Business Model Innovation and the Evolving Market for Electric Vehicles

Much has been written in recent years - both about business model innovation and electric vehicles. One of the Cambridge Service Alliance PhD students, Claire Weiller, has been studying the evolving market for electric vehicles - looking at the business models adopted by Better Place in California, TEPCO in Japan, Autolib' in Paris and Move About in Norway. Claire's just finished her PhD thesis and I thought it was timely to create a short summary of her research insights. Of course if you want the full story you'll have to: (i) talk to Claire, (ii) read her thesis and/or (iii) have a look at the various reports available on the Cambridge Service Alliance website. For the sake of efficiency, however, here's a short summary of Claire's key findings...

There's no uniform business model for electric vehicles...
The first thing that the research shows is that there is no uniform business model for electric vehicles. The different firms studied adopted different models - ranging from battery swapping (Better Place), fast charging (TEPCO) through to mobility as a service (Autolib' and Move About). Clearly there are different pros and cons to each of these business models.

Battery swapping as a business model...
The battery swapping business model is based on the premise that the cost of the battery is a significant deterrent to customers buying electric vehicles. So Better Place experimented with a model where customers bought cars, but then leased batteries from Better Place. The idea was that when the battery was running out of charge you could call into a battery swapping station and replace the discharged battery with a fully charged one in less than five minutes. Customers pay a monthly fee for the privilege of using Better Place's services, as well as a charge "per mile".

Better Place filed for bankruptcy in May 2013 despite having raised $850 million investment. The fundamental flaw in the model was the failure to create a standard battery adopted by multiple auto manufacturers. Because the Better Place battery was not widely adopted it became impossible to efficiently manage the range of inventory - different batteries for different marks of vehicle. The battery swapping model could still work, but it requires coordination across the ecosystem, with the vehicle manufacturers agreeing a standard for batteries that would simplify the challenges of logistics and distribution.

Fast charging as a business model...
One of the barriers to consumer adoption of Electric Vehicles is the issue of range anxiety - the fear that the car won't go as far as you need it to. Couple with this is the time taken to refuel the car (or recharge the battery). If it takes too long and you have to recharge too frequently then clearly Electric Vehicles offering significantly worse performance than regular cars. To address these concerns an alternative business model is fast charging - firms like TEPCO (Tokyo Electric Power Company) are investing in technologies to speed up the time take to recharge batteries. Today's fast-charging technology allow a 100-mile electronic vehicle with 24kWh of storage to fully charge in less than 30 minutes. Even 20 minutes gives an 80% recharge. TEPCO - through its CHAdeMO fast-charging connector - have been trying to shape an international standard for fast-charging technologies. They appeared to be making good progress, but were blown off course by the Fukushima tsunami that severely damaged four of TEPCO's six nuclear reactors. The subsequent clean up costs and the decision to shut down nuclear reactors in Japan have put an enormous financial burden on TEPCO and so their efforts recently have been diverted. 

Mobility as a service... 
The final business model studied concerned mobility as a service. Both Move About (Norway) and Autolib' (Paris) were examples of this. Under the mobility as a service business model customers does not take ownership of the product, but instead pay for the right to use the product - through a monthly subscription fee - supplemented by a time-based usage fee. The context for both Autolib' and Move About is interesting. Autolib' is heavily supported by the Marie de Paris and focuses its service on Paris and the surrounding 63 municipalities. Bolloré, an industrial conglomerate with activities in transport, infrastructure and logistics, won the contract to support Autolib' and provides the cars, as well as the charging infrastructure. The density of Paris - 105 km² versus London with 1,570 km² - means that a car with a 250 km range covers almost 100% of daily drivers needs. Move About, based in Norway, also benefit from natural resources that make electric vehicles more appealing. In Norway's case there is a significant over-capacity in hydro-electric power. This means that spare electricity is relatively cheap and so the costs of operating electric vehicles drop significantly. 

Fit between business model, ecosystem and environment is the key to success... 
One of my key take aways from this research is the importance of the fit between the business model, the ecosystem and the broader natural environment. Autolib' and Move About's relative success are a function of small and dense distances for travel - e.g. Paris and its immediate surroundings - coupled with cheap (or subsidised) and plentiful energy supply. Better Place failed because it didn't engage its ecosystem partners - it could not create the standard battery. TEPCO failed because of a natural disaster which diverted attention elsewhere. Without these interesting experiments and forays into new business models we'd never learn which worked best, but without alignment between the business model, the ecosystem and the broader environment, its clear that firms struggle to survive.

Innovating Your Service Business Model: The Capabilities to Succeed

One of the themes we have been exploring in the Cambridge Service Alliance is the question of how organisations best innovate their service business models. In some of our early work Ivanka Visnjic and I developed a framework of 12 capabilities that underpin successful service business model innovation. Since then we have been developing and iterating this framework, creating a maturity model that firms can used to assess the maturity of their capabilities for innovating their service business models. It seemed to me that it would a good idea to write a series of blogs on this framework and the twelve capabilities that underpin it - so here's the first one - explaining the framework.

In essence our research suggests there are four categories of capability that really matter when it comes to innovating the service business model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the value delivery system and (iv) accountability spread. Let me explain these in turn.

The first set of capabilities are concerned with the ecosystem - increasingly competition is taking place at the level of the ecosystem, not the individual firm. In today's interconnected economy, what matters is the way the ecosystem is configured and how your firm is positioned to capture value from it. Apple and HP illustrate the point. If you ask the question - "of the $1,000 someone pays for an Apple or HP machine, who gets the money" - you find that Apple keep 60-70%, while HP keep only 30%. Why the difference? Because Apple use their own proprietary operating system (they don't cede money to Microsoft), they use their own chip (they don't cede money to Intel) and they have created their own distribution infrastructure (they don't cede money to the retailers).

So what can HP do? It is too late for them to develop their own operating system or get into chip manufacturing. Both technologies are too well established, with large incumbent players and high barriers to entry. The cost of establishing a retail infrastructure, certainly a high street retail infrastructure, is prohibitive. But what they can do is invest in Linux. If HP help Linux become a more dominant operating system then Linux reduces Microsoft's power in the marketplace and hence their ability to appropriate value, leaving more of the money on the table for HP. And in fact, it is in the interests of all of HP's traditional competitors to increase the power of Linux. So if HP collaborates with other laptop manufacturers, then collectively they can try to shape the ecosystem and their ability to capture value.

It is not just the ecosystem perspective that matters. The second theme that we saw in our research was the importance of innovating the value proposition - really understanding what the customer valued and the outcomes they were looking for. There's an old Theodore Levitt quote - "customers don't want quarter inch drills, they want quarter inch holes".  We don't think this is right. Customers don't even want quarter inch holes. When innovating your value proposition you have to understand why the customer wants the quarter inch hole. If it is to hang a picture, then how else might the picture be hung - you could glue it to the wall. You could invite an artist in to paint the picture on the wall. The key to innovating you value proposition is to understand deeply what your customers really value.

Beyond the value proposition, the third category of capabilities centred on the value delivery system. Here we are shifting into the question of how do we configure the resources and activities required to deliver the value proposition. What should we do? What should we ask others to do? Many of the services firms deliver today require networks of organisations to pool their capabilities. Understanding the right network structure and identifying the right partners is essential when innovating the service business model.

Finally, we shift to capabilities concerned with accountability spread. Here the idea is that by taking on responsibility for the outcomes your customers want - you increase your risk and exposure. By innovating the value delivery system - either through technology or partnering with others - you may decrease the control you have over the ecosystem. Hence you have increased your accountability, but potentially reduced your control - hence you may have increased your risk or accountability spread. Understanding the implications of this and how the risk will therefore be managed is paramount if the service business model is to be sustainable.

These four categories of capability - ecosystem, value proposition, value delivery system and accountability spread - form the highest level of our framework for understanding business model innovation. In future blogs I'll unpack each of these categories in turn and explain the capabilities that underpin them.