Lodestar: Rising in Low Tides


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published January 21, 2004

It has often been said that rising tides lift all ships, but what happens when the tide is going out? Will all ships be lowered or can some ships continue to rise despite the receding tide?

For the past few years, it is no secret that most software companies solving customer management issues of utilities have been challenged by a market whose tide has recessed. Yet despite current uncertainties in electricity deregulation, financial challenges created in the utility industry by the Enron disaster, and general decline of corporate investment in information technology, some technology companies serving the utilities industry have been able to grow. Lodestar Corporation is one such company. This case study will examine three competitive factors that support Lodestar’s achievements in the current challenging market.

Competitive Factor 1: Supportive Industry Trends within Niche

At a high level, Lodestar’s target market may be described as the Customer Information System (CIS) market of the utilities industry. But defining Lodestar’s market as CIS industry alone is misleading. While most CIS vendors concentrate on creating solutions to manage the millions of residential and small commercial and industrial accounts, Lodestar instead focuses on delivering solutions to manage the handfuls of large commercial and industrial (C&I) accounts. In doing so, they serve a niche need within the larger CIS industry.

Three long-term global industry trends have driven market demand for solutions in managing large C&I customers. (1) Worldwide, competitive C&I market dynamics have preceded residential market deregulation, enabling power generation companies to contract with C&I loads anywhere within a transmission and distribution grid. (2) Costs of installing and operating distributed generation facilities have fallen, making the use of co-generation more common among C&I customers. (3) Demand-response programs have received global recognition as an efficient means of using market forces to manage asset infrastructure requirements of utilities.

The above long-term global industry trends within the utilities market have increased the demand for software solutions to enable utilities to compete for C&I customers within an open market. The factors that drive the trends have been largely unaffected by the uncertainty in legislation surrounding utility deregulation. Thus, while most CIS vendors face fluctuating trend challenges in selling multi-million dollar solutions for managing millions of low-value residential and small C&I customers, Lodestar has enjoyed market trends that drive demand globally for their multi-hundred-thousand dollar solution for managing the handful of highly valuable and highly competitive large C&I customers. In other words, Lodestar serves a growing niche within a challenged larger market.

Lodestar serves a growing niche within a challenged larger market.

Competitive Factor 2: Differentiated Competitive Frontier

Large C&I utility customers are valuable to acquire yet complex to manage. According to the 1997 US Economic Census published by the US Department of Commerce, 46% of the revenue base for electric power generators and transmission grid operators is derived from commercial and industrial customers. This factor makes C&I customers a valuable source of revenue for utility companies. The complexity of managing large C&I utility begins with the challenge of capturing data from many plant locations and billing according to specific contracted rates and expands to implementing demand-response programs, accounting for distributed generation facilities, and executing open-market electricity trading requirements, to name a few.

Lodestar, unlike other CIS vendors, has concentrated their product evolution path on managing the complexity associated with these few but highly valuable customers rather than on managing the bulk associated with the larger residential customer and small business base. The difference in strategy can be easily understood by considering a competitive map and the product improvement frontier. As seen in Exhibit 1, most CIS products are valued according to their ability to manage millions of customers and their product improvement path primarily applies pressure to expand the number of customer’s managed within a single system. But Lodestar’s products are instead valued according to their ability to manage the high complexity of a handful of accounts, and their product improvement path focuses primarily on expanding the ability to manage complexity in creating, fulfilling, and billing customer demand.

By pursuing a different product development path than other vendors, Lodestar has been able to create a highly differentiated product suite that meets the demands of niche business function within power suppliers across the globe.

Lodestar differentiated their product suite to fulfill a specialized and complex niche challenge that few competitors understood.

Competitive Factor 3: Unique Legacy Investments

The historic corporate development path can play a large role in attaining assets and strengths to enable current strategic execution. That said, Lodestar’s 25 year heritage serves them well.

Beginning in 1978, Lodestar concentrated on electricity load research and analysis as a part of TASC. This origin enabled Lodestar to understand utility requirements in managing complex load data. Mr. Creegan, Sr. VP of Global Sales at Lodestar, went so far as to claim that Lodestar “understand[s] complex energy data better than everyone else.” This unique legacy creates a barrier against imitation by competitors. For a competitor to dislodge Lodestar from this position would require a significant investment with uncertain success. Few companies are able and willing to attack their defensible position.

According to Mr. Creegan, other factors of strength for Lodestar are that their product is truly componentized, they have long experience with the partnership model, they possess a referencable client base, their team is able to respond quickly to market requirements, and that they have built a decent brand. Thus, Lodestar can use their deep understanding of complex utility data to create customer value while using their brand, client base, and partnerships to support the delivery of that value to customers.

Lodestar’s long term investment in managing complexity created a defensible competitive position.

Strategic Positioning for Performing in all Cycles

Indeed, some ships can rise in falling tides. For Lodestar, supportive niche industry trends, differentiated product, and legacy investments in understanding complex customer challenges enable them to perform in most all business cycles. While most technology entrepreneurs pursue hot-idea driven business plans, it is worth noting the lasting achievements of Lodestar created by pursuing solutions of obscure, complex, and challenging business processes

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.