June 2011
No buzz, no tweets, no cutting edges. In the energy and natural resources industries, things are, well, not terribly exciting: Pipes carry crude oil and natural gas, not data; ecosystems involve Mother Nature, not hordes of app developers. However, the sector does share one characteristic with glamorous companies like Apple, Google and Facebook: the critical need to innovate continuously.
Perhaps lacking the panache of social media or the latest smartphone, innovation in the energy and natural resources industries arguably matters more because they provide the traction—the fuel and raw materials—that is essential to moving the global economy into the future. But many industry players fall short in this critical dimension, hurting their ability to compete in a multi-polar world.
While many Western nations struggle with high unemployment, low growth and moribund markets, booming economies have turned formerly inertia-bound nations like Brazil, China and India into fast-lane foragers as they seek to secure reserves of everything from oil to iron ore to uranium. So for energy and natural resources companies facing diminished prospects at home, searching out growth on the world stage makes sense.
But that game is changing too. Take the oil industry. With increased competition from state-owned energy companies in emerging markets, Western players need to innovate just to stay in the game. Furthermore, as local companies co-opt the best and easiest-to-reach oil and gas reserves, Western firms are left with technologically challenging, costly and risky projects such as deepwater drilling, oil sands exploration or gas extraction from shale.
These new industry dynamics extend far beyond the oil and gas fields. Spot prices for everything from industrial metals to rare earths, from coke to carbon fiber continue to swell as voracious emerging economies that lack abundant local supplies sop them up relentlessly.
While superheated demand for formerly commoditized resources has rescued some industries from a chronic inability to earn their cost of capital, their post-boom futures could be more challenging. Once supply catches up with demand and the race for resources decelerates to more traditional velocities, finding profitable growth will become increasingly difficult. Meanwhile, continued industry consolidation has made attractive new takeover opportunities scarce for top players.
In such an environment, innovation offers the only sustainable and differentiated way to stoke further growth.
Beyond product innovation
But can innovation thrive in a basic industry? It can and it does. One key difference from the high-tech experience, which focuses mainly on the product itself, involves the wider arc innovations trace in this space, encompassing products, processes, services, business models, marketing and organizational breakthroughs.
Product innovations can include entirely new products or current ones either repurposed to fill different needs or fitted with new technologies. Process innovations do not change the product or service; they change the way they are produced. The just-in-time production and lean techniques employed in many chemical and processing plants are good examples of process innovations.
Service innovations add value to a product. They include entirely new services; new billing or dispatching models; advanced services like “turnkey” management of specific plant processes; and online troubleshooting and RFID asset tracking.
Business model innovations change the ways a company delivers value. Marketing innovations can involve powerful but intangible elements such as brands, which enable companies to differentiate themselves from their competitors. For example, innovative brand positioning enables some companies to charge as much for a small bottle of water as a municipality might charge for a cubic meter of tap water. Organizational innovations focus on how a company works both internally and with partners to outperform competitors in serving customers.
Companies also mix and match these strategies to develop hybrid combinations of innovations. What follows are profiles of selected innovations and the innovators that made them possible, ranging from oil companies to chemical manufacturers to utilities and beyond.
Marathon sniffs out safety improvements
Oil refinery operations—which transform crude oil’s complex organic molecules into lighter hydrocarbons like gasoline—can be volatile, and companies must be constantly vigilant about safety. The potential for toxic or explosive gas concentrations makes pervasive monitoring and control systems among the most important parts of operating in this industry.
Standard monitoring devices typically warn only the wearer—not the refinery’s managers—about elevated gas levels, and they are usually able to detect only one gas. At Marathon Petroleum Company’s refinery in Robinson, Illinois, division manager John Swearingen (now the president of Marathon Pipeline in Findlay, Ohio) wanted to do better. So he led the development of an intelligent, continuous monitoring system capable of tracking workers and sending out alerts if they become incapacitated.
At its heart, the system features a portable safety device that automatically reports back to the control center on the type of emergency taking place and the gas involved. Swearingen’s development team included refinery workers early on, soliciting their input on displays, alarm functions and other attributes.
Beyond dramatic safety improvements, the new system is cost-effective and opens the door to non-safety-related efficiency improvements that range from mobile asset tracking to video links with workers in the field.
Dow Corning perfects needs-based pricing
To inject new vigor into its established silicone product lines, Dow Corning Corp. launched a business model to reach new customers in different ways. Research revealed that Dow Corning was missing a vital customer segment less concerned with individual service and more interested in standard products at low costs. These savvy customers already knew all about silicone products, available from multiple suppliers, and did not want to pay a premium for application support they didn’t need.
Digging deep into its customer data, Dow Corning identified three segments it was already effectively serving, each with its own needs and requirements. The company needed a new way to capture the value proposition of this price seeker segment, and it quickly realized that its premium, one-size-fits-all business model wouldn’t suffice for the commodity silicone market.
Executives decided to create a new brand instead of diluting the flagship Dow Corning brand, and rolled out the value-focused XIAMETER brand that focused on serving customers more efficiently. To deliver on the XIAMETER brand promise, the company stripped costs by enabling a completely automated web-enabled platform that allowed customers to become self-sufficient in their ordering process. In 2002, its first year, the new channel reduced logistics costs 60 percent; by 2003, the combination of Dow Corning’s online presence for all brands accounted for 30 percent of the company’s sales. The XIAMETER website now supplies more than 2,100 products and remains a one-of-a-kind business innovation.
Iberdrola finds eco-friendly answers blowing in the wind
José Ignacio Sánchez Galán, chairman and CEO of Spanish energy company Iberdrola, views sustainability as a must-have element of his business model, with wind power playing a central role in the utility’s innovation mandate. Iberdrola Renovables, the utility’s profitable, eco-friendly startup, develops, builds and operates power plants that sell electricity produced from renewable energy sources. The organization is also currently developing forestry biomass and wave energy technologies.
Beyond wind farms, Iberdrola’s facilities include mini-hydroelectric and thermo-solar energy power stations in Spain and natural gas storage businesses in North America and the United Kingdom. The company also operates in Central and South America, Europe, Africa, the Middle East and Asia.
While Iberdrola’s innovative approach to alternative energy sources might be all about blue skies, the utility’s investment strategies are a lot closer to the ground. Every spending decision is based on a detailed business case, and these decisions are carefully managed by top managers. The company has supported this hard-nosed philosophy by acquiring like-minded firms with assets that complement its portfolio. As a result, Iberdrola is recognized as the first global company to earn money consistently from renewable resources.
One bottom-line reflection of this business strategy: Iberdrola’s renewables business increased its earnings sixfold between 2004 and 2010.
BP’s Aral refines a designer diesel fuel
BP’s Aral subsidiary in Germany has a pedigree that’s long on innovation. In 1924, the chief chemist of the company then known as Benzol-Verband developed a benzene-gasoline fuel and named it “Aral” (“ar” from aromatic, benzene’s chemical group, and “al” from aliphatic, gasoline’s chemical group). In 1987, the company (renamed Aral in 1962 and ultimately acquired by BP in 2002) rolled out the fuel industry’s first super diesel grade, followed by diesel formulations with lower sulfur content and a “whisper fuel” that reduced engine noise. So it made sense that in 2004, Aral, one of Germany’s most inventive and trusted fuel brands, was tasked with developing a greener and highly efficient diesel fuel.
While diesel engines represent a very small percentage of North America’s vast pool of light vehicles, they are far more common in Western Europe, where they account for almost 50 percent of total new car sales. As a result, developing a new diesel fuel that protects the environment while simultaneously improving engine efficiency and performance could pay extremely attractive dividends. Extensive research revealed that nearly 40 percent of consumers would pay more for a green fuel that also delivered extra miles per gallon (or kilometers per liter, as the case may be).
The project made use of BP’s global research resources and ultimately involved 11 workstreams with separate teams. By increasing the fuel’s combustion speed and eliminating by-products that coat valves and fuel injectors with residue, Aral experts boosted engine performance and reduced fuel-caused engine wear. They also virtually eliminated the fuel’s traditional strong odor—a key negative among customers—and raised its energy content, enabling engines to generate more power from each gallon of fuel used.
This string of eureka moments in the lab was matched by Aral’s innovative go-to-market plan in which marketers interacted with consumers extensively. The results of this contact ultimately informed the development of the fuel’s brand profile and positioning—and led to a well-thought-out launch campaign.
The resulting fuel, Aral Ultimate Diesel, has been a commercial success. Introduced in 2004, it quickly became the fuel of choice for more than 10 percent of Germany’s diesel motorists. While the fuel has clearly exceeded business case predictions, independent assessments indicate that Ultimate Diesel could capture up to 20 percent of the country’s diesel market.
Inventions on the verge
In hindsight, successful innovations often seem like sure things, especially when they bristle with leading-edge thinking like BP’s Aral Ultimate Diesel fuel or Iberdrola’s focus on sustainability. But in the trenches, conclusions are rarely so well defined. The ideas that become paradigm killers find success through a combination of luck, serendipity and lots of hard work.
Here are some snapshots of innovations in the making from energy and natural resources sector research labs worldwide.
- The power of predictive maintenance. The concept behind predictive maintenance is deceptively simple: Why not enable a multimillion-dollar piece of capital equipment to tell you when something is starting to go wrong instead of letting it devour itself for want of a $20 dollar widget? By outfitting big industrial machines with a variety of sensors that continuously measure vibration, temperature, pressure and other parameters, managers immediately know when something is off-kilter and can intervene before a little problem becomes a catastrophe. This innovative approach to monitoring systems is already in widespread use at such energy companies as Edipower, Enel, ConocoPhillips and Green Mountain Power, delivering both higher productivity and better returns on investment.
- Intelligent electricity. Smart grids allow electricity providers to track consumer energy use at significantly more granular levels, enabling utilities to manage demand more efficiently and effectively. Because smart home meters provide a real-time profile of consumer energy use, utilities can provide customers with tailored pricing plans that encourage conservation during peak hours while also helping them save money. In its quest to become a CO2-neutral municipality by 2015 and achieve a 40 percent reduction in CO2 emissions by 2024 (1990 benchmark), the City of Amsterdam has created a public-private partnership that will initiate innovative projects utilizing smart meter technology.
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Oil from algae. South San Francisco biotechnology company Solazyme, a leader in algae technology, has developed new ways to control algae growth, including cultivating it without the need for light. The company has also worked out ways to turn a wide variety of cellulosic and bio-waste materials into energy. Instead of using only food crops, Solazyme produces oil that can be refined like conventional crude from other types of biomass, such as wood waste and switchgrasses. With a target retail price of between $60 and $80 a barrel—a competitive range given the volatility of oil prices in the wake of unrest in the Middle East—the new fuel offers performance characteristics that are similar to crude. Primarily targeting transport fuels, the formulation appears poised to become a commercial success after 2012, when it is projected to achieve its price target. The company is also serving other markets, such as chemicals, nutritionals and personal care, with its algal products.
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Sneaky solar. The Dow Chemical Company has developed solar shingles designed to be seamlessly integrated with regular asphalt roof tiles. Besides eliminating clunky roof-mounted boxes from the solar equation, the new shingles can be installed twice as fast as regular solar panels and cost 10 percent to 15 percent less. Due to the ordinary appearance of the solar shingles, Dow anticipates a high probability of commercial success: The company forecasts revenues reaching as much as $5 billion by 2015.
Innovation drives success in basic industries just as surely as it powers high-tech players from win to buzz-filled win. However, while many energy and raw materials companies assume they already innovate effectively, only a few have fully mastered the challenge of combining invention and market success in ways that create value throughout their organizations and across the value chain.
As these case studies demonstrate, innovations come in many shapes and sizes, and can occur from one end of a company’s business system to the other. The lesson? When it comes to translating a good idea into a great new business proposition, the only limitations a company faces are its business savvy and the power of its own imagination.
For further reading
Innovation Excellence: Creating Market Success in the Energy and Natural Resources Sector, by Stephan Scholtissek (Kogan Page and mi-Wirtschaftsbuch, 2011)
“Exploring 12 disruptive new transport fuels,” Outlook, June 2010
Sidebar | Tips for innovators
The ability to innovate involves a skill set that requires constant nurturing and more than a modicum of managerial restraint: Nothing kills the innovative impulse like an overly strict management team. The following eight principles can help players in the energy and natural resources sectors unleash the ability to innovate.
- Just do it. Innovations often cause trouble, but opening the door to the innovative urge usually excites shareholders and triggers internal growth.
- Make innovation everybody’s job. The entire company needs to be reorganized to deliver innovations consistently, to promote new ways of thinking and to ensure the degrees of freedom required to take risks.
- Involve the board. Major innovations require heavyweight champions.
- Establish an innovation portfolio. Leaders need to run their business as a portfolio of innovation projects. While not all projects will survive, those that do will more than pay for the losers.
- To beat upstarts, act like one. Well-managed big companies can be as nimble as smaller attackers when it comes to innovation, and they can sustain much higher rates of investment.
- Ask how, not what. Because inventions can be bought and sold, big enterprises need to know how to bring new ideas to market, leaving upstarts to thrash through the question of what idea to pursue.
- Establish a “skunk works” for non-product innovations. Companies need the equivalent of a product R&D center to generate process, organizational, business model, service and marketing innovations.
- Seek outside inspiration. Companies often find value more quickly by developing innovations in alliances and other types of collaboration.
About the author
Stephan Scholtissek is a global managing director in the Accenture Resources industry group. In this role, Dr. Scholtissek helps clients in the utilities, chemicals, energy and natural resources industries to execute large-scale transformations. A biochemist by education, Dr. Scholtissek has been working in different innovation areas for more than 25 years, and he sits on several review committees for innovation prizes. His most notable books include the Financial Times Deutschland bestseller New Outsourcing (2004) and Innovation Excellence: Creating Market Success in the Energy and Natural Resources Sector (2011). Dr. Scholtissek is based in Munich.
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