Every decade the utility industry is confronted with new challenges to its purpose and position. While the utility sector wrestles with its latest challenges, including disruptive technology, demand destruction, digital infrastructure, non-traditional entrants, customer activism and policy constraints, it continues to search for ways to retain its vitality and value.
These current challenges create a different kind of stress to the industry-how the historical utility purpose and role must shift to adapt to a different future technology and market model. Utilities must consider how to adopt a deployment, interface and delivery model with which many companies honestly admit they are largely unfamiliar. As these companies search for new strategies and capabilities to respond to these externalities, they will find that one source of potential advantage lies in how they embrace and embed innovation as a fundamental element of the business.
Historic static utility models are being shaken and are challenged by emerging influences that the industry has not seen in the past. While upstream competition occurred in selected generation and retail markets beginning in the early 1990s, the industry is now finding itself challenged in additional downstream markets-the delivery infrastructure and customer fulfilment. These new challenges reflect the new economic and operational technology decentralized within the grid (i.e. distributed generation and a digital infrastructure). In addition, an emerging change is occurring in how customers see their incumbent utilities as future providers, as well as how they see themselves as moving from pure consumers to prosumers. While some of these challenges were spawned by policy mandates, they also are giving rise to their own set of next stage policy shifts, like battery deployment rules and requirements.
Beyond the impact that new technology has on the boundaries and execution of the business, the larger effect is on the role of the utility within this environment, particularly how it interfaces with its customers. Utilities are finding that the “how” and the “what” of customer engagement is shifting away from pure, one-way interaction to bilateral exchange and knowledge sharing.
With these emergent changes, utilities need to move from slow followers of trends to well-versed leaders in change anticipation and response-the perfect role for innovation to enable.
Innovation in the Sector
Utilities will argue that innovation is nothing new to them and they have been innovating for years. They are somewhat correct because the industry has adopted, developed and deployed new technology over its history; however, utilities definition of innovation is largely centered on only this application. The historical aperture of innovation in the utility sector has been relatively tight. It has largely focused on new generation technologies, such as highly-efficient gas turbines, or equipment in the network that enhances operation, like sensors. The utility industry has been a slow ubiquitous adopter of new technologies and it employs a cycle that often extends from 10 to 20 years beyond the first availability of the technology. More importantly, technology is but one element of innovation these companies must consider.
For sure, a few companies have used structured approaches to innovation in the last several years. Some have used specific events to seek new ideas or set out challenges to the employee base to attack a discrete problem. Utilities tend to approach innovation in a targeted manner with a specific outcome in mind. No one, however, has truly “cracked the code” to embed innovation throughout the four corners of the business. When they do address innovation, utilities tend to act insularly and forget that innovation is going on all around them outside their walls.
To be successful in the future, utilities must demolish these artificial boundaries and tap into expertise that lies among a host of entities like universities, research labs, original equipment manufacturers, technologists, venture capitalists and marketers, among other groups (Figure 1). Utilities must learn to be effective partners with these innovation sources and treat them as active agents for positioning the business.
Innovation as a Catalyst
Utilities need to move beyond treating innovation as simply an isolated undertaking directed at problem-solving. They need to evolve to a point where innovation is more than just a concept to rally around-it needs to become part of the business strategy and delivery model.
In many other industries, innovation is viewed as a critical capability for differentiation and survival. In fact, technology and product companies thrive on it. In high technology companies, the ability to develop solutions that address both acknowledged needs and needs customers haven’t yet recognized is table stakes. These companies continually invest in extending the “art of the possible” because it is necessary to ensure their sustenance in a market where state-of-the-art technology is always just around the corner.
Similarly, product companies continually focus on developing products or services that anticipate and fulfill customers’ needs in the form of choice, comfort, convenience or control. These companies know that if they are to retain their current customers and build brand loyalty, they must be foremost in their customers’ minds when they think about product breadth, quality, applicability and ingenuity.
Three archetypes of innovation typically exist outside the utilities industry-incremental, radical and breakthrough. Each one has a different focus, purpose and impact. The differences in innovation intent and expectations are linked to the emphasis that companies place on this capability to fortify and enhance their strategic positioning:
“- Incremental: The scope of innovation at this level relates to simpler improvements like existing product enhancements and technology upgrading that do not truly drive business growth.
“- Radical: Innovation at this level focuses on bringing new products to market or deploying state-of-the-art technology or both, leading to sharp revenue growth.
“- Breakthrough: This last stage of innovation addresses fundamental shifts in the bases of competition or the nature of markets served. Technology is applied with the intent to rapidly accelerate or create significant, new value streams.
All of these approaches to innovation are applicable to the utility industry and need to be understood and adopted by companies. Utilities have had a hard time, however, conceiving what innovation really is and how to implement it successfully. Utilities must quickly leapfrog other industry learning and development cycles if they are to capitalize on the opportunities available and preserve their customer position.
Parameters of Innovation
This backdrop to innovation in the utility sector provides a point of contrast for how companies may approach this topic. Most utilities are taking an incremental approach because they are risk averse, more singularly issue focused and have not evolved into a products and services creation or customer fulfilment mindset. An alternative view of the innovation archetypes illustrates that utilities are more targeted than aggressive in their thinking (Figure 2).
Utilities tend to work at the bottom end of the innovation spectrum-innovation with a little “i”. This means that they are incremental thinkers and focused on improving the business. With this view, which is natural for an industry more traditionally focused on operations, the emphasis is on small steps forward rather than bolder actions. These actions typically results in cost reduction or performance improvement.
The second stage is where most innovation occurs. This is innovation with a capital “I”. Its emphasis is on advancing the business and the extension of the way a company competes. This is the level where the utility industry would typically collectively aggregate. Management would focus on taking the business to another level from a market positioning perspective and introducing a broader portfolio from which to compete, such as more product and service offerings or enhanced technology adoption and ubiquitous deployment.
The final stage of innovation is more typical to where a technology or products company would target its research and development, as well as its ideation. Innovation at this level is all “uppercase”. It is the level where the utility industry should aspire to reshape the business, focusing on changing the way in which utilities compete and redefining their underlying role. Most companies will never realize innovation at this level, but can still create differentiated platforms, such as new markets and delivery models that can build presence, position and profitability.
Regardless of the innovation stage at which the utility industry finds itself, it needs to elevate its focus on innovation. Utilities should direct attention to the internal building blocks-visible commitment, executive alignment, formal emphasis and adequate funding-that are necessary to successfully implement a robust innovation model.
Successful innovation can occur when companies move beyond thinking through an internal lens and take a market-back approach. There are four principal areas where successful companies focus-process, technology, product and business model-but most companies center on process, and to a lesser extent, technology (Figure 3). These are useful to the business, especially technology deployment, which is one element of the new table stakes for utilities. They are limiting, however, in creating new value to the business. To succeed, emphasis must shift to products and business models, where companies are far less adept at the inventiveness necessary to change the market rules, customer access and role definition.
Culture of Innovation
Preaching innovation is different than actually being innovative. Most companies are willing to adopt new technologies at some point in their maturity curve, but they are far less open to being at the frontier of ideation and innovation, particularly with respect to products and business models.
This is where building and embedding a culture of innovation provides the foundation for success. Innovation needs to be embraced and embedded throughout the business, not just used as an occasional theme. Management should be clear about its objectives for innovation and ensure alignment across the business. Innovation is frequently discussed on the executive floor, but incentives to encourage the right kinds of behaviour often are missing. Company lore chronicles instances where acting boldly was not celebrated, but punished. Many remember a culture where, instead of risk taking (within established bounds), avoiding failure at all costs was embraced.
Pursuing innovation brings value to the business perspective, but is perhaps most valuable at teaching an organization how to collaborate and cooperate on a recurring basis and eliminate existing formal silos. This collaboration might pay dividends into perpetuity by creating a culture of innovation.
Building an culture of innovation does not occur quickly and can challenge management’s patience. Companies should expect that culture adaptation will take more than five years and demand visible commitment and constant nurturing-outcomes that are generally inconsistent with pursuing yearly earnings targets. More importantly, embedding a new culture typically exceeds CEO tenures, which are generally less than five years
Embedding an culture of innovation means defining parameters that utilities can monitor and measure to gauge their progress toward this goal. Indicators of adoption will come in a variety of ways, both tangible and intangible. While management will be looking for ways to profit from innovation, other measures are just as valuable. Utilities must become comfortable with measuring items they never thought about in the past. Items like ideas and collaboration. The fact that ideation occurs more broadly and seamlessly will be considered important in the future, but less so than understanding how many ideas were converted into accomplishments and how idea pursuits were the result of cross-business unit engagement.
Embedding a culture of innovation within utilities holds the promise of real advances in market positioning and connecting to customers. Those companies that embrace innovation as a way of doing business and view it as the entire enterprise’s responsibility will gain market and financial success.
Tom Flaherty is a principal in the Dallas office of the Power & Utilities practice of PwC Strategy& (formerly Booz & Company). He is part of a global team of practical strategists committed to helping companies seize essential advantage.