Are electric utilities on the cusp of being made redundant?

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Electricity utilities may be on the road to irrelevance, and there may be nothing they can do to stop it.

There was a blog post recently describing the threat posed by new energy technologies to electricity utilities in Australia (see here).  The article describes how these utilities have realised that solar combined with the emergence of energy storage technologies poses a threat to their business models.  The problem that this creates is that it allows more and more consumers to either generate their own power, or  go off the grid altogether, leaving fewer and fewer people paying for the maintenance of expensive fixed electrical infrastructure.  This problem is often referred to as the ‘energy market death spiral’ (for a detailed description of the issue, see here for a paper by AGL’s Paul Simshauser).

The emergence of solar and energy storage technologies certainly present a problem for regulated electricity utilities, but the issue is far more of a threat than is commonly believed.   This is because these technologies display classic features of disruptive technologies and the environment in which they exist is fertile ground for the type of industry change that these innovations create. 

In terms of the technology, solar is quickly approaching the point where it can generate power at a similar cost to centralised coal fired generation in certain circumstances.  However, for a long time solar has been relatively expensive.  As a result it has been used in niche applications, where its scalability, environmental benefit or ability to supply power to remote sites was valued over the cost of generation.  More recently however, these niches have been used as footholds to improve performance to the point where solar is ‘good enough’ for a wider range of applications.  This process of starting out with poor performance, followed by rapid improvement in niche markets to a ‘good enough’ performance level is a hallmark of disruptive innovation.

The second issue here is how the incumbent market behaves in response to the rise of a potentially disruptive technology.  While incumbent utilities have responded to wind by being large buyers of the technology, solar and energy storage present a different challenge altogether.  The evolution of the electricity grid has been partly built on the need to provide reliable, high quality electricity to the end user – issues such as availability, power quality and network stability are at the heart of network design and the associated maintenance strategies.  The problem this creates is that technologies like solar (and not so long ago, wind) are perceived as being ‘mickey mouse’ in nature because of the quality of both the product and the power they produce.  In true disruptive fashion, this means that utilities continue to think the way they always have – that is, how do they maintain quality of supply when their  revenue base is being eroded by solar (and soon, by energy storage as well).  Instead of focussing on how they can ‘eat their own lunch’ by getting into the solar/energy storage game, they will continue to defend their traditional business models, looking for changes to network tariff structures and cost reduction to avoid the erosion of their income streams.

This is classic disruption.  When an incumbent continues to apply existing management thinking to serve their existing customers better, then disruptive innovations can sneak up on them and change the rules of the game completely.  These businesses will remain well run, with competent decisions being made by skilled managers, but they will be the wrong decisions.  This attitude can be seen in a figure published by the Australian Energy Market Operator and reproduced by Renew Economy (below).  In this figure, new technologies are shown as having decreasing ‘industry value’.  If you were to change the right hand axis to ‘customer value’, the curve would increase from left to right, not the other way around.  This style of thinking is real problem faced by utilities, not the loss of customers and their associated revenue base.

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As a result, the future of electricity supply may not have ‘networks’ involved in it at all, and it is this future that utilities should put their minds to.  Because solar, wind, energy storage and other technologies yet to be on their radar could change the game completely.  So while utilities might be the best player on the network field, the reality is that the game might be played on another field altogether.  And they will be left wondering what happened, long after their expensive, well maintained networks have ceased to be relevant to the rest of us.

Well, That About Wraps it up for Clayton Christensen

There’s been a lot of static around the concept of disruptive innovation this week, based on a well written critique of Clayton Christensen’s original work by Jill Lepore at the New Yorker. David Smith discusses the issue in his most recent blog and I think one of the key ideas he presents here is that the concept is useful as an instructional tool. I agree with Jill Lepore that Christensen’s work is weak as a theory, but that doesn’t mean that it’s not useful as a framework for examining competition in an environment of increased and accelerating innovation. David’s point about the value of narratives is spot on in this respect and is worth remembering if you are reading the debate on the validity of Christensen’s work this week.

The Sailing ship Effect – a counter to Disruptive Innovation?

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Disruptive technologies displace incumbent technologies over time – that’s the basis of the theory of disruptive innovation.  But incumbent technologies don’t just sit idly by while they are replaced by the new.  Instead, bright minds continue to innovate old technologies, improving them in the face of increasing competition.  This idea is captured in the concept of the sailing ship effect, and it offers an insight into how established technologies can respond to the challenges of disruptive innovation.

The sailing ship effect is a concept that describes how the introduction of a new technology to a market accelerates the innovation of an incumbent technology. The idea was coined in the 1960s to describe how the introduction of steamships in the 1840s triggered an acceleration in sailing ship innovation.  The incorporation of steel into sailing ship manufacturing (hulls, masts) and auxiliary engines for example, extended the life of sailing ships well past the period when steam ships were expected to consign them to the technological scrap heap of history.

While the basis of the original idea has been contested (and what idea isn’t?) more recent research has confirmed the phenomena.  For example, studies of electric cars suggests that innovations in that space has forced accelerated innovation in internal combustion engine (ICE) technology.  In addition to driving the development and adoption of diesel engines, innovations in the electric car space have also spilled over into traditional vehicle design.  A prime example of this is the development of hybrid cars over pure electric ones by incumbent motor firms.  This type of innovation can be described as a ‘hybridisation’ rather than direct competition, with the disruptive technology living side by side with the incumbent one. 

My own research into the spread of disruptive technologies within technological systems confirms this idea as well.  In many cases, well established technological systems constrain the diffusion of a potentially disruptive technology.  This is particularly the case where network effects are in play and the new innovation has to rely on parts of the system which are strongly adapted to incumbent technologies.  The result is the dynamic development of both technologies, without a clear-cut displacement of the old technology by the new.

There are several take outs from this.

Firstly, disruptive technologies are seldom so compelling that they can quickly or easily sweep the competition from the field.  Incumbent technologies are often owned by well-funded organisations who will use their not inconsiderable resources to innovate and defend their market position.  This is easily observed in the car and energy industries, where the established players are large investors in potentially disruptive technologies (for example, Toyota in electric vehicles or Siemens in renewables).  This can create problems for the disruptive innovator as it can extend the time it takes to obtain a commercial return, exacerbating the ‘funding valley of death’ problem that can beset new technologies.

Secondly, continued innovation can be a defence against disruptive innovations.  This underlines the ongoing importance of sustaining innovation as well as disruptive innovation, topics covered recently in several good articles (in particular, see here).  It may be that the disruptive innovation will win out in the end, and this is often the case.  However, continued innovation allows companies to extract maximum value from their stock of IP and product know-how while preparing for a transition to the next wave of technology.

So while sailing ships might seem a quaint example of the contest between disruptive innovation and old technologies, the idea is a useful one for firms facing the increasingly rapid evolution of technologies in the marketplace.  Of course, this requires deliberate planning and execution, but then again, this is one of the skills that makes an incumbent firm incumbent.

So… what changes faster, technology or people?

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So… what changes faster, technology or people?  And does it matter?

It’s a relatively well accepted truism these days that the pace of technological innovation is increasing.  Access to ever increasing levels of computing power, innovative and easy to use design tools, and techniques such as crowdsourcing means that ideas can be brought to market more quickly and easily than ever.  But does this mean that people – and society – are equipped to deal with these innovations?  And what if the innovations are disruptive in nature?

In general terms, technological innovation advances faster than the social fabric needed to support it.  Traditional innovation adoption models capture this in the idea of innovators and early adopters, who will take up a new technology well before the large majority of the population.  This process reflects the fact that technologies are both social and technical in nature.  This can be seen with more complex technologies, where there needs to be a certain level of knowledge relating to a technological innovation before it can be widely adopted.  More broadly, the social infrastructure needed to support an innovation can extend beyond knowledge to norms and values, or expectations about what technologies represent legitimate innovations within society. Innovators and early adopters tend to be socially aligned with newly introduced innovations, and are more likely to adopt them early in their lifecycle as a result.

A good example of this is Google Glass.  This innovation could transform the way that people relate to the word through the implementation of augmented reality in daily life.  But Google Glass is both embraced and rejected at the same time, as people who have norms and expectations consistent with the innovation adopt it, and those that don’t shy away.  Despite the obvious innovation involved with Google Glass, the social evolution required to ensure its widespread success is yet to be realised.

When the innovation is radical in nature (and arguably Google Glass is), then the timeframe from introduction to widespread adoption can be quite long.  When the innovation is disruptive in nature, then the problem can be multiplied as not only do people need to understand the technical aspects of the innovation, but they may need to significantly adapt their norms and expectations before adoption can proceed. This is because disruptive innovations tend to displace the prior technology as well as the social fabric that surrounded them, which is no mean feat.  And they may fail on one or both dimensions, becoming innovations that were ‘before their time’, consigned to the dustbin of innovation history.

The take away from this is that when considering the potential for an innovation, both the technical and the social impacts need to be considered.  Technical prowess – which is often the focus of the enthusiastic innovator – is only one driving force for the adoption of an innovation.  Social change can be a powerful ally or a powerful foe in the quest for innovation adoption.  A careful examination of the social as well as the technical can therefore go a long way to developing better strategies for the adoption of disruptive technological innovations.

Disruption Three Ways

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The concept of disruptive innovation has become a widely used term in business, to the point where it is both a cliché and a valuable tool for business planning and execution.  The elegant power of the original concept is part of the reason that the idea has gained so much traction, and why it is used so liberally to describe businesses from Apple to the newest digital start-up.  The value of a term however (and language more generally), is the creation of common understanding.  Given the broad range of phenomena it covers, is it really possible to put the disruptive innovation ‘genie back into the bottle’ to allow better conversations about what it is and what it means?

Instead, it’s likely that we will continue to hear disruption applied in a number of ways. My observations of discussions on disruptive innovation suggest that there is a spectrum of disruption containing at least three discernable points at the moment – disruption as a substitute term for competition, disruption to describe change created by the application of enabling digital technologies and disruption based on technological innovations themselves.

When disruption is used as a substitute word for competition it is usually used to describe the entry of a new competitor to a marketplace.  For example, at a basic (and trivial) level, opening a new coffee shop next to an established one is disruptive.  The owner of the existing shop has to change the way they do business, and it disrupts their market, their time and their customer base; sometimes to the extent that the original business fails.  So you could argue that disruption is a legitimate way to describe this situation, and it is often used in this way.

The next point in the spectrum relates to the use of digital technologies to create new business models which compete with established companies. In this respect, disruption is often driven by disaggregation of supply chains.  The myriad companies that leverage mobile app technologies to access niche, global markets are a good example of this.  Rather than creating radical business models, they are accessing fragmented, distributed market places through the use of digital technologies (like this blog…!).  Some will develop to the point where they disrupt established markets through the application of these enabling technologies.  However, they rely on other technologies to do so, rather than creating these disruptive innovations themselves.

At the other end of the spectrum is disruptive technological innovation.  This type of disruption is closer to the type from which Christensen drew his original insights.  In that case, companies were developing hard disc drives that served nascent sectors of the computer industry, but their innovations eventually displaced their incumbent rivals.  Business model innovations could also be placed in this category, particularly where they initially serve alternative markets before disrupting mainstream incumbents. This is probably the most difficult type of disruption to pull off, particularly if the innovation is capital intensive, or relies on established, complementary infrastructure to operate.

In the end however, disruption is about impact.  It doesn’t matter what the source of your competitive advantage is, whether it be location, a business model, an enabling technology or an original disruptive technology.  And like most spectrums, you could define a whole range of disruptive business activities, combining those described above or new ones altogether (for example, see here).

What do you think? Are there other categories of disruptive innovation out there that are worth adding to the spectrum of disruption?