Business Model Innovation and What’s Really Missing in Renewables

by | Jul 8, 2010

The surest way to develop successful new businesses – especially in transforming industries – is to focus carefully on an unmet market need and tailor a business model to meet it.  This sounds straightforward but in practice it is devilishly hard because established, successful companies so often let structure (read: organizational baggage) drive strategy, rather than making strategy – choices about where to play and how to win – dictate the right structure.

Consider a certain segment of the home-furnishings industry. Grad students and young couples have long had a clear need for cheap, attractive furniture that can quickly fill up a temporary space. They don’t need massive sets made of solid wood: They probably can’t afford “real furniture,” and they’ll likely be moving from dorms to temporary apartments to first homes to dream houses over the years ahead, so lugging complete dining room sets around would be a hassle. What’s more, not many young folks want their stuff to look like their parents’ houses; they’re looking for hip, cheap, nearly disposable furniture to do the job for a few years before they settle down.

So where do they turn when this need presents itself? The obvious choice, and the category leader, is Ikea, where furniture is much cheaper than in traditional stores, and much more stylish than at discounters. Ikea has thrived for years because its business is custom designed, from the ground up, to give young furniture buyers what they want.

An Ikea couch, fully assembled at a warehouse and shipped to a traditional retail outlet, wouldn’t be nearly as cheap as it is within the company’s tightly integrated system. Beneath each store’s famously meandering display floor lies a highly efficient logistics facility in which furniture is stored in modular, easily transportable units, that, once bought, are then cost-effectively assembled at home by the customer. Furniture designs, store layouts, and store perks like subsidized cafeterias reinforce the value proposition. Competitors are not nearly as focused on serving this particular segment and are therefore continually playing catch-up.

Is there an analog in renewable energy?

There is definitely a need for renewable power, but market adoption has been so low because no business model has definitively emerged to make existing technologies competitive with longstanding fossil-fuel alternatives. The problem is no longer with the technologies themselves; it is with the larger ecosystem of which the technology is just one part. In other words, we’re not missing the Ikea couch, but the design, sourcing, supply chain, and packaging of the couch.

In solar, for instance, the march of technology development is relentlessly driving module prices down, as steadily improving conversion efficiencies make panels more and more powerful. But system costs are not dropping at a commensurate pace because installation – sticking the panel on a roof – is still too expensive (it’s often 50% of the entire system cost). The mistake many solar power companies are making is that their ultimate customers aren’t just buying slabs of tempered silicon; they’re buying watts that can only be used once delivered in installed systems. Here is where we need business model innovation.

The installation market is highly fragmented, especially for smaller-scale projects like houses. This leads to inconsistent quality and lack of scale economics –a problem not that different from the furniture market prior to Ikea, the fast-food restaurant business before McDonald’s, or, in a more recent example, the electronics installation market before Best Buy’s Geek Squad.  These business model innovators transformed their markets by focusing on a customer need and tailoring their businesses to meet it, in the process stripping out layers of cost.

Certain players in solar have made steps in this direction – SunPower bought the installer Powerlight in 2006, and innovative installation companies like SunEdison have come up with financing schemes to make system costs more palatable – but we are still waiting for someone to put all the pieces together to make solar power as powerfully convenient, affordable, and practical as an Ikea futon.

Mark W. Johnson is chairman and co-founder of innovation consulting and research firm, Innosight. He is the author of Seizing the White Space: Business Model Innovation for Transformative Growth and Renewal, to be published in February 2010 by Harvard Business Press and a co-author of The Innovator’s Guide to Growth (Harvard Business Press, July 2008). Josh Suskewicz is a manager at Innosight where he has worked on consulting engagements in numerous industries, specializing in cleantech and healthcare.

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