14. Innovation and Energy Business Models



the following content is provided under a Creative Commons license your support will help MIT OpenCourseWare continue to offer high quality educational resources for free to make a donation or view additional materials from hundreds of MIT courses visit MIT opencourseware at ocw.mit.edu okay we've been chatting up here taking up her valuable time we have the privilege today to have Thomas our professor Thomas are speaking done and I and professionally taught this course retreat just prior two years for the handset which is a small boy God perfect start okay I I wish I'd been with you all term but I'm glad I'm not I'm on sabbatical this year and I'm enjoying that so I'm probably a bit rusty in the classroom today but I hope hope we'll have a good time I'm gonna talk about innovation and energy business models so that's a big mouthful this we're trying to get a lot of things done in one session but it's where I really want to go is to make you you know comfortable with focus on these these are the big questions the first question always is what problem are we solving what's the value proposition what problem we're solving for whom how how will we monetize it how will we turn it into a business what's the best business model to do that second question and we're not going to answer all of that but I want to give you a little sense of which kinds of energy and innovations lend themselves to startups which kinds of energy and of innovations have to be undertaken by large incumbent firms which ones might be undertaken by new big pioneering firms which ones require consortium right so how big what kind of structure has to carry a particular type of innovation forward because energy is a very complicated space then this is something we will not completely deal with an accession ball start on and you've been talking about a lot already under what circumstances will the innovation you're focusing on be viable and who and what has to change for it to work is that's the primary question you've got a better light bulb who is going to have to change for it to work what are the various barriers to change going to be you looked at hexia and you look at the biofuels you've got questions within the firm you have questions with the customer you have questions within the industry you have questions with regulation you have questions with societal attitudes so which of those things have to change and that takes you back to the business model because the business model very often will be not only about producing the thing but also bringing about the change that's required so that the thing will be viable in the marketplace right so that that may really complicate the notion of a business model and you know finally the kind of the standards strategy questions what capabilities what do you have to be good at what scale what scope what various activities do you have to be involved in and where do you have to be and that's for another session later where do you have to be to make this work and of course the answer is it all depends I'd say it depends it depends on many things but I'm gonna focus on really the first two so and they're they're related they're slightly different concepts but they're related it depends upon the maturity of the technology and it depends upon whether the innovation is disruptive or not so we need to start doing some classification of the nature of the technology the nature of the innovation to understand what kind of business models might work okay so far and then I'm gonna talk a bit about innovation games which is a nice way to think about different types of innovation processes it's some new work being done by a friend of mine and then we'll end with some innovation business models okay so technology maturity you read read the paper here we have you know you can do this with a rising s-curve or you can do this with this falling curve in terms of rate of innovation but there's a sense that most technologies go through these three phases right there's a phase of a fluid phase what's the statement in Genesis without form and void so that form and void and there may be some sense of an unmet need and there are lots of different solutions being brought about nobody's quite sure how to do it their entrance from all kinds of places it's a zoo it's highly fluid there is no clear sense about which the best products or technologies or even what categories sometimes the products or services fit into so automobiles took off yet 2,000 autoboot manufacturers in the US by what 1933 you'd probably slim down to 16 now we're back to what eight may be but with three based in the US big consolidation over time fluid phase everybody's at it transitional phase you know it's it's starting to take shape and then the mature phase its consolidated and it's really blocking and tackling and tough competition on an operational basis and it's largely scale based it's Comcast right so you think about communications and Internet and all those things we've got some mature monopolists over here with regulatory capture and that that's more to her face but we've got some all kinds of new stuff going on in the same time and a number of transitional things going on at the same time and energy is particularly lively this way again from the paper fluid phase right a lot of a lot of uncertainty this is important a high rate of product innovation and high degree of process flexibility means people do things lots of different ways it's almost craft industry one company does it one way another company does it another way you really haven't scaled it you produce the product or service however you can demand is taking off but still it's low total volume this is important not always the case but but what does that tell you about who's buying the product in this face functionality is more important than brand names who's buying the product who would care more about functionality than brand name think about it in terms of computers or internet somebody who really knows the stuff right somebody who knows the functionality is a is a lead user it's really into what it does don't tell me who makes it tell me exactly what it does right so you get the techies of that particular product into it so the early emergence of an electrical car or the early emergence of some other new product may be much more about the intricacies of that particular product because you've got a set of people who are fascinated with the functionality right later it becomes is it accepted is it a brand name is it kind of standard so this is saying that the markets are different the nature of what's going on in the firm is as we go across but also the customer behavior is different and what are you trying to do you're trying to develop your technology and you're trying to hang on to it because you're inventing new ways to satisfy someone met need you're gonna try to cash in on that you know that there's going to be a shakeout you know there's gonna be a consolidation you're trying to hang on either to a market position or some IP or ideally both right now we get into transitional phase dominant design so think about bicycles in what 1880s and they had a big one big front wheel and it had a little small wheel and they had to equal wheels and some had chains and some didn't if you look in the old books all kinds of designs I don't know what year but probably mid-90s or maybe 2005 1905 or so the standard two wheel bicycle with a seat position the chain emerged as the dominant design of course there were other companies making other designs but most bicycle companies were focused on that what happens there's a much better understanding about what's what customers need much more process innovation so in my global strategy class one of my favorite cases to teach is Shimano we look at Shimano from 1921 through the present and Shimano starts off in a small village outside of Osaka it actually is the village where the samurai swords were made so it has it has experience with metalworking the bicycles not invented there it's invented in France mm bicycle shops spring up in a year everybody's making bicycles in their own shops but as the dominant design emerges and as you get two thousand bicycle shops Shimano figures out that there are economies of scale and making rear hubs and crank sets not in welding frames not in putting on handlebars not in making bicycle seats but in making hubs and crank sets and then they get really good at that they become codependent right they become a supplier of components to the whole industry you still have a couple thousand bicycle makers but you have one company that's making the high scale economy more high-technology product and they really start focusing on process innovation they find ways to make things cheaper with the same quality so they go from casting to drop forging a huge jump in quality so process technology starts becoming the differentiator because it allows me to develop deliver the same product right either at a lower cost or with greater functionality so back to the frontier you were talking about last last period and so the competition becomes much more about process and that's scale and experience and becoming good at things right and quantity quality and availability becomes the competition the technological capabilities of the firm are much less about development much more about manufacturability again we've got a large customer base we probably have a fairly strong brand mature phase right the product starts commoditizing there are more than enough manufacturers for it there's a more than enough capacity for it it's very hard to differentiate your product from someone else's more similarities than differences in final products convergence of project and process innovation really focused on cost control lean an efficient organization lean tight not waste to penny do everything right no just think about the company that is in the mature phase how ready it is now to engage in a new round of innovation it just squeezed all of that out right if it's a single product company it's in a phase of its life where it's really worried about efficiency and production process and it's pretty well forgotten it's forgotten about the innovation process the classic example was Volkswagen which was a single product company for many years and the bug became that the beetle became the dominant design and it was out there and it held up and it held up and it held up and they kept producing and producing and producing it staying in that market they forgot how to design a car they forgot how to bring in a new model it took them a lot of time to relearn that right so you see this kind of cycle is this this is common sense stuff but it's if you look at a technology it's important to think about where are you in the evolutionary period is this kind of pre pre fluid right you don't even know what's going on is this fluid but it's starting to take shape is this transitional where you're beginning to see the emergence of dominant designs and you're starting to see the shakeout and you're starting to see a few firms take on strong positions or is this really mature cost based quality based brand based competition where the big players win typically or the very focused players win and okay so you've got it spend 2 or 3 minutes 5 minute 3 minutes with the three or four people around you what I want is an example of an energy technology at each stage of evolution so again something is just emerging turmoil something is kind of in a transitional stage where you can start seeing that it's going to look this way but it's not quite settled and something where it's highly mature its head-to-head competition so think about clean tech products of a wide variety and again very importantly I'd say any anywhere right anywhere in the in the energy supply chain so I I tend to think of right primary energy conversion transmission distribution and use but now we have end use in industry residential transport and then I guess we have dicks area which is how do we how do we balance that stuff or how do we balance the whole thing if we include demand management right so that would be the space we're looking at so anything in that space new technologies innovative technologies for new is the wrong word but technologies that are coming into the marketplace or in the marketplace for primary energy energy conversion energy transmission storage etc or for all kinds of end use what stage would you put them at and kind of within your group give me give me one for each area give me fluid transitional mature so we have not not only do we have batteries and very different kinds of battery technologies and we have compressed air and we have flywheels and we actually have quite a few substitutes because we have fast start generators right and demand management is actually a substitute if you think of the balance but it's a zoo right I've been trying to follow a 1-2-3 with its grid level storage and no one knows what the dominant design is there and is this to be used for grid stabilization do you want to stick it out on the end next to a wind farm right it's not known it's all going on over in Department of material science there what about six different six or seven different competing companies or more out of DMS II right I like that away swimming pools okay a transitional which kind of wind oh wind good why is it transitional no so so grid grid level wind and again if we were drilling down a little bit we'd find I think that on onshore wind looks like it's starting to standardize offshore wind is still very much in the air in terms of the standard design right so you're you're somewhere in between although there's I guess there's still some big transitions in the size of the blades I look out my window in Vermont and I have 180 footers now and they're going to build 480 footers right so with the strobe lights that's that's the point so it's it's you know the water starting to freeze it's starting to congeal it's starting to standardize there's a real ship partly the demand is has shrunk a little bit with European financial difficulties with uncertainties about the US credits and the Chinese have run through a very quick ramp up partly but it's also starting to consolidate right so it's okay Trant from the tour our our mature big right so that's right that's your question mark so it's it's mature and almost dead now but if it comes back to life it's probably going to become fluid for a little while I hope not too fluent but anyway okay okay team in the middle whoever you are which fuel cells yeah that may that's yeah it's pretty fluid may be free but that's good it's right it's still largely in the labs transitional grid solar that again we start drilling down right so the crystalline stuff looks fairly mature the thin film stuff is probably fluid the concentrated solar is still probably fluid so that's so that's a good catch-all so let's just say grid and people looking to increase efficiency and if somebody hits it right crystalline silicon against this place well and you have everybody looking at the efficiency of the chip and all it matters is the installation cost so chip more efficient you don't still want to get it okay I'll take a group over here I I don't know exactly where the boundaries of the groups are but I'll just take one in the back on this side okay and that may be free also but it's starting it's starting to merge so ocean or a or wave it's very early okay why why is it with why is it that you're all focused here if we're going to solve right if we're going to solve the energy problem we got to knock 1/3 off the carbon footprint here we've got to cut 1/3 of the inefficiency here and we've got to cut use here by 1/3 why is it you're only focusing on one of the three ok let's have something over here ok what do they do ah okay so so Wireless yeah yeah Tesla comes back to life right okay good right so so again which kind of batteries do I have here solid-state batteries in here I have lead-acid batteries right so this is interest and now you're moving into the middle and at least towards the end with those two that but but it's interesting because the categories right you say within within an existing broad category of Technology you probably have some of all of those right within wind within solar within storage within lighting so you've got these life cycles going on within classes of technology as well as across anybody okay let's go over here anything radically different no okay anybody who's got some downstream examples you know something here like what we use yeah pardon okay tell me a little bit more for what kind of use power supplies and power converters for all kinds of stuff okay some of them right I mean there's there clearly is emitter category of those right and then so power converters but there's also right emerging emerging better ways of doing this yeah I spent about a day running around Delta electronics in Taiwan and they're all over this they are right the power converter guys what Oh for essent light yeah yep so now we have fluorescent right it's not dead yet it still has several waves of innovation in it it's still competitive for some uses but it's mature technology although I guess the drivers the drivers for the flutter light there's some big changes putting the drivers on a chip lowers the cost raises the efficiency so if you get inside the fluorescent light there's some MIT professors who have the new chips to drive them to discuss the final third as well so put habits in mature they don't as much innovation and thinking that is a very interesting different way so you'd say you know what what is it and we'll come when we talk about disruption we'll talk about the customer there's a nice thing saying here we're talking about hard stuff technology but in fact human behavior human behavior could be categorized and institutional behavior could be categorized in the same way and our habits for commuting and driving and where we choose to live those things are pretty hardwired our habits regarding the use of electricity mental attitudes probably pretty mature we've been doing that now for 100 130 years right pretty mature habit we've got some things that are transitional there may be some things that are quite fluid right so this is so you could apply a similar thinking structure to behaviors this is focused on technology but I think you've all got the point on anytime you're looking at a technology you want to know where it's at because that's gonna tell you a lot about the business what's going to be required to have a successful business model in that phase okay now we'll go on to the next piece of this which is discontinuities are disruptive and they're similar and Huayra maybe you can straighten me out in terms of the difference between these literature's I view them as almost the same but the point of kind of discontinuities are disruptive change so we've got some incumbent technology right and it's gone through an s-curve of unit sales and it's matured and it's leveling off and a challenger comes in out of the fluid phase it starts really emerging let's say in the transitional phase in here it starts garnering some sales it's probably not direct competition at first it may even be dismissed as irrelevant right and over time if it's if it's appropriate right it will supplant the existing technology so I gave you a reading about codec and a reading about some of the difficulties that Kodak had in dealing with right this is film based photography kodak wrote it from the initial chemistry to pretty much dominating the market although they did have a little challenge from the Japanese and the Germans but they've rode that market very nicely now we're in a totally different world nobody uses film totally different product and so you see these cycles over and over again I may be getting out of out of line a little bit but but one of the things you want to think about in these discontinuities is who who is having to change this becomes a critical thing so the question I'll pose in two slides after I do this next one is discontinuous at what level disruptive at what level is you really have to sort that out but in order for your opportunity to materialize what changes do you need do you need changes in end-user behavior habits do you need changes in prices do I now need peak load pricing or do I need carbon pricing do I need a change in policies Building Codes right so a whole series of things that may need to change not just my technology my technology may be maturing but I need I may need behavior I may need prices I may need regulation and of course we'll come back to these but you'll think about right which which points you can lever let's look at this this point now though disruptive to what so we we're trying to classify a technology an innovation as to whether it will be disruptive or not not just because it's fun but because it gives us some notion of how we need to address it and what it will take to get it implemented is it disruptive to the customer to the firm to the incumbent firm to the platform or system to the industry to the regulatory context to the social acceptance and mindset right we're kind of going down in levels of difficulty so Oh that slide turned out beautifully but customer and we could you've talked a bit about customers taking on new products you know we we tend we tend to focus on the price and the economics of a new energy use and then of course we get in an argument about whether people really look at the current cost or whether they look at the lifecycle cost but there are two other issues at least that go along with that price and net price calculation new behaviors or competencies do I have to start acting in a different way does this require that I undo some habits to use this new product if it does I've got a much harder sell right and I have to think this is not marketing my product this is getting you to change your behavior that's one issue or the other of course is does it require new system complements do I have to have other goodies to go along with it so you give me some device for I don't know controlling the the heat they are conditioning in my unit I also need obviously the controls on the pieces and I probably need that be hooked in with my cell phone so I can do it from a distance and I need an infrastructure that inter communicates so think about the customer you've got a product for them you say this is a new and improved product it's going to save you energy and/or it's going to reduce the carbon footprint hopefully it's going to do both of those and so you should buy this product and if you do a careful lifecycle calculation which you probably won't do you may find that this product is attractive you still have to think about am I going to use it but I'll have to do differently and am I going to have to change out a bunch of other stuff because the critical point about energy and you've seen this over and over again is this is the installed base industry to kill for right it's got huge installed base of complementary stuff so your wiring your appliances everything in your house are all built in a particular way to change that it's a big job kind of scary job okay so I'm not going to go too deeply on the customer today because I didn't give you any readings on that but I think that's the primary one yeah mr. Reid some of the teams taking their rules in the radio stations so they don't have to sit around the living room with a big to radio the point is that it was not disruptive competing they got privacy there the quality of the scent was pretty solid the same way that all of you adopting social media right it's very simple method of doing that you can think of disruptive innovation of ways that you can kind of find a customer that is very anyway it's the great simple way almost even simple but a way to get there well in fact the if you like the disruption may be desired by your customer so disruptive sounds like this is negative so all of the family had to sit around the single TV set or the single radio set and the parents may have like that or may not of like that depending upon their style but certainly there were there were customers who wanted to get away from that right who wanted privacy want to go their own rooms so they say this is disruptive for the existing family habits but but question is is there a segment that finds this disruption attractive I'm just trying to open up this concept of disruption at all of these different levels because we tend to think of it is it disruptive to the incumbent firm but that's only one of the many considerations and should not be a negatively or positively loaded term it's a descriptive term is it disruptive does it require certain types of changes and very often does it require changes in a complementary set of activities and then what are those changes required so not how do we make it but what changes will be required so that is adopted and that will often be a more central part of the business model than how do we make it that's we got the next but putting a lot of wind and electric power system whereas a lot of changes in other parts of the system I mean it's not disruptive to people to be electricity it's not disruptive to people who you know are buying is disruptive to how do you run the grid right so so if we push past what six eight percent in a deep grid in wind or solar then it's disruptive to the grid and it may be disruptive it's probably going to be disruptive the economic model of the grid because how do you recover the additional costs associated with having the depth to deal with the intermittency right or or you could say wind has to have storage at source so that it's interaction with the grib its grid as smooth right that's happening in some places yeah no no 1 2 3 is actually in Chile they've got this so you've got wind farms way the hell away right if you've got a wind farm a long way away from a population center then your problem is you're gonna have to build a very high capacity line to deal with the intermittency it becomes economic to put grid level storage at the wind farm tune to the wind farm so that it can then feed through the line on a study basis and now it's not disrupted but now it's disruptive in that wind farm has to combine storage right so it's a more complex business model to avoid the disruption to the grid so general point any technology you think about you need to think of the various points at which it may be disruptive and not saying disruptive is bad but rather to focus on who is going to have to change how and will they have the incentives to do so and how could you work on those incentives for them to do so but it's it's just a way of thinking about the process okay incumbent firms capacity to change this is the Christensen article could what some of you one of you like to tell me that tell us all the Kodak story in terms of those four quadrants I just happened to pick up the FT yesterday and have this beautiful story ready for today's class right so we all know that Kodak lost it right it dominated the the film business it was an early participant in digital technology it certainly had the money to do it it certainly had the technology to do it and it's nowhere right so it totally lost the score and it had a fantastic brand name it had everything going for it lost it so what what was it in that story that you know I guess the question would be does this does this framework even help and how would we kind of shoehorn that case into this framework so did did it fit with their processes capabilities the one thing I'd add processes capabilities and relationships the digital fit with the Codex why not how nod I mean I guess for the longest time they invested in well film technology is over we're chemists the pet what you start you start off kind of at the habit or people level right the high prestige people in this firm our optics people in chemists there's some really pretty pretty hairy stuff going on there and those are so first of all the prestigious people this is not prestigious so that's a little bit of an issue and so it doesn't draw in the chemical capabilities at all or the filmmaking capabilities Kodak was also a very advanced manufacturing company if you go on to Kodak planted with what a mile long a continuous one single continuous machine to make all this film just a technical marvel again digital cameras have nothing like that so there's not a deep manufacturing capability okay selling capabilities putting them in stores ought to be about the same any anything different about the model between putting cameras and film in stores versus digital cameras and stores as a compliment for Philips a compliment you probably you probably basically subsidize or sell the camera at a very low cost especially the cheap cameras right there were disposable cameras that basically cost nothing because you're selling film what's the compliment that you sell with digital photography you may sell some compliments in the Internet and in terms of storage and in terms of social media but it's not within your same category it's not even people you know alright so I very quickly start saying yeah this would require Kodak to be a very different place on the other hand they do have a brand name this is a show see associated with images right they do have the optics that are still very important in digital photography so they have some relevant capabilities they're not out of the game but they don't have them all how about the values and time horizon did you pick up anything from the story about values and time horizon yeah and it started by the founder it was just right that's almost that's identity right so is is our identity images or is our identity photography or that they were cannibalize their customers thinking that they alone owned the transition there's a little bit of hubris right just because they were leading firm didn't mean that they alone owned the transition but let's let's get down to the nitty-gritty value and time horizons how did Kodak measure investments and the desirability of investments what did they what it was in the story what did they judge investments on or businesses on good business versus bad business was there if you read the story carefully from a kind of a financial or accounting perspective would have jumped out at you profit margin the difference been sales price and cost they were in a near monopolist position with the mature product they had very high profit margins anything that they're looking at they're judging in terms of profit margins this new product even if eventually it's going to have a high profit margin will not have a high profit margin you've got to be forward-looking right the company is looking let's say quarter by a quarter at the current profitability of the existing business if you use that optic on businesses which now fits the existing business no way in hell you're gonna choose this new business is going to take five seven eight years to launch and it's actually gonna take quite a long time to figure out what the compliments are that you reach into to get the extra profit so if you if you look in digital photography I'm sure that a lot of money is being made by people other than camera makers there's a lot of value out there's a lot more photography being done there's a lot more being swapped granted its swapped at lower costs but Isis it would be interesting to go out and add up who all makes money on Facebook right Facebook makes money YouTube makes money you have a whole series of places that make money out of storing and swapping images some of that space might have been codecs right they were in the image business well they tried point point is companies companies evolve companies change with the conditions they are in with the pressures they're in this is a company with a very mature technology that it was driving it had a couple of tough customer competitors so it worried quite a bit about cost but it still had nice margins had this fantastic scale and quality oriented manufacturing it had brand name based distribution it made most of its money off the film not off the cameras well – in business model and you could judge each different sector by profit margin and along comes this new business that is going to take ten years to build come on guys right we're not in the VC business we're in the current profitability business so I think that puts a little life into this figure it's hard it's very hard for incumbent companies to change especially and we often talk about the disadvantages of a company being diversified because it gets very confusing it's not focused etc one of the advantages may be that it may in fact house technologies at all three stages of maturity because if the company is predominantly at a mature stage it's going to have a very hard time dealing with things at the transitional stage because everything it's going to do is going to be tuned to cranking it out low cost lean right manufacturing operations focus the best parking lots will belong to the sales managers and the manufacturing managers not the scientists and the innovation folks not even the engineers it says you know shift who gets the parking lot who has the power okay the technology right being focused on a segment all built to do to deliver top quality to a set of customers to turn that ship it's very hard to be good without being finely tuned and if you're finely tuned it's very hard to change that's the whole story there's nothing more to it than that then you can think about the different elements of that change and I think this is a useful categorization to make an assessment of whether it's even worth trying you can make an assessment is that we're trying and then what things would you have to work on in order to make the change or do you totally give up Christensen's claimed the fame he basically says nothing innovative can come out of a big company it always has to be a start-up that creates a major conundrum for us in the energy sector because almost anything you need to do in the energy sector is large-scale and highly interdependent and therefore requires scale but it needs a start-up catch-22 any other questions about this yeah capital intensive investment so a lot of things that really just basil software's in Google I think they're very finely tuned but at the same time they're innovating very quickly you're Katie they do they acquire a lot of different types of companies that because because they if they see a technology that's promising that you're able to sort of probe and organically buy their company and see you know that let the call come will operate independently for a while in see how firms the technology is it's a very very interesting point so if we were to complicate it we'd say that you could say that this is a story about organic growth kind of just investing yourself and you might say that we could avoid some of these issues by acquiring and we can let things operate by themselves for a while and then we can bring them in now we get a new set of challenges the set of challenges is is the company going to be successful at integrating acquired firm or is it is it going to leave it alone and basically become a portfolio owner therefore it really didn't bring it in or is it going to bring it in and crush it it's very hard for large companies to do this well one of my major case studies over the years has been semak's the Mexican cement company and they have grown entirely by acquisition and they are very until 2007 when they bought the wrong company and almost bankrupted themselves they were very successful acquirers but there were a lot of tricks associated when they have a post-merger integration process one of the key tricks they developed not a trick it's very important they developed the 80/20 principle in the post-merger integration so after 18 months the company we acquire it's a cement company is going to be operating exactly like the rest of semak's hey guys this is an acquisition this is not a merger you will operate exactly xmx but if the post-merger integration team which consists of people from semak's and the newly bought company don't come back with roughly 20% of the practices that they could change in semak's they failed all right so we're willing to learn from the company we acquire that's a way of creating dynamism in a large parent company very few companies have that kind of dynamism I've done a lot of work with BP BP bought standard of Ohio BP bought amico BP bought Arco they changed the label they didn't change the systems and you see what we got so acquisition doesn't solve the problem it may give you it may give you a way to have multiple cultures it may give you a way to have two pieces of the company that operate on a different clock speed but if you're going to gain the advantage ultimately gonna have to integrate it and that's very very very hard so good point but rich yeah and you know I can stay working a large organization although I prefer to small company or I can go buy a yacht and and and it's my baby so so if you if you bring in the acquisition side and especially then you have to also deal with kind of family and founder life cycles which is much more Hiram's area so you have to lay that in as well right so you've got to be at the right life cycle but so the acquired firm has to be willing to be acquired and has to actually want to transfer what it's good at and the key middle employees of that acquired firm want to state have to want to stay there and the top management either wants to integrate itself into the companies bought or just vanish so so now we have this dynamic within the incumbent firm we also have the dynamic within the firm we're going to acquire so it may solve our problem but it's difficult so bottom line change is hard change is particularly hard for large bureaucratic organizations if a company has really dominated a product market segment in something like energy by definition that's huge it's very bureaucratic it's probably very cost oriented if it's a public utility it's even worse because it's regulated and again it's very large and it's focused on cost and a very particular definition of service and it has a set of people and capabilities for delivering the current products and service not for developing new ones right so it's going to be the extreme of this case ok let's go the next level so the system context changed this is the Michelin article right so Michelin brings you this new no flat tire why why did it fail in the marketplace was it a lousy design great design right then why did it fail yeah Julian we're here cops didn't wanna take your time but in you expensive okay so this is a tire an automobile tire unless it's absolutely perfect and of course why would you have a run flat tire if it was perfect right the fact that it's a run flat tire already admits to the fact that it's going to have damage and need repair so that the inherent nature of the product says this is a product that you buy and then a product that you service and the whole appeal is you want to be able to drive to the service shop right you want to go 45 miles on your flat tire at night you don't have to stop on the freeway etc so it's embedded in a system is it just the tire repair shop that we need or do we need any do we have any other complements that we need to make this work needs a clincher rim if you ride really old motorcycles right you have clincher rims now we have rims that are just with tire pressure this needs a clincher rim against you got to go and talk to Hayes or whoever it is that makes the wheels and you've got to get the auto manufacturer to specify those more expensive rims that have the clinchers on them so now I have to buy the valve stems but it also has to be part of the company cars computer system in terms of the pressure management system so who do I let's just think about how many how many parties we have to coordinate and how many parties have to pre invest before they know that this technology is going to work so they can work so Michelin invests years in in this technology and they test lots of different kinds and they find out this one works there they're very good engineering company they obviously in that testing had to work with some wheel manufacturers but they've got to get some wheel manufacturers to pre invest in that capacity they've got to convince Honda or Toyota or General Motors or somebody to specify that tire and wheel probably on a premium model probably at much too low scale to make money on to get it out in the marketplace and get it tried and now I'm going to tell you that five thousand vehicles this year are going to have that wheel and it has to be able to be serviced at what fifty thousand points in the United States because I got forty five mile range so I've got to be able to get to a authorized Michelin repair shop within that range otherwise that product doesn't do me any good now I'm really pissed off but I paid extra money for product is gonna solve this problem for me and suddenly I find out it's worse than the standard product which I could have gotten fixed at any old service station all right you got it so we have a product and this is fairly simple so I only have three four maybe five different complementary to deal with that doesn't sell who wants to buy a console for which there are no games you got to get the consoles out and the games developed when they invented credit cards you had to get the merchants to put in the terminals to accept the cards and you had to get the consumers to carry them but if know consumers carry the card what good is the terminal and if no merchants accept the card what good is carrying it this chicken-egg problem of finding complementary is not uncommon and if you're if you're gonna drive the development of this platform which is what it is it's now the Michelin run-flat platform that includes the Michelin tire the inner ring that is manufactured by someone else the rim that is manufactured by someone else the tire monitoring system that is manufactured by someone else and the distributed repair stations right then you're probably going to have to have a brand and reputation that make people think that you will succeed you have to have a deep enough pocket that convinces people that you will succeed and you have to have a deep enough pocket to pre-fund some of these other activities right so this is not an activity for a startup startup might well come in on the platform in fact it may be the best time to come in because the platform sponsor has to pre-fund the complements anyway the startup may be available for cheap to come into one of those places right so but they can't push it so this is just a perfect example to complement what right so if you came up with this design you'd say who who could make best use of this design and the first question you're gonna ask is not what technology is involved and who knows how to use this technology but what changes will be required for this product to make it in the marketplace and who has the standing and the power and the prestige to bring about those changes right looking at your technology but you say what is what needs to happen for if you're making an app for an iPhone that problems been solved for you right Apple has created the platform they even have the cash collection system for you they even have their standards all you have to do is make your app and stick it on the platform is the platform exist and in fact a good platform is a good entry point for smaller firms but if you've got an idea that is going to change a system you're gonna have to find a system driver okay have done with all of those segments you pick a segment you pick a segment that will place a very very high willingness to pay for your innovation remember last session you pick a segment that is manageable and in fact initially you're probably going to pick a segment that is not profitable because your goal is to get out and show that it works and if you go for the big segment then you've taken on a big change problem if you go for the small segment you've taken on a manageable problem now I've got this set of specialized tire repair places and I probably already have agreements with them that they were fitted able favored michelin right what I do I rent them the machines and I charge them on a per use basis because I say I don't know if you can have any customers for this machine or not that's my risk your risk is learning how to use it right and if we succeed in selling this thing then you're gonna get some business and then you can pay me back piecemeal so you could think about business models that took the complimentary into account my sense is Michelin did not do that because they had a better product they had a clearly superior technology there was no question this was better but to get people to adopt it change change change and I have to think about it differently as the customer a little bit but it's mainly my complementary that I have to bring along and I have to get it specified on the car and then I have to service it afterwards okay difficulty of change and this guess you've had you've had dick channeling Susan as opposed to Susan teaching you on the kind of the cultural the cultural sociological side but this is a little bit like culture if you think of how hard is the change on the customers part or on the firm's part I would argue that it goes in this order so I've got to learn how to do new things in a different way that's pretty hard but it's harder right if I have to use new compliments or change the form in which I use things so use form shared cars versus owned cars it's a totally different use form it's a very different style right or clustered housing versus distributed housing whole series of like that and then finally write different way of thinking about it we we collectively in this country a car is immediately available so we can go someplace on a whim and that's one of the advantages of having a cars that freedom right being untied from schedules from being untied from this and that and the other thing if we're going to shared cars or public transportation or something else we would have to change the rhythms you suddenly have to become synchronized with everyone else again have to become Swiss alright Swiss society is built on railroads American society is built on cars well that's that's deep that's really deep for a society that has not developed that way and where people really value that autonomy so just think of kind of levels of change okay discontinuity will happen the level of industry as well as technology and there'll be an era of substitution air is a design competition area of incremental change this is again in the Mueller and Phillips article industry dynamics this is kind of repetition dominant design similar competencies the interesting point in this article they talk about the activity Network versus the industry because you think of there is a field of firms that are both competitors and complementary and in a well-established industry there will be four or five other firms that look like you and that will be the industry and that's pretty much who you look at in a transitional phase there are all kinds of players that might be involved and you've got to think outside your normal boundaries that's their key point I want to get you to the next next slide this is where I want to end so this is a way of bringing together context Allah Jie maturity versus the product architecture Roger Miller is a friend of mine I did a book with him about ten years ago this is his latest book it's about to come out and he says think think of innovation as a game every innovation is a game it has many many different players and product architecture is the product stand alone is the product platform based is the product a closed system market maturity is it emerging is it in the transitional face or is it mature right Eureka was that say single inventor startup need idea Eureka its standalone its transitional you do it right mature markets stand alone the new and improved tide but it's the new version or five star five star energy rating as opposed to energy star rating as opposed to four star energy star rating or the next version of LEDs a little more warmth warmth than the light compared to the last warmth that right the lighting patter is already satisfied we're now in incremental improvement is it platform based so Apple iPhone versus the other guys right micro swap and whatever they sell Android so Apple versus iPhone versus Android that's those are platform Wars and you've got heavy heavy investment by sponsors of those platforms fighting with each other and you have a lot of app producers who are actually playing across both of them right and they're both in both ecosystems or if it's mature its mass customization is just apps it's no longer the platform wars because there is the established platform system breakthrough pushing the envelope I'm not quite so sure about his terms there but interesting classification so let me change this question let me change the question to think think about the technology that you were working on in your team and decide where it fits there take a couple of minutes to think about kind of position it tell us why because it'll tell you a lot about the business model it's going to go along with your technology let me be countercultural in Cambridge so let me start on my right and just go around this way I don't have to get everybody but you know each team kind of tell me tell me what your technology is and where you think it fits oh ok so why is it platform based okay so there's we're in it certainly a transitional technology area I would think the platform base becomes again who bears the costs of storage and where does the storage fit into the system right so it's it's going to become part of a grid and so there's going to be some some pathway of grid development with particular types of storage embedded in order to make this storage feasible and that in that sense would be a platform and that's good okay next next group yep there's a party that's already mature if there's something that so where does that put you grade level or household or more how so that would be very different right so it may be radical for the household but it's kind of one more feature to change your energy cost mix and change your greenness so in that sense it might be new and improved it probably has a brand name beside it it probably has a financing complementor it may have you know a BB series home improvement where you put it on charge and you do 17 other things at the same time so it could be it might be here or it might be here it could be between those two depending upon the economies of scope but that's good okay next next team okay so and again and again the question is whether you need to link those or whether the grid will link those right and and dick and I were just talking about what's the difference between a closed system and a and a platform based system if the grid manages the complementarities then it's an open system if you manage the complan Tara T's you've chosen to mix them okay I'm gonna run out of time quickly so let me do a couple more teams that team and this team here and then we'll come down to one team over here two more or less cover so what do you have no player again so okay anybody who's different anybody who's down at that at the user end of the chain yes okay because well it's it's even though the actual market before the transportation market is kind of matured but the economy technology is very much in a transitional pace I could have team prove a lot that you have to improve the technology to make it peace but you need to kind of change existing for searching the system like charging and you also have to change some fundamental habits in many ways so you're talking about a large system change you're going to need a important system exchange agent okay you could go on on this I think it's very important to kind of classify where you are if you think of what are the different business models just quickly in the last minute startup or skunk works right so either it's a free-standing company or it's a free-standing piece of a company because it really is autonomous and you want to optimize the innovation process that's probably an established brand new and improved because already has some reputation already has market position or he has distribution the product is not different enough to get you out of that channel if it's up here you know you need a networked shaper somebody who's got money and name and whatever else down here you this is already somebody who has a dominant platform who so the utility has a dominant platform if it will bring you in if not how do you go around it this is probably a public-private consortium right your nuclear solar you're gonna get this developed by a public-private consortium the first time around it's too big it's too complex no-one's going to take it on other than that on the other hand if we're talking about a a new generation of of generation a new kind of grid generation probably maybe a large incumbents the Duke power or southeast and one of the big utilities in the south or a private consortium this is not final but this gives you an indication of who do you have to be when you grow up not because of the complexity of the technology but because of who needs to change in what ways in order for your technology to be implemented so that's that's the story on innovation in business models all set thanks

2 Comments

  1. Nagaraju kuruva1206 said:

    nice video. Looking for some help in promoting my new idea power generation.

    June 26, 2019
    Reply
  2. Katherine Lisette Valderrama Caviedes said:

    Good video.

    June 26, 2019
    Reply

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