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34 E L E C T R I C P E R S P E C T I V E S

Given that we are entering a period in which smart technolo-gies have the potential to transform the industry’s structure, utilities need to consider whether, when, and how to reset their strategies. Indeed, the electric power industry will see more changes in the

next 10 years than in the previous 50. And it is not an exaggera-tion or overly dramatic to say that companies that

don’t keep pace with changes are in danger of being bought by a competi-

tor or going out of business.

How a utility positions itself for success as smart technologies transform markets means seeing what domino falls fi rst. By Jesse Berst

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M AY / J U N E 2 0 1 0 35

It’s not hard to understand the dan-gers of complacency. Think back to the days of

minicomputers, when the market was dominated by companies such as Digital Equipment Corporation and Data

General. They failed to take the personal computer revolution seri-ously and were extinct a decade later.

Excess urgency has its dangers, as well. Rapid shifts often are accom-panied by pundits loudly proclaiming the need for immediate action. Just as often, such proclamations are from companies and consultants that have something to sell. Think back to the year-2000 preparations in the 1990s and the rising frenzy surrounding the issue, when governments and corpora-tions worldwide spent (by some estimates) $500 billion to avoid a disastrous scenario that never came about.

A more useful planning method is to adopt an attitude of watchful waiting, which you might call the “domino approach.” This refers to the chain reaction that occurs when the fi rst domino topples, knocking over the next one, which upsets the next one, and so on. In the technology world, it’s

M AY / J U N E 2 0 1 0 35


Jesse Berst is founding editor of SmartGridNews.com.

not hard to spot a “domino chain” (a likely series of events). It’s much harder to know when or even whether that fi rst domino will fall. Executives who adopt the domino approach scan for chains that may soon topple—students of business call this process “alternative futures” or “scenario planning.” Those executives don’t rush to remake their organizations every time they spot a possible change. Rather, they watch for trigger events that knock over the fi rst domino. In the electric power industry, likely smart-grid trigger events for competitive transformation include ■ regulatory changes (deregulation or restructuring, decou-pling);■ policy changes (stimulus funding, carbon legislation, re-newable portfolio standards, cyber-security requirements);■ business model changes (demand response aggregators, distributed resources);■ customer changes, especially new uses (electric vehicles, digital-grade power, home-area networks); and■ technology changes, especially cost/benefi t crossovers when prices drop far enough to make the business case viable (wind power, grid-scale storage, phasor measure-ment units).

After that, the strategic adjustment includes three Rs: recognizing the size and scope of the transformation, rethinking the organization’s role to determine the best opportunities in the new era, and repositioning the orga-nization to optimize for the new role (or roles). Industries that have seen similar technological transforma-tions—where new technologies changed competitive environ-ments—are good places to look for lessons in dominoes and for approaches to the three Rs.

Take the HighwayAbraham Lincoln promoted one of America’s earliest and most ambitious infrastructure build-outs. He wanted the country to be connected by rail from coast to coast to avoid long shipboard detours around Cape Horn or chancy overland shipments by wagon train. The transcontinental railroad he authorized was completed in May 1869. Over the next decades, America built out the network until it hit critical mass, crisscrossing the country to form the Americas’ fi rst truly national infrastructure network and expanding as necessary.

But some of the most important lessons from the trans-portation sector come not from the original build-out of the railroads but from the later arrival of a transformational technology that disrupted the railroad business model: the automobile.

On July 7, 1919, the U.S. Army began its fi rst attempt at a transcontinental trip, sent off with speeches from senators

and rousing music from a 15-piece band. Over the next 62 days, a 72-vehicle convoy haltingly snaked

its way across America. A young lieutenant described it as a trip “through

darkest America” because of the shabby condition of the country’s highways. “We were not sure it could be accom-plished at all,” recalled Dwight D. Eisenhower, who, three decades later, would become the nation’s 34th president. The memory of that diffi cult trip, which averaged fi ve miles an hour, would become the inspiration for one of Eisenhower’s boldest moves—federal legislation to construct a vast net-work of high-speed roads that would come to be known as the interstate highway system—the longest engineered roadway in history.

With a cost of $50 billion, at a time when the entire an-nual federal budget was $71 billion, it was a daring plan. After a protracted fi ght—much of it with his fellow Republi-cans—Eisenhower eventually pushed through the necessary legislation and signed it into law on June 29, 1956.

The interstate highway system created new connections for automobiles (and their passengers) and new ways of conducting commerce. “Safe and readily accessible roads for high-speed travel led to a building boom that revitalized the economy,” explained Felix Rohatyn in his recent book, Bold Endeavors: How Our Government Built America, and

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Why It Must Rebuild Now (New York: Simon and Schuster, 2009). “New sectors appeared—fast-food chains, gas sta-tions, hotels and motels, and repair, fi nancing, and insurance concerns to service the automobile industry.”

But certain older sectors suffered—most notably the rail-roads. According to Wikipedia, “an entire generation of rail managers had been trained to operate under…regulations developed when rail transport had a monopoly on inter-city traffi c and railroads only competed with one another. Overregulation, management, and unions formed an ‘iron triangle’ of stagnation.”

As a result of that stagnation (and the boom in autos that took to the highway and the highways themselves which brought light to “darkest America”), the industry was pain-fully consolidated. By the 1960s and 1970s, as capital-inten-sive railroads cut costs dramatically, passenger rail stood on the verge of disappearance: Commuter trains declined by 80 percent from more than 2,500 in the mid-1950s to less than 500 by the late 1960s. Indeed, today, the United States has the poorest, slowest passenger train service of any developed country. Also, trucking ate into freight profi ts. The railroads failed the three Rs: to recognize the scope of the transforma-tion, to rethink their role, and to reposition themselves for maximum profi ts in the new landscape. It took many years (and the disappearance of hundreds of companies) for rail to

regain its footing, mostly through deregulation (the Staggers Rail Act of 1980) and a focus on freight.

Retailing and DisintermediationIn 1886, Richard Sears, an agent of the Minneapolis and St. Louis Railway, realized that the burgeoning transcontinental rail system created new connections to customers and a new, faster way to conduct commerce. He sent out a two-page fl yer to potential customers along the regional railway. By 1895—less than a decade later—that two-page fl yer had become the 532-page Sears Roebuck catalog.

Sears was the original Amazon—the fi rst company to cre-ate a virtual superstore using a new infrastructure for order-ing and fulfi llment. (It even called itself the “cheapest supply house on earth.”) Because of the new railroad network, Sears could undercut the high prices of the mom-and-pop general stores that were the only retail options in most small towns. In today’s MBA-speak, we would say that Sears “disinterme-diated” the general stores. He went around them to create his own direct relationship with customers. Thanks to that relationship, his fi rm went on to dominate mail order sales for more than a half-century. Sears Roebuck even extended its dominion into brick-and-mortar stores, where for a time it was the world’s most successful retailer.

Beginning in the mid-1990s, new technology enabled a

After the embrace of the automobile (intensi-fi ed by the subsequent interstate highway sys-tem), it took many years for rail to regain its foot-ing, mostly through de-regulation and a focus on freight.

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they share at least one danger. Just as gen-eral stores were disintermediated by Sears, and traditional brick-and-mortar stores were disintermediated by online retailers, some analysts predict utilities could be disintermediated from their customers by rivals from software (Google, Micro-soft), telecommunications (Verizon, Comcast), or consumer electronics (Sony, Samsung).

In both transportation and retailing, it was new transformative technologies that allowed enter-

prises to be disintermediated from their core customers.Retailing provides another technological lesson. Begin-

ning in the 1980s and continuing through today, Walmart and other big box retailers have used technology to revolu-tionize retailing yet again. Many retailers—including former powerhouses such as K-Mart—failed to rethink and reposi-tion in response. Today, thousands of them are out of busi-ness and hundreds more are hurting.

A superfi cial analysis might lead to the conclusion that advances in back-offi ce computing led to the transforma-tion. It is certainly true that Walmart and its imitators have exceptional enterprise computing systems. Yet the truly transformative aspect has been the connection of those pow-

second transformation of the retail sector. The development and widespread use of the internet and home computing provided a new avenue for retailers to reach consumers. And traditional retailers that failed to recognize this trend paid a high price.

Founded in 1966, the B. Dalton bookstore chain spotted the rising importance of locating in shopping malls and rap-idly expanded around the country. Yet even though B. Dalton had started as an innovator, it failed to recognize the threat of the internet as a transformational technology. As Amazon.com and other online retailers took hold, they decimated the B. Dalton business model. The chain operated 798 stores at its peak, but its last 50 outlets closed in January 2010.

During that same transformational period, several regional bookstore chains also went out of business. So did many in-dependent bookstores, which stood at 4,000 nationwide in 1990, but number less than half that today. Today, virtually every surviving retailer of any kind has an online presence in addition to (or in place of) physical locations, enabling them to sell goods directly to customers without the costs of sup-porting a physical location while providing customers with the convenience of shopping from home.

Electric power and retailing have many differences, but

Even though B. Dalton started as an innovator by locating in shopping malls, it failed to rec-ognize the threat of the internet, and its stores were decimated by Amazon.com and other online retailers.

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erful backend systems with terminals at the point of sale. The moment a clerk fi nishes ringing up a sale, the data instanta-neously ripples up the value chain. It is no exaggeration to say that a purchase made at Walmart in the morning may affect the size of a shipment from a Chinese manufacturer later that same day.

In other words, Walmart has a smart, end-to-end system that operates in near real-time. It has put thousands of stores out of business with this transformative technology while thoroughly disrupting the balance of power between manu-facturers and retailers.

Smart technologies could ultimately transform the electric power infrastructure into an end-to-end network as well, from supply through delivery and all the way down to indi-vidual devices in factories, offi ces, and homes. It may be too

early to predict exactly how the end-to-end smart grid will play out. But it’s not too early to say that the effects could be profound and that utility executives should be on the alert for the fi rst dominos.

Feisty Today, Gone Tomorrow The waves of change that swept over transportation and retailing offer many insights relevant to electric power. The telecommunications sector has even more direct parallels since, like electric power, it was a heavily regulated network of wires and equipment that was transformed by a conver-gence of regulatory and technology changes.

As with electric power, the United States originally regu-lated phones to encourage a massive build-out to allow every home and offi ce to be connected. The government created

incentives and allowed monopolies for companies willing to undertake the risk and the capital expense.

Then came the Telecommuni-cations Act of 1982, which began a process of deregulation that would culminate in the Telecommunica-tions Act of 1996. Within a few years, venture investment had risen tenfold as the telecommunications industry began the process of moving from analogue to digital technology. As a result of those regulatory and tech-nology changes, a feisty upstart by the name of MCI began offering con-sumers choice in the form of low-cost calling plans.

Ever since, the telecom sector has seen a blizzard of new companies

Real-time value chain. By connecting its backend systems with terminals at the point of sale, Walmart revolution-ized the retailing industry and forced many competitors out of business.

Adam Lautenbach


pushing new technologies—private branch exchanges, multiline phones, 800 numbers, voice over internet proto-col (VOIP), cell phones, and today’s smart phones. One could argue that more innovation occurred in the 20 years after deregulation than in the 100-plus years that preceded it.

This growth phase enabled hundreds of successful new companies, tens of thousands of new jobs, and, ultimately, billions in new revenue for the winners. The losers, mean-while, saw their market shares and infl uence dwindle steadily until they were forced to merge or sell at a low price. As MIT

lecturer Jonathan Byrnes points out, the winners recognized the scope of the change and rethought the strategic para-digm. More specifi cally, they segmented the customer base and then went all-out to secure the high-growth, high-profi t segments. When industries transform, says Byrnes, compa-nies can “have any part of the market they choose, but not everything. If they fail to choose, and try to hold on to it all, they will lose the best parts.”

When you are a monopoly, you can be all things to all people, since customers have no choice. When the telecom transformation began, many old-line companies clung to the vision of a full-service, all-things-to-all-people network. AT&T provides a sobering example. “Ma Bell” derived 80 percent of its revenues and nearly 100 percent of its profi ts from its long-distance service in the days before deregula-tion. But AT&T failed to reorient itself to a world in which its long-time cash cow was evolving into a commodity. In the late 1990s, CEO Michael Armstrong tried to counter this trend by becoming all things to all people, keeping all the old lines of business while also expanding into cable, wireless, and business services.

Like the railroads before it, AT&T was plagued by the same

trio of failures: It failed to recognize the scope of the change, failed to rethink where value would migrate,

and failed to reposition itself to focus on the high-value lines of business. Meanwhile,

rivals concentrated on the profi table segments and stole them away.

Ironically, the telecommunications industry already is undergoing another transformation that may turn some of the early winners into losers instead. A few short years ago, mobile phone operators were the disruptive force. Today, some of them are already in the same precarious position as the landline operators before them.

Mobile phone operators began life as providers of access, but that access is now becoming a commodity. Customers can choose from a range of mobile phone operators and, increasingly, from alternative technologies such as Wi-Fi and WiMAX. Yet some mobile operators are showing great reluc-tance to recognize, rethink, and reposition. They fear that new products such as VOIP, email, location-based services, and video services will cannibalize their traditional revenue sources (voice and text messaging).

If we apply the earlier lessons from transportation and re-tailing, it seems obvious that today’s mobile operators must act decisively. They must decide what kind of company they want to become and then optimize to attract and retain the best customers. Otherwise, more agile companies will tailor the underlying services into appealing, consumer-centric packages and take over the customer relationship.

And Google may be one of those nimble new competitors. A quick study of Google Voice (a voice portal) and Google Android (an operating system for cell phones) gives every

As its long-distance service evolved into a commodity, AT&T failed to reorient itself. And with broadband access becom-ing a commodity as well, mobile phone operators face similar challenges.

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Google is agile and has the ability to tailor its underlying services into appealing, con-sumer-centric packages and to take over the customer relationship.

indication that Google intends to disinterme-diate the mobile phone operators. In December 2009, The Wall Street Journal reported that Google plans to sell its own brand of smart phone in 2010, without partnering with a wireless provider, escalating “the internet giant’s assault on the traditional business model of the wireless industry.”

Google is the kind of innovative, hyper-competitive com-pany that America needs to remain viable on the global stage. But it is fair to note that Google began its relationship with mobile phone companies with simple, lightweight “partner-ships” very much like the ones it recently announced with several utilities for Google PowerMeter. Next, Google of-fered handset makers the Android operating system for cell phones, ostensibly to liberate them from the restrictions of previous choices.

But now Google is using that same operating system to liberate cell phone customers from their access providers. If Google has its way, those customers will have their relation-ship with Google and Google-branded phones. They won’t care which mobile phone system is providing the access.

As we consider the many competitors and new entrants attacking the telecom sector, let’s remind ourselves that

there is at least as much money at stake in electric power. The nation’s annual electric bill is as large or larger than the nation’s phone bill, according to most estimates.

As the Googles of the world come to realize how much money is at stake and come to believe there is a way they can tap into that revenue stream, the electric power industry will come under assault as well.

Recognizing the ChangeHow might the lessons from transportation, retailing, and telecom apply to electric power?

First, it is no secret that electric power has been relatively untouched by the digital revolution that remade virtually every other industry. One factor is the regulatory inertia that continues to protect electric power long after most other industries have deregulated. Another is the length of time from the fi rst inklings of change to the ultimate infl ection point—20 to 30 years for most industries. That means that the skeptics and naysayers are right for two decades or more. Then the transformation hits the tipping point, and suddenly

they are very wrong.This is especially dangerous because technol-

ogy-driven transformations act more like a step function than a slow, steady incline. Usage of the new technologies creeps upward for years until it fi nally reaches a critical mass, tipping the sector into a frenzy of rapid adoption.

And there’s every indication that the pace is accel-erating with the smart grid. In late 2009, research fi rm Zpryme predicted the worldwide smart grid market would double in only four years, from $69.3 billion in 2009 to $171.4 billion in 2014. Pike Research had similar

fi ndings, predicting the global smart grid market would hit $200 billion by 2015. And that’s just the smart grid piece of the puzzle. If carbon legislation passes in the United States, it will heap even more rapid change onto

the backs of utilities. Likewise, a national renewable portfolio standard also could accelerate the pace.

Looking back at the transport, retailing, and telecom sec-tors and their failures to recognize the scope of the trans-formation, electric power executives surely should ask themselves: What possible scenarios could transform the electric power industry? How far and fast could they occur? What are the fi rst dominos that would signal transformation is about to accelerate? Have the fi rst dominos already fallen or begun to topple?

Rethinking the ModelOnce they get a handle on the size and pace of the transfor-mation, executives need to re-evaluate their roles in the new ecosystem. Apple Computer provides a reminder that it is as important to innovate in business models as in technol-ogy. Early iPods were only marginally better than the MP3players that had been around for years. It was their iTunes business model that revolutionized the music business. A few years later, Apple repeated the feat by using a new busi-

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ness model—its online Apps Store—to transform the ways

cell phone services were sold.Utility executives must re-

think things while remaining bound by the fundamental contracts of electric

power. Unlike Apple or Google, utilities have an obligation to serve, to maintain exceptional reliability, and to keep their systems secure in an era of increasing cyber-terrorism. What’s more, utilities (and their regulators) must ensure that electricity continues to be as affordable as possible given its essential role in the national economy.

If the telecom sector is any indication, the upstarts will attempt to leave those diffi cult and costly obligations on the backs of the incumbents, while skimming off the cream of the high-margin customers. With that in mind, questions to ask include: What high-value, high-margin customer seg-ments will emerge? Which new lines of business are natural extensions of our core competencies? What roles do our customers and regulators want us to take (and which do they want us to stay away from)? How can we be sure that competitors pay their fair share of the costs of maintaining the infrastructure?

Repositioning the Organization for SuccessThe fi nal task is repositioning, which has stumped many incumbents over the years. The television networks, for instance, failed to reposition themselves for a world with hundreds of channels instead of just three. As a result, tens of millions of viewers have abandoned the networks in favor of cable. As we enter 2010, the trend continues with the advent of network programming over the internet (such as YouTube and Hulu.tv) where a growing mobile audience, whether on travel or at the local coffee shop, can watch programming when and where they choose.

Repositioning will be even more challenging in the elec-tric power industry. First, the basic business model has not changed for nearly 100 years. Second, the current regulatory

structure entrenches that traditional business model. Third, the obligations of reliability, se-curity, and affordability create tight boundar-ies. Fourth, most utilities will no longer be able to count on high growth from demand alone. Between recessions and the strong push for energy effi ciency, growth rates will be lower in most developed countries.

Lower growth rates create a lot of pressure to move from volume to value—from simply selling more electrons to looking for ways to add (and charge for) value. For instance, some utilities are experimenting with provisioning and managing rooftop solar installations at industrial facilities. Others are looking at com-munity energy storage as a wedge into the marketing of distributed resources or are con-sidering the microgrid model and premium power parks for customers who need high-reli-

ability power.There’s nothing wrong in going after new lines of busi-

ness—provided you don’t make the “all-things-to-all-people” mistake that bedeviled AT&T. But there’s also nothing wrong with being a commodity provider—as long as you do it in-tentionally and optimize for that kind of business. Likewise, there’s nothing wrong with becoming an ultra-effi cient wires company that leases its pipes to others who want to build high-value applications (or pursues joint ventures with those other companies).

The trick is to choose deliberately how to evolve, and to play to your strengths and core competencies. Utilities may want to be especially cautious about consumer applications. Entering those markets could put them at war with some of the world’s largest and best capitalized companies, who have decades of experience marketing to consumers.

Home energy management is one example. At this mo-ment, the cable companies and telecommunications com-panies are planning how to turn their current triple play (voice, video, internet) into a home run by making energy management a major service. Other entrants are bundling energy management with home security and telecare (re-mote health care). All these players have business models

In a world of hundreds of content channels—and with little budgeted for promotion—utilities face an uphill battle in con-sumer marketing.

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that include major expenditures on consumer marketing, call centers, and technical support. If utilities fi nd them-selves up against tech and consumer giants, they will be facing massive advertising budgets, some portion of which will be aimed at home energy. Microsoft spends as estimated $1.3 billion per year for all its advertising; Sony an estimated $5.0 billion. Compare that to the minuscule budgets of most utilities: Even the total advertising dollars spent by all share-holder-owned electric utilities ($196 million in 2009) doesn’t

come close to what one tech company might spend. This could have real consequences in the consumer education battles to come.

The commercial and industrial marketplace is also fraught with competitive pitfalls. Respondents to Pricewaterhouse-Coopers 2009 senior utility executives survey pinpointed power equipment and technology companies as a more signifi cant competitive threat than even direct retail compe-tition from other utilities. For instance, giant multinationals

such as Siemens, Honeywell, and Sch-neider all have plans to handle most or all of customers’ power needs “behind the fence” and then to broker the relationship between the customer and the utility.

Repositioning won’t be easy. All the more reason utility executives must ask themselves: Which lines of business are we willing to de-emphasize to put more effort elsewhere? With whom should we partner to succeed? What new technolo-gies and new skills do we need to bring into the organization? How do we get in direct dialogue with the customer set we have identifi ed as core?

Resetting the Strategic ParadigmThere are many more examples of com-petitive threats that can occur as the domino chains start to topple. Industry transformations driven by new technol-ogy pervasively and permanently change the underlying economic structure—and many companies make fatal errors dur-ing that crucial period. Only rarely are they mistakes of execution. In most cases, their execution was fi ne, but they were executing the wrong strategy.

The key determinant of success was whether or not a company reset its stra-tegic paradigm—its underlying assump-tions about the core strategy for success. The most common mistake: pursuing strategies that were either extensions of the old ones, or a wish list of what they wanted the world to become.

Former General Electric CEO Jack Welch writes that “the ability of an organization to continuously learn from any source, anywhere…is its ultimate competitive ad-vantage.” The good news is that electric power utilities still have time to recog-nize, rethink, and reposition themselves for the changes ahead. And they have the opportunity to minimize their mistakes by learning from the lessons of previous infrastructure transformations. ◆

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