JGM - Schiavone Final

The liberalisation and
diversification of the
European electricity industry
A country-based view
Francesco Schiavone
Assistant Professor of General Management, Department of Business Studies, Faculty of
Economics, Parthenope University, Naples, Italy
European Commission directives for the liberalisation and deregulation of the European
electricity industry were adopted almost at the same time in several nations. But each country
had specific market structures and internal conditions. The aim of this paper is to analyse
descriptively if and how differences between the home countries of European electricity firms
affected, quantitatively and/or qualitatively, their diversification strategies after liberalisation.
Research consisted of collecting and analysing data on the strategic actions of the main
European electricity firms. The analysis covers a period of ten years (1998–2007), i.e. the first
ten years after the first European directive. This paper sheds light on the link between pre-
liberalisation specificities and attributes of a national electricity market and the post-
liberalisation diversification strategy of its national electricity companies.
Introduction
The main aim of this paper is to analyse the link between industry liberal-
isation and the diversification activity of European electric firms (henceforth:
EEFs). Liberalisation offered many opportunities for electricity companies to
diversify. In general, this strategy has been very popular among EEFs but it has
been not adopted by all the companies to the same extent. Various motiva-
tions could explain such divergence across firms. One explanation could be
that new regulatory arrangements of liberalisation were followed by a
heterogeneous population of companies. Thus, the impact of liberalisation
on the EEFs’ growth strategies was heterogeneous too. For instance, small local
electric companies could not have any surplus of financial resources to
diversify and could prefer to keep their strategic focus just in the electric
industry. Another explanation could be that not all the EEFs held the
managerial capabilities (and/or the willingness) to implement such a complex
process as diversification. Indeed, the search for new managerial capabilities
and new competitive strategies, in order to exploit new opportunities and
contrast new threats of liberalisation, is a critical issue for managers of firms in
liberalised markets (Pettus et al., 2009).
# 2010 The Braybrooke Press Ltd. Journal of General Management Vol. 36 No. 1 Autumn 2010 63
63–79
Francesco Schiavone
This paper enriches the debate by proposing a point of view little

explored in literature to date. It is argued here that the extent of adoption
of this strategy by EEFs might have been affected by crucial initial
divergences across countries. In this paper it is argued that many coun-
try-specific attributes may affect the diversification of national electricity
firms. For instance, national demand conditions and industrial conditions
can augment or hamper the international market power of an electric firm.
Market size (number of inhabitants and companies) and demand composi-
tion may be critical for strategising within the liberalised European
electricity market. It would be very surprising if countries with low GDP
or levels of industrialisation may be able to provide large profits to their
electricity (monopolist or non- monopolist) firms. The concentration of
many industrial firms in a country (or in a region) is a further condition
increasing electricity consumption and thus, providing revenues for elec-
tricity companies to diversify. The economic growth of a country may be
another reason for an electricity company to diversify in new businesses,
both abroad and/or in its country of origin. The research question of the
paper is, therefore: what is the impact of home-countries’ specificities on
the diversification strategies of national electricity companies after liberal-
isation? In order to reply to such a question, desk research was performed
by collecting and analysing data and information on strategic operations
(mergers and acquisitions) of the main EEFs. The theoretical approach of
national competitive advantage (Porter, 1990; Dunning, 1992) is adopted in
order to conduct the analysis. The analysis focuses on companies generating
electricity and not on companies working in others phases of the supply
chain (e.g. transmission and distribution). The operations for diversifica-
tion by all the main EEFs were considered at both national and inter-
national level. Data were taken from both scientific papers and research
reports (e.g. Gravitie Limited, 2006; Standard and Poor’s, 2007; Leveque
and Monturus, 2008). The analysis covers the period 1998–2007, the first
ten years after the European directive 96/92/CE which started liberalisation
of the electric industry across Europe.
Liberalisation of the European electricity industry

Research states that liberalisation and deregulation are fruitful, as these
processes may create ‘an economic experiment by generating carefully defined
opportunities for a homogeneous set of firms’ (Ingham and Thompson, 1995:
p. 177). Management scholars studied the strategic responses of firms to
electricity market liberalisation (e.g. Midtunn, 2004; Delmas et al., 2007;
Domanico, 2007). Since the first half of the 1990s, some European countries,
such as Great Britain (1990) and Norway (1990) started the process of
liberalisation of their national electric markets. The other European nations
followed this process after the emanation of two specific directives of the
European Union. The first is the directive 96/92/CE. It established common
regulations across countries for the generation, transmission and distribution
of electric energy within the single national markets. Furthermore, the
directive modified the traditional industrial organisation of these markets
64 # 2010 The Braybrooke Press Ltd. Journal of General Management Vol. 36 No. 1 Autumn 2010
The liberalisation and diversification of the European electricity industry
by allowing privatisation in many of them for the first time. The second
directive was the act n. 54/2003, which substituted the former norm, regulated
more critical issues (e.g. the extent of competition in national markets and the
environmental standards of the industry) in order to create an unique
continental electric market and established 1st July 2007 as the deadline for
the full and complete liberalisation of the single European national markets
(in September 2007 EU a third directive was passed in order to increase
industry competition). EU directives regulated four critical issues of the
European electric industry, although with different impact across countries
and at different times (Jamas and Pollit, 2005):
Industrial organisation: It changes completely through the disintegration
of the traditional national electricity supply chains. This phenomenon is
the so-called unbundling. This allowed more independent actors to work in
different phases of the supply chain (see Figure 1). Furthermore, the
European directives established maximum market shares achievable by
firms in each phase.
Internal competition: The European Union tried to increase the extent of
internal competition of a single national market by making access easier
for new entrant firms in the phases of generation, distribution, transmis-
sion and trading of electricity.
Industry regulation: The European Union made great efforts to set up
common regulatory mechanisms and institutions across countries. It
brought about the establishment of national agencies and governmental
authorities of regulation of the electric industry.
Privatisation: In several countries, European directives boosted the
privatisation of many national and regional public firms supplying energy.
It had a great impact on the nature and corporate governance of these
organisations.
Figure 1: The ‘disintegrated’ energy industry after EU directive.

Source: Rider, 1999
Many firms that had grown in very different national systems were put
together in the same integrated (continental) market by liberalisation (Mid-
tunn et al., 2003). The issue of their ‘harmonisation’ is a critical challenge for
European policy makers (Serralles, 2006). In some cases, the electricity market
was fragmented between more companies (as in Germany, England, Spain and
Sweden). In other nations the market structure was a legal public monopoly
(Italy and France) or a ‘de facto’ private monopoly, as in the case of Belgium)
(Table 1). The main differences across countries cover: the property of
Francesco Schiavone
Table 1: Organisation and structure of the electric industry before liberalisation (1989)
Country Property Geographic Level of Energy Supply Vertical
Integration
France Public National Fully
Holland Public Regional and Local Partly
Spain Public Regional Mostly
England Public National and Regional Partly
Italy Public National Fully
Norway Public National, Regional and Local Partly
Sweden Public and National, Regional and Local Mostly
Private
Denmark Public and National, Regional and Local Partly
Private
Finland Public and National, Regional and Local Mostly
Private
Germany Public and Regional and Local Total and
Private Partial
Source: author’s elaboration from Serralles, 2006
electricity firms (public, private or the presence of both), the scope of the
energy supply (national, regional, local or the presence of more levels) and the
extent of the vertical integration of the electricity supply chain. The most
common structures of national energy markets were monopolies of national
public operators (as in France and Italy) and oligopolies of more minor
regional and/or local energy companies (as in Germany).
In general, deregulation stimulates strategic choice of electricity utilities
(Delmas et al., 2007). A number of studies have analysed the strategic reactions
of EEFs to liberalisation. EU directives caused some market and organisational
phenomena that were completely new for European energy companies (Rider,
1999). These are:
Increase in their environmental and internal complexity (e.g. mechanisms
of corporate governance and industrial relations.
Increase of mergers, acquisitions and strategic alliances between incum-
bent European companies.
Increase of cross-border convergence with firms of other industries (e.g.
gas or insurance companies).
In the case of the European electricity industry, liberalisation caused several
new issues for electricity companies and greatly influenced their strategies.
Many common management techniques of market forecasting (such as
scenario planning, game theory, real options analysis, agent-based models,
business dynamics and financial risk models) became critical tools in this
industry for the first time (Dyner and Larsen, 2000). Many companies lost
their traditional market positions within their home countries and had, for the
first time, to face the competition of both new industry entrants and foreign
electric incumbents. The main strategic options for EEFs became decoupling1
and specialisation, horizontal integration between two or more value chains,
vertical integration within one or more value chains and various forms of
diagonal integration between upstream and downstream sides of different
value chains (Midtunn, 2004).
Corporate diversification in the electric industry

Diversification strategy: an overview
Diversification is a typical risk management strategy of industrial firms.
Diversification occurs when a firm decides to both produce and commercia-
lise a new product and enter a new market. Ansoff (1957) distinguishes three
different types of diversification: vertical, horizontal and lateral diversifica-
tion. A firm adopts vertical diversification when it starts offering new products
or services related to its traditional product lines and processes (e.g. an
electricity generation company enters into the electricity distribution busi-
ness). A firm implements horizontal diversification if it starts offering new
products or services not related and not contributing to its traditional product
lines but related, in some way, to its traditional know-how and/or technology
(e.g. an electricity generation company enters the gas industry). Finally, lateral
diversification occurs if a firm moves beyond the boundaries of its traditional
industry (e.g. an electricity generation company enters into the food and
beverage industry). Thus, this third type of diversification is ‘wide open’ and is
not restricted by a firm’s traditional markets and product, as is the case with
the former two examples.
The implementation of diversification is usually complex, expensive and
hard to manage. Firms must hold valuable human, financial and organ-
isational resources in order to perform it. Management scholars have studied
diversification extensively after industry deregulation (e.g. Ingham and
Thompson, 1995; Haveman, 1993). Previous research found that large
organisations are more capable of taking advantage of the opportunities to
enter new markets than are small organisations (Haveman, 1993). This
finding is consistent with the idea that firms with large bases of (technological,
financial, organisational) resources tend to diversify more than others.
Furthermore, the resource profile of firms affects their diversification patterns
(Montgomery and Hariharan, 1991). Firms diversifying after deregulation
follow patterns affected by firm characteristics, resources, capabilities, owner-
ship factors and regulatory arrangements (Ingham and Thompson, 1995).
Why firms in a liberalised electric industry diversify

The electricity industry is capital intensive and mature. In general, an electric
company may diversify in order to achieve one of the following goals (Dezi,
1997):
1
In the electricity and gas sectors, decoupling (or revenue decoupling) is ‘a generic term for a
rate adjustment mechanism that separates (decouples) an electric or gas utility’s fixed cost
recovery from the amount of electricity or gas it sells’ (NARUC, 2007).
Francesco Schiavone
To invest a surplus of resources (typical conditions of mature industries)

in new businesses.
To overcome normative constraints for penetration of traditional markets.
To exploit know-how and managerial capabilities in new synergic busi-
nesses.
To share the risk in more industries.
Liberalisation and deregulation generally make it easier for electricity firms
to perform these goals. The adoption of vertical diversification of electric
companies usually augments the business after liberalisation, except (of
course) for former national monopolists in countries where the supply chain
was already fully integrated. Horizontal diversification should also augment
the business after liberalisation. The rationale of this type of diversification,
indeed, is the presence of a technological or managerial synergy between old
and new businesses. The set of potential businesses horizontally related to the
electric industry is wide due to the great amount of competencies, know-how
and technologies an electric company usually holds (see Table 2 for a brief list
of synergic businesses). Over the last ten years, the electricity market
concentration and the several mergers between electric and gas companies
in Europe are clear consequences of liberalisation (Domanico, 2007). Finally,
lateral diversification implies the entry of a firm into further businesses, totally
unrelated to electricity. Of course, the privatisation of an electricity company
is an important condition in order to increase its managerial freedom and
thus, its entry not just in related businesses (e.g. gas or telecommunications)
but also in unrelated businesses (e.g. banking and finance) just to make
additional profits and share the risk.
The need for a new organisational structure or business model might be
another critical reason to diversify for EEFs. An electricity company may
achieve one of the following business models through horizontal or lateral
diversification: multi-business, multi-service and multi-utility. The multi-
business model is adopted by electricity firms offering more public utility
services to the same markets but not managed through an organisational
structure divided in distinct strategic business units (SBU energy, SBU gas,
SBU water and so on). The multi-utility model is adopted by electricity firms
offering other public utilities services to the same markets. Each utility is
managed by a specific SBU. The multi-service model is adopted by electricity
firms not developing other public utilities as new services. Therefore, it is
accepted in the literature that the different extent of adoption of diversifica-
tion between electric firms in a liberalised industry might be explained in
terms of different surpluses of financial resources to invest, ‘gaps’ from the
maximum market shares fixed by EU directives, risk management strategies,
Table 2: Synergic businesses for diversification of EEFs

Technology-based Synergies Competence-based Synergies
Gas Engineering and planning
Telecommunications Trading
Public Transport Other public utilities
Source : author’s elaboration
organisational structures and/or managerial capabilities. An additional ex-

planation might lie in a country-based view about the different patterns and
the extent of diversification between EEFs.
A country-based view of diversification of EEFs

after liberalisation
A home base is ‘the nation in which the essential competitive advantages of the
enterprise are created and sustained. It is where a firm’s strategy is set and the
core product and process technology (broadly defined) are created and
maintained’ (Porter, 1990: p. 77). There is no unequivocal view within the
management literature about the role that home bases of electricity companies
may have on their corporate performances and strategies after market
integration. A common view within internationalisation studies is that the
integration of more national markets diminishes the role of nations (and their
specificities) in orienting market dynamics and firms strategies (Ohmae,
1985). Conversely, another stream of literature states that resources, economic
and social features of a nation can provide critical country-specific advantages
for the global competitiveness of its firms (Kogut, 1985; Porter, 1990). Firms’
strategic patterns are affected by both firm-specific resources and other extra-
firm resources not directly controlled by the firm. Previous researchers
showed that firm-specific resources are not sufficient to give competitive
advantage to firms operating in global environments. Country-specific
advantages and resources (e.g. natural resources) should be integrated with
firm-specific resources in order to understand corporate strategy and forecast
the likelihood of success in international markets (Fahy, 2001).
The literature on the competitive advantages of nations is likely to be a
promising framework of analysis in order to study how a set of critical non
firm-specific resources affect firm diversification and strategising. This
theoretical perspective is a classic subject in macroeconomics and inter-
national trade. Within the last two decades a rising number of management
scholars have analysed how the national attributes of a country affect com-
petitive strategies and the international success of their companies. Porter
(1990) suggests that four determinants affect the competitive advantage of
nations: firms’ behaviours and market structure, demand conditions, factor
conditions, related and sustaining industries (Table 3).2 Activity of the
transnational corporations of a country is an additional exogenous variable
that may affect this model (Dunning, 1992). Grant (1991) argues that Porter’s
diamond of national competitive advantage is complementary to a resource-
based approach. Indeed, national determinants affect firm resource strengths
and the industry environment; these are critical elements for firms to select
their competitive strategy and determine their competitive advantage in
national and international markets.
2
This model derives from a previous Porter theoretical elaboration (the so-called ‘Porter’s
Diamond’) according to which rivalry and competition dynamics depend on more industry
‘forces’: (1) actual competitors within industry; (2) power of costumers; (3) power of suppliers;
(4) threat of substitutive products; (5) threat of potential new entrants (Porter, 1985).
Francesco Schiavone
Table 3: Determinants of national competitive advantage

Determinant Definition (Porter, p. 78: 1990)
Demand Conditions The nature of home-market demand for the industry’s product or
service
Factor Conditions The nation’s position in factors of production, such as skilled labour
or infrastructures, necessary to compete in a given industry
Firm Strategy, The conditions in the nations governing how companies are created,
Structure and Rivalry organised and managed, as well as the nature of domestic rivalry
Related Industries The presence or absence in the nation of supplier industries and other
related industries that are internationally competitive
Source : Porter, 1990
This theoretical perspective is useful for developing some general con-

siderations on the impact of country-specific attributes on the diversification
of national electricity companies after continental liberalisation. Indeed, these
national determinants might provide resources or business opportunities that
electricity companies could exploit through national and international
diversification. The former market structure of a deregulated industry is
likely to be a relevant national condition that determines the strategies of an
electricity company after liberalisation. Former national regulatory arrange-
ments defined the nature of domestic rivalry (monopoly or oligopoly) and the
scope of the electricity market within the country (national, regional or local).
Monopoly gives a company the full national market share of its home base. For
many decades former public and private monopoly electric companies
(namely, EDF in France, ENEL in Italy, EDP in Portugal, Vattenfall in Sweden
and Electrabel in Belgium) had the right to be the unique electricity generator
company in their home countries and therefore did not have to invest
resources in national competition. These types of companies may have greater
financial resources to diversify intensively and to invest in risky and unrelated
businesses. Furthermore, the loss of a national monopoly due to liberalisation
and deregulation may push a former monopolist not only towards diversifica-
tion but also to the re-investment of its resources dismissed in electricity
generation somewhere else. Thus, monopoly legacy may be crucial for the
diversification patterns of former monopolists in the liberalised European
electricity market (especially if the electricity supply chain in their countries
was fully vertically integrated). The ‘former monopolists’ competitive ad-
vantage’ should be much more critical in those countries (such as Italy) in
which liberalisation did not greatly change the nature of competition and
thus, nowadays there is still a sort of ‘quasi-monopoly’ of the electric market.
Therefore, the benefits of a former monopoly on the electric firm’s inter-
national competitiveness (and its impact on corporate diversification) may be
minor if the home-base is a small country with little industrialisation and a
sparse population. In this case, even the former non-monopolists of larger and
richer countries may have more resources, business opportunities and
capabilities for diversification than monopolists of minor countries.
Diversification in the European electricity industry

after liberalisation
General overview
The pace of acquisitions has changed over time. Data show that European
electricity and gas companies implemented 25 acquisitions in 2000 and just
seven acquisitions in 2007 (Leveque and Monturus, 2008). Often, EEFs
implemented diversification strategies after the beginning of liberalisation
(1997–2002). During these years several EEFs diversified laterally or horizon-
tally by acquiring non-electricity companies. These acquisitions were both at
national and international level. The rise of the multi-utility business model
confirms that diversification became a very popular strategy in the European
electricity industry. The main reason for this generalised diversification
pattern was the strong synergies between the electricity industry and other
utility industries (e.g. gas). In some cases, another rationale was the need to
find new opportunities in which to invest and make profit after the asset
disinvestment dictated by European directives (Andersen, 1999). These
companies entered new businesses and markets, both in their home country
and abroad. Afterwards (2003–2007), EEFs became more cautious in the
adoption of diversification and tended to disinvest some of their non-strategic
assets in order to refocus their resources back on the electric and power
businesses.
Extent of diversification
The first issue analysed in the study is that of whether the legacy of monopoly
or national attributes have had any quantitative impact on EEF diversification
after liberalisation. To this end, secondary data were elaborated. They were
reported in a study of CERNA (Centre for Industrial Economics at the École
des Mines de Paris) about the main mergers and acquisitions within the
European power and gas markets during the period 1998–2007 (Leveque and
Monturus, 2008). This database was used since its authors had previously
screened the most relevant EEFs’ operations. The total amount of operations
reported was 191. The number of European energy companies listed in the
database was 44. In the elaboration, 25 firms were excluded from the original
database for various reasons: seven of them had their main core business in gas
and not in electricity (British Gas, Centrica, ENI, Gas Natural, Gaz de France,
Suez, Total); 16 firms implemented less than three operations during the
period analysed (Acciona, AGSM Verona, British Energy, EIDSIVA, Eneco
Ener gie, Energi net.DK, Energo-Pro, ERG, EVN, EWE, Nord-Tronde lag,
Norsk Hydro, RAG, Red Electrica de Espana, SYD Energi, Trentino Servizi);
two firms were not working in electricity generation but transmission
(National Grid and TERNA). The final amount of EEFs analysed thus was
19 (which implemented a total amount of 150 acquisitions and four mergers
over time). The mean amount of corporate acquisitions was 7.89.
These operations were classified as two strategies: (vertical or horizontal)
diversification and horizontal integration. Vertical diversification relates to
Francesco Schiavone
the acquisition of (both foreign and national) electricity suppliers or dis-

tributor (in other words, vertical integration).3 Horizontal diversification
relates to the acquisition of (both foreign and national) new potential entrants
(e.g. heating companies) or companies developing substitutive products (e.g.
technological alternatives to electricity). Eventual (and rare) operations of
lateral diversification were not considered in the analysis. Horizontal integra-
tion refers to the acquisition of firms’ direct competitors (e.g. companies
generating through renewable sources or a generator plant) and therefore are
not related to diversification. In some cases the categorisation was very
complex as it was ambiguous to reconstruct if operations were aimed at
diversifying or integrating. The ambiguity depends on the variety of profiles of
bidder companies and target companies.4 For instance, sometimes acquisi-
tions of gas companies may be classified as diversifications and other times the
same operations may be classified as integrations (it was quite common that
the bidder electricity company was already operating in the gas market before
liberalisation). To find a solution to this methodological problem, the
following general criterion, based not on bidder companies but on target
companies, was adopted: an acquisition is categorised as diversification if two
conditions apply: first, it the target company does not generate electricity (but
it may work in other phases of the electricity supply chain); second, the
acquisition of the target company does not improve, in any case, the electricity
generation capacity of the bidder company (see Table 4). This methodological
criterion can be utilised whereby the perspective of the electricity company
generating energy is adopted. Thus, data analysis and elaboration have been
anchored to the profiles of target companies. This criterion implies, for
instance, companies generating electricity via renewable sources may be
considered direct competitors of electricity firms’ and then, their acquisitions
are horizontal integrations.
Figure 2 shows most of EEFs (13 companies on 19) balanced diversification
and horizontal integration.5 In most instances, diversification of electricity
companies was aimed at acquiring companies upstream and downstream of
the supply chain or companies of other utilities industries. Therefore, there is
no relevant country-based difference between companies. Both former and
3
In order to classify these operations, a customer-based meaning of ‘new market’ was adopted
and not a geographical meaning but of this notion (as Ansoff did). Thus, even acquisitions of
companies within the same country or within the same national supply chain were categorised
as diversifications. This second case should have been categorised as ‘vertical integration’ if a
geographical meaning of ‘market’ were adopted. The rationale of this methodological choice is
liberalisation reshaped industry borders and changed the focus of competition (from a national
to an international level). Therefore, it should have been improper to consider firms home-
countries simply as ‘old markets’.
4
The bidder company is the one that purchases the target company.
5
The final positioning of the firms within Figure 2 was defined via the following procedure. The
vertical axis shows the number of acquisitions undertaken by each firm (the mean value is 7.89).
The horizontal axis shows the general strategic goal of its acquisitions (diversification or
horizontal integration). Acquisitions aimed at acquiring direct competitors (horizontal
integration) were coded with 0. Acquisitions aimed at acquiring other companies (diversifica-
tion) were coded with 1. The positioning of each firm on horizontal axis is the mean value of all
the acquisitions codified.
Table 4: Classification criterion of EEFs acquisitions

Questions Reply Classification
Does the target company generate electricity? Or does NO, NO Diversification
the target company improve, in any case, generation NO, YES
capacity of the bidder company? YES, NO
Does the target company generate electricity? Or does YES, YES Integration
the target company improve, in any case, generation
capacity of the bidder company?
non-monopolists and electricity firms of minor and larger nations decided to

adopt diversification according to their corporate goals and were not
influenced by any particular attributes of their own country. Moreover,
companies of the same country (e.g. the Netherlands) differ in their strategic
behaviour. In general, there is no significant strategic divergence between the
various former monopolists, except Vattenfall which performed mainly
international horizontal integrations. ENEL was the company less interested
in balance, as the Italian company implemented 13 operations but only four of
them were diversifications.
Instead, EDF implemented 26 operations and 11 were diversifications. EDP
(Energias de Portugual) is a former monopolist which balanced diversifica-
tions and horizontal integrations. The former Portuguese monopolist
Figure 2: Acquisitions of EEFs after liberalisation

Source : author elaboration
Francesco Schiavone
Table 5: Number of diversifications of European electricity firms through acquisition

Company Total N. of Total N. of Total N. of Vertical Horizontal Economic Value
(Country) Acquisitions Horizontal Diversific. Diversific. Diversific. of Diversifications
Integrat. (billion )
1 AEM (IT) 6 3 3 2 1 1.087
2 ATEL (CH) 3 3 0 0 0 0
3 CEZ (CZ) 5 2 3 3 0 1.44
4 Dong Energy (DK) 4 2 2 2 0 2.35
5 EDF (F) 26 15 11 9 2 6.11
6 ENEL (IT) 13 9 4 3 1 2.88
7 EDP (P) 6 3 3 0 3 0.94
8 E.ON (D) 28 15 13 7 6 21.06
9 ESSENT (NL) 4 1 3 2 1 0.79
10 FORTUM (FIN) 5 5 0 0 0 0
11 HERA (IT) 3 1 2 2 0 0.24
12 IBERDROLA (E) 3 3 0 0 0 0
13 Int. Power (UK) 4 4 0 0 0 0
14 NUON (NL) 3 1 2 2 0 NA
15 RWE (D) 16 6 10 8 2 6.09
16 Scottish Energy 6 1 5 3 2 4.55
(UK)
17 Statkraft (N) 3 3 0 0 0 0
18 Vattenfall (S) 8 7 1 1 0 0.18
19 Verbund (A) 3 2 1 1 0 0.14
EUROPEAN 7.89 4.52 3.36 - - 2.65
MEAN
Source : author elaboration
acquired (totally or partially) six companies over this period. These compa-
nies were small Spanish or Portuguese suppliers of gas or generators of
renewable energies. Vattenfall, instead, focused its operations solely on
acquisitions (seven) of foreign electricity companies (mainly in Poland and
Germany). Finally, Electrabel is not listed in this database as in 2003 it was
acquired by SUEZ, the French gas company (afterwards merged with Gaz De
France). It is interesting to note that this company, market leader in rich but
small Belgium, has been the only former monopolist acquired by another firm.
Finally, Table 5 summarises the amount of diversification operations
implemented by EEFs during this decade through acquisitions. In this case,
some interesting results emerge. Indeed, diversification has been adopted by
companies from countries (Italy, France and Germany) where national
demand for electricity was large and the former electricity supply chain was
(fully or largely) vertically integrated. Data show a clear difference, instead,
between firms of the same country even in terms of the geographical scope of
their diversification operations. For instance, RWE focused most of its
acquisitions on foreign gas and/or energy distribution companies whereas
E.ON (output of the merger between VEGA and VIAG in 2000) acquired gas
companies in Germany.
Patterns of diversification
The second issue considered in the study is to verify if monopoly legacy or
country attributes had any qualitative impact (or not) on EEFs diversification,
namely on the type of businesses in which companies have diversified.
Table 6 summarises the main non-core businesses of the most important
EEFs after ten years of liberalisation. It shows there is no significant difference
between the patterns of strategic diversification of former market monopolists
and former non-monopolists. Both these types of electricity firms, indeed,
diversified their activities in almost the same businesses and at the same pace.
Table 6: Diversification of the main European electricity firms

Company Country Other businesses
ENI IT Engineering and constructions
E.ON D Trading, energy transmission and distribution
EDF F Trading, distribution networks management, energy
distribution, service industry
RWE D Water supply and management, energy trading, IT services, real
estate management, human resources management,
infrastructures
Centrica UK Energy supply, heating, products for gas consumption,
technology maintenance
Endesa E Management of transmission networks
ENEL IT Engineering and constructions, infrastructures and services
Vattenfall S Transmission networks management, heating
Iberdrola E Transmission networks management, engineering and
constructions, real estate
EnBW D Water management, liquid waste management
Scottish Po UK Energy distribution
wer
EWE D Heating, ICT, IT services, water resources management
Edison IT Gas, management of electricity distribution networks
Essent NL Mineral water, waste management, polluted water management,
ICT networks cabling
Union Fenosa E Information systems, engineering, human resources
management, consulting
Nuon NL Transports, gas supply, constructions, network maintenance
Source : author’s elaboration from Gravitie Limited, 2006
Francesco Schiavone
Most companies followed a competence-based diversification pattern that is

unrelated to the attributes of their home country. Indeed, most diversifica-
tions were horizontal and vertical. Cases of lateral diversification were very
few. The gas market has been the natural extension for many EEFs. Moreover,
many other EEFs were already operating, within their home country, in both
electricity and gas businesses (even before liberalisation). Other choices for
horizontal diversification were telecommunications and other public utilities
(e.g. water management and waste management). Nowadays, almost all EEFs
work in gas and electricity markets without significant distinctions. Almost all
companies (ENI, E.ON, EDF, RWE, Centrica, Iberdrola, EnBW, Scottish
Power, ENEL, EWE, Edison, Essent, Union Fe nosa and Nuon) have their core
businesses in the generation/commercialisation of both electricity and gas.
Just two have their main core business solely in electricity (Endesa and
Vattenfall).
EDF and ENEL (the main former public monopolists in Europe) did not
implement particular patterns of horizontal and lateral diversification. In
other words, their former market dominant position in their home countries
(France and Italy) did not support them in finding innovative and unexplored
avenues of investments which were not accessible for minor EEFs. A similar
result emerges for Vattenfall, a former monopolist in Sweden. Most of the
EEFs launched new controlled ventures or acquired existing foreign and/or
national companies in order to enter in other phases of the electricity supply
chain (e.g. to manage distribution and transmission networks). The main
strategic motivations of this generalised behaviour (common to both former
monopolists and not of many countries) were the following:
To provide and sell services for new companies (at both national and
international level) entering in the liberalised European electric market.
To re-use part of their old knowledge and competencies.
These data and evidences outline former market structure or national
demand conditions that did not affect significantly the choice of new
businesses and markets in which to diversify. Therefore, a country-based
explanation about the impact of national attributes on the avenues of
diversification of EEFs is not convincing.
Conclusion
The validity of a country-based explanation of the activity of diversification of
EEFs after liberalisation has been tested in this paper. The results of the
analysis do not show a clear and unequivocal impact of home-countries
specificities on diversification strategies of national electric companies after
liberalisation. There is no relevant difference between former monopolists and
other EEFs in terms of diversification. After market deregulation, former
monopolists crossed innovative avenues of business and generally, they did
not diversify more than other (non-monopolist) EEFs. However, national
conditions and features (as size or industrialisation) have a quantitative affect
on the diversification activity of their national companies. On the one hand,
German companies (RWE or E.ON) and EDF, Scottish Energy and ENEL
implemented more diversifications than the European mean. All these
companies come from rich and industrialised countries. On the other hand,
results show that if national conditions are minor, then the extent of
diversification may be hampered. Furthermore, results show that a former
national supply chain vertically integrated, if combined with a (geographi-
cally) large and rich national demand, is likely to impact positively on the
extent of firms’ of diversification. Over time, the electricity companies of these
countries grew and, after liberalisation, built their international competitive
advantage on their strong national markets and implemented many diversi-
fications. This conclusion is in line with the findings of Haveman (1993) about
the greater orientation of larger companies for diversification.
Therefore, the study contributes to the existing literature by showing that
the perspective of a country-based view of diversification is partially satisfac-
tory but does not fully explain why some companies diversify more than
others after industry liberalisation. A number of academic and practical
implications are drawn from this study. A critical implication for academics
and researchers in general management is that corporate diversification is not
likely to be caused by just one key condition. The independent variables
affecting the pattern and extent of diversification are numerous and although
liberalisation creates an optimal situation for an ‘economic experiment’
(Ingham and Thompson, 1995), they are difficult to isolate each other. At a
more theoretical level, another implication is that scholars should start
considering the exploitation of country-specific advantages and national
attributes as a condition potentially affecting the diversification activity of
firms after liberalisation. More research is necessary in this direction in order
to better understand what combinations of national attributes and corporate
characteristics (resources, capabilities and managers’ orientation to risk)
affect more diversification.
The results of the study outline practical implications for both managers
and policy-makers. Referring to managers of electric companies, the first
critical implication of the study is that the country-advantages of competitors
are other factors increasing the environmental complexity after liberalisation.
For instance, the presence in a country of a related industry (as natural gas for
the electricity industry) may be a condition increasing the international
competitiveness and the orientation to diversify in related industries of
companies from that home base. Therefore, managers should take these
factors into account in order to properly forecast competitors’ strategic
behaviour and define suitable reactions through diversifications and/or
horizontal integrations. Another managerial implication is that mergers
with foreign electricity companies could be advisable, especially to small/local
electric firms of undeveloped countries, in order to face international com-
petition and the rise of large ‘national champions’ based in rich and developed
countries.
A critical implication for policy-makers arises from this study. They should
avoid carrying out generalised liberalisation in more and complementary
markets (as in the case of the gas and electricity markets). Indeed, the
simultaneous launch of liberalisation in complementary industries could
change market equilibrium. The case of the electricity industry shows that it
would just start a corporate ‘rush’ between the largest industrial groups of the
Francesco Schiavone
richest countries for horizontal diversification and probably would reinforce

their dominant market position at a continental level (as shown in the work of
Domanico, 2007). The risk that liberalisation starts up the emergence of
‘continental champions’ based in the most competitive countries should be
avoided as it makes it harder to attain the main goals of liberalisation (industry
openness and increase of market competition). Therefore, the control by the
EU commission of horizontal diversification (between gas and electricity
markets) is as critical as the control on vertical diversification. A limitation of
the study is the small number of country conditions analysed and the depth of
their analysis. It should have been possible to consider more country
attributes. Future studies may collect more official data about European
countries in order to develop the analysis. Furthermore, the present analysis
was only focused on equity diversifications (through acquisitions) and did not
consider the cases of diversification through inter-firm collaborations and
strategic alliances.
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Francesco Schiavone is Assistant Professor of General Management at Parthenope

University in Naples, Italy. He holds a PhD in Network Economy and Knowledge Management
at Ca’Foscari University in Venice, Italy. His main research interests are entrepreneurship and
innovation, technological change, high-tech clusters and competitive strategies in the energy
industry.

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The liberalisation and

This paper enriches the debate by proposing a point of view little

Liberalisation of the European electricity industry

Figure 1: The ‘disintegrated’ energy industry after EU directive.

Corporate diversiﬁcation in the electric industry

Why ﬁrms in a liberalised electric industry diversify

 To invest a surplus of resources (typical conditions of mature industries)

Table 2: Synergic businesses for diversiﬁcation of EEFs

organisational structures and/or managerial capabilities. An additional ex-

A country-based view of diversiﬁcation of EEFs

Table 3: Determinants of national competitive advantage

This theoretical perspective is useful for developing some general con-

Diversiﬁcation in the European electricity industry

the acquisition of (both foreign and national) electricity suppliers or dis-

Table 4: Classiﬁcation criterion of EEFs acquisitions

non-monopolists and electricity ﬁrms of minor and larger nations decided to

Figure 2: Acquisitions of EEFs after liberalisation

Table 5: Number of diversiﬁcations of European electricity ﬁrms through acquisition

Table 6: Diversiﬁcation of the main European electricity ﬁrms

Most companies followed a competence-based diversiﬁcation pattern that is

richest countries for horizontal diversiﬁcation and probably would reinforce

Lambin, J. J. (2008), Market-driven management, Milan: McGraw-Hill.

Francesco Schiavone is Assistant Professor of General Management at Parthenope

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To invest a surplus of resources (typical conditions of mature industries)