VRIO’s Application to Ørsted

To understand the sources of competitive advantages of Ørsted, it is necessary to apply the VRIO framework, as the latter will allow to understand how the firm’s resources represent sources of competitive advantage. To apply the VRIO framework, the following key resources will be taken into consideration, and then each resource will be analyzed to understand if it is valuable, rare, difficult to imitate, and if the firm is organized to capture that resource value:

• Wind – A Key Natural Resource

• R&D Commitment

• Digital Focus

• Human Resources

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• Capital Structure and Financial Resources

• Continuous Innovation Approach

• The Triple Bottom Line

5.3.1.1 Wind – A Key Natural Resource

Ørsted’s wind energy business clearly depends on the availability of wind. In fact, the location of Ørsted’s wind farms have a rather high wind speed, such as Denmark, the UK, and the Netherlands (see Figure 14 and Figure 15). Moreover, much of the ocean that surrounds the coasts is shallow, allowing an easier installation of the offshore wind turbines (Genesen, 2016).

Figure 15: Wind Speed (m/s), offshore wind farms

Wind is certainly a valuable resource, however, it is not rare, as it is a resource available to anyone, thus, also to potential competitors.

Figure 11: Wind speed (m/s), onshore wind farms (Ørsted, 2021)

Page 77 of 107 5.3.1.2 R&D Commitment

Ørsted is at the forefront in regards to R&D, innovation and technology development in wind energy. In this regard, the firm cooperates with research institutions and innovative companies (Ørsted, n.d.). For example, in 2017 Ørsted led the so-called project PISA in cooperation with the University of Oxford, University College Dublin, Imperial College London and eleven industry firms. The project provided new knowledge regarding the construction of smarter turbines: the pile foundations do not have to be as long as it was previously believed in order to withstand the wind. It represents an important discovery as the PISA project significantly reduced the price of wind energy. The project also won the prestigious Fleming Award during the Fleming Competition, which is held annually to recognize excellences in the application of geotechnics. (Lehn-Christiansen, 2017).

Moreover, Ørsted utilizes the most advanced technology available for wind turbines. As an example, the company has the largest offshore wind turbines, with a wingspan of over 164 m and a capacity of 8 MW. The enormous advances in wind power technology, ultimately makes wind energy more affordable. In 2012 Ørsted set the goal of reaching 100 EUR per MW by 2020; this ambition became a reality four year earlier, in 2016. In 2020, the firm could provide electricity at the price of 78 EUR per MW (Ørsted A/S, 2021)

Resources are to be considered valuable when they allow a firm to implement strategies which improve effectiveness and efficiency (Barney J. , 1991). Thus, Ørsted’s R&D commitment is a valuable resource. It is also a rare resource, as the competition in Ørsted’s industry is not too high, and only a few firms possess prime technologies. Since the company is a first mover in the industry, it is not simple for the competition to imitate its top-notch

Page 78 of 107 technology, which is the result of several years of experience. Lastly, the company is organized to capture its value, as it actively engages with different academic and industry partners to foster its development.

5.3.1.3 Digital Focus

Ørsted utilizes various digital technologies to optimize business processes, data-driven decision-making, and to improve the design and maintenance of the firm’s assets. The firm deploys advanced data analytics and machine learning to increase the amount of energy produced and reduce costs. As an example, assets’ maintenance is characterized by a data-driven approach, i.e. assets that can be inspected remotely will allow to save up the physical check-up costs. (Ørsted, 2021). Another example is represented by the advanced radar, the world’s first of its kind, which collects three-dimensional wind data so that the design of the wind farms is continuously improved. (Ørsted A/S, 2021). Moreover, wind turbines’ data are also utilized to align the assets with the wind, so that more electricity can be produced, the assets’ lifetime increases and maintenance costs are reduced. (Ørsted, 2021).

The digital focus resource is valuable and rare, however, the competition can catch up over time, thus, this resource has to be continuously innovated so that it can represent a source of sustained competitive advantage in the long-term.

5.3.1.4 Human Resources

As of 2020, Ørsted employees almost 6500 people across the different locations, namely Denmark, the UK, the US, Malaysia, Poland, Germany, and Taiwan (Ørsted A/S, 2021). The firm is particularly focused on employer branding, talent acquisition, inclusion and diversity.

Ørsted employs people from different nationalities and with different perspectives. In fact,

Page 79 of 107 the firm believes that it is possible to deliver on their mission – to have a world that runs entirely on green energy – only if their workers provide diverse ideas that come from all around the globe. (Ørsted, 2021). In 2020, the turnover rate, calculated as the number of full-time employees that left the company relative to the average number of full-time employees, was 8 percent. Moreover, the firm runs every year a comprehensive employee satisfaction survey, and in the past five years Ørsted scored 80 percent. (Ørsted A/S, 2021).

Ørsted’s skilled workforce, characterized by a low turnover, certainly represent a valuable and rare resource, however, skilled workforce and talents are always in high demand, thus, human resources represent for Ørsted a temporary competitive advantage.

5.3.1.5 Capital Structure and Financial Resources

Ørsted represents a holding company, with all its business activities operated through its subsidiaries. The financing is concentrated at the parent level, to secure their liability profile avoiding subordination issues. The firm finances its long-term assets though cash flows from its operations and debt issuance with various securities, such as the Euro bonds. (Ørsted, n.d.). Another significant way in which the firm finances its investments is though the farm-down model. The latter consists in the firm funding half of a project on their own in the balance sheet, and the rest of the funding through project financing, based on the projected cash flows from that project. Thorough the farm-down model, the Danish, Dutch, and Canadian pension funds, among others, became important investors for the company. As Martin Neubert, the CCO of Ørsted says, most of their projects in Europe would have not been possible without this method. (Tryggestad, 2020). Lastly, an important part of their financial strategy is represented by the divestments of their previous operations. In August

Page 80 of 107 2020, the firm finalized the divestment of their residential customer, city light and Danish power distribution businesses. This transaction resulted in a loss of DKK 10 billion. Another important divestment was, in August 2020, the LNG business, which resulted in a cash outflow of DKK 1.5 billion. The remaining of their activities in the oil and gas business was sold in 2020, thus, Ørsted decided to discontinue their reporting regarding this business line.

(Ørsted, 2021).

From 2019 to 2020 the firm’s net profit raised from DKK 925 billion to 2174 billion, resulting in an increase of more than DKK 1.2 billion. The ROCE for 2019 and 2020 is at 10 percent.

(Ørsted, 2021). Due to the regulated prices of their product, the firm has a high degree of revenue certainty, and it expects the ROCE to continue being approximately 10 percent until 2025. (Ørsted, 2021). As it can be seen in Figure 16, Ørsted’s total assets have been steadily increasing since 2016, reaching USD 32000 million in 2020 (Jaganmohan, 2021):

Figure 16: Orsted's total assets from financial year 2011 to 2020 (Jaganmohan, 2021)

Page 81 of 107 Ørsted capital structure is a valuable and rare resource, as it allowed the firm to successfully fund their project and increase their financial performance and it does not face a fierce competition. The capital structure, paired with the financial resources, represent a resource of sustained competitive advantage, as it is not possible to imitate, and the firm is well organized to capture its value.

5.3.1.6 Continuous Innovation Approach

Innovation is part of Ørsted’s DNA, as they continuously challenge the status quo, which enables a continuous transformation. For example, in the Dutch offshore wind farms Borssele 1 & 2, Ørsted utilized 66 kV array cables, while the 33 kV array cables were previously the established norm. Ørsted’s next step is to deploy 132 kV array cables, which will be part of the next generation of wind turbines rated at minimum 15 MW. Apart from technical innovations, Ørsted is also committed to pushing the boundaries of the green transition in the global energy system. For example, the Danish government affirmed its will to develop an offshore wind hub in Bornholm, which can connect Denmark, Germany, Sweden and Poland and Ørsted is engaging with all the stakeholders to ensure a successful implementation of this project, and ultimately upscale the enormous potential of wind power.

(Ørsted, 2021).

Ørsted’s continuous innovation approach is certainly a valuable resource, however, nowadays several firms adopt this approach. Thus, Ørsted’s continuous innovation approach results in a competitive parity.

Page 82 of 107 5.3.1.7 The Triple Bottom Line

The triple bottom line is the concept based on which a firm measures its social and environmental commitment, on top of the financial performance. (Miller, 2020). Ørsted annually present financial, sustainability and ESG performance reports that are relevant for its shareholders, the debt investors, and anyone that wishes to look at them, as they are made publicly available (Ørsted, 2021). In the annual reports it is possible to find the financial and sustainability performances, while the ESG performance reports comprises a thorough overview of Ørsted’s ESG indicators (Ørsted, 2021).

The successful incorporation of the triple bottom line into Ørsted’s business model is a valuable, rare and difficult to imitate resource. Moreover, the firm is fully equipped to capture the full value, as they are profitable, and at the same time their business is beneficial for the environment and the wider society in which they operate. Thus, the triple bottom line is a source of sustained competitive advantage.