1. Value Innovation in Electricity Utilities
Heiko Gebauer, Hagen Worch & Bernhard Truffer
Department Innovation Research in Utility Sectors (Cirus)
Eawag: Swiss Federal Institute of Aquatic Science and Technology
Karlstad University (Sweden)
Seminar in Karlstad, October 26-27 2011
2. Changing environment for electricity
utilities
Customer
• Renewable energies
• Smart grid & smart meters
• Electric cars
• Market liberalization
• Sustainability
• Social networks
Source: Picture are free-licensed by Gettyimages
3. Empirical example «RWE» (national provider)
• German company
• Founded in 1898 in Essen
• Revenue € 53.32 billion
• Profit €3.57 billion
• Owner of 5 nuclear power plants (2
in dismantling, 1 stopped generation)
• Owner of several other coal-firing
power plants and natural gas power
plants
• Attends private and business
customers
• Energy mix (2009) consists of:
fossil fuels 79%
nuclear power 18%
renewable energies 3%
Key facts
Power generation,
sales and marketing;
distribution
New business fields like «intelligent
home» solutions, support for electric driven
cars (e-cars) (pioneer role in Germany),
support around solar affairs
Customer service such as
information; self services
Advanced services such as support
programs for heat pumps and newly
developed natural gas heating's
4. Empirical example «YelloStrom» cost
leadership
Generation by EnBW
power plants and
purchasing from the
market; distribution &
sales
Customer service self-service;
information
Key facts
• Founded in 1999
• 100% of stacks are hold by
EnBW
• Revenue € 735 million
• Started with 100,000 customers
• In 2010 1,1 million customers
• Purchases current from EnBW
power plants and at current
market
• Supplier of electricity and
current near services
• Low-price-policy, very
successful
• Attends private and business
customers
• Energy mix (2009) consists of:
• fossil fuels 29%
• nuclear power 47%
• renewable energies 24%
Advanced services as solar support,
online electricity meter
5. Empirical example “Municipality Munich” (local)
• municpial energy provider; 100% of
stocks are hold by city of Munich
• founded in 1998
• revenue 3.766 million €
• owns 3 combined heat and power
plants and 11 hydro-electric power
plants and drives 10 baths within
Munich; geothermic power plant
• engaged in several solar projects in
Andalusia
• attends to private and business
customers
• the energy mix (2010):
• fossil fuels 76,8 %
• nuclear power 0%
• renewable energies 23,2 %
Key facts
Generation;
distribution of current,
gas and internet;
sales
New business fields: Participant in
model project for e-cars and e-bikes
Customer service: internet
bill paying, information
Advanced services: online meter,
100% renewable energies
6. Newness to the customer
Incremental
innovations
• Generating, distributing, and selling electricity
with few customer service as an add-ons
• Generating, distributing, and selling electricity
• Extended service offerings, including
customer service, basic & advanced services
for energy efficiency
• Exploration of new business opportunities
emerging through new technologies
External environment
Value innovation
opportunities
Position in value chain
• Liberalisation of electricity markets
• Strong environmental concerns surrounding
renewable energy and energy efficiency
• Diffusion of new technologies such as smart
metering, smart grid, ICT, and electric mobility
Newness to the electricity
utility
Low High
Low
High
Radical innovations
Value innovation
•Fundamental
reconceptualisation of the
business model,
•Reshaping of existing
markets, and
•Dramatic value improvements
for customers.
• Regulated electricity markets
• Little environmental concerns around
renewable energy and energy efficiency
Our conceptual framework combines
following key constructs
7. Our conceptual framework combines
following key constructs
Potential absorptive
capacity
•Knowledge acquisition
•Knowledge assimilation
Degree of realized absorptive
capacity
Transforming and exploiting the
knowledge into different
degrees of value innovation
•Fundamental re-
conceptualization of the
business model
•Reshaping of existing markets
•Dramatic value improvements
for customers
Context (moderator) variables
•Organizational form
•Strategy & strategic behavior
•Network position and behavior
P2
P1
P2
Proposition 1: By mediating the relationship potential and realized absorptive capacity,
combinative capabilities determine the degree of realized absorptive capacity for value
innovations
Proposition 2: Contextual variables either strengthen or weaken the mediating effects
Independent variable Dependent variable
Combinative capabilities
•Coordination capabilities
•System capabilities
•Socializing capabilities
Mediator variable
P1
Low
High
8. Nature and type of value innovation is
characterized by three different components
• Questions existing business models, breaks away from “taken-for-
granted” assumptions about competition, industries and their intra- and inter-
organizational ways of working and deviates from the dominant industry
recipe
• Reshapes existing markets by changing the nature of competition,
looks across conventionally defined boundaries of competition, discovers
uncontested market spaces and seeks radically superior value, which will
render competition irrelevant
• Strives, not for marginal or incremental improvements, but for quantum
leaps in value, includes innovating customers by increasingly considering
business opportunities from the value-in-use and value co-creation
perspective, and is therefore not restricted to new services and products, but
also addresses customer roles and skills in the value creation process.
Sources: Kim and Mauborgne, 1999; Matthyssens, Vandendempt and Berghman, 2006; Christensen et al., 2002; Hamel, 1998;
Markides, 1998, Vargo and Lusch, 2004
9. Value innovations require absorptive capacity
Absorptive capacity ...
... firm’s ability to recognize the value of new information, assimilate it, and apply it
to commercial ends
... consists of two components: potential absorptive capacity and realized
absorptive capacity
• Potential absorptive capacity - knowledge acquisition and
assimilation, which refer to a firm’s capacity to identify and acquire
externally generated knowledge.
• Realized absorptive capacity encapsulates the firm’s capacity to transform
and exploit the knowledge for commercial purposes (knowledge
transformation and exploitation).
Source: Cohen and Levinthal, 1990; Zahra and George, 2002
10. Absorptive capacity co-evolves with
combinative capabilities
Absorptive capacity ...
… depends on past and cumulative experiences
… is not static, but rather co-evolves through combinative capabilities
• Coordination capabilities enhance knowledge exchange across
disciplinary and hierarchical boundaries (e.g., cross-functional interfaces,
participation in decision-processes, and job rotation)
• System capabilities refer to the organizational and individual knowledge
(e.g. the formalization and routinization of organizational actions).
• Socialization capabilities capture aspects of social relations (e.g. the
density of social linkages (structural aspect) and shared social experience
(cognitive aspects) in an organization, and between the organization and its
customers)
Sources: Bosch, Volberda and Boer, 1999; Jansen, Bosch and Volberda, 2005; Kogut and Zander, 1992.
11. Context variables interact with co-evolvement
Absorptive capacity and value innovation linkage ...
… is moderated by contextual variables
• Organizational form
• Strategy & strategic behavior
• Network position & behavior
Sources: Lane, Koka and Pathak, 2006; Lichtenthaler, 2009; Tsai, 2001
12. Our conceptual framework has been applied
to diametrical case studies
Characteristics Alpha Beta
Strategic innovation • Limited (Low degree of
strategic innovation)
• Comprehensive (High degree of
strategic innovation)
Examples • Few information and consulting
services for supporting
households and industry in order
to reduce electricity consumption
• Service provision for photovoltaic,
services for planning, financing, and
running fleets of electric cars, consulting
and monitoring services for reducing
electricity consumption
Business model &
value constellation
• Substantiating existing
business model on selling
electricity
• Exploiting existing value
constellation of providing
electricity at reasonable prices
• Changing the business model from selling
electricity to benefiting from customer
producing renewable energies
• Changing the business model form selling
to electricity to benefiting from customers
electricity reductions
• Exploring new value constellations in
existing markets and uncontested
market spaces
Markets • Exploiting the existing market • Opening up new markets surrounding
renewable energies, electric mobility and
self-service technologies for monitoring and
reducing electricity consumption
Value
improvement
• Incremental value
improvement
• Leap in value improvement
13. Contextual variables show strong
moderating effects
Potential absorptive
capacity
•Knowledge acquisition
•Knowledge assimilation
Degree of realized
absorptive capacity
for value innovation
Independent variable Dependent variable
Strengthening (Beta)
•Late Follower & observant behavior
•Little centrality in the knowledge
network position
•Participating in the knowledge
exchange, information channeling and
distributing within the knowledge network
Low
High
Weakening (Alpha)
•First mover & proactive behavior
•Highly central position in the knowledge
network
•Dominating information channeling and
distributing in the knowledge network
14. Combinative capabilities mediate the
potential and realized absorptive capacity (1)
Potential absorptive
capacity
•Knowledge acquisition
•Knowledge assimilation
Degree of realized
absorptive capacity
for value innovation
Independent variable Dependent variable
Mediator variable
Low (Alpha)
•Knowledge acquisition and assimilation was merely a reaction to occurring
customer needs
•Socialization tactics aimed at understanding customer needs and expectations
•Connectedness focuses mainly on the relationship with existing customers
•Knowledge sources overlap substantially and are highly complementary
•Relatively fast learning processes throughout the knowledge acquisition and
assimilation processes
•Highly formalized of knowledge acquisition and assimilation with respect to
customer needs and expectations
Low
15. Combinative capabilities mediate the potential
and realized absorptive capacity (2)
Potential absorptive
capacity
•Knowledge acquisition
•Knowledge assimilation
Degree of realized
absorptive capacity
for value innovation
Independent variable Dependent variable
Mediator variable
High (Beta)
•Deliberate knowledge acquisition with respect to trends in various technological
and psychological fields
•Specific coordination capabilities for integrating the different knowledge
sources
•Anticipation of new value opportunities emerging through a combination of socially
constructed experiences surrounding electricity consumption, technological
developments and legal changes
•Socialization of an in-depth understanding of how customers perceive the social
construction surrounding electricity consumption
•Beta’s knowledge source exhibits little overlap and yields few complementarities
•Relatively slow learning processes throughout the knowledge acquisition and
assimilation processes
•Informal routines and processes of knowledge assimilation
High
16. Following similarities and differences were
observed in the contextual variables
Alpha’s low degree of value
innovation
Beta’s high degree of value
innovation
Similarities
•Alpha and Beta have formed a matrix organization
Differences
Alpha
•First mover
•Proactive behavior
•Highly central position in the knowledge
network
•Dominating information channeling and
distributing in the knowledge network
Beta
•Follower
•Reactive behavior
•Little centrality in the knowledge network
position
•Participating in the knowledge exchange,
information channeling and distributing
within the knowledge network
17. Following similarities and differences were
observed in the potential absorptive capacity
Alpha’s low degree of value innovation Beta’s high degree of value innovation
Similarities
−Assessing external knowledge sources
−Past experiences
Differences
Alpha
•Knowledge acquisition and assimilation was merely a
reaction to occurring customer needs
•Socialization tactics aimed at understanding
customer needs and expectations
•Connectedness focuses mainly on the relationship
with existing customers
•Knowledge sources overlap substantially and are
highly complementary
•Relatively fast learning processes throughout the
knowledge acquisition and assimilation processes
•Highly formalized of knowledge acquisition and
assimilation with respect to customer needs and
expectations
Beta
•Deliberate knowledge acquisition with respect to
trends in various technological and
psychological fields
•Specific coordination capabilities for
integrating the different knowledge sources
•Anticipation of new value opportunities emerging
through a combination of socially constructed
experiences surrounding electricity consumption,
technological developments and legal changes
•Socialization of an in-depth understanding of how
customers perceive the social construction
surrounding electricity consumption
•Beta’s knowledge source exhibits little overlap
and yields few complementarities
•Relatively slow learning processes throughout the
knowledge acquisition and assimilation processes
•Informal routines and processes of knowledge
assimilation
18. Following similarities and differences were
observed in the realized absorptive capacity
Alpha’s low degree of value innovation Beta’s high degree of value innovation
Similarities
−Promoting mutual understanding and comprehension of value-creation opportunities
−Convergence on the political intentions
Differences
Alpha
•Limited variety in cognitive structures of
organizational members
•Conventional managerial thinking is the
dominant mind-set
•Organizational members exhibit minimal role &
gender diversity
•Looking for certainty in exploiting knowledge for
commercial purposes
•Coordination, systematization, and socialization
capabilities enables the transformation and
exploitation of knowledge through the conception
of planned strategy
•Planned strategy restricts managerial
cognition in using incremental value innovations
for increasing the general quality of customer
relationships
Beta
•Strong variety in cognitive structures of
organizational members
•Entrepreneurial thinking is the dominant mind-
set
•Organizational members exhibit high role &
gender diversity
•Allowing uncertainty to emerge with respect to
knowledge exploitation achieves commercial ends
•Coordination, systematization, and socialization
capabilities enables transformation and exploitation
of knowledge through the conception of an
umbrella strategy
•Strategic directions and scenarios inherent in the
umbrella strategy facilitate managerial
cognition of leaps in value innovation, uncontested
market spaces, and new value constellations
19. Based on the findings, we can draw following
theoretical implications
General theoretical implications Specific theoretical contributions
• We depart from the existing
preoccupation with analyzing
absorptive capacity and direct
innovation outcomes.
• Absorptive capacity and
combinative capabilities
contributes to a better
understanding of value
innovation processes
• “… a richer, even more
behaviorally grounded
characterization …” (Cohen and
Levinthal, 1997, p. 1468)
• Changes in the level of realized absorptive capacity
cannot be attributed to a single combinative
capability, but through complex interactions
(coordination, system, and socialization capabilities
and absorptive capacity)
• Positive associations: interfaces with diverse
set-of external and internal knowledge sources, for
routines for knowledge sharing, comprehensively
understanding consumer psychology, and gender
& behavioral diversity
• Negative associations: hierarchical and
centralized decision-making authority
• Contextual variables: Strategy & strategic behavior
is counter-intuitive, dominant network behavior &
position limits absorptive capacity, organizational
form has no impact
20. Our study offers managerial guidance for
value innovations, but also entails limitations
Managerial guidance Limitations
Evaluation the appropriateness
of value innovation initiatives.
Assessment of how knowledge
is acquired, and assimilated,
Managers should be also aware of
the limitations of the first-mover
strategy, and be more observant
of their network position and
behavior
Generalization remains unclear, even though
this new mode of analysis seems promising.
Qualitative measures to capture the different
degrees of value innovation and realized
absorptive capacity
Latest advances on the subject of absorptive
capacities:
Process-based definition of absorptive
capacity and identifies technological and
market knowledge.
Exploratory, transformative, and
exploitative learning process are key
issues in absorptive capacity and influence
positively firm performance.
Sources: Lane et al. (2006); Lichtentaler (2009)
Short Introduction – new to the field of sustainability, Main focus has been service research. Topic & topic selection: (Innovation not regulation helps us to respond sustainability issue) – Electricity utilities, play a key role Structure of the presentation: Motivate research, shortly introduce our theoretical concept on absorptive capacity, I continue with presenting our empirical setting and results. I end with a short conclusion, and hope that my presentation is inspiring to have a nice discussion. Hesitate
Part I: Motivation of the research: Value chain of electricity ulitilities – ended at the electricity meter with strong focus on efficiency and effectiveness in power generation, power grid, power distribution & network, final distibution & marketing to the end-customer. Little knowledge on customer‘s request on electricity usage, consumption, and saving. Various trigger that create opportunities for new innovations. Renewable energies photovotaic equipment for households, co-producers. Cities buying wind parks and offer eco-electricity to end-customers or for they publicly-owned companies and administration. Smart grid in combination with intellegint household devices could optimize power distribution in the network. Smart grid is highly interwined and interconnected with photovoltaic equipmemt. Smart metering - Cost reductions on monitoring electricity consumption, but the information could be used for monitoring & intelligent feedback services „ Runner story Electric cars – LA car exhibition - car batteries, 2nd life concepts of batteriers, e-bikes demographic change Market liberalization, full, partly or still regulated. Electricity becomes a commodity, new innovation potentials to avoid cost competition and erosion of margins Sustainability as a major opportunity, which more or less provides the fertile ground for all the other tiggers and drivers Social network, people use social medias in relation with electricity consumption, signaling environmental behavior and standard. Get your electric meter sleep Farmville – facebook game impact on behavior,.
Questions existing business models , breaks away from “taken-for-granted” assumptions about competition, industries and their intra- and inter-organizational ways of working and deviates from the dominant industry recipe Reshapes existing markets by changing the nature of competition , looks across conventionally defined boundaries of competition, discovers uncontested market spaces and seeks radically superior value, which will render competition irrelevant Strives, not for marginal or incremental improvements, but for quantum leaps in value , includes innovating customers by increasingly considering business opportunities from the value-in-use and value co-creation perspective, and is therefore not restricted to new services and products, but also addresses customer roles and skills in the value creation process.
Questions existing business models , breaks away from “taken-for-granted” assumptions about competition, industries and their intra- and inter-organizational ways of working and deviates from the dominant industry recipe Reshapes existing markets by changing the nature of competition , looks across conventionally defined boundaries of competition, discovers uncontested market spaces and seeks radically superior value, which will render competition irrelevant Strives, not for marginal or incremental improvements, but for quantum leaps in value , includes innovating customers by increasingly considering business opportunities from the value-in-use and value co-creation perspective, and is therefore not restricted to new services and products, but also addresses customer roles and skills in the value creation process.
Questions existing business models , breaks away from “taken-for-granted” assumptions about competition, industries and their intra- and inter-organizational ways of working and deviates from the dominant industry recipe Reshapes existing markets by changing the nature of competition , looks across conventionally defined boundaries of competition, discovers uncontested market spaces and seeks radically superior value, which will render competition irrelevant Strives, not for marginal or incremental improvements, but for quantum leaps in value , includes innovating customers by increasingly considering business opportunities from the value-in-use and value co-creation perspective, and is therefore not restricted to new services and products, but also addresses customer roles and skills in the value creation process.
Questions existing business models , breaks away from “taken-for-granted” assumptions about competition, industries and their intra- and inter-organizational ways of working and deviates from the dominant industry recipe Reshapes existing markets by changing the nature of competition , looks across conventionally defined boundaries of competition, discovers uncontested market spaces and seeks radically superior value, which will render competition irrelevant Strives, not for marginal or incremental improvements, but for quantum leaps in value , includes innovating customers by increasingly considering business opportunities from the value-in-use and value co-creation perspective, and is therefore not restricted to new services and products, but also addresses customer roles and skills in the value creation process.
What do customers value?, What are the most important customer value dimensions today and in the future?, How well (poorly) are we doing in delivering the value that customers want?, and Why are we doing poorly (well) on important value dimensions? How do individuals and groups participate in the perceptions of social reality about electricity?, What traditions are relevant for electricity consumption and efficiency?, How can the traditions facilitate or limit value innovation?, and Why do customers behave as they do?.