Wednesday, April 18, 2012

thoughts published: Green Innovations - The European Financial Review

Green Innovations – Green technologies must follow established rules of innovation and commercialization to succeed

Green Innovations – Green technologies must follow established rules of innovation and commercialization to succeed

By admin • Apr 18th, 2012 • Category: Economics & PoliticsInnovationManagementNewSustainability
Green technologies can be an engine of economic growth that leverages the investment dollars pouring into them. But to do so, these technologies must heed the same rules of innovation that drive all technologies, such as the ones behind the rise of personal computers, mobile phones, and software.
Four months after he took office, President Barack Obama proclaimed that green technologies would be the lynchpin of economic advancement. “We can hand over the jobs of the 21st century to our competitors,” he said to workers at a wind energy manufacturing plant in Newton, Iowa, “or we can confront what countries in Europe and Asia have already recognized as both a challenge and an opportunity: The nation that leads the world in creating new energy sources will be the nation that leads the 21st-century global economy.” Private sector investors in the United States have been similarly enthusiastic, as they invested a total of $8.9 billion in clean energy companies in 2009.1
We, too, believe that green technologies can be an engine of economic growth that leverages the investment dollars pouring into them. But to do so, these technologies must heed the same rules of innovation that drive all technologies, such as the ones behind the rise of personal computers, mobile phones, and software.
“Green energy technologies can succeed provided that they avoid the four traps that trip up promising technologies: Technological Intractability, Systemic Complexity, Head-on Competition, and Customers Don’t Want It.”
Why Advanced Technologies Often Fail
There are generally four reasons advanced technologies fail to achieve commercial success.
Technological Intractability: The first reason is obvious: the technological approach itself proves to be intractable or unscalable. Most green energy technologies face some kind of significant technological hurdle. For example, the potential for generating energy from controlled nuclear fusion seems as far away as ever because fundamental technological problems repeatedly defy techniques to initiate and control this reaction. Most green energy technologies face some kind of significant technological hurdle. Solar cell technology has advanced, but it, too, still faces technological hurdles to improving efficiency.
Systemic Complexity: A second reason promising technologies fail is that they are rarely “plug-compatible” with existing value chains. For example, hydrogen-powered fuel cells promise a means of powering vehicles with no emissions except a trickle of water out the tail pipe. But fuel cells face an extremely long and challenging road to commercial acceptance, as they suffer from extraordinary systemic complexity. The ubiquity of the gasoline filling station is one reason that fuel cells will have a difficult time achieving widespread adoption. The infrastructure required to refuel a hydrogen-powered car does not exist and would require the coordinated investment of billions of dollars. Existing gasoline station equipment cannot be adapted to store and dispense hydrogen. This entire stock of equipment would need to be replaced. It is impossible to use an incremental approach in this situation. Hydrogen-powered cars can catch on only if hydrogen filling stations are liberally sprinkled across our roadways. Unfortunately, such stations will not exist unless there are a lot of hydrogen-powered cars as well.  It is a classic technological chicken and egg problem that can be overcome only through expensive government mandates and subsidies that would alter the fuel distribution infrastructure in a coordinated way. With such a large and thriving gasoline ecosystem in place, we are more likely to see adoption in technologies that either work with the existing system or bypass it entirely. Gas-electric and plug-in hybrid vehicles are examples of technologies that improve fuel efficiency while working within the constraints of the existing infrastructure.
“Whenever new technologies compete head-on with established systems, challenges loom because of the cost and performance gaps between the new technology and the old.”
Head-on Competition: The third cause of the commercial failure of advanced technologies is head-on competition with established technologies. When a technology is forced into direct competition against an established foe, it will be adopted only if it is more cost-effective and performance-effective than the established technology in the markets where it is being used. This creates enormous barriers against commercial success. New technologies have much better success rates when they are aimed initially at nonconsumers—those who are not consuming the existing products or services because of lack of wealth, expertise, or access.  These non-consumers often embrace products with limited functionality or quality because they are superior to the alternative of no product at all.
Consider the path that the transistor took in overthrowing the vacuum tube. Throughout the early 1950s, most electronics products were made with vacuum tubes—devices the size of a child’s fist that consumed a lot of power. The mass of these devices meant that the televisions and radios from which they were built had to be large. Radios were placed on tabletops and televisions stood on the floor. All of the vacuum tube companies—the giants of consumer electronics, such as RCA, Zenith, General Electric, and Westinghouse—saw the potential of the transistor and spent hundreds of millions (in today’s dollars) trying to make the transistors good enough for the markets where vacuum tubes were used.
Meanwhile, some inventors saw the potential for transistors to create new markets altogether. The first commercial application for transistors was the germanium transistor hearing aid in 1951—an application where vacuum tubes simply weren’t feasible. Then in 1955 Sony introduced its first pocket radio, a simple, inexpensive, low-performance product. But Sony marketed its radio to teenagers, customers who were delighted to have a limited product because it was infinitely better than the alternative: no radio at all. While the vacuum tube companies continued to work on the technology, Sony introduced the world’s first portable transistor television in 1959. Again, it was a limited product. But by making a television so much more simple and affordable, an entirely new population of customers whose apartments or wallets were not big enough to afford an RCA TV now could have a television. Again, because the simple Sony product was infinitely better than nothing, these customers were delighted. New markets emerged as Sony wielded simplicity and affordability to compete against non-consumption. By the late 1960s, solid-state technology had become good enough that Sony and Panasonic could begin building large televisions and radios. Within about five years, customers had switched over to solid-state electronics, and every one of the vacuum tube companies vaporized.
Solar and wind power generation are green technologies that, at least in the developed world—in Europe and the United States, for example—are being deployed in competition with the existing electrical grid. As noted, whenever new technologies compete head-on with established systems, challenges loom because of the cost and performance gaps between the new technology and the old. Had no one come along to implement the transistor to compete against nonconsumption, who knows what the world would look like, as even today vacuum tubes are able to handle more raw power than are transistors.
Customers Don’t Want It: The fourth reason promising technologies fail commercially is that, although they provide technically sophisticated functionality, they do not help customers do a job they need to have done. By job, we mean a fundamental problem a customer needs to solve, including a specific result or outcome. If a technology helps users accomplish a job they are already trying to do in a superior way, it is far more likely to succeed. If a technology tries to solve a job with which a customer isn’t terribly concerned, it is likely to face headwinds.
“If a technology tries to solve a job with which a customer isn’t terribly concerned, it is likely to face headwinds.”
As a practical example, although we believe that the smart grid as a whole will be an important incremental innovation, certain aspects of it run afoul of the jobs-to-be-done concept. The term “smart grid” encompasses a set of technologies that allow both electricity producers and consumers to make better decisions about power use through real-time data. Portions of the smart grid system are important, evolutionary improvements to the existing power grid. Advanced smart meters benefit power companies by eliminating the need for manual meter reading, automating the billing process, and providing real-time detections of outages.2 In general, the power grid is comprised of aging infrastructure that is in need of a major facelift. We believe that power companies will readily adopt smart grid technologies that effectively lower cost or improve performance.
Smart grid enthusiasts may be disappointed, however, as they find that the behavioral change from consumers is not as strong as they had anticipated. Although smart grid technology makes it possible for consumers to achieve savings, it does not ensure consumers will change their behavior. Consumers will change their behavior only if the technology helps them accomplish a job they were already trying to do. For frugal consumers who already monitor their power consumption to reduce their power bills, real-time price signals will be welcomed as a way to more efficiently manage their power bill. Unfortunately, not all consumers fall into this category. Those who are not looking for a system to help manage electricity usage will probably have little interest in smart grid technologies. They will not change their behavior because the technology does not help them do a job they already were trying to do.
Are green energy technologies doomed to failure for the reasons we’ve outlined? We don’t think so. What follows are some recommendations on how to develop and deploy green energy technology to maximize its chances for success both in the developing and the developed world.
Green Energy in the Developing World 
Solar energy is both less reliable and more expensive than traditional power generation, despite its desirable environmental impact. Given its limitations, would-be commercializers of solar energy should ask themselves: Where are there customers who would value a technology that generates unreliable electricity? The answer: the rural villages of India, Mongolia, Indonesia, Tanzania, and other developing nations. These are the locations where solar energy can be successfully commercialized because solar will be competing against nonconsumption of energy rather than a reliable, inexpensive power grid.
In contrast to wealthy nations where consumption of electricity and gasoline is ubiquitous, developing nations are an ideal place to commercialize green energy technologies. In these countries, there is so much nonconsumption that green technologies need only be better than the alternative: nothing. Just as Sony’s transistor radio gained acceptance among nonconsumers, green technologies will find enthusiastic receptions in the unconnected villages of the developing world.
Commercializing green technology in the developing world has the added benefit of contributing to the fight against carbon emissions. Currently, nearly half of carbon-dioxide emissions are from developing nations. And according to the U.S. Department of Energy, by 2030 developing nations will produce nearly double the carbon dioxide emissions of developed countries if their energy sources develop along the same lines. Green technology can enable both greater energy consumption and a cleaner path to economic development.
Although competition with nonconsumption will greatly aid its commercial success, green technology faces unique challenges in the developing world. First, technologies succeed best when the business unit responsible for developing and deploying the technology is also located where its targeted customers are. That way, the business unit will have the cost structure and managerial incentives that make pursuing “good enough” products at lower price points an attractive proposition. This is the classic path of disruptive innovation in which a new technology initially gains share at the low end of a market and eventually finds applications in increasingly larger and more attractive markets.
The second requirement for success in the developing world is to sell a product that provides a full solution for a customer need. In the developing world, it may not be enough to sell solar panels. Such a product may be of little use to a village with no electrical infrastructure or appliances. Rather, it is important for companies to deploy a technology that is tied to an application. d.light Design, which is based in India but was founded in Silicon Valley, illustrates the importance of understanding customers’ circumstances. Rather than just offer a lamp in a place with unreliable energy or offer a raw solar cell, d.light bundles its lamps with solar panels fit for consumers’ energy requirements, which are small—often around 0.5 watts. d.light Design has been successful to this point, as it has distributed 1.7 million lamps to rural Africa and India and raised venture capital financing to continue developing its business.
The third requirement for the developing world is that companies may need to integrate their activities across a wider spectrum of the value chain. In many bottom of the pyramid (BOP) countries, a well functioning sales and distribution infrastructure with wholesalers and retailers does not exist. As a result, companies that usually rely on channel partners to go to market, may find a similar strategy will get them nowhere in the developing world. In these regions, companies may need to take on sales and after-market servicing to develop their markets.
Green Energy in the Developed World 
Green energy adoption faces more daunting challenges in the developed world. With a convenient, low cost, and pervasive energy infrastructure in place, green technologies must prove themselves more affordable or better performing to displace their competitors. We believe that there are some spaces in which green energy technologies can succeed and thrive in the developed world, but they must comply with the rules of innovation. As a case study, let’s look at the Electric Vehicle.
We believe electric vehicle manufacturers should ask themselves a question similar to the one we posed to solar energy advocates: Where are there customers who would actually value a car that won’t cruise very far or go very fast? The electric vehicle (EV) contains certain limitations that will prevent it from winning in head-on competition with traditional vehicles. Remember, to win in head-on competition, a technology must be either less expensive or better performing, and the electric vehicle is neither. Despite undeniable progress, no manufacturer has succeeded in bringing the cost of EVs below that of traditional sedans. And even if EVs reach cost parity with gas vehicles, their performance limitations remain. Battery technology caps an EV’s range at 100 miles between recharges. Because a full recharge takes 8 to 12 hours, EVs cannot be used for long trips, which make up an important part of the job-to-be-done for which consumers hire a car.3 Furthermore, most EVs accelerate slowly and have maximum speeds well below the 80 mph that consumers typically demand. These limitations have held back the commercial success of pure-play EVs despite the existence of government subsidies and other such policies designed to make these vehicles more attractive to consumers.
We believe there is set of customers who would actively seek out a car with both limited range and acceleration. The parents of American teenagers have precisely the job to be done for which an electric vehicle would be a perfect match. These parents want to allow their teenagers to transport themselves to and from school, work, and friends’ homes, but nowhere else. They would actuallyprefer a car that does not accelerate quickly or drive on freeways. To complete their appeal to this market segment, however, EVs need to be priced cheaply so that affluent families could plunk down cash to buy it, just as they pay cash for the used Honda Civic they now buy for their teenagers. Again, this is good news for EV manufacturers, as they can offer a bare bones version of their vehicles and not worry about their performance relative to standard sedans. Compounding the good news for manufacturers is the fact that by getting a product in the market, they will incrementally improve their EVs and slowly close the performance gap with gas-powered vehicles. In this way, a low-priced EV could disrupt the predominance of the gas-powered vehicle, just as Sony’s transistor radios disrupted vacuum tube radios.
“With a convenient, low cost, and pervasive energy infrastructure in place, green technologies must prove themselves more affordable or better performing to succeed in the developed world.”
Although a real market for low-cost electric vehicles exists, it is unlikely that EVs will achieve substantial market share for some time. Disruption often unfolds at a glacial pace, especially in an industry like autos with high capital costs and long design-to-production cycles. For that reason, the primary mode of competition in the auto industry will continue to be a sustaining one. By sustaining competition, we mean that competitors will continue to try to best each other within the framework of well-established technologies by incrementally improving performance or reducing costs. Hybrid technologies will likely be a critical part of this.

Conservation in the Developed World

As long as green technologies follow the rules of successful innovation, they will be adopted readily in the developed world. The problem is that the developed world’s existing energy infrastructure is so cheap and so convenient that it creates large barriers to adopting new energy technologies. And with few nonconsumers of energy, there is hardly any space in which green technologies can take hold organically. To the extent government-mandated conservation efforts play a role, they will succeed best where they align with the interests of entrenched stakeholders.
The world is clamoring for cleaner and more sustainable sources of energy. Green-energy technologies can contribute to that effort. Yet our research into innovation and technology commercialization cautions us that the development and success of these technologies must conform to well-established rules. Developing and deploying green-energy technologies in the places where they can succeed commercially from the outset is critical.

About the author

Suman Talukdar is an experienced global business development executive for Silicon Valley technology companies and a graduate of Harvard Business School.
Michael B. Horn is the co-founder and executive director of education of Innosight Institute, as well as the coauthor with Harvard Business School Professor Clayton Christensen of Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns.

1.Venture Capital 2009 Investments in Cleantech Fall 50% to $2.6B as Investors Shift Focus to Energy Efficiency,” Ernst & Young press release, Feb. 8, 2010.
2.Michael McNamara, et. al, “Clean Technology Primer,” Jeffries & Company Research, Sept. 2009.
3.Shai Agassi’s EV service provider company, Better Place, attempts to solve this problem through its network of battery switching stations, but this effort suffers from significant upfront capital costs.

No comments:

Post a Comment