Scenarios and bets, big companies and small

  • Posted By:
  • Posted In: Innovation
  • May 10, 2018
  • Comments Off on Scenarios and bets, big companies and small

In a previous blog on scenarios and bets, we described why strategic experimentation is critical to big companies. Experimentation involves placing controlled bets on the future and leveraging all forces and influences to create a reality that works in favour of the “innovating company”. What do we mean by that?

If you are pursuing domination in an alternative energy sector such as solar, you are also working to create an ecosystem, a platform, lobbying on several levels – lobbying the industry to endorse your dominant design, lobbying governments for incentives and lobbying the market to champion you and promote you.

You are not just pursuing but creating a new reality.

So how does this approach to innovation, i.e. placing bets on the future vary between big companies and start-ups? How do big companies and start-ups need to experiment differently, is it just about scale?

 

Experimenting Big v/s Small:

Scenarios: Multiple Bets and single strategies

Start-ups don’t plan on the basis of scenarios. They do not have huge assets or ecosystems that they need to turn around. They formulate a singular strategy and adjust accordingly as the markets provide feedback. Each iteration is a (relatively) low-cost experiment designed to validate demand, develop product-market fit and drive adoption rates. Start-ups are working in a micro market, customer by customer, having made a quick assessment of macro market size, growth etc. The evolution happens one conversation at a time.

Big companies forecast scenarios and bet on multiple outcomes in a structured way. Companies such as Shell are working against systemic forces. As the largest non-government oil company, the trends it needs to test against are macro in nature, not micro. What if energy portability (hydrogen fuel cells), solar or wind power become mainstream? What if hydrogen fuel cells were to overtake battery technology (which still needs fossil fuel to power electric generator stations) as the dominant design? What if world demand for energy continues to increase at a rate where efficiencies, economics and supply from alternative sources is not sufficient?

It might not be all or nothing

Markets may support multiple technologies that seemingly compete with each other. Toyota has been successful in developing Hybrid vehicles, as well as supporting Elon Musk’s battery powered vision and is still backing hydrogen fuel cell technology.

As Toyota chairman Takeshi Uchiyamada puts it, they do not see the three technologies competing against each other and they are not giving up on hydrogen (yet). In a world of innovation in component technologies, platforms and ecosystems research by George Tellis[1] has shown that multiple competing technologies can co-exist for a while as they compete on different dimensions that customers value[2].

Model evolution: Start-ups may start with plan A but don’t stay there for long and quickly change direction

If the founders of Google or PayPal had stuck to their original business models, we’d likely never have heard of them. PayPal started as encryption software for the Palm Pilot. Only in its 6th iteration of a business did it end up as the PayPal we know today.

Small companies need to work one plan at a time. Large companies don’t need to and should not.

Large companies need to place several bets, some serving as hedges and running in parallel until situations become clearer. We heard from Toyota now let’s turn to Shell. According to Raoul Restucci, MD of Petroleum Development Oman (Shell JV with the Oman Government) in this talk a couple of months ago he claimed[3], “We have oil for another 150 years. Enough to go around for the scenarios in a world of high energy demand and dependency on carbon fuels…It is not the lack of availability but the efficiency of other technologies, consumer attitudes, government incentives that will drive our dependence on need on oil.” That is why the companies need to place big bets. Shell is doing so by investing heavily in solar energy, wind farms and diversifying its value chain as it buys up hydrogen fuelling stations in the UK, US and Germany[4].

Experimenting and Minimum Viable Products (MVPs)

Minimum Viable Products: A term coined by Eric Reis, defines the minimum feature set of product development that companies need to invest into either test whether customers are willing to buy (buying behaviour), or how it solves a customer need in a meaningful way (consumption behaviour). Well-funded and well run startups always develop intelligent MVPs without laying out huge capital unless they are sure that customers will find the product valuable and are willing to pay for it. The same applies to big companies. Big bets and big companies do not mean big projects that run over a decade with millions and billions invested in their outcomes. As GE showed with its Series X engine, you can test consumer demand for billion-dollar technologies at a fraction of the cost using minimum viable product development design principles[5].

Design principle: Minimising Affordable Loss vs Minimising Maximum Regret

Affordable Loss: Saras Sarasvathy[6], the famous entrepreneurship professor from Darden Virginia, coined the term “Affordable loss”. Affordable loss involves decision makers (owners of new ventures) estimating what they might be able to put at risk and determining what they are willing to lose to follow a course of action and draws insights from behavioural economics[7]. Simply put, entrepreneurs like to know their ring-fenced risky investment that they are willing to forgo for a larger upside.

Start-ups work on the principle of minimising their affordable loss by running experiments. The experiment feedback tests assumptions, which then change business models and strategies. This “product and market” testing is all done in a low-cost experiment, designed both to test the potential of the current idea and also be open for market signals on the unexpected. A B2C experiment that we ran in entrepreneurial education resulted in B2B enquiries for entrepreneurship training.

Maximum Regret: Jeremy Bentham, the chief scenario planning officer at Shell coined the term “maximum regret” which represents the worst outcome of poor decision making. The big difference here is that a “no decision”[8] can also lead to an outcome you regret. Big companies work on the principle of minimising maximum regret. Big companies need to make bold bets and signal those bets in the market. What doesn’t work for big companies is to experiment and tinker timidly. (I had the privilege of speaking with Leo Roodhart who led the group GameChanger, Shell’s corporate strategic innovation program that identifies and sponsors the development of new breakthrough technologies. His famous thought experiment “10-15 years ago did you expect the fundamental changes ahead?” In terms of how banking and telephony have changed is a keen reminder of the evolution of new contexts and technologies.

As GM did more than a decade ago in hydrogen fuel cells (see wired https://www.wired.com/2002/08/fuelcellcars/) and has pursued it relentlessly for 15 years with success in military vehicles. The company’s fuel cell investment program has added up to more than $2.5 billion since the 1990’s.

Here’s what the CEO of Shell, Van Beurden, said “Shell failed in renewable energy before because it didn’t regard it as strategic. As a result, it behaved timidly and sloppily. It invested too much in the wrong things. It invested too little in the right things.”

“We are not going to play in this space in an experimental way. We’re going to play in this space with conviction to win.”

 

The Sakichi battery: Time duration of these bets

According to Leo Roodhart, in a lecture he gave at London Business School in 2016, some of the bets that companies like Shell make have implications over a 10, 20, 30-year time period. In 2002 GM committed to investing $1 billion in fuel cells and 16 years on, the future is yet to play out.

Sakichi Toyoda, the founder of Toyota, once offered a ¥1m prize to the inventor of his dream: an electric battery that would free Japan forever from its dependence on imported oil. Toyoda imagined cars running on abundant hydroelectric power. All he needed was a battery to provide 100 horsepower for 36 hours, with a weight below 225kg and a volume of less than 280 litres. That was in 1925[9].

Almost a century later the prize remains unclaimed. It is not only a big bet, it is a long shot… maybe even a pipe dream?!

[1] Unrelenting Innovation George Tellis, where he shows how competing component technologies for colour TVs such as Plasma, LED OLED have coexisted and competed on different dimensions

[2] In this instance Fuel cells offer quick recharge (5 minutes) v/s hours for recharging batteries and a longer range. Fuel cells-based engines are more expensive, efficiency is less than battery and refuelling requires a complex infrastructure investment

[3] Public Lecture Series February 2017 at Muscat university: A talk on Energy Transition by Mr Raoul Restucci, Managing Director of Petroleum Development Oman (PDO)

[4] FT Article: Royal Dutch Shell places bet on hydrogen cars going mainstream. https://www.ft.com/content/74970ba2-f7f7-11e6-bd4e-68d53499ed71

[5] The Start-up Way, Eric Reis

[6] Prof Saras Sarasvathy came up with the famous effectuation theory of entrepreneurship and how it differs from corporate planning, risk-taking and new market creation. You can read more about it here http://www.effectuation.org/

[7] Dew, N., Sarasvathy, S., Read, S., Wilbank, R. ‘Affordable Loss; Behavioral economic Aspects of the Plunge decision’, Strategic Entrepreneurship Journal Strat. Entrepreneurship J., 3: 105–126 (2009) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.66

http://www.effectuation.org/wp-content/uploads/2017/05/Dew_et_al-2009-Strategic_Entrepreneurship_Journal.pdf

[8] Economists like to call it acts of omission vs. acts of commission. Daw Aung San Suu Kyi became famous for her lack of actions on the Rohingya crisis in Myanmar. Her no action was also a conscious decision,

[9] https://www.ft.com/content/328df346-10cb-11e7-a88c-50ba212dce4d

- Viren Lall