Punished Despite Success
It doesn’t make sense to shut down profitable programs – or does it? It happens all the time when the current yet wilting business model still tastes sweet. Investing in building a disruptive, future business model appears less palatable as it takes uncomfortable transformation that comes with investment cost and lower profits initially. The sobering reality is that short-term gains often win over long-term investments, sustainability and bold moves to explore uncertainty and white space.
Here is a quick example from the fossil oil and gas industry straight out of Bloomberg Businessweek, “Chevron Dims the Lights on Green Power” (June 2-8, 2014): Chevrons renewable power group successfully launched several projects generating solar and geothermal power for over 65,000 homes. Despite margins of 15-20%, the group was surprisingly dissolved earlier this year after they had just about doubled their projected profits from $15 million to $27 million in 2013, the first year of their full operation. – Why would you kill a profitable new business?
Clashing Business Models
As for reasons for the shut-down, a former Chevron employee and Director of Renewable Energy notes that Chevron’s core businesses, oil and gas, still remain more profitable than renewable energy. This development signals that Chevron’s leadership is willing to experiment with renewable energy but does not seem fully committed – it makes Chevron’s slogan “Finding newer, cleaner ways to power the world” sound like lip-service.
Instead, Chevron continues to hold on tightly to their old business model to squeeze out the last drop of oil. Chasing short-term profit margins may prove not only a questionable path for long-term company sustainability but also from a business model perspective. While oil and gas prices have been on the rise for the past decades, it is well-known that these natural resources become scarce, so extraction from more challenging locations becomes increasingly expensive. It cuts into the company’s profits and the consumers’ pockets. To date, Chevron already pays a higher cost for extracting oil compared to competitors.
Chevron focuses on the upper tail of the S-curve of the current technology instead at the expense of preparing for the disruptive jump to the next technology platform. (See section “Technology S-curves” in 10x vs 10% – Are you still ready for breakthrough innovation?)
The risk here is to lose out on developing and acquiring new technologies that will be the make-or-break competitive advantage in the industry’s future.
Interestingly, Chevron’s competitor and largest oil company, Exxon-Mobil, takes a different approach. Even after initial setbacks where proof-of-concept did not scale to industrial size, Exxon-Mobile now partnered with Craig Venter’s Synthetic Genomics to produce oil from micro-algae at industrial scale. Hopes are high that this bio-tech and bio-agriculture approach proves more practical, profitable and sustainable to replace fossil fuels in the future.
Sounds risky? It sure is, but with profits from oil and gas still in the tens of billions this is the time to invest heavily in the jump on to the next technological S-curve. You may recall Craig Venter as a most successful entrepreneur and also the first to sequence the human genome, so there is no shortage of top bio-brainpower, which opens the flow also for more investment capital.
Truth being told, several other bio-fuel ventures of this nature exist all around the world. Neither made it to produce in industrial scale needed to satisfy the world demand for crude oil – yet. There is no question, however, that the world is running out of affordable oil and gas at accelerating speed. Disruptive technologies will emerge to fill the gap and redefine the energy sector.
Leadership is needed to prepare and transform the industry beyond short-term management of profit targets. Not taking a bold step forward is the absence of leadership. (More on the clashing goals in Leadership vs Management? What is wrong with middle management?)
The learning here is that even profitable disruptive ventures get shut down at times when the leadership is comfortable and holds on tightly to the existing business model they are familiar with and doing what they always did rather than taking transformative steps to prepare the organization for the future. Even with the writing clearly on the wall, the way of how profitability of a new venture is measured and the (still higher) margins of the established business (fossil fuels) make short-term focus attractive despite concerns over business model sustainability. So often enough there is little patience to further develop even successful, transformative ventures of tomorrow in favor of enjoying the sweet but wilting fruits of today.
Somehow this short-term mindset painfully reminds me also of the established car industry who, obviously, had little interest to bring electric vehicles to market at scale over the past decades until a Tesla comes around to show them how it can and should be done.
As for our example, time will tell whether Chevron or Exxon-Mobil made the better choice in the long run to win the new business model race leading us into the post-crude oil era – or if they both get disrupted by an even different new technology altogether.