The Strategic Destruction of Northeast Utilities
167 Pages Posted: 25 May 2001
Date Written: April 2001
Northeast Utilities System, an electricity generating and distribution company in Southern New England, adopted the low-cost dominant strategy fashionable in the management consulting companies in the mid-1980s and carried through with that strategy in the face of extreme employee, regulatory, and public resistance to the mid-1990s. Management achieved a significant measure of its strategic cost-cutting goals in that decade, but simultaneously took on ever-increasing risk that its operation of three large nuclear power plants subject to that cost cutting would be declared unsafe by the Nuclear Regulatory Commission. Management's strategy was not constrained by the company board of directors, even though nuclear shutdown could destroy the market value of the shares of the investors. The "worst case" scenario finally did take place, when the Millstone plants in 1996 were not allowed to operate until rebuilt and then relicensed by the Nuclear Regulatory Commission. Subsequent to this rejection of strategy by the regulator, the Northeast generation facilities were broken up and auctioned off, and the distribution facilities were put on the market.
Is this disaster just another in the long line of corporate failures? Our response is that the Northeast experience is different, and raises a basic question worth a detailed answer. The application of competitive strategy by Northeast Utilities management, even when faced with increasing risk of nuclear plant shutdown, increased in intensity and scope. Why did management in effect ignore the risk involved? The narrative of events supports the explanation that it was in management's interest to do exactly that particularly after 1992 and before 1996. The narrative also supports the argument that it was not in the investor's interest, and, contrary to the charter of the corporation, the investor's interests as represented by the board were not controlling when it came to the application of strategy by management. Management's implementation of strategy may not have deliberately destroyed the company, but its implementation took on the significant and apparent risk that the result would be the destruction of the enterprise. The implications for management, even in the worst-case result, were orthogonal to those of the board and the owners.
This competitive strategy was, for the most part, an application of generic low-cost-dominant positioning methodology. The application was in a corporation dominated by management, where downside risk would affect the shareholders, consumers, and the public, but least of all management. The "worst case" result was not certain, but could be tolerated by management, if not by the company's owners. The return-risk profile examined here would not seem to be unique to Northeast Utilities.
JEL Classification: G34, L21, L94
Suggested Citation: Suggested Citation