Agility Lessons from Utilities
The industry faces pressure on its core businesses and unexpected digital competition. Evaluating the external environment and making bets more quickly will be decisive for incumbents.
The utility industry offers a fascinating microcosm of the challenges facing legacy companies today. Its sprawling base of heavy assets amplifies the forces of inertia, while agile-by-nature digital players nip at parts of the value chain once considered immune to competition. Utilities need a nimble strategic response to both of these challenges. In the core businesses—the generation and distribution of energy—companies scramble to address the uncertainty and volatility manifested in sudden policy shifts on nuclear power, skyrocketing demands to ramp up renewable energy, and the possibility of high-stakes (and profit-draining) regulatory changes for carbon prices and often dirty backup power plants. At the same time, new technology is steadily reshaping the energy sector: the falling cost of solar power makes historical scale economies less valuable as distributed generation becomes more feasible. And digitization is disrupting traditional areas of business and enabling new ones.
Utilities aren’t alone, of course, in their need to manage both new horizons and valuable legacies. In the automotive sector, capital-intensive value pools based on production expertise are yielding to service offerings such as car sharing. Digital and communications technologies are propelling innovation in connectivity for vehicles, autonomous driving, in-car “infotainment,” and other areas. With legions of digital competitors emerging, traditional banks are under pressure to match disruptive new business models while maintaining valuable customer relationships.
Like most of the economy, the energy sector faces huge challenges from digital disrupters. Internet technologies are breaking open the traditional value chain, driving down interaction and transaction costs. Customers can now plug their consumption data directly into a utility’s computer system and shift usage to lower-cost, nonpeak periods. These changes have already triggered new business models characterized by customization and a laser focus on the customer.
One cutting-edge shift is e-mobility, the electrification of cars. Another is the range of power-to-heat technologies that can exploit the excess capacity of cogeneration and of wind power. The hypergranular real-time metering of home appliances could turn power consumption into a big data play, opening vast new windows on the behavior and preferences of customers. Meanwhile, “digital natives” with the technology and analytical firepower to build a data-driven level of the energy economy are moving in to take advantage. Can incumbents open up vistas themselves and roll with technology?
The risk of missed opportunities is all too apparent from the example of the telecom industry. Its incumbents, caught unawares by the rapid shift to mobile speech and data beginning in the late 1990s, ceded a sizable share of growing value pools to new entrants—those, for example, that could profit from the rapid growth of mobile apps.
In utilities, we see a similar potential for large value pools. Centralized, asset-heavy production of electricity won’t disappear. But legacy economies seem likely to change, creating possibilities to consolidate traditional assets and placing a premium on operational excellence. Utilities must also explore new horizons in renewables; in downstream markets; and in digitally enabled, customer-centric business models.