Conventional approaches to renewable energy are falling short. The key is to shift the focus from developing individual technologies to creating whole new systems.
What will it take to transition from a fossil-fuel economy to a “clean-tech” economy powered by renewable energy? Silicon Valley is teeming with new projects in this field, and bold policy proposals are flying around inside the Beltway. The Obama administration has pledged more than $100 billion for sustainable technologies; China plans to spend $200 billion, and the G-20 industrialized nations some $400 billion. Venture capitalists around the world have pumped in excess of $20 billion into clean-tech companies since 2005.
So far, the bulk of investment has been in companies using conventional business models in an effort to fit clean technologies into existing systems. Sadly, history shows that this rarely works. Start-ups predictably struggle when competing head-on against incumbents in established markets. Disruptive market forces could over many years enable clean technologies to supplant fossil fuels the way the PC replaced the mainframe. ( See the sidebar “An Evolutionary Approach to Clean-Tech Adoption.”) But we won’t have to wait that long if we can deliberately effect a wholesale shift in our energy infrastructure.
An Evolutionary Approach to Clean-Tech Adoption
Competing head-on with fossil-fuel-based energy is exceptionally difficult. A century of investment and innovation has yielded a comprehensive network of energy production and distribution that powers our homes, cars, and factories more conveniently, efficiently, and cost-effectively than anything else right now. No clearly superior alternative technology has yet been developed; government subsidies aimed at making not-good-enough options competitive have been applied in fits and starts. In any event, no alternative will be viable over time if it can succeed only on an artificially created playing field maintained by permanent subsidies.
Not-good-enough technologies take root in markets all the time; the personal computer couldn’t begin to substitute for mini and mainframe computers when it was introduced. But as improvements evolved and were tested in the less-demanding home market, PCs eventually became a better alternative in the mainstream business market.
Some clean technologies are following a similar path, starting out as small, basic applications—such as neighborhood electric vehicles in developed countries and off-the-grid solar power installations in the developing world—that may improve and become more competitive in wider markets. We applaud all these efforts. They are certainly smarter than simply throwing large sums of money at the technology of the month.
To be sure, this is an ambitious goal that requires thinking on a grand scale. The key, we believe, is to understand that in a major infrastructural shift, technologies don’t replace other technologies. Rather, systems replace systems.
Edison’s Insight
Thomas Edison grasped the systemic nature of technological transformation a century ago, when he introduced the electric lightbulb. He realized that the technology he envisioned—no matter how innovative—couldn’t by itself sweep aside the kerosene-based lighting industry. Instead of asking how he could solve the technical problem of inventing a lightbulb, Edison asked how he could get consumers to switch from kerosene to electricity. He understood that despite the many advantages of electric light, it would replace kerosene only if it had its own, economically competitive network.
So, while scores of people worldwide worked on inventing a lightbulb, Edison conceived a fully operational system. His technical platform included generators, meters, transmission lines, and substations, and he mapped out both how they would interact technically and how they would combine in a profitable business. It had been widely assumed, for instance, that low-resistance filaments were most appropriate for lightbulbs, because they minimized the amount of energy lost as heat. But Edison determined that to make electric light economically competitive with kerosene lamps, he would have to limit the amount of costly copper used in transmission. Thus he’d need a high enough voltage to maintain current within a narrow wire—which meant a high-resistance filament in the lightbulb itself. Edison’s search for a lamp filament “was conditioned by cost analyses,” the science historian Thomas Hughes wrote in the journal Technology and Culture. “In his notebooks pages of economic calculation are mixed with pages reporting experimental data, and among these one encounters reasoned explication and hypothesis formulation based on science—the web is seamless. His originality and impact lie…in this synthesis.”
Edison tested his concept in a pilot project at his Menlo Park facility and then launched it commercially on a small scale in Lower Manhattan, a favorable foothold market because the buildings were close together and filled with potentially enthusiastic customers: Wall Street firms that were eager to be on the technological cutting edge and that had employees who worked long into the night. It was not coincidental that he was demonstrating his system to the very people who could fund its expansion. He also used his public standing to acquire regulatory support—for example, to get the needed permits despite opposition from the lamplighters’ union.
Others had designed decent lightbulbs, but without coherent commercial systems their inventions were for naught. We should be looking for the Thomas Edisons of clean tech.
A Transformation Framework
Many of the difficulties of clean-tech adoption can be traced to the fundamental error of focusing on parts rather than on the whole. Like Edison’s, our framework for thinking about new systems consists of four interdependent and mutually reinforcing components: an enabling technology, an innovative business model, a careful market-adoption strategy, and a favorable government policy. The clean-tech discourse has given far too little attention to the importance of business models and market adoption and even less to coordinating all four components into a coherent whole. Let’s look at each of the four in turn.
An enabling technology.
Systemic shifts are often instigated by the emergence of new technologies. The invention of the steam engine catalyzed the era of the railroad; the creation of the microprocessor launched the information age. But the real impact of these technologies was felt only after systems had evolved around them. The invention of the internal combustion engine gave rise to the automobile, but it was Henry Ford’s production process and the construction of roads, gas stations, and so on that ushered in the automobile age, dooming the horse and carriage. As Edison understood, for such advances to become viable, they must belong to complex, interdependent systems whose components work together in specialized ways. Edison didn’t try to plug his lightbulb into the kerosene system, or even to adapt it to the contemporary method of electricity generation, in which each location relied on its own power source. He knew that he needed to envision an alternative system, build it out of both old and new technologies, and properly integrate it from the ground up.
An innovative business model.
As we’ve written in these pages and elsewhere, successful commercialization depends on combining an offering that solves a real customer problem with a business model whereby the company can deliver that offering at a profit. The business model consists of the customer value proposition, the profit formula, and the key resources and processes the company must combine to deliver the offering. The unique way in which these elements are integrated to create value for both the customer and the company is the essence of competitive advantage. (For a more complete description of the business model, see Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, “Reinventing Your Business Model,” HBR December 2008.)
New technological paradigms require business models designed specifically for them. Consider Google: Countless dot-coms attempted to fashion new businesses on the internet, but many of them simply replicated traditional media business models, such as those built on display advertising, and, of course, many of them had no business model. Google, however, paired its advanced search technology with a fundamentally different business model—advertiser-paid search—and became one of the fastest-growing and most profitable companies in the world.
