A Silicon Valley perspective on the energy industry
Deloitte at ONS 2020 with Johannes Wiik and John Hagel
Oil and gas companies are increasingly announcing that they are ‘going green’ . But how will they solve the challenge of transforming their business model from fossil fuels to renewable energy? If we apply learnings from Silicon Valley, these companies will not succeed without a clear ‘zoom-out’.
In our recent discussion on the future of energy, Ramez Naam pointed out that the energy industry could enable more radical innovation by learning more from Silicon Valley. On the question of how large oil and gas companies could transform, he recommended talking with Singularity University colleague, a globally recognized expert on the subject of corporate transformation.
John Hagel has nearly 40 years of experience from working in Silicon Valley, before co-founding Deloitte’s Center for the Edge over ten years ago. He has helped top executives from several of the largest companies in the world shape a transformative strategy for their company.
As part of the ONS 2020 Digital Program, Johannes Wiik, lead partner for Energy, Resources and Industrials in Deloitte Nordics, gives Hagel the challenging question: How can leaders in the energy industry balance finding new business models while at the same time driving value from their existing business model?
– Having a strong sense of direction is going to be increasingly necessary.
The global energy sector is going through a major change, and it becomes even more important for leaders to ensure focus on what matters, Hagel states.
As the world is becoming increasingly uncertain, our human instinct is to initiate lots of initiatives and hope that one or two of them becomes a success. According to John, leaders need to fight that urge. Too many digital initiatives can jam the organization and hinder actual transformation.
– The more initiatives you have, the more risk you're taking.
While many recommend companies having a portfolio approach to innovation to reduce risk, Hagel advocates the opposite. He points out two challenges with doing lots of initiatives:
– Firstly, you spread yourself way too thin across many different initiatives, so none of the initiatives get the critical mass needed. Secondly, it makes people complacent. If one of those initiatives fail to succeed, that is not a problem, as they have 20 others.
In a world of increasing pressure and change, leaders that are not committed to a long-term opportunity and aggressively pursuing it will likely not succeed. Leaders of a business need to focus and commit, Hagel states.
Focus on the long-term certainties
The energy industry is familiar with long-term planning, with natural resource forecasts spanning decades and a long history of scenario planning. In John’s view, while understanding and navigating in uncertainties can be helpful, leaders need to develop a sense of focus and direction, inside and outside the company.
Inspired by some of the most successful technology companies in Silicon Valley, Hagel is a strong proponent of an alternative approach to strategy called “zoom out, zoom in”.
– What emerging long-term opportunity could we address - and then focus on action in the short term?
The ‘zoom-out’ consists of two questions, Hagel explains: «What will our market or industry likely look like 10 to 20 years from now?». The second question is “What are then the implications for the kind of business we're going to need to be to be successful in that market or industry?».
The ‘Zoom-in’ operates with a very different time horizon: Six to twelve months. Here, the first question is “What are the two or three business initiatives that we could pursue in the next six to twelve months that would have the greatest impact in accelerating our movement towards this long-term opportunity?” The second question leaders need to ask is "Do we have a critical mass of resources in the next six to twelve months for those two or three initiatives?
Don’t change the core, scale the edge
Wiik points out that energy companies have long investment cycles, and people stay in the industry for a long time. They develop skills for understanding specific complex engineering problems. And suddenly, there is a need to pivot into new areas. How do leaders of energy companies build new capabilities based on that?
Hagel promotes an approach to change called “scaling the edge”. Rather than trying to get everybody in the organization to change what they're doing all at once, it's finding an edge to the existing business that has the potential to scale to the point where it could become the new core of your business.
– Leaders then have to focus on scaling that edge and driving the change within this side initiative. And ultimately, the core will be pulled towards the edge.
What is an edge? How to succeed with developing new business models
Many energy companies have a separate business unit or separate entities that is given more autonomy. However, if there is no commitment to making these initiatives the new core of the business, they are not "edges".
The “zoom-out” approach for strategy helps to identify what a potential edge could be. If you have that 10-to-20-year view, you can start to look for where you can start today to make some initiatives that would scale very rapidly, given the broader changes in the market or industry.
And then the ‘zoom-in’ initiatives give you the focus to ask “What can we do in the next six to twelve months to as rapidly as possible scale this edge?”
It helps to create focus and to start with a small group of people that are committed to and excited about this opportunity that they're going after.
Strengthen the core – the back-bone of the business
–At the same time, leaders need to keep most of the people in the organization focused on just delivering more value and impact in their current business - at least in the near term. Ultimately, that's where the profits and money are today.
Therefore, other piece of the ‘zoom-in’ is going back into the core of your business and asking:
– “What is the one thing I could do in the next six to twelve months that would have the greatest impact in strengthening the existing core of my business?”
-You want to prolong the life of the core as long as possible.
Find a targeted area in the core that would have a big impact on the overall core if performance was improved.
Who are the workers in this area? And how could we refocus them on addressing unseen problems and opportunities to create more value? The key theme is focus: Don’t try to do it for everybody all at once, but get impact as quickly as possible.
-How do you manage an edge to make it successful?
–The key to success here is having commitment from a senior executive, ideally the CEO, Hagel states. If it is not the CEO, then somebody who reports to the CEO who has both commitment and courage to scale that edge and make it the new core.
–You need people that are not going to stop until it has become the new core of the company. It's not just the diversification initiative or growth initiative or an innovation.
The leader of the edge will do whatever they can to make it accelerate the scaling as quickly as possible. This includes finding a leadership team on the edge, that is genuinely driven by that opportunity. These people are eager to take risks and aggressively scale that edge.
- Don’t put the edge back into the core
-Finding the balance between developing the core while also developing an innovative edge aiming to replace the core sounds challenging. How do you combine the two, with all the technological and cultural challenges this creates?
Hagel points out that it is a misconception that the company will need to integrate the edge back into the core or main business. Trying to do so would only activate the organizational antibodies of change, who likely would succeed in defeating the transformation.
- Starve the edge
The edge must scale in order to be successful, requiring resources, and this is an area where many companies mess up. A common mistake is to provide too much resources from the core business to support the edge.
You need to starve the edge, Hagel points out. The goal is not to underfund it, but by forcing the edge to seek outside the company for resources, you reduce some of the tension and friction between the core and the edge. An edge that depends on the core has small chances against the immune system. Furthermore, it forces the edge to connect with third parties, with the potential of accelerating learning and growth.
Shaping an ecosystem
The most successful technology companies in Silicon Valley pursue this kind of strategy, and they are driven by a learning mindset. They are using the short-term initiatives to test and refine their view of what that big long-term opportunity could be and what is going to be required to address that opportunity.
And they're constantly revisiting and reflecting on “what impact did we achieve? How could we get even more impact? How could we refine our view of what that big opportunity really is?”
How will technology influence energy companies’ business models?
Wiik points out that the value of energy companies in the S&P 500 made up around 16 percent back in 2008 - now it's 2.6 percent. The big sector gaining is the technology sector. And it seems like most industries are kind of taken over by technology one way or another.
–If you were a leader in the energy sector, how would you think in terms of understanding and learning, Wiik asks.
John points out that at the core of the oil and gas industry, much of the business activity is around infrastructure management. Extraction, transportation, processing - it is managing asset-intensive infrastructure with high-volume routine processing.
–There’s an opportunity to take that expertise and capability and apply it not just to oil and gas, but into other areas where there are similar extraction activities - it could be any kind of natural resource.
And in that context, large-scale facilities increasingly are going to benefit from having a digital infrastructure that can enhance the efficiency of those operations, where you're taking out more and more of the tasks and automating the activity.
Leveraged growth through ecosystems and digital platforms
Wiik points out that these technology changes are also changing the dynamics between companies, platforms and ecosystems in the energy industry.
–One of the great opportunities in regards to platforms and ecosystems is the concept of leverage. All companies today are under increasing pressure for growth. Investors want more growth. And yet when I sit in discussions about growth strategy with leadership, typically the discussion focuses on two options: Make or buy. You either grow organically, you develop it internally, or you go out and do a big acquisition.
My view is that there is a third path to growth: Leveraged growth. The key question to explore is "How can you understand the needs of your customers in ways where you can start to connect with and mobilize more and more third parties to address those needs?".
Rather than trying to do it all yourself, the opportunity is to become an orchestrator of a growing ecosystem of third parties that can deliver more and more value to your customers. And in that process, take e a portion of that value for yourself as having provided that service of orchestration.
The untapped opportunity of ecosystems and digital platforms
–There is a big untapped opportunity where digital technology can help scale the number of participants that you can mobilize to serve the needs of your customer.
John points out another dimension of ecosystems and platforms: Many think about ecosystems in transactional terms. It is about finding the right expertise or resource to solve the need, connect them, do the deal – and that is it.
–Instead, leaders can use the ecosystem opportunity to build trust-based relationships across a larger and larger number of participants where they can all learn faster together.
This happens as they try to address customer needs and see what the unmet needs are, where they can work together, solve problems that create even more value so that they can serve the customer better.
–This kind of ecosystem is will prevail over the more narrowly defined transactional ecosystems that we have today, John predicts.
Much of the same applies to platforms, John states. Platforms tend to be very transactional, connecting buyers and sellers or just connecting people so that they can stay in touch with their relatives or their friends.
–The big untapped opportunity here is to create what I call learning platforms, where you're explicitly designing the platform to bring more and more participants together so that they can learn faster together. This ties back to our notion of the ‘future of work’: Accelerating learning and scaling that learning. Those are the companies that ultimately will create the most value.
Johannes Wiik points that as oil industry is heading towards decarbonization, it becomes increasingly irrelevant to make five-year plans based on extrapolations of the present. More than ever before, energy companies need a ‘zoom out, zoom in’ approach.
In our conversation with John Hagel, the following seven points are addressed:
1. Have a strong sense of direction
2. Reduce risk by having few initiatives
3. Zoom out, Zoom in: Identify a long-term opportunity and focus on short-term action
4. Strengthen the core
5. Starve the edge
6. Scale the edge
7. Don’t put the edge back into the core