state-owned firm, was expected to invest in the Greek territory, especially under the current environment, and return to the society part of its earnings by providing employment and contributing to the reboot of the Greek economy.
PPC’s investments were mostly allocated in Greece, albeit the firm would be better off to invest in other markets as a means to lower the risk of performing to a single national market, especially when the latter suffers from an economic crisis.
Nevertheless, PPC managed to escape the fallout of the crisis during 2010 mostly unharmed.
It managed to ensure its profitability and presented more than satisfactory results. Still, the pressures imposed by the European Union suggested that PPC’s structure would have to be further changed and it had to await for a change either in its ownership identity or/and in its generation capacity.
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2011: On the edge Contrary to all predictions and the wishful thinking of all economists, the economic crisis was far from over. The Greek market was getting more and more into depression and the Greek government, bound by the Memorandum of Understanding signed on 3 May 2010, had to implement the most “painful” measures included in the austerity package. The year that followed, would determine Greece’s recovery and besides meeting its spending targets, the
Greek Government had also to find alternative sources for funding in order to finance its services.
The events that marked 2011, in relation with PPC were the following. At first, it was the government’s decision to comply with the European Commission and Troika’s directives to sell part of its shares in PPC. Moreover, the government introduced an extraordinary levy on property which PPC, along with all energy suppliers, was assigned to collect in order to enhance state’s revenues. Both decisions raised huge reactions inside and outside of the company. In addition, and along with the impositions of taxes that affected PPC’s generation cost, the company also felt more vigorous competition and saw its market share decreasing day by day.
In the following paragraphs, we will see how these events affected PPC, how the company responded, and whether, and at what extent, it managed to maintain its dominance in the Greek electricity market.
Institutional Environment. In the years that preceded, the Minister of Environment, Energy and
Climate Change, Ms Tina Birbili, had made clear that the Greek Government was not willing to decrease its share in PPC’s share capital even if the EC repeatedly requested it.
Alternatively, she tried to stress PPC’s role as a strategic asset for Greece and she struggled to escape EC’s pressures by proposing either concession of lignite fire plants to private companies or with “lignite swaps”. Nevertheless, she did not manage to finish her job since in June she
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was replaced by the former Minister of Finance, Mr Giorgos Papakonstantinou. The latter, as soon as he was appointed the new Minister, made clear that there were three options regarding
PPC’s future. Some of PPC’s subsidies could be sold to private investors, PPC could search for a strategic partner, or 17% of its shares could be sold through the Athens Exchange Stock
Market despite the company’s declining trend. At the end, it was decided that 17% of PPC’s shared capital, in 2011 owned by the Greek State, would be sold by the third quarter 2012 through the Privatization Fund. The government was also evaluating the possibility to sell hydro capacity and other generation assets to investors irrespective of Commission’s decision on the Greek lignite case.
We should also recall here, that a final decision by the European Commission was still pending regarding the granting of lignite extractions to PPC by the Greek state. Yet, regardless of the
EC’s Decision, and in the framework of the Memorandum, the Greek government should, by
November 2013, ensure the access of third parties to electricity generation by lignite.
Additionally, during 2010, the spin-offs of the transmission and distribution networks were completed and the new wholly owned by PPC subsidiaries became operational.
Concerning electricity tariffs, it has already been stressed that PPC, contrary to its competitors, was unable to decide on its own pricing policy. Its tariffs should be approved both by RAE and the Greek Government before being implemented. Hence, low voltage tariffs remained regulated despite RAE’s opinion that a mechanism of tariff adjustments based on the wholesale price should be established. The Greek Government according to the Memorandum should take steps towards the rationalization of tariffs and ensure that prices are cost-reflective and harmonized with wholesale market prices. Pursuant to that, any cross-subsidies in tariffs should have been removed and all tariffs had to be gradually deregulated in the following two years. Undoubtedly, the deregulation would mostly impact low voltage consumers, since these
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tariffs were subsidised by the medium and high voltage tariffs, signalling PPC’s role in society to provide cheap energy for vulnerable and low-end customers.
Once again, even though PPC’s tariffs remained stable and consumers paid actually less for energy per se, electricity bills were increased due to taxes imposed by the Greek Government.
PPC, as well as all energy providers, was to collect through its bills the special levy on real estate properties, enforced by the government, and attribute it to the state. In case of non- payment, PPC would proceed in the disconnection of power for the consumer. This development, of course, raised huge reactions. Customers of course, were frustrated not only for having to pay extra taxes but also due to the fact that unless they did, their power supply would be cut. PPC’s trade union, opposed the decision, and declared that it would not allow any disconnections of power to costumers unable to pay their bills.
PPC’s powerful trade union, GENOP DEI, which was represented by three of its members in company’s Board of Directors, threatened both PPC’s management as well as the Greek government that it would not accept any disconnection in power supply due to unpaid invoices and additionally, that it was willing to provide its experienced staff when needed in order to reconnect households to the network. GENOP was already at loggerheads with the government for its plans to further privatize PPC and sell off its assets, and the imposition of the levy was the final straw. Public opinion was divided over the potential sale of PPC. The public company was considered overstaffed compared to the level of services provided and its personnel was allegedly overpaid. Additionally, at a report issued by the General Inspector of Public
Administration it was cited that PPC illegally sponsored the Trade Union and financed its operations against the enforced law. GENOP, by adopting populist practices tried to adverse the climate against it and spearheaded strikes that negatively impacted PPC’s performance as well as the economic activity in Greece. Trade Union’s goal was to communicate to the public
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PPC’s pivotal role in the development of the Greek economy and moreover, to emphasize the benefits accruing from its public ownership status.
Market Environment. During 2011, the competition in the energy market was becoming more and more intense both at wholesale and retail market level. PPC’s competitors enhanced their installed capacity, new generation units, both conventional and RES, were connected to the grid and the company continued to lose customers from its most profitable segment.
Independent suppliers employed aggressive strategies and gradually attracted more customers.
Specifically, they offered “energy packages” with cheaper charges and the consumers had to choose between many alternatives on the option that would mostly benefit them. In that way, private suppliers could offer discounts that reached even 20% in some cases as long as the customer chose the right package and did not exceed the predetermined volume of energy of his/her selected rate plan.
Nevertheless, RAE warned customers that these widely publicized discounts might not apply to all customers and in many cases were not reflected in consumer’s bills. Furthermore, independent suppliers issued their bills every four months while PPC billed its customers on a quarterly basis, making difficult for consumers to contrast how much they used to pay in PPC during the corresponding period in the past. On account of this, the General Secretariat of
Consumer imposed a fine of Euro 40,000 on Energa, one of PPC’s biggest competitors, for unfair and misleading commercial practices. Additionally, the Regulatory Authority, in its attempt to protect customers uploaded on its website a detailed table with the tariffs provided by all suppliers in order to ensure that they are well informed before they decide to switch suppliers.
PPC was also in RAE’s crosshairs after the series of complains made by its competitors. Private supplier repeatedly complained that PPC abused its dominant market position and RAE after investigating the issue, fined PPC with almost Euro 1 billion citing that the company used its
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capacity as the owner of the distribution network in order to restrict competition and prevent loss of customers. A decision which PPC could challenge to the Administrative Court.
Nevertheless, PPC’s competitors managed to decrease its market share by 3.5% which in the end of 2011 stood at 92.3% (from 95.8% in 2010). Overall demand, same as in 2010, remained stable nonetheless, this was opposed to the trend noted in the years prior to the crisis when the rise in demand was above the average among European countries (Kavouridis, 2008).
PPC’s responses. By 2011 it was evident that the Greek economy was caught in a vicious death spiral. The implementation of the “austerity package” was reinforcing the crisis it was supposed to “cure” and PPC for the first time since the beginning of the crisis was actually affected.
First of all, the cabinet reshuffle and the appointment of the former Minister of Finance as the
Minister of Environment, Energy and Climate Change also indicated the government’s decision to comply with the “Troika” and implement its mandates, including to ensure that the energy market would be completely liberated and that PPC would be further privatized.
That development of course caused huge reactions to the Greek society and PPC in many occasions found itself amidst the “war” of its employees’ trade unions and the government.
GENOP represents one of the most powerful trade unions in Greece and the government’s plans to sale part of PPC or concede its lignite extraction rights raised huge reactions and triggered the strikes that negatively affected PPC’s performance. PPC’s management tried to bargain with its personnel by reassuring them of their future with –and within- the company, but after failing to seize the reactions it used all the applicable legal means so as to terminate the strikes and ensure its smooth operation. The media were also employed, and it cannot be said that it was initiated by PPC’s executives, but there were many articles that attached personally GENOP’s leaders and presented PPC’s employees as unreasonably overpaid.
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During that period, the report by General Inspector of Public Administration was also communicated to the public in which it was stated that GENOP was abusing its power within the company by claiming financial support from the company which subsequently spent to activities unrelated to a trade union’s purposes.
The personnel strikes that were organized by GENOP and held during the summer months, when energy demand increased, interrupted PPC’s generation and supply operations. Many thermal power units stopped operating and remained inactive due to the personnel strikes. PPC was forced to start rolling blackouts in order to avoid a total blackout.
The scheduled outages were available on PPC’s site and were communicated to the Media so as to inform the public on whether and when they might be affected. Additionally, PPC filed a lawsuit against GENOP and requested the strike to be announced as illegal and abusive since the union had not allocated the necessary security staff.
Nevertheless, PPC’s brand image was again hurt. Regardless of whose fault was it, the company was unable to service its customers and to provide any sufficient reasons for its incompetence. Additionally, the imposition of the special levy on real estate properties further aggravated the situation and signalled a values-related crisis (Duttaa and Pulligb, 2011). Even though it was imposed by the government and all power suppliers were supposed to collect it, it was mainly associated with PPC. The government used PPC’s records in order to specify the number of properties eligible to be taxed and the imposed tax was eventually named after the company8. Although, all energy suppliers were supposed to collect the extraordinary tax, yet the regulators were mostly counting on PPC’s effective collection mechanism when they enforced the law and PPC had no other choice than to comply with the state’s decision.
8 “PPC’s Haratsi”, where haratsi is a head tax that was imposed on all Christian citizens by the Ottoman Empire
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Additionally, it had an extensive negative effect on PPC’s liquidity since many customers were already experiencing difficulties in repaying their bills and this development further deteriorated PPC’s capacity in collecting receivables in a timely manner. The company already had updated its policy towards outstanding invoices and developed the necessary procedures in order to facilitate customers in settling their overdue debts yet, this development increased the amount of unpaid bills. Specifically, the rise in outstanding invoices for the Low and
Medium Voltage customers amounted to almost Euro 140 million.
While the company was struggling to deal with the increase in the unpaid invoices and the hurt in its brand image, its competitors, focused on their market performance, were able to attract more and more customers. With a market share loss by 3.5%, PPC redesigned its services, trying to maintain its customers and potentially regain those that had already switched supplier.
Once again, PPC’s responses were rather adaptive. It did not initiate any major change in its practises and rather employed defensive strategies in order to catch up with its competitors in terms of their performance in customer-service.
PPC’s wide brand recognition was unquestioned, nevertheless the state-owned company allocated a total amount of almost Euro 2 million in order to redesign its supply practices and enhance the level of services provided to end-customers. Consequently, all PPC’s branches were redesigned “under the new Visual Corporate Identity” (Annual Report, 2011) so as to promote the image of the organization and reflect company’s customer-centred approach. PPC updated its software systems for billing and customer care services and restructured its web site so that it could provide all the information needed by customers. Additionally, it tried to develop closer ties with its most money-making customers by initiating meetings with them and by sending 300,000 letters promoting the new tariffs.
PPC was also bound, like any other company of the public sector, to proceed in reductions in all controllable costs and mainly in payroll costs in order to secure and increase the revenues
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required to support its investment plan. Nevertheless, PPC did not desire to control its payroll cost at the expense of its efficiency and wanted to retain its employee’s know-how by developing an internal market labour. However, due to the economic crisis, the Greek
Government bound by the MoU, had to redesign its pension system by adjusting the retirement age levels and abolish the benefits certain public workers enjoyed thus far. Hence, many of
PPC’s most experienced workers decided to retire prematurely before the enforcement of these laws, depreciating the company’s human capital.
However, the government undertook commitments that could prove beneficial for PPC such as the deregulation of tariffs, for example, which was repeatedly requested by the company. The
Public Power Corporation, throughout the years submitted its proposal to the RAE and awaited for the Minister’s agreement yet, the government especially during the economic crisis, was unwilling to proceed to the deregulation of the -low and medium voltage- tariffs since it would result in raise in rates and negatively affect the growing majority of struggling citizens. PPC conflicted its political beneficiary and repetitively stressed the positive impact the above mentioned development would have had to its figures. Hence, the inefficiencies caused in
PPC’s financial performance were not caused by PPC’s executives, as would have been expected according to the agency theory, but they were rather cause by the politicians’ unwillingness to facilitate PPC’s profit-seeking activities (Boycko et al., 1996).
The rise in tariffs that were decided in low voltage tariffs would offset PPC’s increasing cost at a small extent since only a small percentage referred to PPC and the increase resulted by the imposition of taxes by the government. Furthermore, PPC was also negatively affected by the implementation of the Social Residential Tariff, designed to provide reduction of 20-30% in tariffs for 1.2 million households and vulnerable social groups, which would remain unchanged. On PPC’s relief, at least the Medium and High Voltage tariffs were liberalized and
PPC was in talks with its clients for the redesign of their contracts.
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Additionally, PPC had also to cope with the cost of the PSOs, for providing services to the islands, a cost that was not fully recovered with the existing calculation methodology adopted by the Regulatory Authority. PPC intensified its efforts towards the implementation of a new methodology which would most accurately take into account the accumulated cost related to these services and offset its increasing expenditure.
The developments specified above were clearly reflected on PPC’s financial results which were negative after two consecutive profit-making years. Its total revenue declined by 5.1% and its net income slumped 126.7% below last year’s figure reporting a net loss of almost Euro 149 million. PPC during 2011 managed to reduce significantly its payroll expenses and all its manageable expenses in general yet, the rise by 11.6% in company’s expenditure for fuels and energy purchases, negatively impacted PPC’s results.
PPC, however, managed to increase its capital expenditure by 15.1%, mostly allocated to the
Generation Division, and implemented projects according to its strategic plan while it also developed and further expanded the distribution network so as to be able to reciprocate the need for new connections.
On the other hand, PPC’s management team had to take into consideration several factors before designing any investment plan. The company’s actions were constantly monitored by its stakeholders which included –among others- its personnel, and the their powerful trade unions, the environmental organizations and the municipalities in which PPC’s units were set or in the case of investment plans were to be sited. In 2010, PPC, faithful to its plan to withdraw its old and inefficient units, terminated the operation of its oldest plant, the Unit I of Ptolemaida in West Macedonia. The environmental groups welcomed PPC’s action yet, the trade union as well as the people of Ptolemaida were worrying that many people will gradually be left unemployed and that will negatively affect the local economy. PPC is one of the biggest employers in Greece and as a state controlled company had also to pursue socio-economic
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goals (Nombela, 2001). PPC had already announced a tender for the construction of the a new
Steam Electric Unit in the area with a budget Euro 1.320 million, and by 2011 the project was already awarded to a contractor, however, the company had yet to secure the funding of the project while the locals and PPC’s personnel were urging for the beginning of the operations.
Hence, PPC’s investment decisions were taken within the context of its institutional embeddedness; the company had to comply with the institutional pressures and proceed in certain actions not for efficiency but rather for legitimation reasons (Meyer & Rowan, 1977;
Zucker, 1987; Kostova and Roth, 2002). Additionally, PPC had expressed its interest in exercising its option for acquiring DEPA shares, which is the Greek Natural Gas Company.
Yet, the Greek Government opposed that decision claiming that it was not in accordance with
State’s strategy to liberalize energy market and would further reinforce PPC’s monopolistic power. According to the International Energy Agency9, the demand for natural gas in Greece is steadily increasing and DEPA’s business, as the main gas importer, was expected to grow respectively. Hence, PPC lost an opportunity to diversify its business portfolio and ensure an alternative source of revenue.
Nevertheless, PPC managed to form strong alliances and implement its strategic plan through promising business collaborations. Most of the partnerships once again aimed at exploiting opportunities in Greece yet, PPC also tried to explore potential opportunities abroad and proceed in the termination of the collaborations that had not produced any results thus far.
Namely, PPC formed a strategic partnership with the Chinese company Sinovel Wind Energy
Group Co Ltd, which is one of the largest wind generators’ constructor globally, in order to further exploit the high potential for wind energy in Greece. Regarding PPC’s business collaboration with URBASER, their joint venture, “Waste Syclo” was successfully pre-
9 https://www.iea.org/media/freepublications/security/EnergySupplySecurity2014_Greece.pdf
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selected in the second phase of the tender held by DIADYMA, the waste management system of Western Macedonia, for the project of “construction and operation of a waste-treatment plant” in Kozani and it also expressed its interest in other similar tenders launched by local authorities in other Greek peripheries. SENCAP, PPC’s joint venture with Contour Global, was for a long time in a sense kept in abeyance and in August its dissolution was decided. The joint company was set in order to pursue the opportunity that emerged after the Ministry of
Energy and Mining of Kosovo announced a public tender for the exploitation of the Sibovic
Lignite Field and the construction of a new electric power generation plant. Nevertheless, several developments delayed the whole procedure and Contour Global, withdraw its interest.
In late 2011, PPC further demonstrated its interest in expanding to the Balkans by submitting its bid in the international public tender launched by the FY Republic of Macedonia (FYROM), for water usage granting rights and the generation of electricity from Hydro Plants on Crna
River as well as participation in state-owned company for electricity in Macedonia. Also, the partnership with Quantum Corporation Ltd and the Bank of Cyprus was further developed and converted into a joint venture which successfully submitted its interest for the study, construction and exploitation of four hydro power plants and has been invited by the Republic of Srpska of Bosnia- Herzegovina to start negotiations regarding the awarding of the contracts.
At last, PPC set up a subsidiary based in Istanbul, which was not incorporated until the end of the year, yet it aimed at expanding PPC’s scope of business by exploring opportunities in the developing market of Turkey.
Taking everything into account, 2011 was the year when PPC actually felt the economic crisis.
The years before, PPC was rather successfully and besides minor losses was able to continue unhindered its operation. But this changed, as the crisis further entrenched and the recession in the Greek economy was inevitable. PPC through the year managed to retain the losses to a certain degree yet, its close ties with the state undoubtedly restricted its capacity to respond
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accurately and efficiently. PPC complied with all the state’s decisions even though, they were against its own interests. The changes in PPC’s environment called for immediate responses yet the company fatalistically accepted the inevitable changes.
It is true, that at least within 2011, PPC tried more intensively to seek new streams of profits and balance its business portfolio by exploring opportunities outside of Greece by employing long-term strategies that can be described as entrepreneurial nevertheless, it could take years before their results were realized while in the meantime PPC’s structure and scope of activities might be differentiated. According to PPC’s Article of Association, the company could exploit its assets for any business activity related or not related to its core business. But this opportunity was only materialized in the case of its participation in the joint venture “Waste Syclo” which operated in the waste management sector.
Discussion The present study sought to examine how institutional embeddedness affects the responses of a mixed-owned firm to an environmental jolt. According to Smart and Vertinsky (1984), when enterprises are faced with changes caused by exogenous factors, they either adapt in order to survive in the short term or they implement entrepreneurial strategies that will allow them to succeed in the long term. Nevertheless, their ability to respond accurately and effectively is hindered by their level of institutional embeddedness (Sun et al., 2010; Siegel et al., 2010).
Additionally, firms operating in heavy industries, like the power sector, do not rely on technological or marketing capabilities in order to outperform their competitors (Henisz, 2003) and thus, lack the entrepreneurial incentives to revolutionize their business and rather respond incrementally not anticipating any major changes in their market environment. Thus, even if under the environmental jolt existing practices might turn out to be ineffective (Meyer et al.,
1990) the heavy investments made by a firm in the past surpass the need for change (Smart and
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Vertinsky, 1984). The PPC case was set to examine how its institutional embeddedness affected its responses to the economic crisis that Greece was facing.
Consistent with the literature review, it was anticipated that PPC would most likely react in an adaptive manner since its responses would be restricted by its institutional embeddedness.
Indeed, PPC’s actions confirmed the first proposition presented in the literature review. The majority of its actions were aimed at maintaining the favourable status quo and its overall strategy could only be described as adaptive. Additionally, PPC’s close ties with the government restricted its level of strategic choice and in many cases had no other option that to comply with the governmental decisions.
What we can derive by the results of this study, is that PPC, a highly institutional embedded and the incumbent firm in its sector, mostly tried to preserve its market share. PPC’s future was predestined if we consider the changes in its regulatory framework. Nevertheless, even if PPC’s executives had not only to monitor the execution of the company’s business plan but also to re-evaluate constantly the strategic assumptions upon which it was designed they did not deviate from their initial plan, no path-breaking steps were taken (Sydow et al., 2009) and only minor changes were noticed.
It could be said that the company was negatively affected by the fact that its major shareholder was the Greek state and its responses were limited and restricted due to the fact that it had to comply with the government’s aspirations and objectives. Indeed, PPC in many occasions has been negatively affected by the fact that it is state-owned. None of PPC’s competitors were subject to the same laws nor faced the same challenges. Nevertheless, PPC was still the leading company in its sector and owned much of its power due to the fact that it remained public. PPC managed to retain its losses during the crisis, and at least until the last year of the study, it was able to implement its investment plan without facing any severe delays in the execution of its ongoing projects.
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Additionally, PPC by being vertically integrated and with activities that expanded from mining to energy supply, had developed what Prahalad and Hamel (1990) have called “core competences”, hence its competitors would have to put much more effort to challenge its dominance. PPC would not have come that far if it weren’t public. For example, it would be interesting, considering the carbon footprint associated with energy production, to investigate whether the reactions of the public would be more intense in case it was an independent private company employing few workers that was to construct and operate a lignite-fired plant. Thus, its public ownership might eliminated its flexibility yet, it also added to its stability and in its establishment as a powerful dominant and successful company.
Market-wise, given the challenges that the Greek economy was facing, PPC managed if not to achieve successful results, at least to retain its losses. During the period of study, Greece’s GDP decreased by one quarter (Economic and Monetary Affairs Committee Study, 2014), nevertheless, PPC managed to hold its leading role and realize moderate profits.
In addition, it was anticipated that PPC will adopt a political behaviour in order to complement its market strategy and facilitate the implementation of its strategic plan (Boddewyn and
Brewer, 1994). A highly institutional embedded firm is likely to leverage its close ties with the environment and to lobby institutional actors in order to shape in its favour the policy changes and acquire better access to resources (Dieleman and Sachs, 2008; Henisz, 2003; Boddewyn and Brewer, 1994).
It was proposed that PPC, as a high institutionally embedded firm, would leverage its resources and authority and would bargain with the institutional actors in order to retain its power and benefit from the rearrangements resulting from the environmental jolt. This proposition was partly confirmed.
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Indeed, PPC’s actions were mostly political rather than market-oriented. PPC represents one of Greece’s most profitable enterprises and the biggest in terms of assets, hence it can always leverage that power in its favour. Nevertheless, in many cases the firm also complied with the decisions of its most salient institutional actor, in PPC’s case the government, even with decisions of high strategic importance. According to Boddewyn and Brewer (1994), a firm will prefer to comply when “governmental actions have low strategic salience and are favorable to them, or these firms lack adequate resources to challenge such actions” (p. 128). This was not confirmed in the PPC case since the firm in many occasions complied with the government against its own interests regarding decisions of critical importance for its operation and efficiency.
For example, PPC had repeatedly stressed the need to deregulate its tariffs. This inability to adjust its pricing policy deprived the firm of a valuable marketing tool. It was of critical importance to the company and it jeopardized its performance vis-à-vis its competitors.
Nevertheless, the company, albeit it tried intensively to convince the government, eventually complied with the Minister’s decision not to proceed to the deregulation of the tariffs nor to accept any increase in the prices. At the end, the firm would only anticipate that the government will implement the commitments derived from the memoranda which included the deregulation of tariffs.
Nevertheless, in many cases, PPC indeed exploited its close ties with the government in order to maintain its dominance. It has to be cited again, that PPC’s competitive advantage lies in its lignite extraction and processing rights granted by the Greek state. PPC aligned its practices with the government’s expectations so as to maintain its legitimacy and enhance the possibilities to preserve its competitive advantage; that it its exclusive access to lignite. PPC partnered with the government and conflicted EC decision regarding the concession of its lignite extraction rights. The Greek government, even if bound by the agreement with its
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institutional counterparts to proceed in the concession of PPC’s lignite extraction rights, advocated in favour of the company and was unarguably delaying the implementation of any relative decision. PPC’s ability to be the sole producer of lignite energy has not been overseen by its competitors who were bound to seek alternative, more expensive resources and were constantly lobbying against PPC claiming that the market could not be fully liberalized unless they could also have access to lignite. Nevertheless, in industries like the power sector, it is expected that governments will interfere in order to promote public interests and private companies are subject to more uncertainty regarding the evolution of the market (Henisz,
2003).
In general, the study tried to assess how the high institutional embeddedness of mixed-owned firm affects its responses during an environmental jolt. In particular, it was investigated whether PPC, being a highly institutional embedded firm, were able to implement its strategic plan and respond accurately and effectively to the challenges imposed by the economic crisis that hit Greece.
Having said that, and considering the aim of this study, it can be claimed that institutional embeddedness unarguably affects the responses of a firm especially during times of upheaval.
The PPC case showed, that a firm’s level of institutional embeddedness should be taken under consideration when we evaluate and shape its strategy (Baum and Dutton, 1996).
Whether it was positively or negatively affected it cannot be said clearly. Considering its performance and its revenue during the year of the studies, which remained mostly positive, one could argue that the impact was positive. PPC were able to proceed with its investment plan and was still ahead of the competition both in terms of energy generation and supply.
Nonetheless, what matters in strategy, it is whether the decisions taken today, which are built on assumptions based on past events, will ensure a firm’s presence in the future. PPC might become “hostage of its own history” (Selznick, 1992) and prove unable to detach from the path
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it has inherited (Cantwell et al., 2010) since previous investments affect future decisions (Teece et al., 1997).
PPC is still undergoing rapidly changes in its regulatory framework, changes that can profoundly alter its organizational structure as well as its share capital structure. Until, those are finalized it cannot be said with confidence whether PPC’s responses during the crisis were adequate or whether PPC would have had to employ different strategies.
Conclusion The present study tried to assess how high institutional embeddedness affects the responses of a mixed-owned firm to an environmental jolt. Specifically, by employing a longitudinal single case study, the paper sought to assess how a mixed-owned firm would respond to an economic crisis. Building upon the concept of institutional embeddedness, the research concluded that a highly institutional embedded firm due to its path-dependant behaviour it is more likely to respond defensively and employ adaptive strategies rather than interpret the environmental jolt as an opportunity and implement entrepreneurial strategies. Additionally, the study indicated that a highly institutional firm will also adopt political behaviour in order to complement its market strategies and will exploit its close ties with its institutional actors in order to affect their decisions and actions in its favour. A highly institutional embedded firm might be bound to align its activities with the expectations of its institutional actors (Goodstein, 1994; Meyer and Rowan, 1977) nevertheless, it is privileged with direct access to information and resources
(Zaheer, 2002) and can further exploit this access in order to outperform its less embedded competitors in the non-market environment.
I examined a mixed-owned firm, which represents a particular kind of embeddedness, and which has been the unit of analysis of very few studies (e.g. Sun and Tong, 2003; Qi et al.,
2000; Vining and Boardman, 1992) even if one-third of firms from OECD countries are partially owned or managed by governments (Bortolotti and Faccio, 2009). In addition, the
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study observed a mixed-owned firm operating in a developed market and not in an emerging economy as most of the studies examining MEs have done (eg. Doh et al., 2004; Ramamurti,
2003; Puffer and McCarthy, 2007; Tian and Estrin, 2007).
Institutional embeddedness has been considered a constraining power over firms (eg. Oliver,
1991; Pache and Santos, 2010). Hence, the study sought to explore whether this constraining power would further deteriorate a firm’s ability to shape and alter its strategy when requisitioned by the circumstances, in particular to an environmental jolt, since the latter interrupts the existing routines and adopted practices and calls for change (Hoffman, 1999;
Haveman et al., 2001).
The economic crisis that many countries are still facing coupled with the vast number of MEs operating in these countries suggest that the study addressed a topical issue which has many ramifications and should be further investigated.
What is apparent after the conclusion of the study is that PPC as a mixed-owned firm confirms the assumptions previously made regarding state-owned firms and adds vigour to the studies that used public-owned firms as the unit of analysis. PPC is an ideal representative of its kind.
Being mixed-owned tried to meet both commercial and socio-economic goals ((Henisz and
Zelner, 2005; Nombela, 2001). It has been a major pillar in the country’s growth (Henisz, 2003) proving equal access to energy to all Greek citizens and has been used by the Greek state as an instrument to attain non-commercial goals (Grout and Stevens, 2003; Goldeng, 2008) such as the control over natural resources, that is lignite and water reserves, and provided employment to people in remote and deprived areas throughout the region which, subsequently, resulted in the firm’s overstaffing (Nombela, 2001).
To conclude, the present study drawing upon institutional embeddedness tried to assess whether the latter as an antecedent of a firm affects its responses during an environmental jolt.
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The answer provided, however, had two facets; the firm is indeed affected yet, its outcome cannot be specified. The short period of study accompanied with the country specific characteristics and the bureaucracy that characterizes any regulated market have not been helpful in determining whether the responses were positive or negative.
Limitations The nature of the research question dictated the research method and a case study was employed. Nevertheless, there are certain limitations associated with that kind of research method. The problem of generalization (Bryman, 2008) arises first, since it is not possible to generalize the results generated by a case study and apply them to different cases. Thus, the results identified here are not binding for all mixed-owned firms and we can only hypothesize that the other mixed-owned firms would respond the same way PPC did. Nevertheless, these results can be tested in larger-scale studies (Ryan et al., 2002) and lead to theory-building
(Eisenhardt & Graebner, 2007).
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