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Warning: Disruption Ahead

Issue 3 and Volume 103.

Warning: Disruption Ahead

Technology

By John C. Zink, Ph.D., P.gif.,

Managing Editor

Three years ago in PowerEngineering I identified what I called “strategic technologies.” I listed distributed generation, energy storage and direct-current devices as having the potential to create a paradigm shift (a term I have grown to hate) in the power generation business. In later issues I added electric vehicles and hydrogen technologies to the list because of their similar potential to reformulate the way we think of power generation, distribution and use. I recently discovered a more-definitive work that sheds light on this topic.

A 1997 Harvard Business School book calls such new technologies “disruptive technologies” and examines their characteristics in-depth. The book, The Innovator`s Dilemma – When New Technologies Cause Great Firms to Fail by Clayton M. Christensen, also offers some advice to companies that wish to profit from these disruptive technologies. I think it deserves a look.

The book describes entrenched technology as “sustaining technology.” Companies develop and refine their major products as desired by their customers, continuing to become more efficient while continuing to upscale their offerings. This process increases profit margins and, hence, company expectations and hurdle rates for new products. However, at some point the market does not need further upscale capabilities in these bread-and-butter products. At that time competition shifts to such things as reliability and delivery time and then, ultimately, to price. When the product reaches this mature stage, the business has turned into a commodities business, and profit margins begin to erode.

Unfortunately, revolutionary new products–the disruptive technologies–are not in the pipeline at these companies. Their product pipeline contains only the unneeded future upgrades to their current offerings. Christensen notes that companies which have a solid competitive position in a sustaining technology are seldom able to simultaneously develop a disruptive technology. This is certainly true in the “upscaling” part of the product cycle. The disruptive technologies, while still in their formative stages, usually have high prices and limited capabilities. They cannot serve the company`s upscale market, nor can they meet the company`s profit requirements.

The book observes that the only way companies with established technologies can exploit disruptive technologies is to establish small, independent subsidiaries with lower profit-margin and market-size expectations.

It is not hard to postulate the development of distributed generation or electric vehicles (EVs) following the disruptive technologies model. For example, EVs are now too limited in range and too expensive to displace internal combustion engine cars. There are niche applications, e.g. city buses, where EV efficiency, life-cycle cost and non-polluting nature give them an advantage, but they cannot now satisfy much of the automobile market. As fuel cells and microturbines develop and begin to fill the role of battery charger for hybrid vehicles, these gradually chip away the performance disadvantage of existing EVs, but they are still not price competitive. However, some begin to recognize hybrid vehicles` potential application as energy storage devices or as distributed generation devices to provide home electricity when not being used for transportation. Aggressive companies may recognize synergies with their businesses and offer not only clean, economical transportation, but also clean, economical power for the home from the same device.

The auto companies, while experimenting with EVs, are not able to bring about the breakthrough because they see EVs as only a niche transportation market. Electric utilities, while seeking new off-peak “appliances,” appreciate the potential of EVs but are not interested in the next generation, the hybrids, because they do not fit the central station generation market. Thus, the door is open for totally separate companies to get into the auto companies` and utilities` cash registers. A disruptive technology has struck again. p