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Future Imperfect: Managing Strategic Risk In an Age of Uncertainty

Part 1 of a 2-part article explores new technologies most likely to influence competitive success.

Fortnightly Magazine - January 2007

telecoms, heirs to the Bell legacy, find their market attacked by technologies that send voice signals over an Internet connection (termed voice-over-Internet-protocol, or VOIP). Do similar strategic surprises stalk the electric utility business today?

The Technology Dimension of Strategic Surprise

A qualitative assessment of emerging technologies can help identify those that might prove decisive in some future competitive environment. Consider the framework for analysis in Figure 2, a matrix that relates the growth potential of a technology to its effect on the business model of a regulated electric utility company. This framework provides the strategic leadership of a company with a systematic way to debate and understand the inherent capabilities of the new technologies most likely to influence competitive success.

The horizontal azis divides the universe of relevant technologies into those that reinforce the prevailing business model and those that could overthrow it. The vertical axis divides the relevant technologies into those with high potential for performance growth and those with limited growth potential. Into each quadrant, I have sorted examples of technologies to illustrate how this framework can raise important strategic questions. The sorting process requires many judgments, and reasonable persons might well disagree with the assessments in Figure 2. But the value of this (or any similar framework) resides less in the precision with which technologies can be sorted and more in the quality of strategy debate that attends the sorting. Below, let’s consider the implications of each of the four quadrants.

The Quiet Life. Technologies judged to fall within the southwest quadrant of Figure 2 generally sustain the current market relationships and hence the business model of the regulated electric utility. Consider, for example, a modern, state-of-the-art power plant fueled by pulverized coal. Though such power plants are technologically sophisticated, the potential for efficiency improvement is bounded by the ability of materials to withstand high temperatures and pressures and by the Second Law of Thermodynamics. Further, the recent experience with independently produced power suggests that the business risk attending such plants will be lower when owned and operated by an incumbent electric utility—hence the reinforcing nature of the technology. Nuclear power plants (but only the light-water reactors) have similar characteristics.

Paradise Lost. Diagonally across the matrix, a set of technology possibilities currently dwell outside the scope of most utility industry experience—those with the potential for high-performance growth and that attack the dominant business model of the regulated electric utility. Consider the fuel cell as a source of distributed generating capacity. Large units in the 200-kW range have been on the market for many years, but at $4,500/kW, they cost too much for all but special applications. However, laboratories around the world are racing to improve the fuel cell in response to markets that promise extraordinary opportunities:

• Low-maintenance energy for remote sites;
• Very small-scale replacements for battery systems for mobile electronic equipment; and
• Vehicular power systems.

Entrepreneurs and innovators in fields far removed from the electric utilities will pursue both of these opportunities. In doing so, they will advance the basic technologies required for all fuel cells,