Disruption is a common theme across all industries. Compared to other sectors, utilities have so far experienced only moderate levels of disruption—more so for electric than gas and water. While that may sound like good news (and it is), looking long term, utilities are face compressive disruption, whereby EBITA is remaining flat while revenues are showing a declining trend. Now is the time to not only continue to maintain existing positions within their core businesses, but also look to scale up new opportunities.
Our analysis of 10,000 companies across 18 industries shows that US$41 trillion in enterprise value is exposed to disruption today. By measuring each industry’s level of disruption as well as its susceptibility to future disruption, we found that disruption follows a pattern with industries falling into one of four periods of disruption—Durability, Vulnerability, Volatility or Viability. Our longitudinal analysis from 2011 to 2018 shows that most companies stay stuck in the same period of disruption year after year.
The utilities sector began in a period of Durability but fell into Vulnerability in 2013. Incumbents benefit from the continued presence of high barriers to entry, such as regulatory and capital requirements. However, our analysis of companies in this period revealed weaknesses in operational efficiency and innovation commitment.
New entrants are already emerging in niche areas such as retail or renewables, but they are also competing across the value chain—mainly through the acquisition of existing players. But for most, that squeeze often isn’t severe enough to inspire substantial action. Incumbents often ponder for too long and lack the risk appetite to invest in new growth ideas early.
Start your innovation pivot
To respond, utilities need to make what we call an “innovation pivot”—it’s a move that’s informed, but not constrained by the nature of disruption in the industry. In short, they don’t just aim to protect their position, they need to truly change it.
Utilities need to attend to structural productivity challenges in their core business. To arrest impeding demand and profit compression, utilities need to learn to spot and scale up innovations, for instance, by leveraging technology and data to build enhanced services and offerings that alleviate customer pain points. This strategy requires building an innovation architecture using innovation hubs and labs.
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Find partners to scale with
Opportunities exist for those that can see beyond short-term pressures and set their sights on creating scalable businesses that will matter long term. Utilities have realized that to succeed, they need to commit to scaling new ideas with ecosystem partners that can provide access to technologies and specialized talent.
While utilities need to embrace disruptive opportunities, they cannot forget their first priority: delivering safe, reliable, affordable power to consumers. Utilities must balance the investments required to reinvigorate their core business, such as grid modernization efforts, while scaling the new businesses by creating entirely new digital business models.
Time for courage
No longer can companies assume that disruption is just a passing storm they need to ride out. While to date, utilities have been somewhat insulated from market disruption, cracks are starting to appear, making now the time for action. The path to repositioning starts by understanding the disruption trends, and takes shape when companies put innovation to work in ways that enable them to set the right pace.
For utilities, offense may well be the best defense—focusing on identifying the innovations that will drive future opportunities and scaling with ecosystem partners will help assuage the impact of future disruptions and lead to long-term profitable growth.