Comparing industry KSF with SSO’s resources and capabilities

This paragraph attempts to match SSO’s resources and capabilities with the KSFs outlined in the previous section. These resources shall be identified and assessed through the VRIO framework.

According to Barney (1995), this framework consists of four questions which help decide whether the resource or capability could be a source of sustained competitive advantage. Namely, is the resource or

41 capability: valuable, rare, costly to imitate and is the company organized to capture its value? If the resource or capability in question fulfills all these requirements, it can deliver a sustained competitive advantage to the firm.

To contextualize, a capability might be necessary as a means of participating in an industry, i.e.

competitive parity, but it might not necessarily lead to a competitive advantage if it is common among industry peers. The capability should also be able to meet the KSFs of the industry. Moreover, a

capability’s sustainability over time can be assessed by considering the following factors: Is it durable?

Is it transformable? Is it replicable? Is it easy for the firm to take advantage of it? This implies that the capability or resource would lose its value quickly if it is easily transferable. If industry peers are not able to appropriate the capability or resource by means of transferability, they are forced to develop it by imitation. If the capability or resource is simple to imitate, the competitive advantage will

deteriorate rapidly (Grant, 2013). The KSFs and capabilities of SSO will be analyzed and assessed on whether they serve as a source of continuous competitive advantage.

6.2.1 Government subsidies: Long-term contracts

Like other players on the market, SSO has long-term FiT or PPA contracts with governments, and is therefore not under immediate risk of having their profit margin severely reduced through a sudden change in government policy. This ensures that their cash flow is stable and predictable, which is of great value to investors and SSO itself. As this is customary in the sale of electricity, this resources is not considered rare. When auctions are conducted, multiple companies are allowed to bid on a contract alongside SSO. Hence, long-term contracts are, although necessary to participate, not synonymous with a continuous competitive advantage.

6.2.2. Slashing production costs: Integrated business model and SPV

As outlined in section 4.3, SSO operates with an integrated business model, which means that they incorporate the majority of their value chain in their operations, i.e. are highly vertically integrated.

This encompasses development & construction, operations & maintenance and power production. SSO believes that this gives them an advantage in terms of higher returns and allows them to develop their projects by themselves. As an example, when SSO completes the Honduras project, they will own 70%

of the revenues from operations, but 100% of the revenue from building the plant (Scatec Solar ASA,

42 2017b). This capability is highly valuable, as it allows SSO to reinvest in other projects at a more rapid pace than if they did not get revenue from constructing the plants. It is a rare resource, as their peers do not have the same degree of vertical integration. However, it is possible to copy this business plan, and it is therefore characterized as imitable. Nevertheless, attempting to integrate a larger part of your value chain and both run and maintain power plants take time, is capital intensive and cannot be replicated instantaneously.

The SPV concept is an essential component of the company’s business model. As explained earlier, for every solar project SSO creates an SPV, a separate entity, which is financed partly by debt, internal equity and co-investment from a third party. This SPVs act as standalone entities which ensure that projects do not affect each other. It helps in decreasing the financial risk of a project because of its adoption of non-recourse debt (lenders only have repayment claim on the profits of the project).

Consequently, the company is capable of accepting multiple contracts simultaneously without

endangering other projects. According to IEA (2016), this is a typical financing method in the energy sector and is therefore not considered rare. Despite the fact that it is imitable, it remains a prominent part of SSO’s business plan and is still considered valuable.

6.2.3. Scaling up through mergers and partnerships: Prominent partners and joint ventures The ability to scale operations through mergers and partnerships was pointed out by The Economist (2010). Partners could supply know-how, capital and be instrumental in doing business with

governments or other stakeholders. SSO has several key partners, which could prove to be strategically beneficial. As an example, SSO has a joint venture with Statoil, in which Statoil owns and co-operates utility-scale solar plants in Brazil, a country in which Statoil is a huge player in the petroleum industry (Statoil, 2018). Statoil does not only bring capital, but also expertise in dealing with Brazilian stakeholders. Another example of a strategically important partnership is SSO’s partnership with Bangladeshi conglomerate A. K. Khan & Company, which, according to GlobalData (2018), is

instrumental in allowing SSO to co-develop utility-scale solar plants in Bangladesh. Lastly, SSO’s joint venture with Norfund, an investment fund, gives the company valuable access to capital. This does not only help them spread financial risk, but it also gives them the actual capital needed to expand

operations.

43 Partnerships and joint ventures such as these are not easily imitated since establishing and fostering such relationships requires trusts and time. These relationships are important, not only as a risk mitigation tool but also to have access to capital, which IEA (2016) regards as a rare resource.

6.2.4. Other resources: Local value creation

Another resource SSO focuses on is its contribution to local value creation. Solar projects affect local communities, and although it is commonly positive, unforeseen consequences can occur. Thus, engaging the local community and promote communication is pertinent. SSO, therefore, strives to employ local labor and use local suppliers, regardless of regulatory requirements (Scatec Solar ASA, 2017b). The company attempts to keep a dialogue with everyone from national governments to

neighbors of the project sites, in order to ensure a mutual understanding and respect. For every project, SSO assigns a Community Liaison Officer (CLO) whose responsibility is ensuring community

engagement and maintain positive relations with the local community. The CLOs hold regular meetings with local stakeholders at which they can share their experiences, concerns, and thoughts. In addition to this, SSO initiates local initiatives in the locations they operate. Examples include building day care centers, schools and funding solar research. These efforts to include the local communities might improve their reputation, reduce potential skepticism and ultimately facilitate a smoother process when they enter new locations. This is therefore considered a valuable resource for the company.

Contributing locally is not considered a rare capability, but difficult to imitate in depth. However, as reputation is earned over time, this could give SSO an advantage in comparison with more recent competitors.

44 Table 2: VRIO

Source: Own creation

The VRIO analysis concludes that long-term contracts and the deployment of SPVs are common among industry peers and are thus necessary to compete, but not a source of sustained competitive advantage. The commitment to local community development could lead to reputational benefits when entering new markets and running operations. This is very valuable to SSO, as they have gained a preferred bidder status in several countries partially on the back of this capability. The combination of the vertical value chain and the focus on local value creation have made SSO an attractive bidder, as they can provide a full-fledged project and will benefit local communities. This has resulted in them having operations in multiple markets worldwide. Their successful track record of operating in these complex markets have lead serious financial partners to continue their partnerships with them (Scatec Solar ASA, 2017b). However, as mentioned earlier, emphasis on R&D is a key success factor in the industry. SSO did not allocate any funds to R&D in 2015 or 2016 and should re-consider this if they choose to integrate the whole value chain (Scatec Solar ASA, 2017b).

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