Superior navigation helps an enterprise adapt to turbulence in a way that enhances returns and controls risks.  Adaptation is disciplined and deliberate change that better equips a company to compete and operate in turbulence.  It is a change in how executives and Board members think, decide, organize and allocate resources.

Our Model of Adaptation

Out model of adaptation is constructed on the premise that it is neither desirable nor necessary for an energy enterprise, such as a utility holding company, to change at the same time or pace at all levels.  Our model of the enterprise consists of six layers:

1. The Franchise:  The highly specific combination of geography, customer base, proprietary infrastructure and legal rights and privileges that is very difficult, if not entirely impractical, for a competitor to replicate.  In many instances the franchise is, indeed, unique or close to it.
2. The Legacy:  The operating traditions, institutionalized ways of doing business, defining values, community and business reputation, core capital-intensive economic activities, shareholder mix and balance sheet that have emerged over decades of building and serving the franchise.
3. The Plumbing:  The pervasive business technologies; middle management and supervisory decision making and managerial business processes; budgeting, accounting, planning, engineering and HR processes that impinge on the vast majority of employees.
4. The Business Services:  The goods, products, services, major non-core investments that sit atop or reside alongside the core economic activities of the company.  Examples are non-regulated businesses within the ambit of the franchise or non-core investments outside the franchise or businesses that were once price or rate of return regulated and now no longer are (e.g., oil and gas production; merchant generation; merchant storage; field gathering and processing). 
5. The Organizational Design:  The structure of work, authority and responsibility amongst different line and staff units, the interfaces among different parts of the company and the management hierarchy.
6. Executive and Board Endowment:  The combination of talent, behavior, decision making styles and decision making processes and protocols (e.g., executive committees, Board committees, topic-specific task forces or working groups) that defines how Board members, the Chairman, the CEO and the top 5 to 15 executives spend their time and energy and what they do in the company.

Layers 1, 2 and 3 are the foundation layers.  They can change only very slowly.  Any attempt to force the pace of change in these enterprise levels is likely to end in financial disaster.  These three levels provide both continuity and constraint on vision, strategy and resource allocation. 

Layers 4, 5 and 6 are the superstructure layers of the enterprise.  They can be changed with varying rapidity.  They provide the opportunity for innovation, growth and risk management.  It is by first methodically but fairly quickly bringing change to layers 6, 5, and 4 and then patiently and, as needed, brining change to layers 3 and 2 (and quite rarely to layer 1) that the enterprise adapts to turbulence.

The process of adaptation begins with and must begin with layer 6.  Once layer 6 has begun to adapt, layer 5 can initiate change.  As layers 6 and 5 implement change, layer 4 can initiate the adaptive process.  Adaptation is, thus, a layered response with each enterprise layer changing at different rates and on different timelines.  Changing the superstructure layers allows the enterprise to adapt at the top. 

The superstructure adaptation can then influence the magnitude and direction of foundation adaptation.  If turbulence threatens dividends, raises cost of capital, compresses operating margins, but does not raise the issue of survival, then adaptation to turbulence can be almost entirely limited to the superstructure layers with some modest changes in layer 3 (largely changes to increase efficiency and cut costs).  If turbulence is so great that the existence of the enterprise is at stake, then the foundation layer must also adapt or the enterprise faces the prospect of failure or a sale.

The tools and techniques Dar & Company uses to implement its model of adaptation have been developed over two decades of working in the energy, especially the natural gas and electricity (including public power and gas) industry.  They have been refined over dozens of engagements involving scores of executives and Board members.