Is Your Head Still In The Sand? Big-Bang Disruption In The Electric Industry

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Solar+Battery+Transmission=Disruption HorizontalFinancial firms, news firms, industry CEOs, real world experience, even bloggers have identified the coming sea-change to the electric industry. A new paper from Harvard says disruption now happens at warp speed. Why aren’t you doing something about it?

Very recently, many financial and news firms have written about the coming electric industry disruption that will be caused by onsite solar, including Deutsche BankUBSMacquarie Group, and Reuters.

We have real world experience of disruption from onsite solar in GermanyAustralia, and Hawaii.

Leaders of two large electric conglomerates (David Crane, NRG and Jim Rogers, Duke Energy) have publicly talked about the coming disruption to the industry, although they seem unable to get their company’s cultures on board.

I have previously written about corporate responses to disruption, referencing a Harvard Business Review article about newspapers and asking how much their dilemma sounded like what was going on with electric utilities and other electric industry participants (Clay Christensen, newspapers and the cliff of despair).

I have also written about the coming disruptive effect of onsite solar on the electric industry paradigm and on distribution utilities, and about what they need to do.

Now we have a new paper by Larry Downes and Paul F. Nunes in the March 2013 Harvard Business Review. After many years of analysis and study, they think the pace of disruption has changed and that the old playbook for incumbents will no longer work.

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By now any well-read executive knows the basic playbook for saving a business from disruptive innovation. Nearly two decades of management research, beginning with Joseph L. Bower and Clayton M. Christensen’s 1995 HBR article, “Disruptive Technologies: Catching the Wave,” have taught businesses to be on the lookout for upstarts that offer cheap substitutes to their products, capture new, low-end customers, and then gradually move upmarket to pick off higher-end customers, too. When these disrupters appear, we’ve learned, it’s time to act quickly—either acquiring them or incubating a competing business that embraces their new technology.

But the strategic model of disruptive innovation we’ve all become comfortable with has a blind spot. It assumes that disrupters start with a lower-priced, inferior alternative that chips away at the least profitable segments, giving an incumbent business time to start a skunkworks and develop its own next-generation products.

The disruption here hasn’t come from competitors in the same industry or even from companies with a remotely similar business model. Nor did the new technology enter at the bottom of a mature market and then follow a carefully planned march through larger customer segments. Users made the switch in a matter of weeks. And it wasn’t just the least profitable or “underserved” customers who were lured away. Consumers in every segment defected simultaneously—and in droves.

That kind of innovation changes the rules. We’re accustomed to seeing mature products wiped out by new technologies and to ever-shorter product life cycles. But now entire product lines—whole markets—are being created or destroyed overnight. Disrupters can come out of nowhere and instantly be everywhere. Once launched, such disruption is hard to fight.

They call this Big Bang Disruption, and I highly recommend reading the whole article (link below). However, there are a couple of excerpts that seem particularly relevant to today’s electric utility industry.

You think rooftop solar and onsite battery storage is too expensive and will not catch on?

Consider such captivating but ultimately unsuccessful launches as Magnavox Odyssey (home gaming), Apple’s Newton (tablet computing), Napster (digital music), Betamax (home video recording), and the first-generation electric cars. When declining technology costs finally make the right solution feasible, the appetite of consumers has been thoroughly whetted. It’s then too late for incumbents to jump in. Waiting for the market to take off and hoping to be a fast follower is now a recipe for irrelevance.

Seemingly random experiments and crash-and-burn flops may actually be your best warning of an urgent need for a change in strategy, or “strategic pivot.” It’s like a battlefield, where near misses signal not that your enemies are confused or incapable of hitting you but that they are zeroing in on your position—walking their fire onto the target, shell by shell—before unloading a full barrage on your exact location.

You think that if solar and onsite storage becomes effective, you will be able to “manage it” or get in on the business?

Or consider electronic book readers. When Amazon introduced the Kindle, in 2007, the company had learned from a decade of doomed efforts by players such as Sony and SoftBook. The first-generation Kindle finally provided the storage, battery life, and display technology that consumers needed. Just as important, Amazon offered a dedicated wireless network that seamlessly checked books in and out of a virtual personal library.

Amazon’s real innovation was waiting just until the right combination of technologies was ready for mainstream use and then leveraging its powerful brand and customer network to launch Kindle with easy access to a huge catalog of books on day one. Since 2007, e-books have risen from trivial sales to account for nearly 20% of all book revenue. Along the way, they have thoroughly scrambled every link in the publishing supply chain.

Their general recommendation to you:

Slow the disruptive innovation long enough to better it. The best survival strategy may simply be to ensure that disrupters can’t make money from their inventions until you’re ready to acquire them or you can win with a product of your own. You can’t stop a big-bang disruption once its unconstrained growth has taken off, but you can make it harder for its developers to cash in. Many big-bang disrupters build market share and network effects by offering their early products free. You can delay their profitability by lowering prices, locking in customers with long-term contracts, or forming strategic alliances with advertisers and other companies critical to your rivals’ plans.

If you are in the electric industry, read this article (Big-Bang Disruption – Harvard Business Review), think, bring in people to help you think, gather your courage, and act decisively and quickly.

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