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The Innovation Imperative

Adaptive companies stand the greatest chance for success.

Fortnightly Magazine - November 2008

alternatives. Indeed, doing so might become a survival skill.

Sometimes, as innovations mature into more common business practices and lead to new opportunities in other industries, broader changes occur in the structure of businesses and in society—at the local, national, and global levels. For existing industry participants, individually or in industry subgroups, failing to navigate these periods of adjustment can lead to corporate decline or even extinction. To see how powerful this cycle is over time, consider that fewer than one in six companies listed on the S&P 500 index five decades ago remains there today. Even companies whose demise at the time might have been unthinkable, such as Pan Am and Bethlehem Steel, have been innovated out of existence. 3

The transitions themselves require a strong focus on innovative business models. The current state of the industry can be described as “passive persistence,” in which traditional market structures dominate, and consumers either accept or prefer the traditional supplier-user relationship. 4 As customers demand more control over their energy choices, and technologies proliferate that allow them to seize that control, utilities likely will follow one of two paths to move to a future state where customers and providers interact over a two-way, information-rich participatory network.

In one path, if customers are slow to embrace more control, or if regulatory structures are not in place to give it to them, companies that deploy technology for performance and cost improvements will transition through innovations in enterprise models. The primary focus will be on leveraging assets, technologies, and core competencies of the company, often through collaboration or partnerships. Such alliances will be especially valuable where proof-of-concept or proof-of-benefit trials are needed.

Conversely, if customers demand control more quickly than technology can be deployed (or regulators permit), companies will require substantial innovation in how they earn revenues. The wide variety of new technologies ready for deployment—smart meters, home automation, self-generation and the like—lend themselves readily to new offering combinations, and the historically static tariff structure of the industry in many parts of the world leaves a door wide open to more effective pricing archetypes.

Utilities will need to analyze how they can best reconfigure offerings and introduce new pricing models to meet shifting demands from more broadly differentiated customer bases. Some recent trials have demonstrated positive results in this regard. For example, a smart-energy pricing pilot in Ontario last year showed decreases in energy consumption and costs for consumers in the trial, and shifted peak consumption noticeably. 5 But this type of benefit would not roll out in the same way in other geographies; different business models might lead to better results, depending on the desires of all stakeholders. A structured, fact-based evaluation of whether the utility is best served by changes in revenue models or enterprise models—or even in leading major innovation in or across the industry value chain—will determine how utilities and consumers can maximize and share in new benefits with the lowest risk and transitional pain of all of the potential options.

The industry’s evolution toward a participatory network will follow one of